the impact of fat tails on equilibrium rates of return and term premia abstract we investigate the impact of ignoring fat tails observed in the empirical distributions of macroeconomic time series on the equilibrium implications of the consumption based asset pricing model with habit formation fat tails in the empirical distributions of consumption growth rates are modeled as a dampened power law process that nevertheless guarantees finiteness of moments of all orders this renders model implied mean equilibrium rates of return and equity and term premia finite comparison with a benchmark gaussian process reveals that accounting for fat tails lowers the model implied mean risk free rate by 20 percent raises the mean equity premium by 80 percent and the term premium by 20 percent bringing the model implications closer to their empirically observed counterparts fat tails also increase the model implied volatility of the risk free rate and the equity premium

review essay on charles f manski s public policy in an uncertain world analysis and decisions public policy setting often involves quantitative choices with quantitative outcomes yet unqualified statements about the precise consequences of alternative choices characterize much of the policy analysis bearing on these decisions public policy in an uncertain world analysis and decisions by charles f manski characterizes and richly illustrates the nature of this unwarranted certitude it details specific constructive alternatives on which the economics profession has achieved varying degrees of consensus those in our profession charged with the education of future policy analysts should consider using it and how to round out its presentation of decision making from their own perspective jel d02 d04 d80 e61

reversing disbursement rates to estimate stationary wealth processes for endowments with recursive preferences endowments have been accused of hoarding their wealth however the theoretically ideal spending plan remains unclear and in practice endowments follow a range of rules here we derive and estimate the optimal spending plans of an infinitely lived charity or endowment with an epstein zin weil utility function given general markovian returns to wealth we analyse two special cases first where spending is a power function of last period s wealth and second where the endowment uses payout smoothing via non linear least squares we estimate the optimal spending rate and the elasticity of inter temporal substitution for an endowment with a typical diversified portfolio and for a portfolio of hedge funds in a new approach we use maximum entropy methods to characterize the returns distribution of an endowment whose spending plan conforms with the optimality condition we confirm that the estimated returns distribution is largely consistent with the optimal spending plan

environmental protection rare disasters and discount rates the stern review s evaluation of environmental protection stresses low discount rates and uncertainty about environmental effects an appropriate model for analysing this uncertainty and the associated discount rates requires sufficient risk aversion and fat tailed uncertainty to account for the observed equity premium calibrations based on epstein zin preferences and existing analyses of rare macroeconomic disasters suggest that optimal environmental investment can be a significant share of gdp even with reasonable rates of time preference optimal environmental investment increases with risk aversion and the probability and typical size of environmental disasters but decreases with uncertainty about policy effectiveness

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

recreation demand and residential location abstract we use the properties of competitive location equilibrium to study the demand for recreation and the choice of primary residence location location specific recreation and employment lead to pooling equilibria in which consumers reside according to their preference for recreation in general the stronger the taste for recreation the greater the attraction of living close to the recreation site and the lower the demand for other goods including housing we explore the effects of trip frequency trip length and recreation cost on the spatial distribution of consumers we also consider the effect of the wage rate on recreation and location demands

shirking and sorting in a political market with finite lived politicians this paper analyzes principal agent slack in the context of a political market composed of voters challengers and incumbents the introduction of a last period via finite livedness in combination with voters imperfect information about politicians preferences causes time varying shirking behavior on the part of politicians political markets eventually sort out those politicians with significantly deviant policy preferences potentially providing a solution to the last period problem and enabling politicians to make credible commitments in the extreme sorting can insure that it is not worthwhile for potential shirkers to run for office a systematic relationship between political shirking and number of terms in office may exist and depends on how quickly sorting takes place we show that evidence of little if any shirking is quite consistent with politicians having diverse and strongly held policy preferences in addition if sorting is a significant feature of political markets cross sectional studies will tend to oversample little and non shirking politicians compared to longitudinal studies reinterpretations of existing empirical work are also discussed

on welfare frameworks and catastrophic climate risks recent theoretical work in the economics of climate change has suggested that climate policy is highly sensitive to fat tailed risks of catastrophic outcomes weitzman 2009 68 such risks are suggested to be an inevitable consequence of scientific uncertainty about the effects of increased greenhouse gas concentrations on climate criticisms of this controversial result fall into three categories the first suggests that it may be irrelevant to cost benefit analysis of climate policy the second challenges the fat tails assumption and the third questions the behavior of the utility function assumed in the result this paper analyses these critiques and suggests that those in the first two categories have formal validity but that they apply only to the restricted setup of the original result which may be extended to address their concerns they are thus ultimately unconvincing critiques in the third category are shown to be robust however they open up new ethical and empirical challenges for climate economics that have thus far been neglected how should we value catastrophes as a society i demonstrate that applying results from social choice to this problem can lead to counterintuitive results in which society values catastrophes as infinitely bad even though each individual s utility function is bounded finally i suggest that the welfare functions traditionally used in climate economics are ill equipped to deal with climate catastrophes in which population size changes drawing on recent work in population ethics i propose an alternative welfare framework with normatively desirable properties which has the effect of dampening the contribution of catastrophes to welfare

rare disasters and exchange rates we propose a new model of exchange rates which yields a theory of the forward premium puzzle our explanation combines two ingredients the possibility of rare economic disasters and an asset view of the exchange rate our model is frictionless has complete markets and works for an arbitrary number of countries in the model rare worldwide disasters can occur and affect each country s productivity each country s exposure to disaster risk varies over time according to a mean reverting process ri sky countries command high risk premia they feature a depreciated exchange rate and a high interest rate as their risk premium mean reverts their exchange rate appreciates therefore currencies of high interest rate countries appreciate on average to make the notion of disaster risk more implementable we show how options prices might in principle uncover latent disaster risk and help forecast exchange rate movements we then extend the framework to incorporate two factors a disaster risk factor and a business cycle factor we calibrate the model and obtain quantitatively realistic values for the volatility of the exchange rate the forward premium puzzle regression coefficients and near random walk exchange rate dynamics finally we solve a model of stock markets across countries which yields a series of predictions about the joint behavior of exchange rates bonds options and stocks across countries the evidence from the options market appears to be supportive of the model jel e43 e44 f31 g12 g15

a general equilibrium model of congressional voting in this paper we specify a model in which congressmen constituents and campaign contributors simultaneously decide on behavior constituents and contributors desire to influence the voting behavior of congressmen congressmen on the other hand want to be elected and vote accordingly we empirically test this model using roll call voting on eight bills dealing with economic regulation and find support for the model our results indicate that part of the voting behavior of congressmen may be explained by noneconomic factors we also find that unions and businesses as campaign contributors are sometimes influential unions are more often influential than is business ideological factors are also important in explaining voting

driving to opportunity local rents wages commuting costs and sub metropolitan quality of life we examine variation in local rents wage levels commuting costs household characteristics and amenities within metropolitan areas for 2071 areas covering the united states by density and central city status we demonstrate the sensibility of estimating wage levels by workplace not residence and recover decentralized rent gradients that fall with commuting costs we construct and map a willingness to pay index which indicates the quality of life typical households receive from local amenities when households are similar mobile and informed this index varies considerably within metros and is typically high in areas that are dense suburban sunny mild safe entertaining and have elevated school funding

on rational bubbles and fat tails this paper addresses the statistical properties of time series driven by rational bubbles a la blanchard and watson 1982 using insights on the behavior of multiplicative stochastic processes we demonstrate that the tails of the unconditional distribution emerging from such bubble processes follow power laws exhibit hyperbolic decline more precisely we find that rational bubbles predict a fat power tail for both the bubble component and price differences with an exponent smaller than 1 the distribution of returns is dominated by the same power law over an extended range of large returns although power law tails are a pervasive feature of empirical data these numerical predictions are in disagreement with the usual empirical estimates it therefore appears that exogenous rational bubbles are hardly reconcilable with some of the stylized facts of financial data at a very elementary level

power laws in economics an introduction paul samuelson 1969 was once asked by a physicist for a law in economics that was both nontrivial and true this is a difficult challenge as many roughly true results are in the end rather trivial for example demand curves slope down while many nontrivial results in economics in fact require too much sophistication and rationality on the part of the agents to actually hold true in practice 1 samuelson answered the law of comparative advantage the story does not say whether the physicist was satisfied the law of comparative advantage is a qualitative law and not a quantitative one as is the rule in physics indeed many of the insights of economics seem to be qualitative with many fewer reliable

taxation and presidential approval separate effects from tax burden and tax structure turbulence previous research has established that taxation may impose significant electoral costs on politicians this literature however focuses exclusively on the effect of the tax burden in this paper we test the hypothesis that both the level of the tax burden and the change in the tax structure affect the us president s approval ratings over the 1959 2006 period our results support this proposition specifically we find a negative impact from the magnitudes of the tax burden and the deficit as well as from changes in the tax structure on presidential approval ratings

market fragility and the paradox of the recent stock bond dissonance abstract after the lehman brothers collapse the stock index has exceeded its pre lehman brothers peak by 36 in real terms seemingly markets have been demanding more stocks instead of bonds yet instead of observing higher bond rates paradoxically bond rates have been persistently negative after the lehman brothers collapse to explain this paradox we suggest that in the post lehman brothers period investors changed their perceptions on disasters thinking that disasters occur once every 30 years on average instead of disasters occurring once every 60 years in our asset pricing calibration exercise this rise in perceived market fragility alone can explain the drop in both bond rates and price dividend ratios observed after the lehman brothers collapse which indicates that markets mostly demanded bonds instead of stocks

an exploration of the effect of doubt during disasters on equity premiums in this note we consider the effect on equity premiums of a representative household s subjective expectations during disasters in particular we focus on the effect of doubt during disasters we derive analytical solutions of equity premiums in the model of power utility function and conduct numerical exercises of the model of the recursive utility function our contribution is to demonstrate that doubt during disasters even mild ones generates high equity premiums

rational asset price movements without news this paper argues that an important part of movements in asset prices may be caused by neither external news nor irrationality but by the revelation of information by the trading process itself two models are developed that illustrate this general idea one model is based on investor uncertainty about the quality of other investors information the other is based on dispersion of information and small costs to trading the analysis is used to suggest a possible rational explanation of the october 1987 crash copyright 1993 by american economic association

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

state budget stabilization fund adoption preparing for the next recession or circumventing fiscal constraints the high rate of budget stabilization fund adoption during the 1980s is often attributed to the 1980 1982 recession in this view states adopted funds to prevent a recurrence of the fiscal crises experienced during that recession an alternative hypothesis is that some funds adopted during this period were intended to circumvent tax and expenditure limit laws we find that states with tels in place were significantly more likely to adopt statutory funds but were significantly less likely to adopt funds with stringent deposit and withdrawal rules suggesting that some funds were adopted to circumvent existing fiscal constraints

the benefit cost ratio as a decision criteria when managing catastrophes previous work has shown that when projects are non marginal it creates an interdependence among projects this implies that policies to manage catastrophes should not be evaluated in isolation but in conjunction with each other as long as relative risk aversion is sufficiently high the benefits of averting one catastrophe depend positively on the background risk created by other catastrophes this specific bias makes it possible to create upper and lower boundaries on the willingness to pay to manage catastrophes and the optimal policy these boundaries can be used to make inferences on which catastrophes should be averted and not and in which order the upper and lower boundaries depend only on the individual catastrophe s benefit cost ratio and the coefficient of risk aversion which both are easy to identify using standard economic frameworks

a simple state contingent pricing rule for complex intertemporal externalities abstract some externalities such as global warming involve complex relationships between emissions and an environmental state variable with effects over lags of uncertain length coming up with theoretically motivated and practical policy options in such cases has proven difficult deterministic intertemporal general equilibrium models yield what appear to be feasible optimal price paths but only by assuming away many key uncertainties nor do they specify how the possibility of new information should affect the policy path bayesian models allow limited uncertainty and optimal learning based on observed effects of policy changes but suggest a discouraging delay before optimal policy can be identified a full insurance model suggests that risk aversion and fat tailed probabilities of catastrophe imply an implausibly or at least impractically large risk premium implying that practical policy decisions depend so critically on uncertain parameters as to be unavoidably arbitrary this paper proposes an entirely new approach based on the observation that the situation giving rise to a complex intertemporal externality also yields an observable state variable that contains information relevant to the identification of the optimal policy path i derive a simple transformation by which the state variable can yield a good approximation to the optimal externality price i outline assumptions sufficient to yield the transformation and present numerical examples that illustrate its ability to follow linear and nonlinear first best price paths a specific application to greenhouse gases is proposed

an application of a stated preference method to value urban amenities this is a case study analysis of how residents value the amenities of a small us city missoula montana a measure of a community s amenity values is needed in city planning so as to protect those

time varying rare disaster risks oil returns and volatility abstract this paper provides a novel perspective to the predictive ability of rare disaster risks for west texas intermediate wti oil market returns and volatility using a nonparametric quantile based methodology over the monthly period of 1918 01 2013 12 we show that a nonlinear relationship and structural breaks exists between oil returns and various rare disaster risks hence linear granger causality tests are misspecified and the linear model results of non predictability are unreliable however the quantile causality test shows that rare disaster risks strongly affect both wti returns and volatility with stronger evidence of predictability observed at lower quantiles of the respective conditional distributions our results are robust to alternative specification of volatility based on a garch model and measure of rare disaster risks based on the number of crises

income inequality in the united states 1913 1998 this paper presents new homogeneous series on top shares of income and wages from 1913 to 1998 in the united states using individual tax returns data top income and wages shares display a u shaped pattern over the century our series suggest that the large shocks that capital owners experienced during the great depression and world war ii have had a permanent effect on top capital incomes we argue that steep progressive income and estate taxation may have prevented large fortunes from fully recovering from these shocks top wage shares were flat before world war ii dropped precipitously during the war and did not start to recover before the late 1960s but are now higher than before world war ii as a result the working rich have replaced the rentiers at the top of the income distribution

relative risk aversion and power law distribution of macroeconomic disasters summary the coefficient of relative risk aversion is notoriously difficult to estimate recently barro and jin on the size distribution of macroeconomic disasters econometrica 2011 79 3 434 455 have come up with a new estimation approach that fits a power law model to the tail of distribution of macroeconomic disasters we show that their results can be successfully replicated using a more refined power law fitting methodology and a more comprehensive dataset copyright 2014 john wiley sons ltd

disaster risk and preference shifts in a new keynesian model in rbc models disaster risk shocks reproduce countercyclical risk premia but generate an increase in consumption along the recession and asset price fall through their effects on agents preferences gourio 2012 this paper offers a solution to this puzzle by developing a new keynesian model with such a small but time varying probability of disaster we show that price stickiness combined with an eis smaller than unity restores procyclical consumption and wages while preserving countercyclical risk premia in response to disaster risk shocks the mechanism then provides a rationale for discount factor first and second moment uncertainty shocks

on the size distribution of macroeconomic disasters confidence interval of 2 to 4 the results are robust to uncertainty about the values of the disaster probability and the equity premium and can accommodate seemingly paradoxical situations in which the equity premium may appear to be infinite

looking beyond reelection revising assumptions about the factors motivating congressional behavior this paper challenges the assumption inherent in most models of legislative behavior namely that congressmen are driven by the desire for reelection i offer an alternative perspective incumbents seek to maximize their discretionary investments and the income generated by the job the only constraint on this behavior is that legislators provide a satisfactory level of constituency service a product that i suggest entails slight opportunity and few manufacturing costs for congressmen and one that is unlikely to lose its value with increased production i also demonstrate that increases in salary and discretionary investments have lengthened congressional careers

the behavior of stock prices around institutional trades all trades executed by 37 large investment management firms from july 1986 to december 1988 are used to study the price impact and execution cost of the entire sequence package of trades that we interpret as an order we find that market impact and trading cost are related to firm capitalization relative package size and most importantly to the identity of the management firm behind the trade money managers with high demands for immediacy tend to be associated with larger market impact financial economists have long studied the equity trading process and its impact on stock prices much prior empirical research isolates individual trades and analyzes the behavior of the stock price around each trade see for example kraus and stoll 1972a holthausen leftwich and mayers 1987 1990 keim and madhavan 1991 petersen and umlauf 1991 hausman lo and mackinlay 1992 and chan and lakonishok 1993 evaluating the behavior of stock prices around trades provides a means of discriminating among various hypotheses as to the elasticity of the demand for stocks yields an estimate of the cost of executing trades and a measure of the liquidity of a market and permits tests of different models of the determination of quotes and transaction prices for many institutional investors however even a moderately sized position in a stock may represent a large fraction of the stock s trading volume accordingly an investment manager s order is often broken up into several trades it is often misleading therefore to consider an individual trade as the basic unit of analysis in the study of trading activity and its effects on prices this paper uses the record of trades executed by 37 large investment manage

on the welfare cost of rare housing disasters abstract this paper examines the welfare cost of rare housing disasters characterized by large drops in house prices i construct an olg general equilibrium model with recursive preferences and housing disaster shocks the likelihood and magnitude of housing disasters are inferred from historical housing market experiences in the oecd the model shows that despite the rarity of housing disasters canadian households would willingly give up 6 percent of their non housing consumption each year to eliminate the housing disaster risk the welfare evaluation of this risk however varies considerably across age groups the risk translates into a welfare loss of as much as 16 percent of annual non housing consumption for the old but a welfare gain of 2 percent for the young this asymmetry stems from the fact that compared to the old younger households suffer less from house price declines in disaster periods due to smaller holdings of housing assets and benefit from lower house prices in normal periods due to the negative price effect of disaster risk

uncertainty shocks as second moment news shocks we provide evidence on the relationship between aggregate uncertainty and the macroeconomy identifying uncertainty shocks using methods from the news shocks literature the analysis finds that innovations in realized stock market volatility are robustly followed by contractions while shocks to forward looking uncertainty have no significant effect on the economy moreover investors have historically paid large premia to hedge shocks to realized but not implied volatility a model in which fundamental shocks are skewed left can match those facts aggregate volatility matters but it is the realization of volatility rather than uncertainty about the future that has been associated with declines

events that shook the market tick data on the standard and poor s 500 stock index s p 500 futures contract and newswire searches are used to match events to large 1 to 5 minute stock price changes sixty nine events that led to large stock price changes are identified between 1982 and 1999 53 of which are directly or indirectly related to monetary policy many large stock price changes have no events associated with them

trading volume definitions data analysis and implications of portfolio theory we examine the implications of portfolio theory for the cross sectional behavior of equity trading volume two fund separation theorems suggest a natural definition for trading activity share turnover if two fund separation holds share turnover must be identical for all securities if k 1 fund separation holds we show that turnover satisfies an approximately linear k factor structure these implications are examined empirically using individual weekly turnover data for nyse and amex securities from 1962 to 1996 we find strong evidence against two fund separation and a principal components decomposition suggests that turnover is well approximated by a two factor linear model if price and quantity are the fundamental building blocks of any theory of market interactions the importance of trading volume in modeling asset markets is clear although most models of asset markets have focused on the behavior of returns predictability variability and information content their implications for trading volume have received far less attention in this article we derive the implications of various asset market models for volume and quantify their importance using recently available volume data for individual securities from the center for research in security prices crsp although the volume literature is voluminous 1 we hope to add to this literature in two ways first we develop the volume implications of popular asset market models rather than construct more specialized and often stylized models to

on modeling and interpreting the economics of catastrophic climate change with climate change as prototype example this paper analyzes the implications of structural uncertainty for the economics of low probability high impact catastrophes even when updated by bayesian learning uncertain structural parameters induce a critical tail fattening of posterior predictive distributions such fattened tails have strong im plications for situations like climate change where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages this paper shows that the economic consequences of fat tailed structural uncertainty along with unsureness about high temperature damages can readily outweigh the effects of discounting in climate change policy analysis

learning and climate feedbacks optimal climate insurance and fat tails we study the effect of potentially severe climate change on optimal climate change policy accounting for learning and uncertainty in the climate system in particular we test how fat upper tailed uncertainty over the temperature change from a doubling of greenhouse gases the climate sensitivity affects economic growth and emissions policy in addition we examine whether and how fast uncertainties could be diminished through bayesian learning our results indicate that while overall learning is slow the mass of the fat tail diminishes quickly since observations near the mean provide evidence against fat tails we denote as partial learning the case where the planner rejects high values of the climate sensitivity with high confidence even though significant uncertainty remains fat tailed uncertainty without learning reduces current emissions by 38 relative to certainty indicating significant climate insurance or paying to limit emissions today to reduce the risk of very high temperature changes is optimal however learning reduces climate insurance by about 50 the optimal abatement policy is strongly influenced by the current state of knowledge even though greenhouse gas ghg emissions are difficult to reverse non fat tailed uncertainty is largely irrelevant for optimal emissions policy

wages rents and the quality of life this study focuses on the role of wages and rents in allocating workers to locations with various quantities of amenities the theory demonstrates that if the amenity is also productive then the sign of the wage gradient is unclear while the rent gradient is positive the theory is extended to include the housing market and nontraded goods these extensions require little modification of the conclusion the empirical work on wages shows that the regional wage differences can be explained largely by these local attributes with the use of site price data implicit prices are estimated and quality of life rankings for the cities are computed

internal rationality imperfect market knowledge and asset prices we present a decision theoretic framework in which agents are learning about market behavior and that provides microfoundations for models of adaptive learning agents are internally rational i e maximize discounted expected utility under uncertainty given dynamically consistent subjective beliefs about the future but agents may not be externally rational i e may not know the true stochastic process for payoff relevant variables beyond their control this includes future market outcomes and fundamentals we apply this approach to a simple asset pricing model and show that the equilibrium stock price is then determined by investors expectations of the price and dividend in the next period rather than by expectations of the discounted sum of dividends as a result learning about price behavior affects market outcomes while learning about the discounted sum of dividends is irrelevant for equilibrium prices stock prices equal the discounted sum of dividends only after making very strong assumptions about agents market knowledge

trading cost the critical link between investment information and results 1983 trading cost the critical link between investment information and results financial analysts journal vol 39 no 3 pp 39 44

deep recessions fast recoveries and financial crises evidence from the american record do steep recoveries follow deep recessions does it matter if a credit crunch or banking panic accompanies the recession moreover does it matter if the recession is associated with a housing bust we look at the american historical experience in an attempt to answer these questions the answers depend on the definition of a financial crisis and on how much of the recovery is considered but in general recessions associated with financial crises are generally followed by rapid recoveries we find three exceptions to this pattern the recovery from the great contraction in the 1930s the recovery after the recession of the early 1990s and the present recovery the present recovery is strikingly more tepid than the 1990s one factor we consider that may explain some of the slowness of this recovery is the moribund nature of residential investment a variable that is usually a key predictor of recessions and recoveries

building codes and land values in high hazard areas vacant land prices on florida s barrier islands are examined under four coastal building regulatory regimes a hedonic pricing model features 1 745 vacant residential land sales from five barrier islands in lee county between 1980 and 1993 we find that land values decrease in response to the county s participation in the national flood insurance program the establishment of a coastal building zone and following the reestablishment of the coastal construction control line the findings suggest that benefits of safety from increased building standards are outweighed by the additional costs of compliance brought about by the code changes

margin regulation and volatility an infinite horizon asset pricing model with heterogeneous agents and collateral constraints can explain why adjustments in stock market margins under us regulation t had an economically insignificant impact on market volatility in the model raising the margin requirement for one asset class may barely affect its volatility if investors have access to another unregulated class of collateralizable assets through spillovers however the volatility of the other asset class may substantially decrease a very strong dampening effect on all assets return volatilities can be achieved by a countercyclical regulation of all markets

institutional investors and stock market volatility statement of responsibility on t p reads xavier gabaix parameswaran gopikrishnan vasiliki plerou h eugene stanley

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

fifth order perturbation solution to dsge models abstract this paper derives a fifth order perturbation solution to dsge models the paper develops a new notation that reduces the notational complexity of high order solutions and yields a faster code the new notation consists of new matrix forms of high order multivariate chain rules and a new representation of the model as a function of one vector variable the algorithm that implements the new notation is between 3 and 55 times faster than dynare depending on model size and solution order

rare disasters asset prices and welfare costs a representative consumer model with epstein zin weil preferences and i i d shocks including rare disasters accords with observed equity premia and risk free rates if the coefficient of relative risk aversion equals 3 4 if the intertemporal elasticity of substitution exceeds one an increase in uncertainty lowers the price dividend ratio for equity and a rise in the expected growth rate raises this ratio calibrations indicate that society would willingly reduce gdp by around 20 percent each year to eliminate rare disasters the welfare cost from usual economic fluctuations is much smaller though still important corresponding to lowering gdp by about 1 5 percent each year

migration and job change a multinomial logit approach abstract a multinomial logit model of residence and job change is developed and estimated both housing demand and job search characteristics are found to be significant determinants of the decision to migrate it is also found that both equilibrium and disequilibrium forces induce migration and job change finally the data do not appear to be ordered with respect to job and residence change contingencies with the exception of changing neither job nor residence relative to all other contingencies

exact solution of asset pricing models with arbitrary shock distributions abstract the paper provides an exact solution to standard asset pricing models for any distribution of shocks to endowment s growth rate it determines the conditions that guarantee the existence of a stationary bounded equilibrium and examines these conditions for an edgeworth expansion distribution of the shocks the results are extended to the case of multivariate asset pricing models

wages rents and amenities differences among workers and regions what explains persistent regional earnings differences this paper argues that regional differences in amenities can account for the wage differences in contrast cost of living variations do not account for wage differences but actually exacerbate them this conclusion results from a model in which variations in rents and wages are equalizing differences for amenity differences empirical results are consistent with the model

strategic trading in a dynamic noisy market this paper studies a dynamic model of a nancial market with a strategic trader in each period the strategic trader receives a privately observed endowment in the stock he trades with competitive market makers to share risk noise traders are present in the market after receiving a stock endowment the strategic trader is shown to reduce his risk exposure either by selling at a decreasing rate over time or by selling and then buying back some of the shares sold when the time between trades is small the strategic trader reveals the information regarding his endowment very quickly

the upstairs market for large block transactions analysis and measurement of price effects this article develops a model of the upstairs market where order size beliefs and prices are determined endogenously we test the model s predictions using unique data for 5 625 equity trades during the period 1985 to 1992 that are known to be upstairs transactions and are identified as either buyer or seller initiated we find that price movements prior to the trade date are significantly positively related to trade size consistent with information leakage as the block is shopped upstairs further the temporary price impact or liquidity effect is a concave function of order size which may result from upstairs intermediation

on the political and fiscal determinants of income redistribution under federalism and democracy evidence from germany several recent studies suggest that transfers from central to regional governments are motivated by political considerations in this paper we examine if this is also the case for transfers from regional to central governments in the context of the german fiscal equalization system we examine the factors that contribute to differences in tax revenues across german states the evidence indicates that both fiscal incentives and political factors can explain these differences although in germany the former are more important moreover accounting for fiscal institutions has important consequences for the empirical assessment of political influences on taxation overall we find that the political affiliation of the state governor is an important factor in explaining differences in state tax revenues thus the right wing party cdu csu is effective in relaxing the tax burden at the state level in contrast partisan alignment between the state government and the federal government loses its importance once fiscal conditions enter the empirical model

on the stability of the constant relative risk aversion crra utility under high degrees of uncertainty growth models under uncertainty and constant relative risk aversion crra utility are fragile in explaining consumers choice as equilibrium consumption is dependent on distributional assumptions we show that under semi nonparametric distributions general equilibrium models are stable as the existence of expected utility is guaranteed

how much would you pay to resolve long run risk abstract though risk aversion and the elasticity of intertemporal substitution have been the subjects of careful scrutiny the long run risks literature as well as the broader literature using recursive utility to address asset pricing puzzles has ignored the full implications of their parameter specifications recursive utility implies that the temporal resolution of risk matters and a quantitative assessment thereof should be part of the calibration process this paper gives a sense of the magnitudes of implied timing premia its objective is to inject temporal resolution of risk into the discussion of the quantitative properties of long run risks and related models jel d81 g11 g12

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

political control and public sector savings evidence from the states the right to access and ultimately spend public sector savings is determined by the party which can control the politicaloutcome this implies that anticipatedfuture changes in the state s controllingpolitical party may systematicallyadversely affect current savings extendingthe life cycle permanent income model ishow that a representative legislator willopt to forgo current saving in favor ofspending when his prospects for futurepolitical control diminish estimating apanel data model of 39 states from1973 1995 i find that an actual futurechange in the controlling party of astate s lower house significantly reducescurrent saving

do demand curves for stocks slope down since september 1976 stocks newly included into the standard and poor s 500 index have earned a significant positive abnormal return at the announcement of the inclusion this return does not disappear for at least ten days after the inclusion the returns are positively related to measures of buying by index funds consistent with the hypothesis that demand curves for stocks slope down the returns are not related to s p s bond ratings which is inconsistent with a plausible version of the hypothesis that inclusion is a certification of the quality of the stock

the political costs of tax increases and expenditure reductions evidence from state legislative turnover this paper estimates the political costs of increasing taxes and cutting expenditures for members of a legislature it is found that both costs are individually significant but that they are not significantly different this coincides with the first order condition for maximization of the probability of reelection republican legislatures have a higher political cost for taxes thus the party s relative bias toward smaller government is founded in stronger constituent preferences against taxes not for lower spending additionally by being ideologically conservative republicans lower the political costs of taxes while by being more liberal democrats lower the cost of cutting expenditures

a note on some limitations of crra utility abstract in a standard environment for choice under uncertainty with constant relative risk aversion crra the existence of expected utility is fragile with respect to changes in the distributions of random variables changes in prior information or the assumption of rational expectations

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

is the market price of risk infinite abstract in a bayesian model a rational expectations euler equation involves a learning wedge that disconnects the consumer s imrs from the rational expectations pricing kernel the wedge is extremely volatile and explains the high volatility of the rational expectations pricing kernel

market liquidity hedging and crashes in the absence of significant news hedging strategies were blamed for the stock market crash of october 1987 but traditional models cannot explain how a relatively small amount of selling could cause so large a price drop the authors develop a rational expectations model in which prices play an important role in shaping expectations markets are much less liquid in their model than in traditional models discontinuities or crashes can occur even with relatively little hedging the model is consistent with theories as disparate as keynes beauty contest insights and thom s catastrophe analysis and suggests means to reduce volatility copyright 1990 by american economic association

on the existence of expected utility with crra under stur abstract this note shows that in a standard framework for choice under uncertainty expected utility fails to exist with constant relative risk aversion crra when the endowment follows a stochastic unit root stur process

institutional trades and intraday stock price behavior abstract this paper examines the price effect of institutional stock trading using a unique data set that reports the transactions large and small of 37 large institutional money management firms the direction of each trade and the identity of the management firm behind each trade are known although institutional trades are associated with some price pressure we find that the average effect is small there is also a marked asymmetry between the price impact of buys versus sells we relate our findings to various hypotheses on the elasticity of demand for stocks the cost of executing transactions and the determinants of market impact although market capitalization and relative trade size influence the market impact of a trade the dominant influence is the identity of the money manager behind the trade