preferred risk habitat of individual investors abstract the preferred risk habitat hypothesis introduced here is that individual investors select stocks whose volatilities are commensurate with their risk aversion the data 1995 2000 holdings of over 20 000 clients at a large german broker are consistent with the predictions of the hypothesis the returns of stocks within each portfolio have remarkably similar volatilities when stocks are sold they are replaced by stocks of similar volatilities and the more risk averse customers indeed hold less volatile stocks greater volatility specialization is associated with lower sharpe ratios primarily because more specialized investors hold fewer stocks and thereby expose themselves to more unsystematic risk

consumer response to commodity specific and broad based promotion programs for fruits and vegetables generic promotion activities have traditionally been used for individual agricultural commodities yet there is renewed interest in implementing a mandatory broad based promotion program for all fruits and vegetables here we use data from an experiment that introduce subjects to various promotional efforts for fruits and vegetables to estimate the shift and rotational effects of advertising econometric results indicate that commodity specific promotional efforts may not be effective at increasing demand for fruits and vegetables after controlling for various demographic differences among treatments our results show that consumers valuation of fruits and vegetables was highest among subjects exposed to broad based advertisements copyright 2011 oxford university press

an asset allocation puzzle comment should the proportion of risky assets in the risky part of an investor s portfolio depend on the investor s risk aversion according to basic financial theory in particular the mutual fund separation theorem with a riskless asset the answer is no the theorem states that rational investors should divide their assets between a riskless asset and a risky mutual fund the composition of which is the same for all investors risk aversion affects only the allocation between the riskless asset and the fund however niko canner et al 1997 cmw hereafter observed that popular investment advice does not conform to this theory they reported the stocks bonds and cash allocations recommended by four advisors for conservative moderate and aggressive investors as shown in table 1 which is reproduced from cmw the advisors recommend a bond stock ratio that varies directly with risk aversion for example fidelity recommends a bond stock ratio of 1 50 for a conservative more riskaverse investor a ratio of 1 00 for a moderate less risk averse investor and a ratio of 0 46 for an aggressive still less risk averse investor the inconsistency between such advice and the separation theorem is called an asset allocation puzzle by cmw they attempted to solve the puzzle by relaxing key assumptions in the theory but finally reached a negative conclusion although we cannot rule out the possibility that popular advice is consistent with some model of rational behavior we have so far been unable to find such a model p 181 however they suggested that consideration of intertemporal trading might help resolve the puzzle in the present paper we provide theoretical support for the popular advice the two key insights are that the investor s horizon may exceed the maturity of the cash asset and that the investor rebalances the portfolio as time passes if the investor s horizon exceeds the maturity of cash which might be a money market security with maturity of one to six months then cash is not the riskless asset as is commonly assumed in the basic theory in a theory allowing portfolio rebalancing as opposed to a buy and hold framework it is not unreasonable to assume that the investor can synthesize a riskless asset a zero coupon bond maturing at the horizon using a bond fund and cash then bonds will be both in the synthetic riskless asset and in the risky mutual fund and we show that in this case the theoretical bond stock ratio varies directly with risk aversion for any hyperbolic absolute risk aversion hara investor as an example of the type of results that a specific model can produce we provide a continuous time model with closed form solutions which produces theoretical bond stock ratios similar to the popular advice the present paper is organized as follows in the next section we analyze the popular advice in terms of the theory of mutual fund separation of david cass and joseph e stiglitz 1970 we show that this theory is relevant both in static and dynamic frameworks and use it to analyze the popular advice in complete and incomplete markets in section ii we analyze the popular advice in the context of robert c merton s 1971 continuous time statement of mutualfund separation and present an illustrative model in which a crra investor makes continuous time portfolio decisions under interest rate and stock price uncertainty in section iii numerical results are compared with the popular advice section iv is a conclusion bajeux besnainou department of finance school of business and public management george washington university 2023 g street nw washington dc 20052 jordan national economic research associates 1255 23rd street nw washington dc 20037 portait cnam and essec finance chair cnam 2 rue conte paris france this research was supported by a grant from the institute for quantitative investment research we thank two anonymous referees for their comments 1 hara functions include quadratic utility which is one way of justifying mean variance preferences and constant relative risk aversion crra utility both quadratic and crra utility were considered in the cmw analysis

an asset allocation puzzle comment the purpose of this note is to look at the rationale behind popular advice on portfolio allocation among cash bonds and stocks we argue that the typical investment advice is not inconsistent with the behavior of risk averse expected utility maximizers we propose an additional solution to the asset allocation puzzle posed by niko canner et al 1997 who argue that popular advice contradicts financial theory because it is inconsistent with the capital asset pricing model capm mutual fund separation theorem the capm asserts that investors should hold the same selection of risky assets while popular advice is that investors should hold a proportion of bonds to stocks that increases with risk aversion using mean variance mv analysis and the capm canner et al show that recommended portfolios are far from optimal and that losses from the apparent failure of optimization are not substantial however they failed to explain the popular advice within an economic model we offer a rational model based on stochastic dominance to demonstrate that all popular financial advice portfolios belong to the efficient set for all risk averse investors using the historical annual real returns on bonds and stocks in canner et al we cannot ascertain that investment advisors indeed offer bad advice rather we maintain that acting as agents for numerous clients advisors recommend portfolios that are not inefficient for all risk averse investors i overview

units of measurement and the stone index in demand system estimation the stone index typically used in estimating linear almost ideal demand systems is not invariant to changes in units of measurement which may seriously affect the approximation properties of the model a modification to the stone index or use of a regular price index instead are both desirable practices in estimating linear ai models

generic fluid milk advertising demand expansion and supply response the case of new york city a transfer function was used to estimate the fluid milk demand equation of new york city the consumption effect of a generic fluid milk advertising program in the city was found to be positive and statistically significant the resulting higher blend price of milk was found to have a negligible effect on the subsequent supply of milk though being successful in generating positive returns on advertising it was found that a 35 reduction in the advertising expenditures would have been optimal in the marginal sense

optimal portfolio choice for long horizon investors with nontradable labor income this paper examines how risky labor income and retirement affect optimal portfolio choice with idiosyncratic labor income risk the optimal allocation to stocks is unambiguously larger for employed investors than for retired investors consistent with the typical recommendations of investment advisors increasing idiosyncratic labor income risk raises investors willingness to save and reduces their stock portfolio allocation towards the level of retired investors positive correlation between labor income and stock returns has a further negative effect and can actually reduce stockholdings below the level of retired investors financial advisors typically recommend that their customers invest more in stocks than in safe assets when they are working and to shift their investments towards safe assets when they retire jagannathan and kocherlakota 1996 malkiel 1996 by contrast the standard academic models of portfolio choice merton 1969 1971 samuelson 1969 show that retirement is irrelevant for portfolio decisions if investment opportunities are constant and human capital is tradable in this case the fraction of wealth optimally invested in risky assets should be constant over the lifetime of an individual recent research building on the pioneering work by merton 1971 shows that time varying investment opportunities result in portfolio rules with an intertemporal hedging component whose magnitude depends on the investment horizon of the investor kim and omberg 1996 balduzzi and lynch 1997 brennan schwartz and lagnado 1997 brandt 1999 campbell and viceira 1999 2001 barberis 2000 with time variation in investment opportunities retirement and death play an instrumental role as events that exogenously fix the individual s investment horizon more importantly retirement also marks the time at which individuals stop working and thereafter must live off their lifetime savings and possibly transfers from this perspective retirement matters for portfolio choice

who should buy long term bonds according to conventional wisdom long term bonds are appropriate for conservative long term investors this paper develops a model of optimal consumption and portfolio choice for infinite lived investors with recursive utility who face stochastic interest rates solves the model using an approximate analytical method and evaluates conventional wisdom as risk aversion increases the myopic component of risky asset demand disappears but the intertemporal hedging component does not conservative investors hold assets to hedge the risk that real interest rates will decline long term inflation indexed bonds are most suitable for this purpose but nominal bonds may also be used if inflation risk is low

advertising information and product quality the case of butter this study examines the roles of cholesterol information and advertising in explaining consumption trends for fats and oils focusing on butter results suggest increased consumer awareness of the health effects of blood cholesterol has contributed to the secular decline in butter consumption in canada although consumers responses to negative information appear to outweigh their responses to positive information the industry advertising campaign launched in 1978 by the dairy bureau of canada has had a positive effect on butter demand

estimated inflation rate consumption and portfolio decision abstract when the expected inflation rate could not be completely observed by investors we show two main results 1 both portfolio weights on financial assets and real consumption would be affected by the estimation error of unobservable inflation rate 2 if there is only nominal instantaneously risk free asset in the financial market the change of nominal price would affect the optimal real consumptions plan

quasi fixed inputs in u s and japanese manufacturing a generalized leontief restricted cost function approach in this paper a generalized leontief variable cost function is develope d which permits analytical derivation of steady state levels of quasi fixed inputs and capacity output and does not require specification of a numeraire input this framework is then used to evaluate the fa ctor demand patterns of japanese and u s manufacturing based on bot h one quasi fixed capital input and two quasi fixed capital and la bor input specifications and both static and dynamic optimization t he findings provide evidence of considerable flexibility of demand re sponses in japan which may have contributed to japan s relatively st rong economic performance in the volatile 1970s copyright 1988 by mit press

productivity growth in u s agriculture under dynamic adjustment a dynamic measure of productivity growth adjusted for deviations from the long run equilibrium is established within an adjustment cost framework an empirical application to u s agriculture is presented which permits identifying the dynamic linkages between technical change and productivity growth in u s agriculture total factor productivity as dynamically measured grew at 1 50 per annum the combined effect of scale quality adjusted input growth and long run disequilibrium input use contributes only 3 44 of the growth while technical change dominates the growth of total factor productivity

dynamic model of fresh fruit promotion a household production approach many studies consider the dynamic effects of commodity promotion on demand but few derive the theoretical basis for these effects in a model of optimal consumer behavior this study develops a dynamic household production model of u s fresh fruit consumption which it uses to evaluate the effectiveness of advertising and promotion expenditures by the washington apple commission estimates from a dynamic dual generalized leontief system show direct advertising to be marginally more effective than retail promotion in increasing apple sales but advertising has positive spillover effects to sales of other fruits whereas promotion reduces sales of competing products

when to switch to a hybrid electric vehicle a replacement optimisation decision abstract this research proposes a replacement purchase decision model in which trade in and subsidy are provided for vehicle owners to replace their old conventional fuel powered vehicles with hybrid electric vehicles hevs the uncertainty in fuel prices has distinguished this model for its ability to illustrate a time dependent cost trade off between hev induced economic benefit and replacement cost a cost effective replacement time cert is quantitatively determined using a dynamic programming approach afterwards the theoretical model is illustrated with an empirical example of which the result shows that the adoption of byd qin hev in china is not optimal at current fuel price without subsidies moreover sensitive analyses are presented revealing significant effects of subsidy level fuel price and personal travel mileage on the cost effective replacement time results suggest that the effect of subsidy is attenuated by an increase in fuel price whereas cert is shortened by a decrease in fuel price volatility the implications and recommendations for policymakers are also provided

evolutionary portfolio selection with liquidity shocks insurance companies invest their wealth in financial markets the wealth evolution strongly depends on the success of their investment strategies but also on liquidity shocks which occur during unfavourable years when indemnities to be paid to the clients exceed collected premia an investment strategy that does not take liquidity shocks into account exposes insurance companies to the risk of bankruptcy when liquidity shocks and low investment payoffs jointly appear therefore regulatory authorities impose solvency restrictions to ensure that insurance companies are able to face their obligations with high probability this paper analyses the behaviour of insurance companies in an evolutionary framework we show that an insurance company that merely satisfies regulatory constraints will eventually vanish from the market we give a more restrictive no bankruptcy condition for the investment strategies and we characterize trading strategies that are evolutionary stable i e able to drive out any mutation

the rationality of asset allocation recommendations the popular finance literature describes the asset allocation decision as one of the most important factors in determining investment performance this article reviews the implications of modern portfolio theory for the asset allocation decision and then examinesthe recommendations of some leading financial experts to see if they are consistent with theory

dynamic measures of scope and scale economies an application to german agriculture static concepts of multiproduct economies of scale and scope are extended into a dynamic setting within the cost of adjustment framework important properties of the dynamic measures are developed and the foundations of a dynamic theory of the firm generalizing static neoclassical theory are presented dynamic measures of scope and scale as well as shadow costs are estimated empirically for multiple output multiple input german dairy farms operating under a production quota causes of scope economies are explored and a conceptual model to predict the evolution of the production structure of german farms is formulated

a model of housing in the presence of adjustment costs a structural interpretation of habit persistence building on the model of sanford j grossman and guy laroque 1990 this paper provides a model of household consumption and portfolio allocation which incorporates the role of housing as both a consumption good and as a component of wealth the model captures the following features of the household s problem a utility depends probably nonseparably on two distinct goods nondurable consumption and housing b nondurable consumption can be adjusted cost lessly but housing is subject to an adjustment cost c households face housing price risk in the sense that the relative price of housing varies over time and d in addition to the house the household can invest in a wide variety of financial assets this single reasonably tractable model generates testable implications for portfolio allocation risk aversion asset pricing and the dynamics of nondurable consumption because the original grossman and laroque model considers a utility function in which the durable good is the sole argument and thus abstracts completely from nondurable consump tion their analysis cannot address either the potential spillover effects of the adjustment costs of the durable good on the dynamics of nondurable consumption or the implications for portfolio allocation of housing risk arising from variation in the relative price of housing in addition to generating implications for issues on which the original grossman and laroque model was silent the housing model delivers a strikingly different message concerning asset pricing that is in contrast to the grossman and laroque result that the consumption based capital asset pricing model consumption capm fails the housing model implies that the consumptioncapm holds we assume that the household incurs an adjustment cost when altering the holding of the dura ble good or house although financial assets can be bought and sold costlessly consumption of the nondurable good can also be adjusted costlessly when choosing a new house the consumer takes into account the fact that the consumption of housing services will be constant at the new level until the subsequent stopping time when it is again worthwhile to incur the adjustment cost thus the home purchase decision is endogenous and fully rational but because of the adjustment cost infrequent in this continuous time setting the household s decision process has a recursive structure at each instant the household first decides whether it is optimal to sell the house immediately on those rare occasions that it is optimal to incur the adjustment cost the household sells the old house and buys a new one instantaneously if the household decides that it is not optimal to sell the house immediately it then determines its optimal holdings of financial assets and optimal level of nondurable consumption conditional on the current housing stock in essence because of the adjustment costs associated with the durable good the current

how loss averse are investors in financial markets abstract we investigate loss aversion in financial markets using a typical asset allocation problem our theoretical and empirical results show that investors in financial markets are more loss averse than assumed in the literature moreover loss aversion changes depending on market conditions investors become far more loss averse during bull markets than during bear markets indicating their more profound disutility for losses when others enjoy gains contrary to most previous results we find that investors are more sensitive to changes in losses than changes in gains

naive diversification strategies in defined contribution saving plans there is a worldwide trend toward defined contribution saving plans and growing interest in privatized social security plans in both environments individuals are given some responsibility to make their own asset allocation decisions raising concerns about how well they do at this task this paper investigates one aspect of the task namely diversification it is shown that some investors follow the 1 n strategy they divide their contributions evenly across the funds offered in the plan consistent with this naive notion of diversification it is found that the proportion invested in stocks depends strongly on the proportion of stock funds in the plan

delaying the introduction of emissions trading systems implications for power plant investment and operation from a multi stage decision model relying on real options theory we employ a multistage decision model to analyze the effect of delaying the introduction of emission trading systems ets on power plant investments in carbon capture and storage ccs retrofits on plant operation and on carbon dioxide co2 abatement unlike previous studies we assume that the investment decision is made before the ets is in place and we allow ccs operating flexibility for new power plant investments thus the plant may be run in ccs off mode if carbon prices are low we employ monte carlo simulation methods to account for uncertainties in the prices of co2 certificates other inputs and output prices relying on a realistic parameterization for a supercritical pulverized coal plant in china we find that ccs operating flexibility lowers the critical carbon price needed to support ccs investment because it renders ccs investment less irreversible for a low carbon price path operating flexibility also implies that delaying the introduction of an ets hardly affects plant co2 abatement since the plant operator is better off purchasing emission certificates rather than operating the plant in ccs mode interestingly for low carbon prices we find a u shaped relation between the length of the delay and the economic value of the plant thus delaying the introduction of an ets may make investors worse off

dynamic adjustment in the u s dairy industry a dual model is used to examine the dynamic structure of the u s dairy industry properties implied by the theory of the competitive firm and independent adjustment of two quasi fixed inputs labor and herd size are tested and not rejected instantaneous adjustment however is soundly rejected for each quasi fixed input input adjustment to optimal levels is estimated to take about two years for labor and ten for cows quality adjustments of the labor and cow series do not fully embody the technological change that has occurred in this industry over the study period

behavioral portfolio theory we develop a positive behavioral portfolio theory bpt and explore its implications for portfolio construction and security design the optimal portfolios of bpt investors resemble combinations of bonds and lottery tickets consistent with friedman and savage s 1948 observation we compare the bpt efficient frontier with the mean variance efficient frontier and show that in general the two frontiers do not coincide optimal bpt portfolios are also different from optimal capm portfolios in particular the capm twofund separation does not hold in bpt we present bpt in a single mental account version bpt sa and a multiple mental account version bpt ma bpt sa investors integrate their portfolios into a single mental account while bpt ma investors segregate their port folios into several mental accounts bpt ma portfolios resemble layered pyramids where layers are associated with aspirations we explore a two layer portfolio where the low aspiration layer is designed to avoid poverty while the high aspiration layer is designed for a shot at riches

a dynamic adjustment model for u s agriculture 1948 79 abstract a multioutput model is developed within the adjustment cost framework to analyze the structure of dynamic adjustments in u s agriculture during the post war period an important feature of this model is that the econometric model is consistent with dynamic economic theory fluctuations in capital stocks variable inputs and outputs are explained by changing opportunity costs empirical results indicated that durable equipment farm produced durables and family labor exhibited significant rigidity in adjustment as a response to exogenous shocks surprisingly the hypothesis that real estate was a variable input could not be rejected the univariate flexible accelerator hypothesis which is widely maintained in most agricultural adjustment studies is inconsistent with the data

advertising strategies in a dynamic oligopoly the author uses a dynamic model of oligopolistic advertising competition in which competitors are assumed to make a series of single period advertising decisions with salvage values attached to achieved sales in each period as the foundation for empirical analysis of the competitive situation involving the three largest ready to eat cereal manufacturers kellogg general mills and the post division of philip morris general foods the primary insight of the author s empirical analysis is that general mills places a higher future value on achieved sales than do the other competitors in the market

the multivariate flexible accelerator model its empirical restrictions and an application to u s manufacturing this paper derives an exhaustive set of restrictions implied by the multistock flexible accelerator specification of the adjustment cost model for the firm the flexible accelerator specification of the demand for capital and labor is estimated using u s manufacturing annual data for the 1947 1976 period the consistency of the data with the model is examined by testing the validity of the derived restrictions finally the conditions which permit aggregation over firms are determined and tested empirically the flexible accelerator specification has been popular in the empirical literature on interrelated investment and employment decisions see nadiri and rosen 38 coen and hickman 10 and schramm 40 more recent examples include sargent 39 berndt fuss and wavermann 4 berndt and morrison 6 and meese 34 under suitable assumptions the specification may be rationalized by the adjustment cost model of the firm eisner and strotz 13 lucas 30 mortensen 35 extends the work of lucas and derives some empirically testable restrictions of the accelerator specification that are implied by the adjustment cost framework the broad objective of this paper is to provide a more rigorous and comprehensive test of the adjustment cost model than is presently found in the literature this objective is achieved in three stages first we offer an alternative derivation of the mortensen restrictions and more importantly we prove theorem 1 that his restrictions are exhaustive i e we establish an integrability result for the flexible accelerator adjustment cost model second the flexible accelerator specification of the demand for capital and labor is estimated using total u s manufacturing annual data for the 1947 76 period it is assumed that firms minimize expected production costs subject to a technology which implies that capital and labor stocks are costly to adjust while a third factor materials is freely adjustable the consistency of the data with the adjustmentcost framework is examined by testing for the validity of the derived restrictions further we test the validity of some separability restrictions on the adjustmentcost technology that to varying degrees are imposed a priori in all of the cited empirical studies finally we provide a complete characterization of the individual firm technologies which justify the common assumption of the existence of a representative firm this problem of aggregation over firms which has been

wholesale and farm level impacts of generic advertising the case of catfish a four equation econometric model of the us catfish industry is estimated to determine the impacts of industry funded advertising on the wholesale and farm levels of the market results suggest that despite the market power held by middlemen the compaign has increased quasi rents to producers the relatively large benefit cost ratios about 13 1 however are attributed primarily to the price effects of the campaign this highlights the importance of supply response in evaluating the economic effects of industry generic advertising programmes elasticity estimates based on 1980 89 monthly data are farm level supply 0 15 wholesale level demand 1 01 farm wholsale price transmission 0 68 and advertising 0 0075

the behavioral relevance of mental accounting for the pricing of financial options abstract the paper reports an experiment on the pricing of financial options arbitrage free option pricing is tested against three hypotheses based on mental accounting the data show that even with considerable experience unexploited arbitrage opportunities persist subjects do not seem to make the connections between the different investment possibilities as essential for arbitrage free pricing afp instead they act as if they associate the risky assets to the same mental account while the bond is treated separately this corresponds to the construction of a two layer portfolio of a risky and a safe layer in the behavioral portfolio theory of shefrin and statman j fin quant anal 35 2000 127

an asset allocation puzzle this paper examines popular advice on portfolio allocation among cash bonds and stocks it documents that this advice is inconsistent with the mutual fund separation theorem which states that all investors should hold the same composition of risky assets in contrast to the theorem popular advisors recommend that aggressive investors hold a lower ratio of bonds to stocks than conservative investors the paper explores various possible explanations of this puzzle and finds them unsatisfactory copyright 1997 by american economic association

european co2 prices and carbon capture investments we assess the option to install a carbon capture and storage ccs unit in a coal fired power plant operating in a carbon constrained environment we consider two sources of risk namely the price of emission allowance and the price of the electricity output first we analyse the performance of the eu market for co2 emission allowances specifically we focus on the contracts maturing in the kyoto protocol s first commitment period 2008 to 2012 and calibrate the underlying parameters of the allowance price process then we refer to the spanish wholesale electricity market and calibrate the parameters of the electricity price process we use a two dimensional binomial lattice to derive the optimal investment rule in particular we obtain the trigger allowance prices above which it is optimal to install the capture unit immediately we further analyse the effect of changes in several variables on these critical prices among them allowance price volatility and a hypothetical government subsidy we conclude that at current permit prices immediate installation does not seem justified from a financial point of view this need not be the case though if carbon market parameters change dramatically carbon capture technology undergoes significant improvements and or a specific governmental policy to promote these units is adopted

the effect of supply management on herd size in alberta dairy a supply management program limits the aggregate supply of a commodity often through the use of marketable quota licenses the static aggregate welfare effects of supply controls are well known but the farm level dynamic effects on dairy investment are not a theoretical cost of adjustment model is used to show that supply management reduces the rate of quasi fixed input adjustment at the farm level in fact when a quasi fixed input is complementary to quota licenses investment or disinvestment can be impaired to such an extent that the input moves away from the long run equilibrium as a result overinvestment in this input can significantly reduce productivity growth

asymmetric adjustment of dynamic factors at the firm level presents a study which addressed the deficiencies of previous studies the specification and estimation in the modeling of asymmetry and zero gross investment in the agricultural industry reference to previous studies on asymmetry information on the standard dual model results of the study

personal investing advice theory and evidence data from a unique survey containing information on the composition of the respondents total asset holdings both inside and outside their retirement accounts shed light on individual asset allocation behavior individual asset allocations are consistent with the recommendations of expert practitioners and with the prescriptions of economic theory the survey respondents maintain in cash and near cash investments a proportion of their wealth that declines as wealth increases they hold these safe assets outside their retirement accounts the proportion of total assets that they hold in equities declines with age and rises with wealth they do not appear to manage their assets across retirement and nonretirement accounts to maximize tax efficiency

when the carrot goes bad the effect of solar rebate uncertainty abstract although meant to encourage investment in solar photovoltaic pv systems some incentive policies may themselves become a barrier in instances where policy related uncertainty is present as potential solar adopters delay their investment until uncertainty is resolved this study utilizes a quasi experimental setting to quantify the effect of solar policy uncertainty focusing on the california solar initiative s residential rebate program i exploit the temporary exhaustion of funds within one of the utility territories as an exogenous source of increased uncertainty and estimate that it leads to a 67 drop in rebate applications in an average zip code week there is considerable heterogeneity in this effect depending on household income and pv system size among households that are least likely to invest in pv without a rebate incentive program participation drops by up to 69 this suggests potentially significant loss in program effectiveness due to lower pv adoption and underscores the importance of accounting for uncertainty in policy evaluations

dynamic asset allocation for stocks bonds and cash closed form solutions for hara optimal portfolios are obtained in a dynamic portfolio optimization model in three assets stocks bonds and cash in a vasicek type model of stochastic interest rates with correlated stock prices the hara is a buy and hold combination of a zero coupon bond with maturity matching the investor s horizon and a crra mutual fund this simple characterization facilitates insights about investor behavior over time and provides explanations on the rational use of convex versus concave investment strategies the model illuminates clearly the role of the different market parameters and relative risk aversion in portfolio strategies

labor supply flexibility and portfolio choice in a life cycle model abstract this paper examines the effect of the labor leisure choice on portfolio and consumption decisions over an individual s life cycle the model incorporates the fact that individuals may have considerable flexibility in varying their work effort including their choice of when to retire given this flexibility the individual simultaneously determines optimal levels of current consumption labor effort and an optimal financial investment strategy at each point in his life cycle we show that labor and investment choices are intimately related the ability to vary labor supply ex post induces the individual to assume greater risks in his investment portfolio ex ante

dynamic asset allocation portfolio decomposition formula and applications a new decomposition of the optimal portfolio in dynamic models with von neumann morgenstern preferences and ito prices is established the formula rests on a change of numeraire that uses pure discount bonds as units of account the dynamic hedging demand has two components the first hedge insures against fluctuations in an optimally designed bond with a maturity date matching the investor s horizon the second hedge immunizes against fluctuations in the market price of risk in the bond numeraire various applications are examined new results concerning the behavior of extremely risk averse individuals the demand for bonds and its long horizon limit and the optimal portfolio in incomplete markets are derived the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

owner occupied housing and investment in stocks an empirical test abstract this paper analyzes the empirical link between housing investment and stockholding by testing implications of the model of flavin and yamashita american economic review 92 2002 345 362 their model illustrates how the house to net worth ratio influences a homeowner s portfolio composition regression estimates suggest that there is a strong relationship between housing investment and stockholding and the house to net worth ratio could explain certain heterogeneity in stockholding households with a high house to net worth ratio hold a lower proportion in stocks the results support the hypothesis that overinvestment in housing affects financial portfolio of homeowners

a symmetric normalized quadratic gnp function and the u s demand for imports and supply of exports this paper reports estimates of a gnp function for the united states using data covering most of the postwar period and it introduces a new functional form the symmetric normalized quadratic variable profit function which is a natural extension of recent work by diewert and wales this functional form allows convexity in prices and concavity in fixed inputs to be imposed globally empirical results indicate that the demand for imports is less price elastic than the supply exports that an increase in labor endowment favors trade and that a deterioration of the terms of trade mostly hurts labor

competitive dynamic advertising a modification of the case game abstract in this paper we consider a modified version of the advertising differential game of case 1979 we derive non cooperative nash equilibria for open loop controls as well as for feedback strategies we consider finite and infinite planning horizons the feedback equilibrium is shown to be robust against stochastic disturbances of the state equation

portfolio rebalancing in general equilibrium abstract this paper develops an overlapping generations model of optimal rebalancing where agents differ in age and risk tolerance equilibrium rebalancing is driven by a leverage effect that influences levered and unlevered agents in opposite directions an aggregate risk tolerance effect that depends on the distribution of wealth and an intertemporal hedging effect after a negative macroeconomic shock relatively risk tolerant investors sell risky assets while more risk averse investors buy them owing to interactions of leverage and changing wealth however all agents have higher exposure to aggregate risk after a negative macroeconomic shock and lower exposure after a positive shock

when to invest in carbon capture and storage technology a mathematical model abstract we present two models of the optimal investment decision in carbon capture and storage technology ccs one where the carbon price is deterministic based on the newly introduced carbon floor price in great britain and one where the carbon price is stochastic based on the ets permit price in the rest of europe a novel feature of this work is that in both models investment costs are time dependent which adds an extra dimension to the decision problem our deterministic model allows for quite general dependence on carbon price and consideration of time to build and simple calculus techniques determine the optimal time to invest we then analyse the effect of carbon price volatility on the optimal investment decision by solving a bellman equation with an infinite planning horizon we find that increasing the carbon price volatility increases the critical investment threshold and that adoption of this technology is not optimal at current prices in agreement with other works however reducing carbon price volatility by switching from carbon permits to taxes or by introducing a carbon floor as in great britain would accelerate the adoption of carbon abatement technologies such as ccs

semi analytical solutions for dynamic portfolio choice in jump diffusion models and the optimal bond stock mix this paper studies the optimal portfolio selection problem in jump diffusion models where an investor has a hara utility function and there are potentially a large number of assets and state variables more specifically we incorporate jumps into both stock returns and state variables and then derive semi analytical solutions for the optimal portfolio policy up to solving a set of ordinary differential equations to greatly facilitate economic insights and empirical applications of jump diffusion models to examine the effect of jump risk on investors behavior we apply our results to the bond stock mix problem and particularly revisit the bond stock ratio puzzle in jump diffusion models our results cast new light on this puzzle that unlike pure diffusion models it cannot be rationalized by the hedging demand assumption due to the presence of jumps in stock returns

time to build option value and investment decisions abstract investment decisions and outlays are often made sequentially for example the rate at which construction proceeds is usually flexible and can be adjusted with the arrival of new information traditional discounted cash flow methods which treat the pattern of investment as fixed ignore this flexibility and understate the value of the project this paper uses contingent claims analysis to derive optimal decision rules and to value such investments we determine the effects of time to build opportunity cost and uncertainty on the investment decision for reasonable parameter values we show how a simple npv rule can lead to gross errors

investment in u s agriculture resource adjustment problems in u s agriculture are motivated against the background of the farm problem the adjustment cost hypothesis is invoked to specify and estimate consistently a system of dynamic investment demand and output supply equations by utilizing recent advances in dynamic duality theory the investment demand equations assume the form of a multivariate flexible accelerator results indicate that labor capital services and land exhibited quasi fixity while intermediate materials were a variable factor this can be construed as a form of asset fixity within aggregate u s agriculture the univariate flexible accelerator hypothesis is rejected