evidence of nonlinearity in daily stock returns this article applies a newly developed statistical technique to time series of daily rates of return of 15 common stocks the technique involves estimating the bispectrum of the observed time series the bispectrum is defined as the double fourier transform of the third order cumulant function if the process generating rates of return is linear with independent innovations then the skewness of the bispectrum will be constant the article describes a test that can detect nonconstant skewness in the bispectrum hence if the test rejects constant skewness a nonlinear process is implied as a consequence the test can distinguish between white noise and purely random noise the results suggest that daily stock returns are generated by a nonlinear process

are probabilities used in markets abstract working in a complete markets setting a property of asset demands is identified that is inconsistent with the investor s preference being based on probabilities in this way a market counterpart of the ellsberg paradox is provided journal of economic literature classification numbers d00 d80 d81

further evidence on the asymmetric behavior of economic time series over the business cycle evidence has recently been presented by salih neftci to support the hypothesis that recessions in economic activity tend to be steeper and more short lived than recoveries in economic activity that evidence however was confined to the behavior of the unemployment rate in the united states in this paper it is shown that when neftci s methods are applied to analyze the behavior of real gross national product investment and productivity in the united states or when they are used to analyze industrial production abroad the asymmetry hypothesis seems to be less compelling

using asset prices to measure the cost of business cycles we measure the cost of consumption fluctuations using an approach that does not require the specification of preferences and instead uses asset prices we measure the marginal cost of consumption fluctuations the per unit benefit of a marginal reduction in consumption fluctuations expressed as a percentage of lifetime consumption we find that the gains from eliminating all consumption uncertainty are very large however for consumption fluctuations corresponding to business cycle frequencies we estimate the marginal cost to be between 0 08 percent and 0 49 percent of lifetime consumption

seasonalities in security returns the case of earnings announcements abstract we document a seasonal pattern in stock returns around quarterly earnings announcement dates small firms show large positive abnormal returns and a sizable increase in the variability of returns around these dates only part of the large abnormal returns can be accounted for by the tendency of firms with good news to announce early large firms show no abnormal returns around announcement dates and a much smaller increase in variability

generalized disappointment aversion and asset prices we characterize generalized disappointment aversion gda risk preferences that can overweight lower tail outcomes relative to expected utility we show in an endowment economy that recursive utility with gda risk preferences generates effective risk aversion that is countercyclical this feature comes from endogenous variation in the probability of disappointment in the representative agent s intertemporal consumption saving problem that underlies the asset pricing model the variation in effective risk aversion produces a large equity premium and a risk free rate that is procyclical and has low volatility in an economy with a simple autoregressive endowment growth process the observed facts of aggregate risks and asset prices in the post war u s economy have led researchers to explore models of intertemporal preferences that generalize the well developed time additive expected utility specification used in the asset pricing economy of lucas 1978 in particular models that allow for countercyclical risk aversion have been shown to perform much better than the standard model see e g campbell and cochrane 1999 gordon and st amour 2000 and barberis huang and santos 2001 1 this leads us to explore the preference foundations that may produce this behavior endogenously our preference specification is a one parameter extension of the gul 1991 disappointment aversion utility function these new preferences

a nonlinear approach to us gnp a univariate nonlinear model is estimated for us gnp that on many criteria outperforms standard linear models the estimated model is of the threshold autoregressive type and contains evidence of asymmetric effects of shocks over the business cycle in particular the nonlinear model suggests that the post 1945 us economy is significantly more stable than the pre 1945 us economy

complicated dynamics in a flow model of the labor market abstract we develop a worker flow model with a nonlinear and endogenous outflow rate from unemployment inconsistent claims on the output lead to changing inflation rates which feedback on job offers through the real money supply via simulations one can show that the nonlinear outflow rate causes asymmetric adjustment of unemployment to the equilibrium rate of unemployment in addition and depending on the parameters the equilibrium rate of unemployment may also become locally unstable then there is a downward sloping phillips curve but no trade off between unemployment and inflation in the short run as there is none in the long run

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

estimating the value of information we derive a general expression for the value of information to a price taking investor in a dynamic environment and provide a framework for its estimation we study the value of both private and public information and break it into its instrumental and psychic parts to illustrate we estimate and rank the values of leading macroeconomic indicators gdp employment etc using variations in option prices we find that consumer investors with conventional preference parameters would pay 3 to 5 bps of their wealth for a one time private peek into these indicators such signals provide substantial instrumental value but a minor psychic value received august 29 2016 editorial decision june 6 2018 by editor itay goldstein authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

nonlinear dynamics and stock returns simple deterministic systems are capable of generating chaotic output that mimics the output of stochastic systems for this reason algorithms have been developed to distinguish between these two alternatives these algorithms and related statistical tests are also useful in detecting the presence of nonlinear dependence in time series in this article the authors apply these procedures to stock returns and find evidence that indicates the presence of nonlinear dependence on weekly returns from the center for research in security prices value weighted index copyright 1989 by the university of chicago

risk preferences and the macroeconomic announcement premium this paper develops a revealed preference theory for the equity premium around macroeconomic announcements stock returns realized around pre scheduled macroeconomic announcements such as the employment report and the fomc statements account for 55 of the market equity premium we provide a characterization theorem for the set of intertemporal preferences that generates a nonnegative announcement premium our theory establishes that the announcement premium identifies a significant deviation from time separable expected utility and provides asset market based evidence for a large class of non expected utility models we also provide conditions under which asset prices may rise prior to some macroeconomic announcements and exhibit a pre announcement drift

is the business cycle characterized by deterministic chaos abstract tests are conducted on u s macroeconomic data for the presence of low dimensional deterministic chaos where deterministic chaos is defined as in grandmont s 1985 walras bowley lecture or in brock 1986 the idea is to test for evidence of endogenous instability causing the business cycle low order autoregressions are hard to reject with our methods evidence of chaos is weak but our tests may be too weak to detect it evidence of nonlinearity is present in employment 1950 i to 1983 iv unemployment 1949 i to 1982 iv monthly post war industrial production and pig iron production 1877 1937

a theory of subjective compound lotteries abstract we develop a savage type model of choice under uncertainty in which agents identify uncertain prospects with subjective compound lotteries our theory permits issue preference that is agents may not be indifferent among gambles that yield the same probability distribution if they depend on different issues hence we establish subjective foundations for the anscombe aumann framework and other models with two different types of probabilities we define second order risk as risk that resolves in the first stage of the compound lottery and show that uncertainty aversion implies aversion to second order risk which implies issue preference and behavior consistent with the ellsberg paradox

are output growth rate distributions fat tailed some evidence from oecd countries this work explores some distributional properties of aggregate output growth rate time series we show that in the majority of oecd countries output growth rate distributions are well approximated by symmetric exponential power densities with tails much fatter than those of a gaussian fat tails robustly emerge in output growth rates independently of i the way we measure aggregate output ii the family of densities employed in the estimation iii the length of time lags used to compute growth rates we also show that fat tails still characterize output growth rate distributions even after one washes away outliers autocorrelation and heteroscedasticity

information quality and long run risk asset pricing implications i study the asset pricing implications of the quality of public information about persistent productivity shocks in a general equilibrium model with kreps porteus preferences low information quality is associated with a high equity premium a low volatility of consumption growth and a low volatility of the risk free interest rate the relationship between information quality and the equity premium differs from that in endowment economies my calibration improves substantially upon the bansal yaron model in terms of the moments of the wealth consumption ratio and the return on aggregate wealth in this paper i introduce learning into a production based long run risk model learning improves the asset pricing implications of the model along three dimensions it increases the equilibrium equity premium reduces the volatility of consumption growth and reduces the volatility of the risk free interest rate i show that because of the production economy setting the relationship between information quality and the equity premium differs from that found in pure exchange economies see e g veronesi 2000 quantitatively my model improves substantially upon the bansal and yaron 2004 model in terms of its predictions about the volatility of the return on aggregate wealth and the wealth consumption ratio compared to bansal and yaron 2004 i use a lower relative risk aversion rra parameter two and a higher intertemporal elasticity of substitution ies parameter two my model generates a lower risk premium on the market portfolio 5 06 per year but does roughly as well as the bansal and yaron 2004 model according to other measures commonly used to assess the performance of consumption based asset pricing models such as the key moments of the risk free interest rate and the consumption growth rate more specifically i consider a general equilibrium model with a linear production technology and kreps porteus preferences kreps and porteus 1978 hengjie ai is at the fuqua school of business duke university this paper is based on chap

optimal savings distortions with recursive preferences abstract this paper derives an intertemporal optimality condition for economies with private information focusing on a class of recursive preferences by comparing it to the situation where agents can freely save in a risk free asset market we derive the optimal savings distortions necessary for constrained optimality our recursive preferences are homogeneous and satisfy a balanced growth condition while allowing us to separate the role of risk aversion and intertemporal elasticity of substitution we perform some quantitative exercises that disentangle the respective roles played by these two parameters in optimal distortions and the implied welfare gains

on endogenous competitive business cycles the belief that the long run equilibrium of a competitive monetary economy that does not experience any exogeneous shocks whether originating from the external environment or from policy should be modelled as a state that is stationary or perhaps growing at a constant rate seems to be deeply rooted in the mind of some economists

expected utility maximization and demand behavior abstract this paper extends the non parametric approach to consumer demand analysis to the case of expected utility maximization we provide necessary and sufficient conditions for a set of price quantity pairs to be consistent with expected utility maximization and investigate their relationship to revealed preference conditions extensions to incomplete markets and intertemporal resolution of uncertainty are also considered

rational choice and erratic behaviour in this paper we show that rational choice in a stationary environment can lead to erratic behaviour when preferences depend on experience we mean by erratic behaviour choice sequences that do not converge to a long run stationary value or to any periodic pattern early investigations of the effects of experience on choice goes back to pareto see also benhabib 1979 some keynesian theories of the consumption function incorporate the effects of experience and habit formation on current levels of consumption duesenberry 1949 modigliani 1949 and brown 1952 a general model of experience dependent choice was described in day 1970 and investigated in day and kennedy 1971 while the specific issue of the existence of stable representable long run consumer demand when tastes vary endogenously has been treated by gorman 1967 pollak 1970 1976 weizsaicker 1971 mccarthy 1974 and hammond 1976 pollak gave conditions for the representability of long run choice when the equations of preference dependence are linear and utility additive hammond in a generalization of these findings provides conditions for stable representable long run choice when preferences are acyclic a condition which in essence assures convergence to a long run choice

are economic time series asymmetric over the business cycle it has long been argued that major cyclical variables such as the unemployment rate display an asymmetric behavior over various phases of the business cycle the paper provides a statistical test for this hypothesis using the framework of finite state markov processes i implement a test to see if the behavior of the unemployment rate is characterized by sudden jumps and slower drops it is argued that the framework provided in the paper can also be used to test other sample path properties of economic time series

news driven business cycles insights and challenges there is a widespread belief that changes in expectations may be an important independent driver of economic fluctuations the news view of business cycles offers a formalization of this perspective in this paper we discuss mechanisms by which changes in agents information due to the arrival of news can cause business cycle fluctuations driven by expectational change and we review the empirical evidence aimed at evaluating their relevance in particular we highlight how the literature on news and business cycles offers a coherent way of thinking about aggregate fluctuations while at the same time we emphasize the many challenges that must be addressed before a proper assessment of the role of news in business cycles can be established jel d83 d84 e13 e32 o33

robustly optimal monetary policy with near rational expectations the paper considers optimal monetary stabilization policy in a forward look ing model when the central bank recognizes that private sector expectations need not be precisely model consistent and wishes to choose a policy that will be as good as possible in the case of any beliefs that are close enough to model consistency it is found that commitment continues to be important for optimal policy that the optimal long run inflation target is unaffected by the degree of potential distortion of beliefs and that optimal policy is even more history dependent than if rational expectations are assumed jel c62 d84 el 3 e31 e32 e52 an extensive literature has considered the optimal conduct of monetary policy under the assumption of rational or model consistent expectations this literature has found that it is quite important to take account of the effects of the systematic and hence predictable compo nent of monetary policy on expectations for example it is found quite generally that an optimal policy commitment differs from the policy that would be chosen through a sequential optimiza tion procedure with no advance commitment of future policy it is also found quite generally that optimal policy is history dependent a function of past conditions that no longer affect the degree to which it would be possible to achieve stabilization aims from the present time onward 1 both of these conclusions depend critically however on the idea that an advance commitment of future policy should change people s expectations at earlier dates this may lead to the fear that analyses that assume rational expectations re exaggerate the degree to which a policy authority can rely upon private sector expectations to be shaped by its policy commitments in precisely the way that it expects them to be what if the relation between what a central bank plans to do and what the public will expect to happen is not quite so predictable might both the case for advance commitment of policy and the case for history dependent policy be considerably weakened under a more skeptical view of the precision with which the public s expectations can be predicted one way of relaxing the assumption of rational expectations is to model agents as forecasting using an econometric model the coefficients of which they must estimate using data observed prior to some date sampling error will then result in forecasts that depart somewhat from pre cise consistency with the analyst s model 2 however selecting a monetary policy rule on the basis of its performance under a specific model of learning runs the risk of exaggerating the degree to which the policy analyst can predict and hence exploit the forecasting errors that result from a particular way of extrapolating from past observations one might even conclude

money real interest rates and output a reinterpretation of postwar u s data this paper reexamines both monthly and quarterly u s postwar data to investigate if the observed comovements between money real interestrates prices and output are compatible with the money real interest output link suggested by existing monetary theories of output which include both keynesian and equilibrium models the major empirical findings are these 1 in both monthly and quarterly data we cannot reject the hypothesis that the ex ante real rate is exogenous or granger causally prior in the context of a four variable system which contains money prices nominal interest rates and industrial production 2 in quarterly data there is significantly more information con tained in either the levels of expected inflation or the innovationof this variable for predicting future output given current and lagged output than in any other variable examined money actualinflation nominal interest rates or ex ante real rates the effect of an inflation innovation on future output is unambiguously negative the first result casts strong doubt on the empirical importance of existing monetary theories of output which imply that money should have a causal role on the ex ante real rates the second result would appear incompatible with most demand driven models of output in light of these results we propose an alternative structural model which can account for the major dynamic interactions among the variables this model has two central features i output is unaffected by money supply and ii the money supply process is motivated by short run price stability this abstract was borrowed from another version of this item

an exploration into pigou s theory of cycles abstract this paper explores a theory of business cycles in which recessions and booms arise due to difficulties encountered by agents in properly forecasting the economy s future needs in terms of capital the idea has a long history in the macroeconomic literature as reflected by the work of pigou industrial fluctuation macmillan london 1926 the contribution of this paper is twofold first we illustrate the type of general equilibrium structure that can give rise to such phenomena second we examine the extent to which such a model can explain the observed pattern of u s recessions frequency depth without relying on technological regress we argue that such a model offer a framework for understanding elements of both the recent u s recession and of the asia downturns of the late 1990s

linear versus nonlinear macroeconomies a statistical test a statistical test based on the estimated bispectrum is presented which can distinguish between the linear stochastic dynamics widely used in macroeconomic models and alternative nonlinear dynamic mechanisms including both nonlinear stochastic models and nonlinear deterministic chaotic models the test is applied to an aggregate stock market index and to an aggregate industrial production index in both cases the test easily rejects the null hypothesis of a linear stochastic generating mechanism this result strongly suggests that nonlinear dynamics deterministic or stochastic should be an important feature of any empirically plausible macroeconomic model copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

threshold nonlinearities in output some international evidence the empirical adequacy of linear ar and nonlinear setar models of trend stationary and difference stationary representations of output for canada germany japan the uk and the us are appraised test results suggest the presence of linear model residual structure of some form for all series and nonlinearities of specifically threshold form in trend stationary data for canada germany japan and the us and difference stationary data for germany japan and the us with the exception of canada estimated threshold nonlinear models imply asymmetric dynamics are able to account for all nonlinear structure in the data on the basis of bds statistics and provide sizeable reductions in residual variance in several cases most notably for germany

learning and asset price jumps w e develop a general equilibrium model in which income and dividends are smooth but asset prices contain large moves jumps these large price jumps are triggered by optimal decisions of investors to learn the unobserved state we show that learning choice is determined by preference parameters and the conditional volatility of income process an important model prediction is that income volatility predicts future jump periods while income growth does not consistent with the model large moves in returns in the data are predicted by consumption volatility but not by consumption growth the model quantitatively captures these novel features of the data jel g00 g12 g14 d83 a prominent feature of financial markets is infrequent but large price movements jumps 1 in this article we develop a model in which income and dividends have smooth gaussian dynamics however asset prices are subject to large infrequent jumps in our model large moves in asset prices obtain from the actions of the representative agent to acquire more information about the unobserved state of the economy for a cost we show that the optimal decision to incur a cost and learn the true economic state is directly related to the level of uncertainty in the economy this implies that aggregate economic volatility as well as market volatility should predict jumps in returns we show that indeed in the data consistent with the model return jumps are predicted by consumption volatility market volatility further the implied asset price implications from our model are consistent with the key findings from parametric models about frequency and predictability of jumps as well as nonparametric jump detection analysis of barndorff nielsen and shephard 2006 based on

non linear adjustment of real wages employment and output in the uk we employ the brock dechert and scheinkman statistic to investigate non linearity in conditional mean in uk real wages employment and output and to fit threshould regression models to the series the latter porvide reasonable representations for thenon lineraity in real wages and output but the residuals from the threshold autoregressive model for employment still contain a non linear component in a forecast comparison the tar models performed better than simple autoregressions using the lagged share of wages as an error correction term we find evidence that all three series respond asymmetrically to lagged changes in wage share and other variables fore casts of real wages and employment derived from these models were superior to those derived from standard symmetric ecms

using asset prices to measure the persistence of the marginal utility of wealth we derive a lower bound for the volatility of the permanent component of investors marginal utility of wealth or more generally asset pricing kernels the bound is based on return properties of long term zero coupon bonds risk free bonds and other risky securities we find the permanent component of the pricing kernel to be very volatile its volatility is about at least as large as the volatility of the stochastic discount factor a related measure for the transitory component suggest it to be considerably less important we also show that for many cases where the pricing kernel is a function of consumption innovations to consumption need to have permanent effects

asset demand based tests of expected utility maximization we provide conditions under which contingent claim and asset demands are consistent with state independent expected utility maximization the paper focuses on the case of a single commodity and demands are allowed to be functions of probabilities and not just prices and income we extend prior analyses by deriving three distinct tests for demands to be rationalized by expected utility i a contingent claim analogue to the certainty strong axiom of revealed preference ii a characterization of the functional form for demand and iii necessary and sufficient conditions based on the slutsky matrix jel d01 d11 d81 the neoclassical certainty model of consumer behavior postulates that a consum er s demand can be described as having been derived from utility maximization sub ject to a budget constraint one is then naturally led to ask what this model implies about observed demand behavior this question has been addressed using two quite distinct approaches the first originating in the work of slutsky 1915 and antonelli 1886 derives necessary and sufficient conditions for utility maximization assum ing knowledge of the consumer s demand functions the second approach known as revealed preference following the classic work of samuelson 1938 provides necessary and sufficient restrictions on a finite set of demand price pairs such that the demand behavior of a consumer is consistent with utility maximization in this paper we extend both approaches to a classic portfolio choice problem where consumers possess state independent expected utility preferences and there is a single commodity in each state we focus only on the complete market case where the financial asset setting is equivalent to the contingent claim setting and hence it is only necessary to discuss demand tests for the latter we depart from the standard contingent claim theory by assuming that state of nature probabilities are not fixed and we model demand as a function of probabilities as well as prices and income for the revealed preference approach with the restriction of a single commodity in each state we derive a much simpler test for expected utility maximization than those that currently exist in the literature for example the formulation of green and

evaluation of price policy in the presence of water theft mathematical programming models of representative farms are commonly used to evaluate policies such as input subsidies and output price supports on canals in india upstream farmers routinely use more irrigation water than allotted in such circumstances the programming model should encompass farmers locational heterogeneity here a representative watercourse with thirty farms is calibrated to the eight crops fifteen irrigation turns yield responses to water and seepage in maharashtra not only does water theft increase the social cost of price policies but the policies increased inducement to theft by upstream farmers leaves those downstream with less water and lower incomes

presidential address asset price dynamics with slow moving capital i describe asset price dynamics caused by the slow movement of investment capital to trading opportunities the pattern of price responses to supply or demand shocks typically involves a sharp reaction to the shock and a subsequent and more extended reversal the amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect institutional impediments to immediate trade such as search costs for trading counterparties or time to raise capital by intermediaries i discuss special impediments to capital formation during the recent financial crisis that caused asset price distortions which subsided afterward after presenting examples of price reactions to supply shocks in normal market settings i offer a simple illustrative model of price dynamics associated with slow moving capital due to the presence of inattentive investors i address the implications for asset price dynamics of the apparent slow movement of investment capital to trading opportunities the arrival of new capital to an investment opportunity can be delayed by fractions of a second in some markets for example an electronic limit order book market for equities or by months in other markets such as that for catastrophe risk insurance accordingly prices respond to supply or demand shocks with a sharp reaction because of the relatively small subset of capital and thus risk bearing capacity that is immediately available to absorb a shock on short notice such a price impact is substantially reversed over time as additional capital becomes available the amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect many sorts of attention costs to trade as well as institutional impediments to capital movement such as search costs for trading

some evidence concerning macroeconomic chaos abstract an empirical assessment of a linear stochastic perspective for canadian macroeconomic time series is presented the methods used are based on the mathematics of chaos present evidence suggests that low order deterministic chaos does not provide a satisfactory characterization of the data the absence of significant nonlinear structure for the investment and unemployment series is of particular note in light of past findings with american data the degree to which the use of a time trend can impose a pseudo structure on the data is illustrated

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances

safe debt risky capital the author extends the diamond 1965 model of national debt in two directions she first introduces technological uncertainty and then she allows the stock of debt to vary the author studies the dynamical equilibria of the resulting stochastic system and she establishes conditions for the existence of stationary states that are expressed in terms of invariant distributions since conditions that ensure the existence of a stochastic stationary state with positive debt are very restrictive in this model financial instability is a pervasive phenomenon and allocations are in general dynamically inefficient copyright 1994 by the london school of economics and political science