We introduce a novel approach to estimating latent oil risk factors and establish their significance in pricing nonoil securities. Our model, which features four factors with simple economic interpretations, is estimated using both derivative prices and oil-related equity returns. The fit is excellent in and out of sample. The extracted oil factors carry significant risk premia, and are significantly related to macroeconomic variables as well as portfolio returns sorted on characteristics and industry. The average nonoil portfolio exhibits a sensitivity to the oil factors amounting to a sixth (in magnitude) of that of the oil industry itself.FEW, IF ANY, COMMODITIES have been the focus of more attention for their perceived economic significance than oil. While there is strong evidence relating oil prices to the business cycle, the nature of the relationship is nonlinear, timevarying, and difficult to attribute to any single source such as political uncertainty, cartel decisions, or global economic conditions (see Hamilton (2003) and Barsky and Kilian (2004)). Despite its prominence in the business media and economics literature, and despite the well-documented role of business cycles in asset pricing, academic research has largely failed to find consistent evidence that oil is an important determinant of cross-sectional asset prices.1 This paper introduces a new model and method to estimate latent oil risk factors using
There is a great deal of misinformation surrounding the economics of pharmaceutical importation and price regulation. Among economists, the principles governing the relationships between prices, innovation, and pharmaceutical research and development (R&D) investment are incontrovertible. Unfortunately, faulty, non-economic analyses abound on these fundamental relationships, reinforcing economic illiteracy and leading to unfounded U.S. public policy.Effective public policy debate requires that all parties to the debate be informed and aware of the potential costs and benefits associated with new policies, or changes in existing policies. This has not yet occurred for pharmaceutical importation and price regulation policy. Therefore, the purpose of this paper is to provide a positive (in contrast to a normative) economic analysis of pharmaceutical importation and price regulation.
There are important fundamental links among the efficiency of pharmaceutical manufacturing, drug prices, and public health in the United States. This article seeks to probe these links because recent research (by academics and even the US Food and Drug Administration) suggests there are significant opportunities to improve the manufacturing processes for pharmaceuticals. Two models are devel-oped that consider the impact of reduced manufacturing costs on pharmaceutical prices and firm profits. The two models effectively bound the range of potential future benefits from greater manufacturing efficiency and estimate that, for example, a 30% reduction in manufacturing costs will generate between $1.0 and $12.3 trillion in social value to the United States.
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