quantity aggregation in consumer demand analysis when physical quantities are observed a method for estimating price and income elasticities from cross section data devised by deaton 1986 1987 1988 makes implicit use of the hicks composite commodity theorem recognition of this fact allows theoretically rigorous definition of aggregate composite quantities a comparison of elasticities of hicks composite with elasticities of simple physical quantity measures for the ivory coast and the united states demonstrates that use of physical quantity measures can be severely misleading when commodity heterogeneity is substantial copyright 1990 by mit press

the baby booms legacy relative wages in the twenty first century the authors assess the baby boom generations impact on relative wages in the united states in the year 2020 time series data for the period 1955 1984 from the mit penn ssrc data bank are used an econometric model of the demand for workers in eight age sex categories is estimated the simulation results indicate that wages of prime age workers will not deteriorate in relation to older workers as a result of the aging of the baby boom cohort conclusions for teens cannot be drawn the general result does not hold for women however prime age women are predicted to lose in comparison with older workers and with men increasing rather than reducing wage differentials by sex ceteris paribus excerpt

changes in labor force composition and male earnings a production approach models of aggregate production are estimated and used to investigate the effects of changes in labor force composition on the recently observed decline in the earnings of college graduates relative to other workers and on the fall in the earnings of younger workers relative to older workers changes in labor force composition explain substantial proportions of these observed earnings changes the most important compositional change appears to have been the rapid increase in the number of young male college graduates projections outside the sample are consistent with depressed earnings throughout the lifetimes of the large baby boom cohorts especially among college graduates but do not suggest that depressed college graduate earnings are a permanent phenomenon for all birth cohorts

no arbitrage bounds for financial scenarios abstract we derive no arbitrage bounds for expected excess returns to generate scenarios used in financial applications the bounds allow to distinguish three regions one where arbitrage opportunities will never exist a second where arbitrage may be present and a third where arbitrage opportunities will always exist no arbitrage bounds are derived in closed form for a given covariance matrix using the least possible number of scenarios empirical examples illustrate the practical potential of knowing these bounds

lp modeling for asset liability management a survey of choices and simplifications dynamic linear programming lp models for asset liability management alm are quite powerful and flexible but face two challenges 1 many modeling choices not all consistent with one another or with finance theory and 2 solution difficulties due to the large number of scenarios obtained from standard interest rate models we first survey these modeling choices with a view to help researchers make self consistent choices next we review how the dynamic lp model for alm and the representation of uncertainty therein have been simplified in the past to motivate new or hybrid models emphasizing tractability to this end we review existing static lp models as extreme modeling simplifications and aggregation as a simplification of uncertainty

input demand elasticities for heterogeneous labor firm level estimates and an investigation into the effects of aggregation labor economists have paid increasing attention to the estimation of demand elasticities for heterogeneous labor the majority of these studies investigate the effect on wage rates resulting from exogenous changes in factor quantities i e the measurement of elasticities of complementarity examples of these studies abound borjas for example investigates the impact of differences in labor market representation on the earnings of racial groups 8 in another paper borjas defines immigrants as a separate labor group and is able to determine the impact of immigration on the wages earned by natives 9 berger defines labor inputs along education and gender lines thereby allowing for the investigation of changes in the age education composition of the work force on wage rates 5 and grant and hamermesh study the effect of increasing female labor force participation on the wages earned by youth and adults 17 less attention has been paid to the study of the responsiveness of employment to exogenous changes in wage rates i e the measurement of elasticities of substitution less attention has been focused on this issue because the data requirements are more stringent since in order to presume that wage rates are exogenously determined the unit of observation must be small ideally establishmentor firm level data would be used the relative inaccessibility of these type of data has led researchers to use more aggregated figures such as smsa level or industry level data to address microissues as long as wage rates are determined exogenously the unit of observation chosen is appropriate there are real concerns however about the adequacy of more aggregated units to describe the behavior of firms 2 this study addresses the issue of whether micro level data are in fact needed to accurately measure elasticities of substitution among labor groups a firm level data set that includes input

labor market competition among youths white women and others we estimate substitution possibilities among a set of age race sex groups in the labor force the estimates are based on cross section data from smsas in 1969 and they allow us to consider how substitutable adult women are for young women or young men the estimates are used along with assumptions about the extent of wage rigidity and elasticities of labor supply to simulate the direct and indirect effects of the growth of the female labor force on job opportunities for youth assuming rigid wages for young workers and on the wage rates of adult males assuming these wages are flexible this abstract was borrowed from another version of this item

analyzing legal regulations in the norwegian life insurance business using a multistage asset liability management model the legal regulations for the life insurance business in norway have recently been and still are under revision the government s intention is to secure the interests of the customers in life insurance companies however there has been debate as to whether the regulations really are in the customers best interest we apply an asset liability management alm model to analyze the implications of the regulations the model is multistage stochastic and integrates assets and liabilities we employ a four stage model to analyze the legal regulations and conclude that the current legal framework is not in the insurance holders best interests

the effect of cohort size on earnings growth a reexamination of the evidence this study reexamines the effect of cohort size on earnings growth finis welch finds that individuals in larger cohorts experience depressed earnings conditions on entry into the labor market but that their earnings grow at faster rates than in smaller cohorts thus a large portion of the cohort size effect on earnings dissipates after a few years however using data almost identical to those of welch but estimating less restrictive models it is found here that cohort size not only depresses earnings at entry but also seems to slow down early career earnings growth the evidence suggests that earnings ini larger cohorts do not approach normal levels after at brief period in the labor force rather the negative cohort size effect on earnings appears to worsen with experience

international income inequality measuring ppp bias by estimating engel curves for food there are large differences between rich and poor people in the world this is of major concern to economists as well as to policy makers the magnitude of the dif ferences however depends on the measure used for comparisons to illustrate per capita income in china is more than five times larger if one uses penn world table pwt 1 incomes rather than exchange rate based ex incomes in this paper we study pwt incomes which aim at correcting for price level dif ferences across countries and identify the bias in them by estimating engel curves for food furthermore we study the relationship between the bias and the income of a country the pwt produces purchasing power parity ppp adjusted incomes and thus the associated bias is referred to as the ppp bias having estimated the bias in pwt incomes we provide new estimates of real income and refer to these as the engel curve ec incomes by comparing the estimated ec incomes and the pwt incomes the issue of how the bias influences estimated inequality is discussed finally we discuss whether ex incomes which simply transform each country s nominal income into one common currency provide better estimates of income than do pwt incomes this paper reports three main findings first there is substantial and systematic ppp bias in the pwt incomes the poorer the country the more its income tends to be overestimated 2 second the ppp bias causes a substantial and robust underesti mation of international inequality the gini index increases substantially when one adjusts for the bias third whereas pwt incomes provide better estimates than the ex incomes for the richer countries the ex incomes which implicitly assume that ppp holds provide better estimates for the poorer countries as we know that price levels differ across countries there is consensus that the seminal work on establishing the pwt was a well founded initiative and the data have been extensively used 3 still although many studies rely on pwt data few focus on the ppp bias in this dataset some contributors focus on one component of the bias however the so called substitution bias and use macro data to measure this

schooling choices and demographic cycles this paper examines the effect of demographic cycles on schooling choices and the timing of school completion utilizing data from the u s national longitudinal surveys of labor market experience and from the panel study of income dynamics we find that men and women born during the upswing of a demographic cycle obtain more schooling and take longer to finish a year of schooling than comparable individuals born during the downswing of a demographic cycle the patterns that we document are more complex than would be predicted by any of the theoretical models of educational responses to demographic cycles that have been presented in the literature excerpt

valuing urban lakeview amenities using implicit and contingent markets amenities influence individual location decisions and affect overall social well being this comparative study focuses on the potential complementarity of implicit and contingent market approaches

the translog approximate function substitution among inputs in manufacturing evaluated at sample means abstract this paper shows the translog function can approximate any first degree homogeneous function around any expansion point estimates for 1987 manufacturing confirm no weak separability of labor from capital but do not confirm lower production than non production worker substitution with capital

generalising interest rate duration with directional derivatives direction x and applications conventional or fisher weil duration is an ordinary derivative that measures the response of portfolio value to marginal parallel shifts in the term structure while other proposed measures are generally specific to particular interest rate processes in this paper we show that portfolio responses to arbitrary shifts in the term structure may be handled by the use of frechet or directional derivatives presenting a simple algorithm for the directional derivative of a fixed interest portfolio viewed as a set of cash flows for a given portfolio one can locate the most sensitive areas along the term structure by computing a function or profile direction x that gives the term structure movement to which the portfolio is most exposed immunisation techniques can be based on choosing ancillary assets that ensure that the portfolio directional derivative is zero or as close to zero as possible this generalises approaches based on factor models of the term structure the analysis is applied to both continuous and discrete time

the retirement wealth of the baby boom generation abstract the paper compares the well being of the baby boom generation ages 40 55 in 2001 with the same age group in 1983 i find little evidence that their relative position deteriorated over the period by some indicators this generation has seen an improvement in terms of income the 40 55 age group was at about the same relative position in 2001 as in 1983 in terms of conventional wealth there was some slippage over the period in terms of mean augmented wealth net worth plus pension and social security wealth their relative position improved somewhat but in terms of median augmented wealth there was again some slippage

comment on generating scenario trees for multistage decision problems in models of decision making under uncertainty one typically has to approximate the uncertainties by a limited number of discrete outcomes ha yland and wallace 2001 formulate a nonlinear programming problem to generate sucha limited number of discrete outcomes while satisfying specified statistical properties they have developed and employed this method for a stochastic multistage asset allocation problem when the method is applied to such financial optimization problems under uncertainty we argue here that it does not suffice to match statistical properties to obtain realistic outcomes the limited description of the uncertainty in such models should also exclude arbitrage opportunities and thereby be consistent with financial asset pricing theory we illustrate that the method proposed by ha yland and wallace can result in arbitrage opportunities in the scenario tree if only statistical properties are imposed we show how one can check ex post for the presence of arbitrage opportunities in a scenario tree by checking for the existence of solutions to sets of linear equations arbitrage opportunities can also be precluded ex ante in the scenario tree by adding constraints to the nonlinear programming problem of ha yland and wallace

how to measure labour market effects of immigration a review abstract this paper surveys available empirical evidence on labour market effects of immigration many different approaches have been used already to try to find out whether immigration hurts the labour market opportunities of natives no doubt new approaches will follow in the future as globalization will keep the migration issue on the agenda this literature review discusses the different approaches concentrating on both the methodology and the results at the end it tries to summarize available evidence

concepts technical issues and uses of the russell yasuda kasai financial planning model this paper discusses technical aspects of the russell yasuda kasai financial planning model these include the models for the discrete distribution scenario generation processes for the uncertain parameters of the model the mathematical approach used to develop the infinite horizon end effects part of the model a comparison of algorithms used in the model s solution and a comparison of the multistage stochastic linear programming model with the previous technology static mean variance analysis experience and benefits of the model in yasuda kasai s financial planning process is also discussed

financial asset pricing theory and stochastic programming models for asset liability management a synthesis practical portfolio investment problems under uncertainty can be modeled well as multiperiod stochastic programs however the numerical optimization methods that need to be used to solve such models seriously limit the level of detail in the uncertainty about future asset rices and returns that can be incorporated somewhat surprisingly the question how this necessarily approximate description of the uncertainty should be constructed has received relatively little attention in the stochastic programming literature moreover many of the descriptions that have been used are not arbitrage free and therefore inconsistent with modern financial asset pricing theory in this paper we will present aggregation methods that can be used in combination with financial asset pricing models to obtain a description of the uncertainty that is arbitrage free consistent with observed market prices as well as concise enough for a stochastic programming model furthermore we will discuss how these aggregation methods can form the basis of an iterative solution approach

economic effects of immigrants on native and foreign born workers complementarity substitutability and other channels of influence the authors use standard metropolitan statistical area smsa data constructed from 1980 census microdata files and other sources to estimate a structural model of native foreign born labor demand and labor supply which distinguishes the effects upon real wages of each type of labor and on the employment of natives the authors specify econometrically estimate and simulate the structural model which incorporates not only a production structure channel through which immigrants influence area real wages and employment but also demand and native labor supply channels it is noted that while these are not the only channels through which immigrants may affect native workers the model nonetheless constitutes a step in the direction of a general equilibrium approach in the production structure channel immigrants and natives are found to be substitutes in production immigration lowers foreign born wage rates and leads to lower wages for natives the negative effects of the production channel usually are ameliorated through the demand channel further immigrants add to local demand through their earnings and potentially through non labor income while also lowering unit costs and local prices which enhances real incomes and potentially net exports and thus the demands for local output and area labor the author discusses findings of interest from the simulation results based upon an analysis of all areas

the effects of demographic change on the distribution of wages 1967 1990 a multiple skills model was used to examine the impact of changes in labor force composition on the wage distribution of workers by age sex education and race in the us from 1967 through 1990 the model provided for a higher level of specification than previous studies of wage distribution changes in previous investigations workers were grouped into arbitrary and a priori categories and workers in each category were assumed to be perfectly interchangeable in contrast the multiple skills model assumed that each worker had multiple skills that each skill had a productive value and that each skill was an imperfect substitute for other skills the model further assumed that changes in labor force composition would alter the distribution of skills in the labor force which in turn would produce changes in relative wages analysis revealed that wages of young college educated white and nonwhite males relative to the wages of older college educated white and nonwhite males declined since 1967 and were expected to decline throughout the 1980s in contrast the wages of young high school educated white and nonwhite males relative to the wages of older high school educated white and nonwhite males did not decline since 1967 and were not expected to decline during the 1980s the wages of white females of all ages and of all educational levels relative to the wages of males of all ages and of all educational levels declined throughout the period and were expected to decline in the future nonwhite workers made greater gains in wages since 1967 than white males and this trend was expected to continue through the 1980s however the wages of nonwhite males remained absolutely lower than those of white males by 1985 the wages of nonwhite females were expected to surpass those of white females these findings were similar to those observed in other studies except that other studies failed to detect the differential impact on the wages of high school and college educated males

no arbitrage rom simulation abstract ledermann et al 2011 propose random orthogonal matrix rom simulation for generating multivariate samples matching means and covariances exactly its computational efficiency compared to standard monte carlo methods makes it an interesting alternative in this paper we enhance this method s attractiveness by focusing on applications in finance many financial applications require simulated asset returns to be free of arbitrage opportunities we analytically derive no arbitrage bounds for expected excess returns to be used in the context of rom simulation and we establish the theoretical relation between the number of states i e the sample size and the size of no arbitrage regions based on these results we present a no arbitrage rom simulation algorithm which generates arbitrage free random samples by purposefully rotating a simplex hence the proposed algorithm completely avoids any need for checking samples for arbitrage compared to the alternative of potentially frequent re sampling followed by arbitrage checks it is considerably more efficient as a by product we provide interesting geometrical insights into affine transformations associated with the no arbitrage rom simulation algorithm

the arbitrage principle in financial economics abstract the importance of arbitrage conditions in financial economics has been recognized since modigliani and miller s classic work on the financial structure of the firm they showed that if a f

high performance computing for asset liability management financial institutions require sophisticated tools for risk management for companywide risk management both sides of the balance sheet should be considered resulting in an integrated asset liability management approach stochastic programming models suit these needs well and have already been applied in the field of asset liability management to improve financial operations and risk management the dynamic aspect of the financial planning problems inevitably leads to multiple decision stages trading dates in the stochastic program and results in an explosion of dimensionality in this paper we show that dedicated model generation specialized solution techniques based on decomposition and high performance computing are the essential elements to tackle these large scale financial planning problems it turns out that memory management is a major bottleneck when solving very large problems given an efficient solution approach and a parallel computing facility we report on the solution of an asset liability management model for an actual dutch pension fund with 4 826 809 scenarios 12 469 250 constraints and 24 938 502 variables which is the largest stochastic linear program ever solved a closer look at the optimal decisions reveals that the initial asset mix is more stable for larger models demonstrating the potential benefits of the high performance computing approach for alm

modeling physical quantities of food and nutrients consumed from aggregate data with an application to finland anticipating the impact of changes in economic incentives on dietary quality and nutritional health requires knowledge of how physical quantities of food consumed respond to price and income variations a problem arises however because physical quantities are 1 not consistent aggregates in demand models and 2 not measured at final retail level in national statistics the article develops a solution by establishing explicitly the theoretical link between composite demand and physical quantities from which a novel empirical approach to the estimation of nutrient elasticities is derived it is applied to finnish aggregate data from the national accounts and food balance sheets over the 1975 2006 period and the results are used to assess the potential effectiveness of several incentive based nutritional policy instruments jel classifications i10 q11 q18

discretized reality and spurious profits in stochastic programming models for asset liability management in the literature on stochastic programming models for practical portfolio investment problems relatively little attention has been devoted to the question how the necessarily approximate description of the asset price uncertainty in these models influences the optimal solution in this paper we will show that it is important that asset prices in such a description are arbitrage free descriptions which have been suggested in the literature are often inconsistent with observed market prices and or use sampling to obtain a set of scenarios about the future we will show that this effectively introduces arbitrage opportunities in the optimization model for an investor who cannot exploit arbitrage opportunities directly because of market imperfections and trading restrictions we will illustrate that the presence of such arbitrage opportunities may cause substantial biases in the optimal investment strategy

a one factor model of interest rates and its application to treasury bond options 1990 a one factor model of interest rates and its application to treasury bond options financial analysts journal vol 46 no 1 pp 33 39

formulation of the russell yasuda kasai financial planning model this paper describes the formulation of the russell yasuda kasai financial planning model including the motivation for the model the presentation complements the discussion of the technical details of the financial modeling process and the managerial impact of its use to help allocate the firm s assets over time discussed in carin o et al 1994 1998 respectively the multistage stochastic linear program incorporates yasuda kasai s asset and liability mix over a five year horizon followed by an infinite horizon steady state end effects period the objective is to maximize expected long run profits less expected penalty costs from constraint violations over the infinite horizon scenarios are used to represent the uncertain parameter distributions the constraints represent the institutional cash flow legal tax and other limitations on the asset and liability mix over time

dollars and dreams a reduced middle class alternative explanations we decompose annual earnings into hours of work and hourly earnings and analyze male female differences in earnings inequality using canadian data our results indicate that the larger female inequality in earnings is due to a greater inequality in the

educational attainment and cohort size we argue that the postwar baby boom caused substantial fluctuations in both the economic rewards to education and educational attainment over the last 3 decades if substitutability between young and old workers diminishes with education the present value of lifetime earnings for a boom cohort is depressed more for highly educated workers reducing incentives for educational attainment the opposite is true for pre and postboom cohorts the diminishing substitutability hypothesis explains the declines in both the returns to college and college completion rates in the 1970s and predicts a substantial increase in educational attainment for postboomers

term structure movements and pricing interest rate contingent claims this paper derives an arbitrage free interest rate movements model ar model this model takes the complete term structure as given and derives the subsequent stochastic movement of the term structure such that the movement is arbitrage free we then show that the ar model can be used to price interest rate contingent claims relative to the observed complete term structure of interest rates this paper also studies the behavior and the economics of the model our approach can be used to price a broad range of interest rate contingent claims including bond options and callable bonds

the overeducated canadian changes in the relationship among earnings education and age for canadian men 1971 81 individual data from six surveys of consumer finances are used to assess recent changes in the earnings profiles of canadian males with particular emphasis upon the role of cohort size the data reveal a marked compression of earnings differences across levels of education at most ages the slope of age earnings profiles did not change systematically regression analysis confirms that cohort size has a negative impact on earnings that diminishes with age however the estimated effects of cohort size do not explain the observed decline in earnings differences across levels of education le canadien trop instruit a propos des changements dans les rapports entre gains age et niveau d instruction pour les hommes canadiens 1971 81 l auteur analyse les changements recents dans les profils de revenus des hommes canadiens en s attachant en particulier a examiner l impact de la taille de la cohorte a l aide des donnees individuelles tirees de six enqu es sur les finances des consommateurs les donnees revelent une compression marquee de la fourchette de revenus pour divers niveaux d instruction et ce pour la plupart des ages la pente du profil age revenus ne change pas systematiquement l analyse de regression montre que la taille de la cohorte a un impact negatif sur le revenu mais un impact qui diminue avec l age cependant les effets calibres de la taille de la cohorte n expliquent pas la chute observee dans les differentiels de revenus pour des canadiens ayant des niveaux d instruction differents

a bank asset and liability management model in managing its assets and liabilities in light of uncertainties in cash flows cost of funds and return on investments a bank must determine its optimal trade off between risk return and liquidity in this paper we develop a multiperiod stochastic linear programming model alm that includes the essential institutional legal financial and bank related policy considerations and their uncertainties yet is computationally tractable for realistically sized problems a version of the model was developed for the vancouver city savings credit union for a 5 year planning period the results indicate that alm is theoretically and operationally superior to a corresponding deterministic linear programming model and that the effort required for the implementation of alm and its computational requirements are comparable to those of the deterministic model moreover the qualitative and quantitative characteristics of the solutions are sensitive to the model s stochastic elements such as the asymmetry of cash flow distributions we also compare alm with the stochastic decision tree sdt model developed by s p bradley and d b crane alm is computationally more tractable on realistically sized problems than sdt and simulation results indicate that alm generates superior policies

stochastic network programming for financial planning problems several financial planning problems are posed as dynamic generalized network models with stochastic parameters examples include asset allocation for portfolio selection international cash management and programmed trading arbitrage despite the large size of the resulting stochastic programs the network structure can be exploited within the solution strategy giving rise to efficient implementations empirical results are presented indicating the benefits of the stochastic network approach for the asset allocation case

a hybrid simulation optimisation scenario model for asset liability management abstract in this paper we desciibe a decision support model to sustain management of pension funds in the strategic planning of the available asset and liability policy instruments a main characteristic of the approach is that the relevant risk drivers are modelled by scenarios rather than by probability distributions we will describe the scenario generation methodology and how the scenarios are used by pension fund managers to simulate and improve asset liability strategies until a strategy is identified which is agreed upon by all who carry responsibility for the pension fund and her sponsors and trustees next we will describe how this process of managerial learning can be improved by a hybrid simulation optimisation method which applies concepts from the field of non linear global optimisation to determine the asset allocations which determine efficient frontiers of contribution rates and downside insolvency risks we will conclude by showing that the application of the developed models to a particular pension fund leads to the annulment of the infeasibility of the current asset liability policy on the one hand and to a reduction of the expected yearly contributions of us 100 million on the other

scenario generation and stochastic programming models for asset liability management in this paper we develop and test scenario generation methods for asset liability management models we propose a multi stage stochastic programming model for a dutch pension fund both randomly sampled event trees and event trees fitting the mean and the covariance of the return distribution are used for generating the coefficients of the stochastic program in order to investigate the performance of the model and the scenario generation procedures we conduct rolling horizon simulations the average cost and the risk of the stochastic programming policy are compared to the results of a simple fixed mix model we compare the average switching behavior of the optimal investment policies our results show that the performance of the multi stage stochastic program could be improved drastically by choosing an appropriate scenario generation method

integrated simulation and optimization models for tracking indices of fixed income securities increasing performance pressures on fixed income managers have led to a search for new and creative ways to add to portfolio returns the largest pension plan sponsors insurance companies foundations and money management firms are using indexed portfolios as their fixed income assets management strategies since the late 1970s tracking a fixed income index is a difficult task due to transaction costs portfolio size and diversification restrictions liquidity requirements bid ask spreads etc this paper develops an integrated simulation and optimization approach for tracking fixed income indices the model was implemented at metropolitan life insurance company we introduce a simulation model for generating scenarios of holding period returns of the securities in the index then we develop optimization models to select a portfolio that tracks the index the models penalize downside deviations of the portfolio return from the index the developed framework is used to track the salomon brothers mortgag

the sensitivity of labor demand functions to choice of dependent variable this paper investigates whether the parameters of labor demand functions are sensitive to alternative methods of estimation the assumption that the production technology is of the generalized leontief type implies that the demand system can be estimated by analyzing cross section differences in earnings across labor markets by studying longitudinal changes in earnings within a labor market or by investigating cross section differences in labor force participation rates across labor markets the estimation of these models on the 1970 and 1980 public use samples from the u s census reveals that the estimates of labor demand functions are indeed quite robust to major specification changes this abstract was borrowed from another version of this item

a framework for analyzing the impact of cohort size on education and labor earning the paper analyzes three models of labor demand solving for the change in wages of a given labor group due to a change in the size of a birth cohort when the production function includes age schooling groups as separate factors an increase in the size of one birth cohort changes the size of several labor market groups also in this case the demand effect of changing factor size is joined by a supply effect of changing schooling proportions ignoring the supply effect may cause us to overestimate the effect of a large birth cohort on wages of young skilled workers

simple explicit formula for near optimal stochastic lifestyling abstract in life cycle economics the samuelson paradigm samuelson 1969 states that the optimal investment is in constant proportions out of lifetime wealth composed of current savings and the present value of future income it is well known that in the presence of credit constraints this paradigm no longer applies instead optimal life cycle investment gives rise to so called stochastic lifestyling cairns blake and dowd 2006 whereby for low levels of accumulated capital it is optimal to invest fully in stocks and then gradually switch to safer assets as the level of savings increases in stochastic lifestyling not only does the ratio between risky and safe assets change but also the mix of risky assets varies over time while the existing literature relies on complex numerical algorithms to quantify optimal lifestyling the present paper provides a simple formula that captures the main essence of the lifestyling effect with remarkable accuracy

comparison of alternative utility functions in portfolio selection problems this paper examines the effect of alternative utility functions and parameter values on the optimal composition of a risky investment portfolio normally distributed assets are the setting for the theoretical and empirical analyses the results agree well with the available theory and imply utility functions and parameter values that are appropriate for investors with particular risk bearing attitudes the results give strong empirical support to the proposition that utility functions having different functional forms and parameter values but similar absolute risk aversion indices have similar optimal portfolios these results suggest that over horizons up to one year one can safely substitute convenient surrogate utility functions for other utility functions for reasons of tractability or otherwise the results also provide guidance regarding the significance of the magnitude and change of particular numerical values of the risk aversion index moreover theoretical exact results are obtained using rubinstein s measure of global risk aversion

bond pricing and the term structure of interest rates a discrete time approximation this paper studies the binomial approximation to the continuous trading term structure model of heath jarrow and morton 1987 the discrete time approximation makes the original methodology accessible to a wider audience and provides a computational proce dure necessary for calculating the contingent claim values derived in the continuous time paper this paper also extends and generalizes ho and lee s 1986 model to include multiple random shocks to the forward rate process and to include an analysis of continu ous time limits the generalization provides insights into the limitations of the existing empirical implementation of ho and lee s model

a method for strategic asset liability management with an application to the federal home loan bank of new york strategic asset liability management is a primary concern in today s banking environment in this paper we present a methodology to assist in the process of asset liability selection in a stochastic interest rate environment in our approach a quadratic optimizer is embedded in a simulation model and used to generate patterns of dividends market value and duration of capital for randomly generated interest rate scenarios this approach can be used to formulate test and refine asset liability strategies we present results of applying this methodology to data from the federal home loan bank of new york

optimal replication of options with transactions costs and trading restrictions this paper analyzes the strategy that minimizes the initial cost of replicating a contingent claim in a market with transactions costs and trading constraints the linear programming and two stage backward recursive models developed are applicable to the replication of convex as well as nonconvex payoffs and to a portfolio of options with different maturities the paper s formulation conveniently accounts for fixed and variable transactions costs lot size constraints and position limits on trading the article shows that in the presence of trading frictions it is no longer optimal to revise one s portfolio in each period at the optimum cash flows in excess of the desired ones may be generated the optimal policy trades off the curvature of the payoff that is generated against the terminal slack

decision model and analysis for investment interest expense deduction and allocation abstract investment income tax planning requires informed strategic choices one must determine the amount of qualified dividends and net long term capital gain to be included in investment income against which investment interest expense can be deducted this choice also determines the residual qualified dividends and net long term capital gain which enjoy a reduced tax rate another important decision is whether all or some of this interest expense should be deducted in the current year or carried forward this paper puts forward a new approach to formulate these questions as a generalized resource allocation problem which permits analysis of the interdependence between and the tax consequences of the above decisions the commonly used approach deducting investment interest expense sooner rather than later we consider myopic since the benefit of deferring some of the deduction is not leveraged presented here is a tax planning guideline a necessary and sufficient condition for optimality to realize a more forward looking strategy we also show that for certain income structures the tax savings by deducting a one dollar investment interest expense may be more than the tax rate on the dollar of investment income that is offset

price unit value and quality demanded abstract given the paucity of quality price data it is common to rely on unit value average expenditure per unit as a proxy for price but this is an imperfect proxy if households respond to price increases by substituting to lower quality goods this paper draws on survey data that contain both unit value and price to estimate the severity of quality substitution in indonesia finding that it is prevalent the paper next calculates price elasticities that correct for quality substitution evaluating and ultimately rejecting a commonly used method for calculating price elasticities using only unit value data finally it demonstrates that quality substitution can result in biased price elasticities even when price is perfectly observed

a geometric approach to multiperiod mean variance optimization of assets and liabilities we present a geometric approach to discrete time multiperiod mean variance portfolio optimization that largely simplifies the mathematical analysis and the economic interpretation of such model settings we show that multiperiod mean variance optimal policies can be decomposed in an orthogonal set of basis strategies each having a clear economic interpretation this implies that the corresponding multiperiod mean variance frontiers are spanned by an orthogonal basis of dynamic returns specifically in a k period model the optimal strategy is a linear combination of a single k period global minimum second moment strategy and a sequence of k local excess return strategies which expose the dynamic portfolio optimally to each single period asset excess return this decomposition is a multi period version of hansen and richard econometrica 1987 orthogonal representation of single period mean variance frontiers and naturally extends the basic economic intuition of the static markowitz model to the multiperiod context using the geometric approach to dynamic mean variance optimization we obtain closed form solutions in the i i d setting for portfolios consisting of both assets and liabilities al each modelled by a distinct state variable as a special case the solution of the mean variance problem for the asset only case in li and ng mathematical finance 10 2000 follows directly and can be represented in terms of simple products of some single period orthogonal returns we illustrate the usefulness of our geometric representation of multiperiods optimal policies and mean variance frontiers by discussing specific issues related to al portfolios the impact of taking liabilities into account on the implied mean variance frontiers the quantification of the impact of the rebalancing frequency and the determination of the optimal initial funding ratio

the response of aggregate production to fertility induced changes in population age distribution with a particular focus upon long term supply effects the authors explored the implications of different population age distributions for the productive capacity of an economy a multilevel aggregate production process was specified plausible values assigned to its parameters and steady state solutions obtained under a range of alternative fertility assumptions the theoretical model was calibrated to conform with canadian data and published estimates of age sex substitution elasticities the study found productive capacity to be related to age distribution although the output effects exceed 8 regardless of the structure of the economy only when total fertility rate is less than 1 6 or well above 3 0 within the range of variation productive capacity and output per capita are lower for both younger and older populations altering the elasticity of substitution between different tasks has negligible effects upon the sensitivity of the economy to changes in age distribution altering the elasticity of substitution between different age sex groups for a given task has a markedly greater effect introducing either increasing or decreasing returns to scale has only a minor effect upon the sensitivity of the economy to changes in age distribution and marginal products are quite sensitive to changes in age distribution for both younger and older workers but far less sensitive for middle aged workers

capturing the correlations of fixed income instruments this paper develops a framework for managing portfolios of fixed income instruments based on traditional principles from the equities market i e based on diversification it shows through an analysis of the high yield bond market over the period 1987 to 1991 that fixed income prices could be highly correlated these correlations can be quantified and integrated in a systematic way in an asset liability management framework for vanishing fixed income securities however we cannot resort to statistical analysis of historical data in order to quantify correlations the paper develops a forward looking simulation procedure for capturing correlations applications are illustrated for examples from high yield bonds and mortgage backed securities the superiority of the proposed approach over the traditional portfolio immunization techniques is demonstrated in the context of funding an insurance liability stream with mortgage instruments

the substitutability of occupational groups using firm level data abstract labor demand elasticity estimates are presented for a model in which labor groups are defined by occupation while most studies construct labor groups according to non productive characteristics such as race or gender the results corroborate much of the existing research

union membership determination and industry characteristics recent literature on the economics of unionism has expanded beyond its customary focus on the wage and nonwage effects of collective bargaining and given increased attention to the determinants of union membership previous union membership studies have been couched primarily within an individual choice framework whereby utility maximizing individuals choose either to join or not to join a union empirical work typically treats membership as a function of some vector of personal characteristics 1 2 10 11 21 it is our contention that such studies can best be interpreted as explaining the determination of the union status of jobs and that several industry and firm characteristics in addition to personal characteristics can be expected to affect significantly union membership in this paper theory and evidence relating to the effects of firm and industry characteristics on union membership are presented industry level data are bridged with a large microdata set containing individual characteristics in order to examine the determinants of unionism among workers in manufacturing utilizing a simultaneous model and controlling for sample selection bias we find that product market concentration capital intensity establishment size and job risk significantly affect the likelihood of union membership