portfolio choice and liquidity constraints we study the infinite horizon model of household portfolio choice under liquidity constraints and revisit the portfolio specialization puzzle we show why the puzzle is robust to several model variations and argue that positive correlation between earnings shocks and stock returns is unlikely to provide an empirically plausible resolution we find that relatively small fixed costs for stock market entry are sufficient to deter stockholding because for a plausible range of parameter values households can achieve desired consumption smoothing with small or zero holdings of stocks such costs could arise from informational considerations sign up fees and investor inertia

issues in irrigation pricing in developing countries abstract this paper surveys the current literature on irrigation pricing in developing countries and discusses the important issues involved in particular this paper discusses the role of government in irrigation development and allocation economics of irrigation pricing current status of irrigation water pricing and cost recovery in developing countries and the reasons for the marginal cost pricing principal being not followed in developing countries the paper also provides some suggestions for improving methods of water pricing and cost recovery

cyclical dynamics in idiosyncratic labor market risk is individual labor income more risky in recessions this is a difficult question to answer because existing panel data sets are so short to address this problem we develop a generalized method of moments estimator that conditions on the macroeconomic history that each member of the panel has experienced variation in the cross sectional variance between households with differing macroeconomic histories allows us to incorporate business cycle information dating back to 1930 even though our data do not begin until 1968 we implement this estimator using household level labor earnings data from the panel study of income dynamics we estimate that idiosyncratic risk is i highly persistent with an annual autocorrelation coefficient of 0 95 and ii strongly countercyclical with a conditional standard deviation that increases by 75 percent from 0 12 to 0 21 as the macroeconomy moves from peak to trough

saving and portfolio allocation before and after job loss we investigate the development of household labor income financial wealth and asset holdings over a 9 year period around job loss using unique administrative panel data from norway consistent with predictions from theory the data show additional saving and a shift toward safer assets in the years leading up to unemployment and depletion of savings after job loss in the years after job loss the households after tax labor income is reduced by about usd 12 500 over the same time period households deplete usd 3 000 of their financial assets of which one third is accumulated prior to the job loss this suggests that at least some households can foresee and prepare for the upcoming unemployment which indicates that private savings can to some extent serve as a substitute for publicly provided unemployment insurance

quantitative easing a sceptical survey evaluation of quantitative easing qe is difficult as it is only used in response to severe and unusual economic difficulties despite this we argue that two main conclusions can be drawn from a sceptical reading of the evidence first large scale asset purchases reduce government bond rates especially at the longer end of the yield curve however this effect may be temporary and is small if bond rates are already low while initial waves of qe are more effective than subsequent programs second qe appears to have been effective in late 2008 and 2009 preventing even larger declines in output and inflation than were experienced we argue that the literature is limited relying on similar methodologies and largely originating in central banks exploration of alternative approaches to qe would be useful in widening an evidence base that is currently too narrow

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

portfolio choice in the presence of background risk in this paper we focus on how the presence of background risks from sources such as labour and entrepreneurial income influences portfolio allocations this interaction is explored in a theoretical model that is calibrated using cross sectional data from a variety of sources the model is shown to be consistent with some but not all aspects of cross sectional observations of portfolio holdings the paper also provides a survey of the extensive theoretical and empirical literature on portfolio choice

appraising alternatives for allocating and cost recovery for irrigation water in egypt abstract alternative approaches to allocating and recovering costs for water on egyptian farms are proposed and evaluated in accordance with the societal objectives of allocative efficiency equity of income distribution and cost recovery a linear programming model of a study area in egypt s northern delta predicts farmers response to the proposed cost sharing instruments over a range of water supply conditions transactions costs for each charging instrument are estimated and incorporated into the allocative efficiency analysis flat land charges supplemented by water quotas in the event of increasing water scarcity best achieve societal objectives in the current and prospective egyptian situation volumetric charging instruments were judged to be somewhat less desirable due to higher tangible and intangible costs of implementation the results highlight the importance of transactions costs the degree of water scarcity and other governmental revenue raising policies in determining an appropriate charging mechanism

the role of labor income risk in household risk taking abstract in fifteen european countries china and the us stocks and business equity as a share of total household assets are represented by an increasing and convex function of income wealth a parsimonious model fitted to the data shows why background labor income risk can explain much of this risk taking pattern uncontrollable labor income risk stresses middle income households more because labor income is a larger fraction of their total lifetime resources compared with the rich in response middle income households reduce controllable financial risk richer households having less pressure can afford more risk taking the poor take low risk because they avoid jeopardizing their subsistence consumption

precautionary motives and portfolio decisions theory predicts that under certain restrictions on preferences prudent consumers will allocate relatively more funds to riskless assets when there is uninsurable background risk this paper analyzes empirically the relevance of precautionary motives for the structure of household wealth to this end a new and rich data source from the netherlands is exploited the question of primary concern is what impact if any does the presence of income uncertainty have on the structure of dutch households portfolios we employ various semi parametric estimators both for cross sections and for panel data to assess the response of households portfolios to uninsurable background risk we find some but not unanimous support for the view that portfolios become less risky as income uncertainty increases

social interaction and stock market participation we propose that stock market participation is influenced by social interaction in our model any given social investor finds the market more attractive when more of his peers participate we test this theory using data from the health and retirement study and find that social households those who interact with their neighbors or attend church are substantially more likely to invest in the market than non social households controlling for wealth race education and risk tolerance moreover consistent with a peer effects story the impact of sociability is stronger in states where stock market participation rates are higher

expected shortfall spectral risk measures and the aggravating effect of background risk or risk vulnerability and the problem of subadditivity abstract we analyze spectral risk measures srms including its most popular representative expected shortfall es with respect to gollier and pratt 1996 s concept of risk vulnerability we find that srms and risk vulnerability are mutually exclusive owing to the property of subadditivity while subadditivity is commonly regarded as the axiomatic cornerstone of srms risk vulnerability by contrast prevails if and only if superadditivity holds the lack of risk vulnerability yields questionable predictions in portfolio problems srm decision makers who split their wealth between a risk free and a risky asset do constantly opt for an increase in the risky investment when their deterministic background wealth is complemented by some additional background risk the more general setting where background wealth is already random and then becomes more risky is not as clear cut any srm decision maker may both increase or decrease the risky investment depending on the concrete instance of the portfolio problem however when random background wealth and the risky asset are jointly normally distributed srm decision makers will again unambiguously increase their risky investment we further conduct a data analysis and discuss possible implications of the findings for regulatory risk management

international effects of a compression of euro area yield curves abstract in this paper we use a bayesian global vector autoregressive model to analyze the macroeconomic effects of a flattening of euro area yield curves our findings indicate positive effects on real activity and prices both within the euro area as well as in neighboring economies spillovers transmit through an exchange rate channel and a broad financial channel we complement our analysis by conducting a portfolio optimization exercise our results show that multi step ahead forecasts conditional on the euro area yield curve shock improve sharpe ratios relative to other investment strategies

portfolio choices firm shocks and uninsurable wage risk assessing the importance of uninsurable wage risk for individual financial choices faces two challenges first the identification of the marginal effect requires a measure of at least one component of risk that cannot be diversified or avoided moreover measures of uninsurable wage risk must vary over time to eliminate unobserved heterogeneity secondly evaluating the economic significance of risk requires knowledge of the size of all the wage risk actually faced existing estimates are problematic because measures of wage risk fail to satisfy the non avoidability requirement this creates a downward bias which is at the root of the small estimated effect of wage risk on portfolio choices to tackle this problem we match panel data of workers and firms and use the variability in the profitability of the firm that is passed over to workers to obtain a measure of uninsurable risk using this measure to instrument total variability in individual earnings we find that the marginal effect of uninsurable wage risk is much larger than estimates that ignore endogeneity we bound the economic impact of risk and find that its overall effect is contained not because its marginal effect is small but because its size is small and the size of uninsurable wage risk is small because firms provide substantial wage insurance

monetary policy in exceptional times this paper describes the way in which the european central bank ecb the federal reserve and the bank of england conducted monetary policy since the beginning of the financial crisis in august 2007 we argue that both quantitative easing and the other non standard measures introduced by central banks that changed the composition of the asset side of their balance sheets so called qualitative easing acted mainly through their effects on interest rates and in particular on money market spreads rather than solely through quantity effects in terms of the money supply we perform a quantitative exercise on the euro area which estimates the effect of the reduction of these spreads to the broader economy michele lenza huw pill and lucrezia reichlin

the effectiveness of unconventional monetary policy announcements in the euro area an event and econometric study abstract we use daily data on government bond yields and market based inflation expectations to measure the announcement effects of unconventional monetary policy announcements in the euro area focusing on their impact on ex ante real interest rates we find evidence of statistically significant effects of several announcements on real interest rates at maturities of two five and ten years that operate partly through nominal interest rates and partly by raising inflation expectations announcements that exceeded market expectations significantly reduced nominal and real interest rates while announcements that disappointed expectations had the opposite effect

income risk borrowing constraints and portfolio choice economic theory suggests that uninsurable income risk and the expectation of future borrowing constraints can reduce the share of risky assets in a household s portfolio if the utility function exhibits decreasing absolute risk aversion and decreasing prudence an individual will reduce his exposure to rate of return risks when confronted with other independent risks if there are transaction costs the expectation of future borrowing constraints should induce individuals to keep a lower proportion of their wealth in the form of illiquid and risky assets the authors find support for these propositions in a cross section of italian households copyright 1996 by american economic association

standard risk aversion and efficient risk sharing abstract this paper analyzes the risk attitude and investment behavior of a group of heterogeneous consumers who face an uninsurable background risk it is shown that standard risk aversion at the individual level does not imply standard risk aversion at the group level under efficient risk sharing this points to a potential divergence between individual and collective portfolio choices in the presence of background risk we show that if the members absolute risk tolerance is increasing and satisfies a strong form of concavity then the group has standard risk aversion

the system of administrative and political corruption canal irrigation in south india the paper describes how some irrigation engineers raise vast amounts of illicit revenue from the distribution of water and contracts and redistribute part to superior officers and politicians it argues that the corruption system which is centred on control of personnel transfers is an important supply side reason for poor performance of canal irrigated agriculture insofar as the same system operates in other government departments it may be more important for understanding indian politics and the political influences on economic development than has previously been realised

monetary policy surprises and interest rates evidence from the fed funds futures market abstract this paper estimates the impact of monetary policy actions on bill note and bond yields using data from the futures market for federal funds to separate changes in the target funds rate into anticipated and unanticipated components interest rates response to anticipated target rate changes is small while their response to unanticipated changes is large and highly significant these responses are generally consistent with the expectations hypothesis of the term structure surprise target rate changes have little effect on expectations of future actions however which helps to explain the lack of empirical support for the expectations hypothesis at the short end of the yield curve

hedging in incomplete markets with hara utility in the context of merton s original problem of optimal consumption and portfolio choice in continuous time this paper solves an extension in which the investor is endowed with a stochastic income that cannot be replicated by trading the available securities the problem is treated by demonstrating using analytic and in particular viscosity solutions techniques that the value function of the stochastic control problem is a smooth solution of the associated hamilton jacobi bellman hjb equation the optimal policy is shown to exist and given in a feedback form from the optimality conditions in the hjb equation at zero wealth a fixed fraction of income is consumed for large wealth the original merton policy is approached we also give a sufficient condition for wealth under the optimal policy to remain strictly positive

heterogeneous background risks and portfolio choice evidence from micro level data we construct a set of household level background risk variables to capture the covariance structure of three nonfinancial assets and two financial assets these risks are in general statistically significant and economically important for a household s stock market participation and stockholdings a one standard deviation increase in background risks reduces the participation probability by 11 and the stockholdings to wealth ratio by 4 the volatilities of labor income housing value and business income reduce a household s participation and stockholdings a household with labor income highly correlated with stock bond returns is less more likely to invest in stock

efficient spatial allocation of irrigation water in the presence of conveyance losses the efficient quantity of water applied falls with distance from the water source but the amount of water sent including conveyance losses actually increases with distance from the source except toward the tail end of the inigation system this implies that if marginal cost pricing were implemented farmers at the middle and lower reaches of the system would have to pay more money for less water received the model is illustrated and alternative financing schemes compared for an empirically derived demand function for imgation water despite massive public investments in irrigation infrastructure ex post evaluations of irrigation projects in developed and developing countries indicate that actual benefits are substantially below projected levels considerable evidence suggests that these low benefits are largely the result of poor on farm water use efficiencies and rent seeking activities that result from water charges that are low and often unrelated to water use chaudhry repetto bowen and young for example farmers near the system headworks are said to consume a disproportionate share of irrigation water while tail farmers are left with scanty and unreliable residual supplies reidinger wade many governments faced with increasing political pressure to conserve water and reduce fiscal deficits are considering higher water charges to decrease waste and increase cost recovery from project beneficiaries there is also increased awareness that low water charges and loosely enforced water rationing guidelines lead to environmental damages and excessive mining of groundwater resources in general the problems of water allocation and low user charges contribute to derivative problems in achieving efficiency equity fiscal stability and environmental sustainability

why do so few hold stocks the authors investigate why 75 percent of u s households do not hold stocks despite the equity premium and predictions of expected utility models the question is relevant for privatization asset pricing and tax progressivity issues they show that risk aversion per se heterogeneity of beliefs habit persistence time nonseparability and quantity constraints on borrowing do not account for the phenomenon a wedge between borrowing and lending rates and minimum investment requirements are plausible but empirically weak factors more promising explanations are inertia and departures from expected utility maximization there is also qualified support for nondiversifiable income risk as a contributing factor copyright 1995 by royal economic society

background risk and university endowment funds abstract this paper tests the effect of background risk on university endowment portfolios where background risk is defined as the volatility of universities nonfinancial income the results show that higher background risk is associated with lower portfolio standard deviations universities with higher background risk invest significantly more in fixed income and less in alternative assets a 1 standard deviation increase in background risk increases the allocation to fixed income by approximately 15 relative to the mean there is also evidence that wealthier highly selective universities hold riskier portfolios

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

methodology ideology and the economics of poticy why resource economists disagree it is evident that there is persistent disagreement among competent and articulate resource economists disagreement not only about the appropriate analytical and prescriptive response to particular constellations of policy issues but also about the uses and limitations of economics as a thought system in the policy arena this must be disquieting and disappointing to many among us who would regard the emergence of an integrated and cohesive as opposed to diverse and fractious resource economics as evidence of its maturation it is my purpose here to argue that the disagreements among us go deeper than mere disputes about priorities and tactics for doing resource economics where all participants share a common vision of what resource economics is and should be rather these disagreements extend beyond alternative conceptions of resource economics to fundamentally opposing methodologies i e conceptions of knowledge and how to get it while the proximate foci of disagreement will shift over time there is literally no good reason to expect an ultimate resolution of intradisciplinary conflict and convergence of viewpoints finally i argue that persistent disagreement is not only a fact of life it has its virtues

income risk and portfolio choice an empirical study this paper investigates the relationship between portfolio choice and labor income risk in the national longitudinal survey of youth 1979 cohort permanent income risk variability of shocks to income that have permanent effect significantly reduces the share of risky assets in the household s portfolio while transitory income risk variability of shocks with no lasting effect does not this result provides strong evidence that households portfolio choices respond to labor income risks in a manner consistent with economic theory theoretical work has shown that uninsurable labor income risk is likely to reduce the share of risky assets in an investor s portfolio pratt and zeckhauser 1987 kimball 1993 bertaut and haliassos 1997 koo 1998 1999 elmendorf and kimball 2000 in a dynamic context when labor in come consists of components of different persistence the magnitude of this effect should depend on the persistence associated with the risk the risk to a persistent component should have a larger effect than the risk to a transi tory component surprisingly however empirical work has not examined this interesting implication of the theory this paper uses the rich information con tained in the national longitudinal survey of youth 1979 cohort nlsy79 to examine this implication we assume that labor income has two components permanent and transitory we then measure the risks of the components for a sample of households in the survey and estimate their effects on the risky asset share previous empirical

the financial market impact of uk quantitative easing after outlining some of the monetary developments associated with quantitative easing qe we measure the impact of the uk s initial 2009 10 qe programme on bonds and other assets first we use a macro nance yield curve both to create a counterfactual path for bond yields and to estimate the impact of qe directly second we analyse the impact of individual qe operations on a range of asset prices we nd that qe signi cantly lowered government bond yields through the portfolio balance

the effectiveness of alternative monetary policy tools in a zero lower bound environment this paper reviews alternative options for monetary policy when the shortterm interest rate is at the zero lower bound and develops new empirical estimates of the effects of the maturity structure of publicly held debt on the term structure of interest rates we use a model of risk averse arbitrageurs to develop measures of how the maturity structure of debt held by the public might affect the pricing of level slope and curvature term structure risk we find that these treasury factors historically were quite helpful for predicting both yields and excess returns over 1990 2007 the historical correlations are consistent with the claim that if in december 2006 the fed were to have sold off all its treasury holdings of less than 1 year maturity about 400 billion and use the proceeds to retire treasury debt from the long end this might have resulted in a 14 basis point drop in the 10 year rate and an 11 basis point increase in the 6 month rate we also develop a description of how the dynamic behavior of the term structure of interest rates changed after hitting the zero lower bound in 2009 our estimates imply that at the zero lower bound such a maturity swap would have the same effects as buying 400 billion in long term maturities outright with newly created reserves and could reduce the 10 year rate by 13 basis points without raising short term yields

hedging familiarity and portfolio choice we exploit the restrictions of intertemporal portfolio choice in the presence of non nancial income risk to design and implement tests of hedging that use the information contained in the actual portfolio of the investor we use a unique dataset of swedish investors with information broken down at the investor level and into various components of wealth investor income tax positions and investor demographic characteristics portfolio holdings are identi ed at the stock level we show that investors do not engage in hedging but invest in stocks closely related to their non nancial income we explain this with familiarity that is the tendency to concentrate holdings in stocks with which the investor is familiar in terms of geographical or professional proximity or that he has held for a long period we show that familiarity is not a behavioral bias but is information driven familiarity based investment allows investors to earn higher returns than they would have otherwise earned if they had hedged