market wide attention trading and stock returns abstract market wide attention grabbing events record levels for the dow and front page articles about the stock market predict the trading behavior of investors and in turn market returns both aggregate and household level data reveal that high market wide attention events lead investors to sell their stock holdings dramatically when the level of the stock market is high such aggressive selling has a negative impact on market prices reducing market returns by 19 basis points on days following attention grabbing events

the valuation of floating rate instruments abstract a framework for valuing floating rate notes is developed to examine the effects of 1 lags in the coupon formula 2 special contractual features and 3 default risk evidence from a sample of floaters indicates they sold at significant discounts while lags in the coupon formulas and other contractual features make these notes more variable they do not account for the magnitude of the discounts we conclude that the fixed default premium in the coupon formula of a typical note is inadequate to compensate for time varying default premiums demanded by investors who treat other corporate short term paper as close substitutes

prepayment and the valuation of mortgage backed securities this paper puts forward a valuation framework for mortgage backed securities rather than imposing an optimal value minimizing call condition we assume that at each point in time there exists a probability of prepaying this conditional probability depends upon the prevailing state of the economy to implement our valuation procedure we use maximum likelihood techniques to estimate a prepayment function in light of recent aggregate gnma prepayment experience by integrating this empirical prepayment function into our valuation framework we provide a complete model to value mortgagebacked securities given an optimal value minimizing call policy a mortgage should never be called when its market value is less than its call price similarly a mortgage should be called if it is worth more than its call price however mortgagors often call their loans when the prevailing refinancing rate exceeds the contract rate on the loan dunn and mcconnell 1981 in addition some mortgagors do not call their loans when the loan s contract rate exceeds the prevailing refinancing rate the purpose of this paper is to put forward a valuation framework for mortgagebacked securities consistent with these stylized facts associated with mortgage prepayments the mortgagor s prepayment decision is integral to our valuation framework however we do not impose an optimal value minimizing call condition to price these securities rather we assume that at each point in time there exists a probability of prepaying this conditional probability depending upon the prevailing state of the economy by integrating this prepayment function into our valuation framework we provide a complete model to value mortgage backed securities to implement our valuation procedures we estimate a prepayment function given recent gnma prepayment experience we follow green and shoven 1986 by using a proportional hazards model to estimate the influence of various explanatory variables or covariates on the mortgagor s prepayment decision distinct from green and shoven we explicitly model the effects of seasoning as well as investigating the influence of interest cost savings from refinancing in addition we also consider the effects of lagged refinancing rates heterogeneity

bond pricing and the term structure of interest rates a new methodology for contingent claims valuation this paper presents a unifying theory for valuing contingent claims under a stochastic term structure of interest rates the methodology based on the equivalent martingale measure technique takes as given an initial forward rate curve and a family of potential stochastic processee for its subsequent movements a no arbitrage condition restricts this family of processes yielding valuation formulae for interest rate sensitive contingent claims which do not explicitly depend on the market prices of risk examples are provided to illustrate the key results in relation to the term structure of interest rates arbitrage pricing theory has two purposes the first is to price all zero coupon default free bonds of varying maturities from a finite number of economic fundamentals called state variables the second is to price all interest rate sensitive contingent claims taking as given the prices of the zero coupon bonds this paper presents a general theory and a unifying framework for understanding arbitrage pricing theory in this context of which all existing arbitrage pricing models are special cases in particular vasicek 1977 brennan and schwartz 1979 langetieg 1980 ball and torous 1983 ho and lee 1986 schaefer and schwartz 1987 and artzner and delbaen 1988 the primary contribution of this paper however is a new methodology for solving the second problem i e the pricing of interest rate sensitive contingent claims given the prices of all zero coupon bonds the methodology is new because i it imposes its stochastic structure directly on the evolution of the forward rate curve ii it does not require an inversion of the term structure to eliminate the market prices of risk from contingent claim values and iii it has a stochastic spot rate process with multiple stochastic factors influencing the term structure the model can be used to consistently price and hedge all contingent claims american or european on the term structure and it is derived from necessary and more importantly sufficient conditions for the absence of arbitrage the arbitrage pricing models of vasicek 1977 brennan and schwartz 1979 langetieg 1980 and artzner and delbaen 1988 all require an iformerly titled bond pricing and the term structure of interest rates a new methodology

married women s allocation of time to employment and care of elderly parents married women who have been shown in past research to exhibit relatively elastic labor supply constitute a group of particular interest with respect to decisions concerning time spent in parental care and time spent in market work this paper presents estimates of a simultaneousequations model of employment hours of work and the provision of care to an older parent the results provide no evidence of reduced propensities to be employed or of reduced conditional hours of work due to the provision of parent care these findings are consistent with other research on women s allocation of time to competing productive uses

the strategic bequest motive although recent research suggests that intergenerational transfers play an important role in aggregate capital accumulation our understanding of bequest motives remains incomplete we develop a simple model of strategic bequests in which a testator influences the decisions of his beneficiaries by holding wealth in bequeathable forms and by conditioning the division of bequests on the beneficiaries actions the model generates falsifiable empirical predictions that are inconsistent with other theories of intergenerational transfers we present econometric and other evidence that strongly suggests that bequests are often used as compensation for services rendered by beneficiaries

should we pay attention to investor attention in forex futures market we investigate whether forex futures dynamics is responsive to change in investor attention the currencies used in the study are the aud australian dollar cad canadian dollar eur euro gbp

exchange rate return predictability and the adaptive markets hypothesis evidence from major foreign exchange rates this study examines return predictability of major foreign exchange rates by testing for martingale difference hypothesis mdh using daily and weekly nominal exchange rates from 1975 to 2009 we use alternative mdh tests for linear and nonlinear dependence which include wild bootstrap automatic variance ratio test generalized spectral test and consistent tests we evaluate time varying return predictability by applying these tests with fixed length moving sub sample windows of two years while exchange rate returns are found to be unpredictable most of times we do observe episodes of statistically significant return predictability they are associated with coordinated central bank interventions and the subprime mortgage crisis in 2007 this finding suggests that return predictability of foreign exchange rates occurs from time to time depending on changing market conditions which is consistent with the implications of the adaptive markets hypothesis

wealth inequality and intergenerational links previous work has had difficulty generating household saving behaviour that makes the distribution of wealth much more concentrated than that of labour earnings and that makes the richest households hold onto large amounts of wealth even during very old age i construct a quantitative general equilibrium overlapping generations model in which parents and children are linked by accidental and voluntary bequests and by earnings ability i show that voluntary bequests can explain the emergence of large estates while accidental bequests alone cannot and that adding earnings persistence within families increases wealth concentration even more i also show that the introduction of a bequest motive generates lifetime savings profiles more consistent with the data

the impact of macroeconomic news on quote adjustments noise and informational volatility we study the impact of the arrival of macroeconomic news on the informational and noise driven components in high frequency quote processes and their conditional variances bid and ask returns are decomposed into a common efficient return factor and two market side specific components capturing market microstructure effects the corresponding variance components reflect information driven and noise induced volatilities we find that all volatility components reveal distinct dynamics and are positively influenced by news the proportion of noise induced variances is highest before announcements and significantly declines thereafter moreover news affected responses in all volatility components are influenced by order flow imbalances

investor attention overconfidence and category learning abstract motivated by psychological evidence that attention is a scarce cognitive resource we model investors attention allocation in learning and study the effects of this on asset price dynamics we show that limited investor attention leads to category learning behavior i e investors tend to process more market and sector wide information than firm specific information this endogenous structure of information when combined with investor overconfidence generates important features observed in return comovement that are otherwise difficult to explain with standard rational expectations models our model also demonstrates new cross sectional implications for return predictability

an economic analysis of interest rate swaps interest rate swaps a financial innovation in recent years are based upon the principle of comparative advantage an interest rate swap is a useful tool for active liability management and for hedging against interest rate risk the purpose of this paper is to provide a simple economic analysis of interest rate swaps alternative uses of and the appropriate valuation procedure for interest rate swaps are described the significant increase in both the levels and the volatilities of market interest rates since the late 70 s has resulted in substantially higher interest rate risks faced by business firms and financial institutions the problem and consequences of interest rate risk exposure are particularly serious for firms in which the duration of assets does not match the duration of the liabilities for instance most financial institutions and many corporations financed long term fixed rate assets with short term floating rate liabilities such firms lose when the shortterm interest rates in the market rise unexpectedly because for given fixed rates of return on their assets the short term interest costs that they have to pay rise with the market interest rates conversely these firms gain from an unexpected decline in short term market interest rates in recent years the introduction and the development of new financial products in the capital markets such as interest rate futures interest rate options and interest rate swaps represent logical responses to the increased need to reduce firms exposure to interest rate risk

new directions for stochastic open economy models the paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages explicit solution of the wage setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare expected output and the expected terms of trade despite the potential interplay between imperfections due to sticky wages and monopoly the optimal monetary policy rule has a closed form solution to motivate our model we show that observed correlations between terms of trade and exchange rates are more consistent with our traditional assumptions about nominal rigidities than with a popular alternative based on local currency pricing 2000 elsevier science b v all rights reserved

inter vivos transfers and intended bequests abstract empirical work on intergenerational transfers has focused on distinguishing between altruistic and exchange motivated behavior however these two models are unable to explain the strong tendency for inter vivos transfers to be negatively related to the income of the recipient while bequests bear no relationship to income this paper presents a new framework for analyzing transfers from parents to children that is more consistent with observed behavior than are the altruistic and exchange models alone in particular the model developed here predicts differing behavior with respect to inter vivos transfers and bequests due to liquidity constraints and uncertainty about the recipient s permanent income the empirical work uses data from the health and retirement study and the asset and health dynamics study the patterns observed in these data are consistent with earlier findings that inter vivos transfers go disproportionately to less well off children while bequests are divided equally across children further the results support the predictions of the model in that differences in inter vivos transfers arise from differences in current income while differences in bequests result when indicators of the children s permanent incomes differ

a nonlinear general equilibrium model of the term structure of interest rates abstract we derive and test an alternative closed form general equilibrium model of the term structure within the cox ingersoll and ross theoretical framework in which yields are nonlinear functions of the risk free rate we show that equilibrium bond prices and the risk free rate are not always inversely related and that bond risk need not be strictly increasing in maturity using hansen s generalized method of moments to obtain parameter estimates this nonlinear model outperforms the cox ingersoll and ross square root model in describing actual treasury bill yields for the 1964 1986 period

nonlinear exchange rate predictability abstract we study whether the nonlinear behavior of the real exchange rate can help us account for the lack of predictability of the nominal exchange rate we construct a smooth nonlinear error correction model that allows us to test the hypotheses of nonlinear predictability of the nominal exchange rate and nonlinear behavior on the real exchange rate in the context of a fully specified cointegrated system using a panel of 19 countries and three numeraires we find evidence of nonlinear predictability of the nominal exchange rate and of nonlinear mean reversion of the real exchange rate out of sample theil s u statistics show a higher forecast precision of the nonlinear model than the one obtained with a random walk specification although the robustness of the out of sample results over different forecast windows is somewhat limited we are able to obtain significant predictability gains from a parsimonious structural model with ppp fundamentals even at short run horizons

spanning and completeness with options the role of ordinary options infacilitating the completion of securities markets is examined in the context of a model of contingent claims sufficiently general to accommodate the continuous distributions of asset pricing theory and option pricing theory in this context it is shown that call options written on a single security approximately span all contingent claims written on this security and that call options written on portfolios of call options on individual primitive securities approximately span all contingent claims that can be written on these primitive securities in the case of simple options explicit formulas are given for the approximating options and porfolios of options these results are applied to the pricing of contingent claims by arbitrage and to irrelevance propositions in corporate finance

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

a simple approach to interest rate option pricing a simple introduction to contingent claim valuation of risky assets in a discrete time stochastic interest rate economy is provided taking the term structure of interest rates as exogenous closed form solutions are derived for european options written on 1 treasury bills 2 interest rate forward contracts 3 interest rate futures contracts 4 treasury bonds 5 interest rate caps 6 stock options 7 equity forward contracts 8 equity futures contracts 9 eurodollar liabilities and 10 foreign exchange contracts article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

competition among trading venues information and trading on electronic communications networks this paper explores the competition between two trading venues electronic communication networks ecns and nasdaq market makers ecns oier the advantages of anonymity and speed of execution which attract informed traders thus trades are more likely to occur on ecns when information asymmetry is greater and when trading volume and stock return volatility are high ecn trades have greater permanent price impacts and more private information is revealed through ecn trades than though market maker trades however ecn trades have higher ex ante trading costs because market makers can preference or internalize the less informed trades and oier them better executions technological innovations that enable high speed low cost electronic trading systems are dramatically changing the structure of nancial markets exchanges and markets around the world are merging or forming alliances to improve liquidity and reduce costs in the face of increased competition from each other and from these computerized trading systems trading volume on electronic communications networks ecns has grown rapidly over the past several years ecns are now involved in more than a third of nasdaq trading volume and are attempting to increase their market share in nyse listed

intergenerational transfers and savings in recent years the role of intergenerational transfers in the process of wealth accumulation has been the subject of substantial empirical and theoretical analysis the key question stimulating this research is what is the main explanation for savings is it primarily accumulation for retirement as claimed by albert ando richard brumberg and franco modigliani in their celebrated life cycle model of savings is it primarily intentional accumulation for intergenerational transfers or is it primarily precautionary savings much of which may be bequeathed because of imperfections in annuity markets this paper examines a range of findings on the importance of intergenerational transfers the strong conclusion that emerges from this evidence is that intergenerational transfers play a very important if not a key role in aggregate wealth accumulation while intergenerational transfers figure very large in savings the precise motivation for such transfers is unclear intergenerational altruism might appear the most likely candidate but at least sane stylized facts such as the equal allocation of bequests among children are strongly at adds with the altruism model other explanations involving imperfect insurance arrangements or payments for child services do not appear capable of explaining the substantial amounts of transfers actually observed sorting cut the relative contributions of different models to intergenerational transfers and the precise role of intergenerational transfers in the process of wealth accumulation remains an intriguing and exciting enterprise this abstract was borrowed from another version of this item

on the short term predictability of exchange rates a bvar time varying parameters approach abstract in this paper we propose a bayesian vector autoregressive model with time varying parameters bvar tvp to examine the short term predictability of exchange rates an important contribution of the paper is the application of the bvar tvp model for the first time to daily data using information from financial markets another contribution is the production of forecasts in real time at the very short horizon of one trading day ahead typically used by traders and investors in financial markets we employ financial criteria and recently developed statistical tests to assess the exchange rate predictability we find that the bvar tvp model outperforms the random walk for all exchange rates these forecast gains are due primarily to the time variation of coefficients and secondly to information from other financial markets it is shown that international investors could have made statistically significant excess profits if they had followed an inter day trading strategy based on the buy sell signals generated by the model s one day ahead exchange rate forecasts even after allowing for transaction costs and risk factors

floating rate notes and immunization as shown in several of those papers the appropriate immunizing duration is a function of the assumption regarding the stochastic process describing the man ner in which the term structure of interest rates changes the theory has been well developed for ordinary bonds this paper extends the existing literature on duration and immunization to a different type of security the floating rate note the floating rate note frn is a debt security in which coupon payments adjust according to changes in interest rates the coupons are closely tied to cur rent short term spot rates with the result that prices of frns are always at or near par value they became popular in this country in 1974 with a citieorp issue

fixed versus variable rate loans this paper discusses the nature of fixed and variable loan contracts and derives the conditions which determine the optimal quantity of each the results indicate that the payoff functions are quite different and dependent upon the project financed the appropriate conditions for the allocation of loan terms to a set of borrowers are then developed finally the analysis derives the optimal portfolio frontier and risk return trade off for the banking firm here it is demonstrated that the solution is unlikely to be at a point of zero interest rate risk

income schooling and ability evidence from a new sample of identical twins we develop a model of optimal schooling investments and estimate it using new data on approximately 700 identical twins we estimate an average return to schooling of 9 percent for identical twins but estimated returns appear to be slightly higher for less able individuals simple cross section estimates are marginally upward biased these empirical results imply that abler individuals attain more schooling because they face lower marginal costs of schooling not because of higher marginal benefits

auction failures and the market for auction rate securities abstract the market for auction rate securities ars made headlines during the second week of february 2008 when auctions at which the bonds interest rates reset experienced a wave of failures contrary to headlines that attribute the failures to a frozen market or investors irrationality we find that 1 even at their height less than 50 of ars experienced auction failures 2 the likelihood of auction failure was directly related to the level of the bonds maximum auction rates 3 the implied market clearing yields of bonds with failed auctions were significantly above their maximum auction rates and 4 ars yields were generally higher than yields of various cash equivalent investment alternatives we infer that investors priced the possibility of auctions failures into ars yields and rationally declined to bid for bonds for which required market yields exceeded their maximum auction rates

a path dependent approach to security valuation with application to interest rate contingent claims abstract the last two decades have witnessed a tremendous growth in the volume of assets and liabilities whose cash flows depend in a variety of ways on the path of interest rates some of these including floating rate notes and swap agreements contractually base cash flows on current and past interest rates and contain caps floors and other more complex features others including mortgages many corporate bonds and time deposits are fixed rate instruments that contain embedded options such as those to prepay call or withdrawal the irregular exercise of these options causes cash flows to vary as time proceeds and interest rates rise or fall this paper develops a state contingent claims technique for valuing such securities it is derived from the option based model of breeden and litzenberger 1978 using the transition matrix approach of banz and miller 1978 particular attention is paid to valuing so called path dependent securities whose contemporaneous cash flows depend on the historical path of interest rates as well as their current level a detailed example is provided in which an adjustable rate mortgage is valued under a variety of economic and security specific assumptions

the supply of children s time to disabled elderly parents i introduction in recent years economists have become increasingly interested in intergenerational transfers of both time and money 1 such transfers may be motivated by altruism or exchange models of altruism assume that a person s utility depends on the consumption or utility of other family members and her own consumption for example children may supply unpaid informal care to aging parents because their utility increases when their parents are happier one of the most striking predictions of models of altruism is that public subsidies tend to crowd out transfers by altruistic individuals especially if the subsidy is financed by taxing the altruistic individual becker 1974 in exchange models there is typically altruism but one family member such as a parent can induce a relative such as a child or kid 2 to provide more services or money than the relative would normally provide by threatening to withhold a bequest to the extent that this is so one would plausibly expect more care and attention to be provided to wealthy parents when there is more than one kid more care should be provided because the threat of disinheritance is more credible when there is competition between kids for bequests in a well known article bernheim shleifer and summers 1985 hereafter referred to as bss found empirical support for the strategic bequest motive based on an observed positive relationship between children s visits and telephone calls to elderly parents per child as the measure of attention and bequeathable wealth per child as the measure of the financial motivation for providing such attention one might expect this result to extend to decisions about direct provision of help informal care that kids may provide to parents the marginal benefit of such care is plausibly greater than the benefit derived from a visit or telephone call in a recent article however we found no evidence that the strategic bequest motive is an important determinant of the amount of informal care kids provide or a related decision whether or not to place the parent in a nursing home sloan hoerger and picone 1996 we focused on the distinction between cognitively aware parents who can threaten to disinherit their kids and cognitively unaware parents who cannot disinherit and examined whether this distinction had any effect on the probability that the parent entered a nursing home or on amounts of formal and informal care received if the parent remained in the community any strategic effects were swamped by the greater marginal benefit of care to the parent when the parent was cognitively unaware moreover among the cognitively aware richer parents actually received less informal care contrary to the strategic model s predictions unfortunately in past research on intergenerational transfers of time and money it was not possible to control for the wealth wage and other characteristics of kids to the extent that kid s wealth and wage were positively correlated with parent s wealth which was observed the parameter estimates on parent s wealth may be negatively biased although parent s wealth and kid s wealth and wage rates are plausibly positively correlated they have opposite effects on the supply of kid s time according to the strategic bequest model that is potential bequests from a parent may be less attractive to rich kids and therefore induce less care we test the strategic bequest model using information on elderly parents and their children from two linked surveys the 1989 national long term care survey nltcs for elderly individuals and the survey of informal caregivers sic for a subsample of the elderly s children using these data we can include explicit measures of kid s wealth and wage rates thereby avoiding the possible bias introduced by a correlation between parent s and kid s wealth and wages also the data sets provide information on several pertinent health cognitive and functional status variables which are not typically observed in surveys of financial status

some evidence of random walk behavior of euro exchange rates using ranks and signs abstract this study utilises recently developed tests based on ranks and signs in addition to the traditional variance ratio test to examine the behavior of euro exchange rates we show that adjustments for multiple tests must be employed in order to avoid size distortions overall such adjustments provide evidence consistent with random walk behavior of euro exchange rates

annuities and individual welfare advancing annuity demand theory we present suffcient conditions for the optimality of full annuitization under market completeness that are substantially less restrictive than those used by yaari 1965 we examine demand with market incompleteness finding that positive annuitization remains optimal widely but complete annuitization does not how uninsured medical expenses affect demand for illiquid annuities depends critically on the timing of the risk a new set of calculations with optimal consumption trajectories very different from available annuity income streams still shows a preference for considerable annuitization suggesting that limited annuity purchases are plausibly due to psychological or behavioral biases

pricing derivatives on financial securities subject to credit risk this article provides a new methodology for pricing and hedging derivative securities involving credit risk two types of credit risks are considered the first is where the asset underlying the derivative security may default the second is where the writer of the derivative security may default we apply the foreign currency analogy of jarrow and turnbull 1991 to decompose the dollar payoff from a risky security into a certain payoff and a spot exchange rate arbitrage free valuation techniques are then employed this methodology can be applied to corporate debt and over the counter derivatives such as swaps and caps the purpose of this article is to provide a new theory for pricing and hedging derivative securities involving credit risk two sources of credit risk are identified and analyzed the first is where the asset underlying the derivative security may default paying off less than promised this is the case for example with imbedded options on corporate debt the second is the credit risk introduced by the writer of the derivative security who may also default examples include over the counter writers of options on eurodollar futures swaps and swaptions for pricing derivative securities involving credit risk there are currently two approaches the first views these derivatives as contingent claims not on the financial securities themselves but as compound options on the assets underlying the financial securities this is the case for example with the pricing of imbedded options on corporate debt see merton 1974 1977 black and cox 1976 ho and singer 1982 chance 1990 and kim ramaswamy and sundaresan 1993 or the pricing of vulnerable options see johnson and stulz 1987 in practice however this valuation methodology is difficult to use first the assets underlying the financial security are often not tradeable and therefore their values are not observable this makes application of the theory and estimation of the relevant parameters problematic second as in the case of corporate debt all of the other liabilities of the firm senior to the corporate debt must first and simultaneously be valued this generates significant computational difficulties as a result this approach has not

dynamic wage and employment effects of elder parent care this article formulates and estimates a dynamic discrete choice model of elder parent care and work to analyze how caregiving affects a woman s current and future labor force participation and wages the model incorporates parental health changes human capital accumulation and job offer availability the estimates indicate that women face low probabilities of returning to work or increasing work hours after a caregiving spell i use the estimated model to simulate the caregiving employment and welfare effects of a longer unpaid work leave than currently available under the family and medical leave act a paid leave and a caregiver allowance

the value of life and the rise in health spending over the past half century americans spent a rising share of total economic resources on health and enjoyed substantially longer lives as a result debate on health policy often focuses on limiting the growth of health spending we investigate an issue central to this debate is the growth of health spending a rational response to changing economic conditions notably the growth of income per person we develop a model based on standard economic assumptions and argue that this is indeed the case standard preferences of the kind used widely in economics to study consumption asset pricing and labor supply imply that health spending is a superior good with an income elasticity well above one as people get richer and consumption rises the marginal utility of consumption falls rapidly spending on health to extend life allows individuals to purchase additional periods of utility the marginal utility of life extension does not decline as a result the optimal composition of total spending shifts toward health and the health share grows along with income in projections based on the quantitative analysis of our model the optimal health share of spending seems likely to exceed 30 percent by the middle of the century

non linear granger causality in the currency futures returns abstract this paper examines the relationship between currency futures returns by employing a test for non linear causality the results indicate evidence of unidirectional non linear causality relationship in four cases however after filtering the returns using a garch 1 1 model we find insignificant and statistically weaker non linear causality relationships

strategic play among family members when making long term care decisions this paper describes a strategic model of bargaining within a family to determine how to care for an elderly parent we estimate the parameters of the model using data from the national long term care survey we find that the parameter estimates generally make sense and that the model is consistent with the data the results have strong implications for using less structural empirical models for policy analysis

parental altruism and inter vivos transfers theory and evidence this paper uses psid data on the extended family to test whether inter vivos transfers from parents to children are motivated by altruism specifically the paper tests whether an increase by one dollar in the income of parents actively making transfers to a child coupled with a one dollar reduction in that child s income results in the parents increasing their transfer to the child by one dollar this restriction on parental and child transfer income derivatives is derived for the standard altruism model augmented to include uncertainty and liquidity constraints these additional elements pin down the timing of inter vivos transfers the method used to estimate income transfer derivatives takes into account unobserved heterogeneity across families in the degree of altruism the findings strongly reject the altruism hypothesis redistributing one dollar from a recipient child to donor parents leads to less than a 13 cent increase in the parents transfer to the child far less than the one dollar increas

the contribution of economic fundamentals to movements in exchange rates starting from the asset pricing approach of engel and west we examine the degree to which fundamentals can explain exchange rate fluctuations we show that it is not possible to obtain sharp inferences about the relative contribution of fundamentals using only data on observed monetary fundamentals money minus output differentials across countries and exchange rates we use additional data on interest rate and price differentials along with the implications of the monetary model of exchange rates to decompose exchange rate fluctuations in general we find that money demand shifts along with observed monetary fundamentals are an important contributor to exchange rate fluctuations

the composition and drawdown of wealth in retirement as the baby boomers approach and enter their retirement years the accumulation phase of their life cycle is nearly over thus the focus of many researchers financial services firms and public policymakers concerned with retirement saving is shifting from the accumulation of resources while working to the drawdown of resources during retirement retired households are dependent on the annuitized income streams that they have built up during their working careers and on the wealth that they have accumulated in other forms the two most common annuitized income streams are social security benefits and the payments from defined benefit pension plans these payout streams provide income for life and thus provide some protection against falling into poverty if one lives an especially long life the three most common sources of accumulated wealth are equity in an owner occupied home financial assets such as bonds and stocks and financial assets held in a personal retirement account such as an individual retirement arrangement or a 401 k plan throughout our analysis we will define retirement age households as those headed by someone between the ages of 65 and 69 in 2008 just over 80 percent of these households had some equity in their home or another property while 52 percent had assets in personal retirement accounts a much higher fraction 87 percent had some financial assets outside their retirement accounts but for many households the amount of such assets was relatively modest only 45 percent had more than 20 000 in non retirement account financial assets the median financial asset holding for this group including holdings in personal retirement accounts is 52 000 in short many households have small enough amounts of accumulated wealth that they will depend heavily on the life contingent payout streams offered by social security and if they have one a defined benefit pension this paper presents evidence on the resources available to households as they enter retirement it draws heavily on data collected by the health and retirement study which we sometimes refer to as the hrs we calculate the potential additional annuity income that households could purchase given their holdings of non annuitized financial assets at the start of retirement even if households used all of their financial assets inside and outside personal retirement accounts to purchase a life annuity only 47 percent of households between the ages of 65 and 69 in 2008 could increase their life contingent income by more than 5 000 per year at the upper end of the wealth distribution however a substantial number of households could make large annuity purchases we also consider the role of housing equity in the portfolios of retirement age households and explore the extent to which households draw down housing equity and financial assets as they age we find that many households appear to treat housing equity and non annuitized financial assets as precautionary savings tending to draw them down only when they experience a shock such as the death of a spouse or a period of substantial medical outlays because home equity is often conserved until very late in life for many households it may provide some insurance against the risk of living longer than expected a brief conclusion summarizes our findings and indicates how they bear on a number of policy issues such as the role for annuity defaults in retirement saving plans

measuring and modeling intergenerational links in relation to long term care long term care has profound intergenerational implications it can be costly for those who need it and onerous for loved ones who provide it we pinpoint three intergenerational aspects of long term care that require further research one concerns the link between costs of private care and intergenerational wealth transfers the second concerns the link between participation in care and the work and welfare of family providers the third relates to intergenerational tensions that these and other late in life interactions create we outline innovations in modeling and measurement that would improve understanding of intergenerational linkages and their implementation in appropriate panel data jel d91 i13 j22

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

heterogeneity in state dependent utility evidence from strategic surveys a standard result of life cycle models under uncertainty is that optimizing individuals equate the expected marginal utility of consumption across states of the world if insurance is available at actuarially fair rates a small empirical literature has suggested that the marginal utility of consumption is lower in less healthy states we use a novel survey based measure to document significant heterogeneity in health state dependence across individuals largely orthogonal to standard controls we further show that individuals value unhealthy states of the world more when facing work limiting disabilities than when facing disabilities requiring long term care and when facing physical rather than mental disabilities jel d12 i10