some aspects of the taxation of capital gains abstract the analysis of the effects of capital gains taxation requires a careful modelling both of the details of the tax code and the imperfections in the capital market under the standard assumptions concerning perfect capital markets and under the standard idealizations of the tax code there are several strategies by which rational investors can avoid note only all taxes on their capital income but also all taxes on their wage income these strategies leave individuals consumption and bequests in each state of nature and at each date unchanged from what they would have been in the absence of taxes although certain detailed provisions of the tax code may limit the extent to which rational investors can avail themselves of these tax avoidance activities there are ways in a perfect capital market by which the effects of these restrictions can be ameliorated accordingly any analysis of the effects of capital taxation must focus on imperfect capital markets if individuals face limitations on the amounts which they can borrow and or if there are limitations on short sales then under some circumstances there is a locked in effect individuals do not sell securities which they would have sold in the absence of taxation but under other circumstances individuals are induced to sell securities that they otherwise would have held in order to take advantage of the asymmetric treatment of short term losses and long term gains a policy of realizing gains as soon as they become eligible for long term treatment dominates the policy of postponing the realization of capital gains provided the gains are not too large a simple general equilibrium model is constructed within which it is shown that the taxation of capital gains may increase the volatility of asset prices and lead individuals not to trade when they otherwise would while the analysis casts doubt on the significance of the welfare losses resulting from these exchange inefficiencies there are circumstances in which the tax leads to production inefficiencies e g terminating projects at other than the socially optimal date finally we argue that the focus of some recent policy debates on the short run revenue impact of a decrease in the tax rate on capital gains is misplaced even when the short run revenue impact is positive consumption may increase thus exacerbating inflationary pressures and private savings may decrease thus leading to a lower level of investment in the private sector moreover there is some presumption that the long run revenue impact is negative our analysis has some important implications for empirical research in particular it suggests that the impact of the tax is not adequately summarized by a single number such as the effective tax rate representing the average ratio of tax payments to capital gains moreover the impact of the tax cannot be assessed by looking only at reported capital gains and losses

information acquisition and under diversification if an investor wants to form a portfolio of risky assets and can exert effort to collect information on the future value of these assets before he invests which assets should he learn about the best assets to acquire information about are ones the investor expects to hold but the assets the investor holds depend on the information he observes we build a framework to solve jointly for investment and information choices with general preferences and information cost functions although the optimal research strategies depend on preferences and costs the main result is that the investor who can first collect information systematically deviates from holding a diversified portfolio information acquisition can rationalize investing in a diversified fund and a concentrated set of assets an allocation often observed but usually deemed anomalous copyright wiley blackwell

tail dependence and diversification benefits in emerging market stocks an extreme value theory approach this article examines tail dependence the benefits of diversification and the relation between the two for emerging stock markets we find most emerging equity markets are independent in limiting joint extremes however the dependence in finite levels of extremes is still much stronger than the dependence implied by multivariate normality therefore simple correlation analysis can lead to gross underestimation of the chances of joint crashes in multiple markets assuming risk averse investors guarding against extreme losses diversification benefits are measured for each two country optimal portfolio by the reduction in quantile risk measures such as value at risk and expected shortfall relative to an undiversified portfolio it is shown that tail dependence measures developed from multivariate extreme value theory are negatively related to diversification benefits and more importantly can explain diversification benefits better than the correlation coefficient at the most extreme quantiles

a country specific point of view on international diversification abstract this paper adds a country specific point of view on diversification among financial markets previous results indicate that emerging markets may generally exhibit higher diversification effects in comparison to developed markets due to lower market linkages however the question remains which markets in particular may be more or less attractive among emerging and developed markets as well as in a world market setting to the best of our knowledge this is the first empirical study which analyzes this question beyond continental levels only we analyze diversification by means of optimal portfolio allocations and in terms of tail risk reductions we also include investors tendency to overweight regional investments home bias our results show that malaysia switzerland jordan chile or singapore are markets with high diversification potential on the contrary argentina brazil and south korea exhibit high individual risk levels in combination with high market linkages

is international diversification really beneficial abstract previous research claims that low constant correlations among international stock indices create substantial risk reduction from diversification we contend that only using constant correlations is too simplistic an approach we examine international diversification by 1 using conditional correlations 2 evaluating tail risk including the effect of skewness and kurtosis and 3 examining the possible tradeoffs of standard deviation with correlation skewness and kurtosis we show that conclusions concerning diversification based solely on constant correlations across markets can be misleading since the diversification benefits are time varying are affected by non normality and depend on the benchmark country employed finally tradeoffs do exist between standard deviation and the other risk factors

does right or left matter cabinets credibility and fiscal adjustments abstract this paper tests the widely held assumption that left wing cabinets favor higher public spending and examines whether cabinet ideology affects the persistence of major fiscal adjustments in a panel of large fiscal adjustments in oecd countries during the last 40 years we find evidence that left wing and right wing cabinets are partisan the left tends to reduce the deficit by raising tax revenues while the right relies mostly on spending cuts our testable hypothesis is that cabinets can signal commitment by undertaking fiscal adjustments in ways that are not favored by their constituencies in other words the left gains credibility when it cuts spending while the right becomes more credible when it increases tax revenues probit estimates of the determinants of persistence in fiscal adjustments confirm that spending cuts by the left and tax increases by the right are associated with persistent adjustments the effect is significant for cuts in public spending public consumption wage or nonwage increases in total revenues direct taxes on businesses and other taxes we test for the role of several other determinants of persistence confirming that coalition and majority cabinets are associated with less persistence while periods of high or rising levels of indebtedness favor persistence the estimates of the impact of ideology and other variables on gdp and its components show that it is the size of the spending cut rather than cabinet ideology that is most important

unobservable shocks as carriers of contagion we propose an identified structural garch model to disentangle the dynamics of financial market crises we distinguish between the hypersensitivity of a domestic market in crisis to news from foreign non crisis markets and the contagion imported to a tranquil domestic market from foreign crises the model also enables us to connect unobserved structural shocks with their source markets using variance decompositions and to compare the size and dynamics of impulses during crises periods with tranquil period impulses to illustrate we apply the method to data from the 1997 1998 asian financial crisis which consists of a complicated set of interacting crises we find significant hypersensitivity and contagion between these markets but also show that links may strengthen or weaken impulse response functions for an equally weighted equity portfolio show the increasing dominance of korean and hong kong shocks during the crises and covariance responses demonstrate multiple layers of contagion effects

on the frequency of large stock returns putting booms and busts into perspective textabstractnumerous articles have investigated the distribution of share prices and find that the returns are fat tailed nevertheless there is still controversy about the amount of probability mass in the tails and hence about the most appropriate distribution to use in modeling returns this controversy has proven hard to resolve as the alternatives are non nested we employ extreme value theory focusing exclusively on the larger observations in order to assess the tail shape within a unified framework we find that at least the first two moments exist this enables one to generate robust probabilities on large returns which put the recent stock market swings into historical perspective

comovement in international equity markets a sectoral view abstract we investigate shifts in correlation patterns among international equity returns at the market level as well as the industry level we develop a novel bivariate garch model for equity returns with a smoothly time varying correlation and then derive a lagrange multiplier statistic to test the constant correlation hypothesis directly applying the test to weekly data from germany japan the uk and the us in the period 1980 2000 we find that correlations among the german uk and us stock markets have doubled whereas japanese correlations have remained the same both dates of change and speeds of adjustment vary widely across countries and sectors

trying to explain home bias in equities and consumption investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest a phenomenon called equity home bias in the absence of this bias investors would optimally diversify domestic output risk using foreign equities therefore consumption growth rates would tend to co move across countries even when output growth rates do not empirically however consumption growth rates tend to have a lower correlation across countries than do output growth rates a phenomenon i call consumption home bias in this paper i discuss these two biases and their potential relationship as suggested by the literature

taxation of capital gains on owner occupied homes the paper compares taxation on realization with taxation on accrual in the context of owner occupied housing it considers a model where the utility a household derives from housing relative to other consumption varies over the life cycle as there are sizeable transaction costs housing consumption will not even in the absence of taxes be adjusted continuously but at discrete intervals the focus of the paper is on tax effects on the length of these intervals the following results are shown u taxing true economic appreciation at the same rate as imputed rental income and other capital income will lead to a shortening of the intervals if the capital gains are taxed on accrual an increase in this tax rate holding other rates constant will lead to a shortening of the intervals if the capital gains are taxed only as they are realized an increase in this tax rate holding other rates constant may either lead to a lengthening or a shortening of the holding period shortening is more likely if transaction costs are large whereas lengthening will occur if the rate of price increase is high

the rationale of the mean standard deviation analysis skewness preference and the demand for money publisher summary this chapter discusses the rationale of the mean standard deviation analysis skewness preference and the demand for money in january 1969 issue of the review of economic studies karl borch and martin feldstein separately criticized the widely used mean variance analysis of portfolio selection borch contended that any system of upward sloping mean standard deviation e s indifference curves can be shown to be inconsistent with the basic axiom of choice under uncertainty he pointed out that one can always pick any two points on an upward sloping indifference curve to represent two bernoulli distributions with probability 1 p of gaining the same amount x in both the cases and probability p of gaining y1 in the case of one distribution and y2 in the case of the second distribution with y2 y1 if the second distribution represents the point to the northeast of the other point then by the dominance axiom the second distribution must be preferred to the first which contradicts the basic meaning of indifference curves feldstein by using a log utility function and a lognormal distribution for investment outcome showed that e s indifference curves for a risk averter need not be convex downwards though upward sloping they would change from convex to concave once the standard deviation of the outcome exceeds the mean multiplied by on the face of it this seems to suggest that risk aversion might decrease as risk is increased beyond a certain extent

the effects of taxation on the selling of corporate stock and the realization of capital gains this study provides the first econometric analysis of the effect of taxation on the realization of capital gains the analysis thus extends and complements the earlier study by feldstein and yitzhaki 1978 of the effect of taxation on the selling of corporate stock the present analysis using a large new body of data obtained from individual tax returns supports the earlier finding that corporate stock sales are quite sensitive to tax rates and then shows that the effect on the realization of capital gains is even stronger

a theory of disappointment aversion an axiomatic model of preferences over lotteries is developed it is shown that this model is consistent with the allais paradox includes expected utility theory as a special case and is only one parameter beta richer than the expected utility model allais paradox type behavior is identified with positive values of beta preferences with positive beta are said to be disappointment averse it is shown that risk aversion implies disappointment aversion and that the arrow pratt measures of risk aversion can be generalized in a straight forward manner to the current framework copyright 1991 by the econometric society

information markets and the comovement of asset prices traditional asset pricing models predict that covariance between prices of difierent assets should be lower than what we observe in the data this model generates high covariance within a rational expectations framework by introducing markets for information about asset payofis when information is costly rational investors will not buy information about all assets they will learn about a subset because information production has high flxed costs competitive producers charge more for low demand information than for high demand information a price that declines in quantity makes investors want to purchase a common subset of information if investors price many assets using a common subset of information then a shock to one signal is passed on as a common shock to many asset prices these common shocks to asset prices generate excess covariance the cross sectional and time series properties of asset price covariance are consistent with this explanation

how burdensome are capital gains taxes abstract this paper uses capital gain realization data from individual tax returns to evaluate recent claims that sophisticated portfolio strategies permit investors to avoid capital gains taxes the results suggest important investor heterogeneity twenty percent of taxpayers with capital gains or losses face binding loss offset constraints another significant group of investors evades the capital gains tax prior to recent legislative changes forty percent of capital gains were unreported finally about forty percent of capital gains accrue to investors who report capital gains and face significant tax burdens as the traditional analysis of the capital gains tax suggests

the limits of diversification when losses may be large abstract recent results in value at risk analysis show that for extremely heavy tailed risks with unbounded distribution support diversification may increase value at risk and that generally it is difficult to construct an appropriate risk measure for such distributions we further analyze the limitations of diversification for heavy tailed risks we provide additional insight in two ways first we show that similar non diversification results are valid for a large class of risks with bounded support as long as the risks are concentrated on a sufficiently large interval the required length of the support depends on the number of risks available and on the degree of heavy tailedness second we relate the value at risk approach to more general risk frameworks we argue that in markets for risky assets where the number of assets is limited compared with the bounded distribution support of the risks unbounded heavy tailed risks may provide a reasonable approximation we suggest that this type of analysis may have a role in explaining various types of market failures in markets for assets with possibly large negative outcomes

international diversification strategies revisited from the risk perspective following roll roll r 1992 industrial structure and comparative behaviour of international stock market indices journal of finance 47 3 42 and heston and rouwenhorst heston s l rouwenhorst g k 1994 does industrial structure explain the benefits of international diversification journal of financial economics 36 3 27 researchers have decomposed stock returns into country and industry components evidence suggests that industry components have become more important in recent years but the reasons for this are unclear existing research concentrated mainly on stock returns in industrial countries in this paper we consider instead the decomposition of stock risks within emerging equity markets we provide a rationale for this procedure and its relationship to return decompositions the results provide new firm specific evidence on the debate over country and industry components their stability over time and the implications for portfolio diversification

international diversification an extreme value approach abstract international diversification has costs and benefits depending on the degree of asset dependence we study international diversification with two dependence measures correlations and extreme dependence we discover that dependence has typically increased over time and document mixed evidence on heavy tails in individual countries moreover we uncover three additional findings related to dependence first the timing of downside risk differs depending on the region surprisingly recent latin american returns exhibit little downside risk second latin america exhibits a great deal of correlation complexity third according to the empirical results correlation does not vary with returns but extreme dependence does vary monotonically with regional returns our results are consistent with a tradeoff between international diversification and systemic risk they also suggest international limits to diversification and that international investors demand some compensation for joint downside risk during extreme events

contagion as a domino effect in global stock markets this paper shows that stock market contagion occurs as a domino effect where confined local crashes evolve into more widespread crashes using a novel framework based on ordered logit regressions we model the occurrence of local regional and global crashes as a function of their past occurrences and financial variables we find significant evidence that global crashes do not occur abruptly but are preceded by local and regional crashes besides this form of contagion interdependence shows up by the effect of interest rates bond returns and stock market volatility on crash probabilities when it comes to forecasting global crashes our model outperforms a binomial model for global crashes only

estimating the basis risk of index linked hedging strategies using multivariate extreme value theory this paper studies the empirical quantification of basis risk in the context of index linked hedging strategies basis risk refers to the risk of non payment of the index linked instrument given that the hedger s loss exceeds some critical level the quantification of such risk measures from empirical data can be done in various ways and requires special consideration of the dependence structure between the index and the company s losses as well as the estimation of the tails of a distribution in this context previous literature shows that extreme value theory can be superior to traditional methods with respect to estimating quantile risk measures such as the value at risk thus the aim of this paper is to conduct an empirical analysis of basis risk using multivariate extreme value theory and extreme value copulas to estimate the underlying risk processes and their dependence structure in order to obtain a more adequate picture of basis risk associated with index linked hedging strategies our results emphasize that the application of extreme value theory leads to better fits of the tails of the marginal distributions in the considered stock price sample and that traditional methods in regard to estimating marginal distributions tend to overestimate basis risk while basis risk can in contrast be higher when taking into account extreme value copulas

property and income taxation in an economy with an austrian sector on industries producing austrian assets in particular the forest industry has been a topic of great interest and much misunderstanding for many years in a series of articles appearing recently in the literature bentick 1980 1982 klemperer 1982 mills 1981 1982 and wildasin 1982 a general consensus was reached that a land value tax insofar as this tax is levied on market value is nonneutral neutrality however unless defined with respect to a complete tax system may not be an appropriate goal of tax policy when tax distortions already exist in an economy the imposition of a nonneutral tax in any given sector may prove more efficient than the imposition of a neutral tax the purpose of this paper is to illustrate this point in a simple and explicit model of an economy with an austrian sector and an ordinary sector in this model efficiency is easily defined and taxinduced distortion easily measured contrary to the findings of bentick 1980 a land value tax does appear appropriate for the austrian sector when the ordinary sector is subject to an income tax a land value tax at a properly chosen rate allows the economy to achieve production efficiency bentick s proposed neutral tax a realized income tax with immediate expensing is inconsistent with production efficiency we outline our paper as follows in section ii we present our basic model efficiency is defined and the case where the austrian sector

dependence structure between the equity market and the foreign exchange market a copula approach abstract this paper investigates the dependence structure between the equity market and the foreign exchange market by using copulas in particular several copulas with different dependence structure are compared and used to directly model the underlying dependence structure we find that there exists significant symmetric upper and lower tail dependence between the two financial markets and the dependence remains significant but weaker after the launch of the euro our findings have important implications for both global investment risk management and international asset pricing by taking into account joint tail risk

impacts of tax alternatives on forest values and investment current interest in the theory and application of local government taxes on forests is intense conflicting discussions abound in the literature and several states have recently revised their forest tax laws or are currently considering changes 2 through an analysis not previously available this paper illustrates certain effects of changing from one forest tax system to another yield ad valorem or productivity in young growth forest regions approaching an even distribution of timber age classes given that all alternatives must raise the same annual tax

capital gains taxation in an economy with an austrian sector abstract this paper examines the effects of a proportional capital gains in an economy with an austrian sector with wine and trees and an ordinary sector we analyze the effect of capital gains taxation on both an accrual and a realization basis on the efficiency with which resources are used within the austrian sector since time is the only input which can be varied in the austrian sector this amounts to looking at the effect of capital gains taxation on the harvesting time or selling time of assets accrual taxation decreases the selling time of austrian assets realization taxation decreases the selling time of some austrian assets and leaves it unchanged for others inflation further reduces the selling time of assets taxed on an accrual basis often but not always inflation increases the selling time of austrian assets taxed on a realization basis we also examine the effect of the special tax treatment of capital gains at death and find that the current u s tax system under which capital gains taxes are waived at death encourages investors to hold assets longer in contrast to these results which suggest that the capital gains tax can reduce the holding period of an asset we show that there is a sense in which such taxes at least when levied on a realization basis discourage transactions and increase holding periods it is never profitable to change the ownership of an austrian asset between the time of the original constraint and the ultimate harvesting of the asset for final use capital gains taxation diverts resources from the austrian sector to the ordinary sector the effects on the efficiency of the allocation of investment between sectors are complicated and not easy to summarize

starving the beast intra generational conflict and balanced budget rules a balanced budget requirement does not only prevent fiscal policy makers from smoothing tax distortions but also affects their preferred choice of government spending the paper analyzes the conditions under which groups opposed to government spending might want to implement a balanced budget requirement in order to induce the government to spend less it shows that relaxing a balanced budget requirement need not be associated with higher government spending

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

zipf s law for cities an explanation zipf s law is a very tight constraint on the class of admissible models of local growth it says that for most countries the size distribution of cities strikingly fits a power law the number of cities with populations greater than s is proportional to 1 s suppose that at least in the upper tail all cities follow some proportional growth process this appears to be verified empirically this automatically leads their distribution to converge to zipf s law

progressive taxation in sequential decisionmaking deterministic and stochastic analysis abstract this paper investigates the effect of progressive taxation on sequential decisionmaking the decision is the archetypical problem of capital theory determining the optimal cutting time for a tree that grows according to either a deterministic or stochastic process for the deterministic model the optimal cutting time is unaffected by proportional taxes but decreases as taxes become more progressive for the stochastic model the major finding is that uncertainty can partially offset the inefficiency induced by progressive taxation when this result holds the government benefits from increased uncertainty whereas the taxpayer is harmed one noteworthy example of this is when the tree s growth is governed by brownian motion

forest taxation and rotation age under private amenity valuation new results abstract this paper studies the impact of harvesting property and profit taxes on private rotation age in an ongoing rotations model where the private landowner is interested not only in the present value of harvest revenue but also in the private amenity services provided by the forest stand the main finding of the paper is that conventional wisdom about the rotation effects of forest taxes distilled from the faustmann model predominantly ceases to hold this is because forest taxes distort the relative profitability of timber and amenity production in a way that is sensitive to the precise nature of amenity valuation therefore the design of forest tax policy necessitates good knowledge of the landowner s objective function concerning the type of amenity services

an income tax wedge between buyers and sellers values of forests although forestry s long production period is seen as a discouragement to reforestation some economists have noted that selling immature timber for future harvest can shorten the payoff period for the original owner this paper shows how income taxes may inhibit such sales of immature forests documenting a type of lock in effect to date not quantified under several types of local government taxes theoretical curves of willingness to pay for immature even aged timber have been derived klemperer 1976 these models showed that the seller s asking price should equal the buyer s bid if both parties have the same view of the future use the same interest rate and face the same local government taxes however income taxes were not included after income taxes kovenock and rothschild 1983 have shown that for assets such as aging wine and timber the asking price will exceed the bid at ages between initial investment and final sale for consumption this paper derives equations for ask and bid prices for even aged forests of any age after income taxes allowing for inflation and separation of land and timber values potential differences between ask and bid are computed using yield functions for loblolly pine pulpwood and douglas fir with a longer sawtimber rotation results show that under certain plausible conditions the mid rotation asking price for forested properties can be from 30 to over 40 percent above the highest bid when ask and bid are computed to guarantee buyer and seller the same after tax real rate of return while these findings are based on restrictive assumptions the general importance for market decisions is discussed relevance of this work can be seen in the unusually large acreage of forested tracts sold or offered prior to harvest date in the early and mid 1980s duke university 1984 1986 numerous forest products firms sought to reduce their capital investment and improve cash flows speculating that enough timber would be available on the open market in the future

household portfolio diversification a case for rank dependent preferences the proliferation of novel preference theories in financial economics is hampered by a lack of non experimental evidence and by the theories additional complexity which has not been shown to be critical in applications in this article i present arguments in support of preferences with rank dependency using the survey of consumer finances data i document two widespread patterns inconsistent with expected utility i many households simultaneously invest in well deversified funds and in poorly diversified portfolios of stocks and ii some households with substantial savings do not invest anything in equities i show that portfolio choice models with rank dependent preferences plausibly parameterized and under fully rational assumptions are quantitatively consistent with the observed diversification these results call for further efforts to integrate the models of rank dependent preferences in portfolio theory and asset pricing the decision theoretic literature has long acknowledged the shortcomings of the expected utility theory of von neumann and morgenstern 1944 several generalizations of the theory are inspired by the experimental evidence and aimed at improving its descriptive accuracy however there are few applications of new models of preferences in finance and expected utility continues to dominate the field 1 two principal hurdles slow the proliferation of novel preferences in financial economics first the lack of empirical non experimental or field data confirming that the behavior motivating non expected utilities is widespread outside the laboratory settings second the additional and often significant complexity of the alternative preferences which has not been shown to be critical in applications where the models based on expected utility fall short of reasonable predictions this article presents empirical and theoretical this paper was previously circulated under the title household portfolio diversification the paper has benefited from the comments of shlomo benartzi luca benzoni markus brunnermeier john dickhaut maria perozek raj singh hersh shefrin and workshop participants at minnesota finance bag lunch 2003 wharton conference household financial decision making and portfolio choice and 2003 summer meetings of econometric society i would like to thank cam harvey the editor and an anonymous referee for many helpful comments and suggestions a special thanks to jack kareken for comments and editorial help on an earlier draft i am grateful to donna zerwitz for editorial assistance the views expressed herein are those of the author and not necessarily of the federal reserve bank of minneapolis or the federal reserve system all errors and omissions are the sole responsibility of the author address correspondence to valery polkovnichenko finance 3 122 csom 319 19 th

public opinion and the balanced budget while most americans have long favored a balanced federal budget not all do this paper uses cross sectional differences among respondents to two public opinion polls to try to discriminate among competing hypotheses about why americans want the budget balanced logit models are fit to data from two different public opinion polls a gallup poll and a cbs new york times poll conducted respectively in march and april of 1980 a time when the proposed balanced budget amendment to the constitution was very much in the news in each case a large majority favored a balanced budget requirement however they favor it for a smorgasbord of reasons and at unclear price it appears that political affiliation ideology and personal circumstances are far less important determinants of the choice than economic rationales this abstract was borrowed from another version of this item

ratings shopping and asset complexity a theory of ratings inflation abstract many identify inflated credit ratings as one contributor to the recent financial market turmoil we develop an equilibrium model of the market for ratings and use it to examine possible origins of and cures for ratings inflation in the model asset issuers can shop for ratings observe multiple ratings and disclose only the most favorable before auctioning their assets when assets are simple agencies ratings are similar and the incentive to ratings shop is low when assets are sufficiently complex ratings differ enough that an incentive to shop emerges thus an increase in the complexity of recently issued securities could create a systematic bias in disclosed ratings despite the fact that each ratings agency produces an unbiased estimate of the asset s true quality increasing competition among agencies would only worsen this problem switching to an investor initiated ratings system alleviates the bias but could collapse the market for information

the choice of the distribution of asset returns how extreme value theory can help abstract one of the issues of risk management is the choice of the distribution of asset returns academics and practitioners have assumed for a long time for more than three decades that the distribution of asset returns is a gaussian distribution such an assumption has been used in many fields of finance building optimal portfolio pricing and hedging derivatives and managing risks however real financial data tend to exhibit extreme price changes such as stock market crashes that seem incompatible with the assumption of normality this article shows how extreme value theory can be useful to know more precisely the characteristics of the distribution of asset returns and finally help to chose a better model by focusing on the tails of the distribution an empirical analysis using equity data of the us market is provided to illustrate this point

taxation corporate financial policy and the cost of capital the cost of capital plays an important role in the allocation of resources among competing uses in a decentralized market system the purpose of this paper is to organize and present what is known and what is hypothesized about the effects of taxation on the incentive to invest via the cost of capital taking full account of important issues that arise independently from the question of taxation included in the analysis is a discussion of empirical findings about the interaction of inflation and taxation in influencing the incentive to invest and a treatment of taxation and uncertainty this abstract was borrowed from another version of this item

bequest taxes and capital gains realizations abstract contrary to popular view capital gains do not escape taxation at death as they are subject to the estate tax the presence of the step up in basis increases the lock in effect of capital gains taxes as individuals are induced to hold assets until death this effect however is mitigated by the estate tax which applies to assets passed to heirs using a sample of matched income and estate tax records in a period that straddles significant changes in capital gains and estate tax rates the estate tax is found to have an unlocking effect on capital gains realizations the realization elasticity with respect to the estate tax rate is estimated at 0 36 in the basic model

international diversification a copula approach abstract the viability of international diversification involves balancing benefits and costs this balance hinges on the degree of asset dependence in light of theoretical research linking diversification and dependence we examine international diversification using two measures of dependence correlations and copulas we document several findings first dependence has increased over time second we find evidence of asymmetric dependence or downside risk in latin america but less in the g5 the results indicate very little downside risk in east asia third east asian and latin american returns exhibit some correlation complexity interestingly the regions with maximal dependence or worst diversification do not command large returns our results suggest international limits to diversification they are also consistent with a possible tradeoff between international diversification and systemic risk

examining risk preferences under high monetary incentives experimental evidence from the people s republic of china several experimental sessions were conducted to elicit certainty equivalents for a sequence of lotteries involving real monetary outcomes the opportunity to conduct sessions in the people s republic of china afforded the ability to offer very large monetary incentives relative to subjects living costs in the highest payoff condition subjects earned three times their normal monthly revenue in the course of a two hour experiment results indicate a statistically significant impact of the level of monetary incentives on revealed risk preferences however even under extreme monetary incentives subjects demanded amounts well in excess of expected value for low probability gain prospects copyright 1992 by american economic association

the dark side of global integration increasing tail dependence abstract we measure stock market coexceedances using the methodology of cappiello gerard and manganelli 2005 ecb working paper 501 this method enables us to measure comovement at each point of the return distribution first we construct annual coexceedance probabilities for both lower and upper tail return quantiles using daily data from 1974 2006 next we explain these probabilities in a panel gravity model framework results show that macroeconomic variables asymmetrically impact stock market comovement across the return distribution financial liberalization significantly increases left tail comovement whereas trade integration significantly increases comovement across all quantiles decreasing exchange rate volatility results in increasing lower tail comovement the introduction of the euro increases comovement across the entire return distribution thereby significantly reducing the benefits of portfolio diversification within the euro area

all their eggs in one basket portfolio diversification of us households abstract this paper uses data from the survey of consumer finances to assess how well mean variance efficiency describes the portfolio diversification of us households it does not seem to work well the median stockholder owns a single publicly traded stock often in the company where he works looking at a sample of high income households who accounted for one third of all publicly traded stock the median holding is only ten stocks indirect stock ownership through mutual funds defined contribution pension plans ira s and trust funds is shown to have little power in explaining this poor diversification

asset market linkages in crisis periods we characterize asset return linkages during periods of stress by an extremal dependence measure contrary to correlation analysis this nonparametric measure is not predisposed toward the normal distribution and can allow for nonlinear relationships our estimates for the g 5 countries suggest that simultaneous crashes between stock markets are much more likely than between bond markets however for the assessment of financial system stability the widely disregarded cross asset perspective is particularly important for example our data show that stock bond contagion is approximately as frequent as flight to quality from stocks into bonds extreme cross border linkages are surprisingly similar to national linkages illustrating a potential downside to international financial integration

securitisation and financial stability a widespread opinion before the credit crisis of 2007 8 was that securitisation enhances financial stability by dispersing credit risk after the credit crisis securitisation was blamed for allowing the hot potato of bad loans to be passed to unsuspecting investors both views miss the endogeneity of credit supply securitisation enables credit expansion through higher leverage of the financial system as a whole securitisation by itself may not enhance financial stability if the imperative to expand assets drives down lending standards the hot potato of bad loans sits in the financial system on the balance sheets of large banks rather than being sold on to final investors since the aim of financial intermediaries is to expand lending in order to utilise slack in balance sheet capacity

sustainable forestry timber bequests future generations and optimal tax policy this paper analyzes harvesting and timber bequest behavior in a two period overlapping generations model where the government uses site productivity yield and inheritance taxation the ceteris paribus effects of forest and inheritance taxes are derived first then the paper discusses the optimal design of forest and inheritance taxes by assuming that intergenerational externalities are either absent or operative in the absence of intergenerational externalities it is optimal to use only the site productivity tax and not to introduce yield and inheritance taxes at all in the presence of intergenerational externalities the situation changes the paper demonstrates that the externality can be internalized by introducing either a yield tax or an inheritance subsidy or both if the government is able to use both at the same time it is desirable to use the yield tax to punish excessive harvesting and an inheritance subsidy to bribe to give bequests