a note on foreigners trading and price effects across firms abstract we study the investment behavior of foreign investors in association with an equity market liberalization and find a strong link between foreigners trading and local market returns in the period following the liberalization net purchases by foreign investors induced a permanent increase in stock prices suggesting that local firms reduced their cost of equity capital we also find a strong link between a firm s fraction of foreign ownership and the magnitude of the cost reduction foreign investors seem to prefer large and well known firms and these firms realize the largest reduction in capital cost furthermore our analysis suggests that foreigners increase their net holding in firms that have recently performed well analyzing foreigners performance we find very little evidence of informed trading suggesting that risk sharing is the most plausible explanation for the reduction of the cost of equity capital

the home bias of the poor foreign asset portfolios across the wealth distribution abstract this paper documents how the share of foreign stocks in us household portfolios rises with the ratio of financial wealth to non financial income this is both because wealthier households are more likely to participate in foreign asset markets and because portfolio shares of participants increase with financial wealth but decrease with non financial income a simple standard two country general equilibrium model shows that hedging of terms of trade movements and non financial income risk produces non trivial heterogeneity in portfolios across the wealth and income distribution within countries that is qualitatively in line with this evidence

capital flow controls international asset pricing and investors welfare a multi country framework this paper investigates the impact of capital flow restrictions on the pricing of securities on the optimal portfolio composition for investors of different nationalities and on their welfare under capital flow controls the equilibrium price of a security is determined jointly by its international and national risk premiums and investors acquire nationality specific portfolios along with a market wide proxy for the world market portfolio removal of investment barriers generally leads to an increase in the aggregate market value of the affected securities and all investors favor a move toward market integration introduction of different types of index funds in the world market generally increases world market integration and investor welfare in recent years the international capital markets have undergone numerous important changes that have increased the international linkage of national markets these changes include the creation of national index funds e g mexico korea taiwan india france and scandinavia and selective liberalization e g brazil india korea sweden and japan despite their potential impact on the national economies and global finance it is not clear what consequences these integrating changes entail for example is welfare increased by allowing cross border investment that is restricted to purchasing the entire national portfolio of which the national index fund is a class unfortunately with the exception of subrahmanyam 1975a who studies the pricing and welfare effects of fully integrating heretofore completely segmented markets other international asset pricing models that incorporate capital flow restrictions for instance black 1974 stulz 1981b lessard et al 1983 errunza and losq 1985 cooper and kaplanis 1986 and eun and janakiramanan 1986 analyze the pricing but not the welfare effects of investment barriers to analyze systematically the welfare implications of various structural changes in the current market environment this paper follows the lead of subrahmanyam and recasts the analysis in two important respects

on cross border bank credit and the u s financial crisis transmission to equity markets this paper examines the role played by cross border equity bond and bank credit flows versus international trade in the transmission of the u s financial crisis to equity markets worldwide we estimate vector autoregressive models with exogenous global factors using monthly data on 36 emerging and developed countries the results from an eclectic methodology that includes causality tests generalized impulse responses and forecast error variance decompositions indicate that the crisis is mostly transmitted through bank credit rather than portfolio flows and international trade the results are robust to altering the exogenous versus endogenous vectors of variables to measuring equity prices in u s dollars or local currency to averaging the data across countries versus averaging the parameters from individual country estimation and to redefining the start date of the crisis the findings endorse the use of banking regulation and capital controls as part of the policy toolkit to limit financial vulnerability

home bias and cross border taxation abstract the relationship between cross border taxation and free float home bias is examined this explicitly recognizes that insider shares are unavailable to foreigners other important explanations for home bias information asymmetry behavioural and governance issues are controlled when examining the impact of cross border tax variables in our sample of countries about sixty percent eighty percent withhold taxes on realized capital gains dividends of foreign investors and about thirty percent of the mature economies provide imputation of taxes paid on dividend income by domestic corporations dividend imputation is a statistically significant impediment to cross border equity flows a tax credit variable for foreign taxes paid on dividends is constructed and found to be statistically significant in reducing home bias a relatively high foreign tax rate that cannot be offset by tax credits is found to significantly increase home bias these results hold for float adjusted home bias and traditional international portfolio home bias

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

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

investment allocation decisions home bias and the mandatory ifrs adoption abstract we examine the familiarity hypothesis of home bias by studying how foreign ownership of swedish firms is affected by the mandatory adoption of ifrs we decompose foreign investors into institutional and non institutional investors foreign investors are further decomposed into eu ifrs adopting countries and non eu residents non ifrs adopting countries we analyse the equity investments of these foreign investor groups in sweden during the period of 2001 2007 we find that after the mandatory adoption of ifrs foreign ownership owners from countries that adopted ifrs and particularly those from the eu increased these effects are particularly strong in small firms foreign institutional investors increased their ownership stake after the mandatory ifrs adoption whereas foreign non institutional investments were not affected significantly by the ifrs adoption in contrast to ownership from non adopting countries ownership from the eu increased in firms with both more and less tangible assets similarly foreign ownership from the eu increased in firms with both concentrated ownership and dispersed ownership after the adoption because sweden has already had strict legal enforcement and a low level of earnings management prior to the adoption our results suggest that increased foreign ownership is due to better abilities to compare firms rather than an improved quality

intergenerational altruism and house prices evidence from bequest tax reforms in italy abstract the degree of intergenerational altruism is estimated in a benchmark barro type olg framework with imperfect altruism exploiting the exogenous variation generated by reforms of the tax treatment of bequests and inter vivos real estate donations enacted in italy between 2000 and 2001 using longitudinal information on the housing stock and house prices in 13 large italian cities between 1993 and 2004 the structural parameter of interest is estimated via the effect of the reform on house prices we estimate a degree of intergenerational altruism ranging between 0 2 and 0 3 a magnitude consistent with existing parameterizations for the us economy

estate and gift taxes and incentives for inter vivos giving in the us abstract this paper describes the current estate and gift tax rules that apply to intergenerational transfers in the us it summarizes the incentives for inter vivos giving gifts from a donor to a recipient while the donor is alive as a strategy for reducing estate tax liability it shows that the current level of intergenerational transfers is much lower than the level that would be implied by simple models of dynastic utility maximization moreover even among elderly households with net worth in excess of 2 5 million roughly four times the net worth at which us households became liable for estate tax in 1995 only about 45 take advantage of the opportunity for tax free inter vivos giving cross sectional regressions using the 1995 survey of consumer finances suggest that transfers rise with household net worth possibly reflecting the impact of progressive estate taxes households with a preponderance of their net worth in illiquid forms such as a private business are less likely to make transfers than their equally wealthy counterparts with more liquid wealth those with substantial unrealized capital gains for whom the benefits of basis step up at death under the income tax are greatest are less likely to make large inter vivos transfers than similarly wealthy households with higher basis assets

risk taking global diversification and growth this paper develops a continuous time stochastic model in which international risk sharing can yield substantial welfare gains through its effect on expected consumption growth the mechanism linking global diversification to growth is an attendant world portfolio shift from safe low yield capital to riskier high yield capital the presence of these two types of capital captures the idea that growth depends on the availability of an ever increasing array of specialized hence inherently risky production inputs calibration exercises using consumption and stock market data imply that most countries reap large steady state welfare gains from global financial integration copyright 1994 by american economic association

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

international portfolio nondiversification and exchange rate variability abstract incomplete international portfolio diversification is implied by an equilibrium models of exchange rates with nontraded goods the model can also explain the greater correlation between consumption and income within a country than between consumption across countries nontraded goods make more stringent the elasticity conditions required to explain exchange rate variability resulting from current productivity disturbances though not from disturbances to fiscal policies or the prospective return to investment the model is also consistent with international real interest rate differentials changes over time in the current account and relative wealth across nations and observed time series properties of exchange rates

why do stocks and consumption imply such different gains from international risk sharing abstract estimates of the gains to international risk sharing based upon stock returns tend to find dramatically higher gains than do estimates from consumption based models in this paper i examine the reasons for these differences using a common theoretical framework for both approaches i find that the differences are largely due to the much higher variability of stock returns and its implied intertemporal substitution in marginal utility also contrary to conventional wisdom the differences in gains from the two approaches do not arise from treating stock returns as exogenous rather than endogenous

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

home bias in equity portfolios inflation hedging and international capital market equilibrium we test whether the home bias in equity portfolios is caused by investors trying to hedge inflation risk the empirical evidence is consistent with this motive only if investors have very high levels of risk tolerance and equity returns are negatively correlated with domestic inflation we then develop a model of international portfolio choice and equity market equilibrium that integrates inflation risk and deadweight costs using this model we estimate the levels of costs required to generate the observed home bias in portfolios consistent with different levels of risk aversion for a level of risk aversion consistent with standard estimates of the domestic equity market risk premium these costs are about a few percent per annum greater than observable costs such as withholding taxes thus the home bias cannot be explained by either inflation hedging or direct observable costs of international investment unless investors have very low levels of risk aversion article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

optimal financial market integration and security design 1 we study 2 period pure exchange capital asset pricing model capm economies with incomplete financial markets and restricted participation we characterize the optimal financial market structure and efficient innovations consisting of both the introduction of new assets and the integration of segmented markets welfare gains from innovations are maximal when the endowments of affected agents are negatively correlated uncoordinated innovations lead to efficient market structures if all assets have identical participation structure or the markets being integrated trade identical assets however coordination failure in the introduction of new assets may result when assets have participation structures that overlap only partially

ricardian equivalence revisited deficits gifts and bequests barro 1974 shows that operative altruistic transfer motives are key for ricardian equivalence to hold this paper evaluates the importance of this mechanism quantitatively by studying deficit financed tax cut experiments i use a heterogeneous agents overlapping generations economy with endogenously operative transfer motives to capture the fact that empirically transfers occur in some but not in all families altruism is calibrated to match aggregate transfer statistics i find that the response of aggregate consumption to a tax cut is in the ballpark of a standard overlapping generations economy that is an economy without altruistic family links welfare implications of this economy however move closer to a dynastic economy

foreign portfolio investors before and during a crisis different categories of foreign portfolio investors in korea have differences as well as similarities in their trading behavior before and during the currency crisis first non resident institutional investors are always positive feedback traders whereas resident investors were negative feedback contrarian traders before the crisis but switch to be positive feedback traders during the crisis second individual investors herd significantly more than institutional investors non resident institutional as well individual investors herd significantly more than their resident counterparts third differences in the western and korean news coverage are correlated with differences in net selling by non resident investors relative to resident investors

do trade costs in goods market lead to home bias in equities abstract two of the main puzzles in international economics are the consumption and the portfolio home biases we solve for international equity portfolios in a two country two good stochastic equilibrium model with trade costs in goods markets we show that introducing trade costs as suggested by obstfeld and rogoff obstfeld m rogoff k 2000a the six major puzzles in international macroeconomics is there a common cause nber macroeconomics annual 15 is not sufficient to explain these two puzzles simultaneously on the contrary we find that trade costs create a foreign bias in portfolios for reasonable parameter values this result is robust to the addition of non tradable goods for standard calibrations of the preferences

on the effects of barriers to international investment a simple model is presented in which it is costly for domestic investors to hold foreign assets the implications of the model for the composition of optimal portfolios at home and abroad are derived it is shown that all foreign assets with a beta larger than some beta plot on either one of two security market lines some foreign assets with a beta smaller than are not held by domestic investors even if their expected return is increased slightly while it is obviously not true that asset markets are completely segmented between countries there is evidence of barriers to international investment although reality seems to lie in that grey area between complete segmentation and no segmentation at all most international asset pricing models are concerned with the extreme case of no barriers to international investment no effort seems to have been made to study the effect on portfolio choice of such barriers which make it costly to hold foreign securities as opposed to domestic securities but which do not in general render international diversification so onerous that investors avoid foreign securities completely casual empiricism suggests that models without barriers to international investment should be suspect those models cannot explain why it appears that in every country investors on average hold more domestic securities than would be required if they held the world market portfolio 2 this paper constructs a model of international asset pricing in which there is a cost associated with holding either long or short risky foreign securities for the sake of simplicity in most of the paper we assume that while domestic investors face barriers to international investment foreign investors face no such barriers it turns out that nothing significant is lost with such an assumption the main conclusions of this paper for the case in which foreign investors face no barriers to international investment are 1 in the presence of barriers to international investment some risky foreign

the determinants of cross border equity flows abstract we explore a new panel data set on bilateral gross cross border equity flows between 14 countries 1989 1996 we show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions gross transaction flows depend on market size in source and destination country as well as trading costs in which both information and the transaction technology play a role distance proxies some information costs and other variables explicitly represent information transmission an information asymmetry between domestic and foreign investors and the efficiency of transactions the geography of information is the main determinant of the pattern of international transactions while there is weak support in our data for the diversification motive once we control for the informational friction we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings

depreciation of housing capital maintenance and house price inflation estimates from a repeat sales model abstract the rate at which physical capital depreciates is fundamental to investment in the economy nevertheless although housing capital accounts for one third of the total capital stock the rate at which housing capital depreciates has only rarely been directly estimated in part because prior studies do not control for maintenance for that same reason widely publicized measures of house price appreciation overstate the capital gain from homeownership using data from the american housing survey we examine these issues over the 1983 to 2001 period results indicate that gross of maintenance housing depreciates at roughly 2 5 percent per year while net of maintenance housing depreciates at approximately 2 percent per year moreover although the typical home appreciated at an annual real rate of roughly 0 75 percent after allowing for depreciation and maintenance the average homeowner experienced little capital gain

repatriation of debt in the euro crisis with the beginning of the euro crisis the long standing trend of european financial integration reversed investors unwound cross border positions of debt obligations and increased holdings of locally issued debt in other words debt obligations were repatriated we use data on bank portfolios to document three new empirical regularities of the financial disintegration i repatriation affected mainly debt of crisis countries ii repatriation affected mainly public debt iii the public debt of crisis countries that was not repatriated was reallocated to large and politically influential countries within the euro area we read these results in light of standard theories of cross border portfolio allocation and argue that the sum of these patterns constitutes evidence for the secondary market theory of public debt

segmentation and time of day patterns in foreign exchange markets abstract this paper sheds light on a puzzling pattern in spot foreign exchange markets domestic currencies appreciate depreciate systematically during foreign domestic working hours this phenomenon spans many years and several exchange rates and overrides calendar effects we argue that it is mainly due to liquidity and inventory patterns that emerge from the combination of two factors domestic agents tend to be net buyers of foreign currency and to trade mostly in their country s working hours the prevalence of domestic foreign traders demanding the counterpart currency during domestic foreign working hours implies sell price buy price pressure on the domestic currency during domestic foreign working hours

does industrial structure explain the benefits of international diversification abstract we examine the influence of industrial structure on the cross sectional volatility and correlation structure of country index returns for 12 european countries between 1978 and 1992 we find that industrial structure explains very little of the cross sectional difference in country return volatility and that the low correlation between country indices is almost completely due to country specific sources of return variation diversification across countries within an industry is a much more effective tool for risk reduction than industry diversification within a country

is local bias a cross border phenomenon evidence from individual investors international asset allocation abstract extant literature consistently documents that investors tilt their domestic equity portfolios towards regionally close stocks local bias we hypothesize that individual investors local bias is not limited to the domestic sphere but instead also determines their international investment decisions our results confirm the presence of a cross border local bias specifically we show i that the stockholdings of individual investors living within regional proximity to a foreign country display a significantly lower foreign investment bias towards investment opportunities in that country and ii that this drop in foreign investment bias levels is disproportionately driven by investments in regionally close neighbor country companies the impact of cross border local bias on investors bilateral foreign equity investments is economically significant and holds even after controlling for previously identified explanations of international asset allocation

rent seeking and international commodity agreements the case of coffee although quotas are known to create opportunities for rent seeking such effects have not been examined in the context of international commodity agreements we hypothesize that export quotas imposed by the international coffee agreement ica by creating quota rents in coffee exporting countries encourage directly unproductive dup behavior by domestic groups seeking to capture such rents such behavior can cause substantial economic waste and undesirably alter income distribution the allocational and distributional effects of even moderate rent seeking behavior could be sufficient to transform a coffee exporting country s expected welfare gain from ica quotas into a welfare loss an understanding of these effects and a measure of their magnitude is crucial to any evaluation of the ica the classic analyses of international commodity agreements have focused on how such agreements affect the commodity terms of trade and export revenue instability 2 surprisingly little work exists on the welfare effects of commodity agreements within exporting countries particularly on the income distribution effects or dup activity the agreements might engender 3 the papers by g mcmahon and h dick and colleagues are partial exceptions 4 mcmahon shows that kenya s response to ica quotas the government banned new coffee plantings in an effort to control output was inefficient and had regressive income effects dick and colleagues compare the effects of buffer stocks and export quotas on a domestic economy using a general equilibrium model and find that quotas are better because they shift resources from

do transfer taxes reduce intergenerational transfers we estimate the effect of taxes on intergenerational transfers by exploiting a sequence of italian reforms culminating with the abolishment of transfer taxes we use the surveys of household income and wealth from 1993 to 2006 which have data on real estate transfers and information on potential donors and recipients difference in differences estimates indicate that the abolition of transfer taxes increases the probability of high wealth donors making a transfer by two percentage points and increases the area transferred by 9 3 square meters relative to poorer donors

nontraded goods nontraded factors and international non diversification abstract can the presence of nontraded consumption goods or nontraded factors of production explain the high degree of home bias displayed by investor portfolios we find that the answer is no so long as individuals have access to free international trade in financial assets in particular it is never optimal to exhibit home bias with respect to domestic traded good equities by contrast holdings of nontraded good equities in an optimal portfolio will depend sensitively on the elasticity of substitution between traded and nontraded goods

human capital heterogeneity and estimated degrees of intergenerational mobility we study the parental investment model of intergenerational mobility where heterogeneity in innate earnings ability and parents altruism rate is explicitly modelled we show that heterogeneity increases the difficulty of detecting the existence of borrowing constrained families conversely the presence of heterogeneity means that economic and linear statistical models of inheritance generate similar intergenerational data on consumption and earnings we also suggest that nay cross country differences in intergenerational earnings mobility are more readily interpreted according to the heterogeneity of inherited ability rather than optimal family responses to countiy specific institutions for accumulating human capital the relationship between a citizen s economic status and his family background is an important clue for understanding and evaluating a country s economic performance some eg bowles 1972 have suggested a close relationship between economic status and family background indicates some failure of labour markets or of institutions fostering investment in human capital others eg altonji et al 1992 mulligan 1997 table 4 1 have offered an apparently contradictory suggestion that efficient allocations involve a very close relationship on some measures between the economic status of parents and children still others find family background effects to be the most offensive sources of inequality regardless of whether those effects are consistent with efficiency empirical studies of this relationship date back to the earliest days of statistical social science eg galton s 1869 british study of the success and eminence of relatives and many can be found outside the field of economics see goode s 1966 survey for a few examples but the increasing availability of new data sets for exploring the relationship between earnings income wealth and consumption of parents and years later of adult children has appropriately led to new and better econometric estimates of intergenerational mobility or the intergenerational auto regression of various measures of economic status and has even permitted some careful comparisons of those estimates across countries however fewer results are available on interpreting such estimates in terms of economic models of inheritance or of the labour market loury 1981 and becker and tomes 1986 are among the exceptions where they show how access to capital markets or other means of

labour market institutions and household consumption insurance within oecd countries this paper tests empirically whether the effect of idiosyncratic income shocks on aggregate consumption depends on institutional features of national labour markets the results show that in a sample of 15 oecd countries institutional heterogeneity is a significant determinant of the response of household consumption to country specific income shocks this is consistent with the idea that institutionally provided social insurance may help increase income stability when people differ in their ability to access financial markets and smooth consumption fluctuations

big fish in small ponds the trading behavior and price impact of foreign investors in asian emerging equity markets this paper analyzes a new dataset for the aggregate daily trading of all foreign investors in six asian emerging equity markets and provides two new findings first foreigners flows into several markets show positive feedback trading with respect to global as well as domestic equity returns the nature of this trading suggests it is due to behavioral factors or foreigners extracting information from recent returns rather than portfolio rebalancing effects second the price impacts associated with foreigners trading are much larger than earlier estimates the results suggest that foreign investors and external conditions have a larger impact on emerging markets than implied by previous work

equity home bias and corporate disclosure abstract i show that more comprehensive corporate disclosure reduces investors uncertainty about domestic companies payoffs at no cost thereby decreasing investors equity home bias toward a country since investors should base their investment decisions on valid and easily interpretable company information only more comprehensive disclosure will reduce the home bias only if domestic securities law is sufficiently stratified and domestic companies use international accounting standards using panel data for 38 countries from 2003 to 2008 i find that more comprehensive disclosure reduces investors home bias though significantly only for countries that sufficiently enforce their securities law and implement international accounting standards

why and when do governments initiate public enterprise reform initiating public enterprise reform is a complex decision influenced by economic factors as well as the ideological biases and personalities of political leaders nevertheless the use of a contracting framework yields important generalizations about what drives the decision this article argues that the decision depends fundamentally on the potential efficiency gains from the reform and its associated transactions costs costs arise because of asymmetries in information and opportunism problems that usually plague contract negotiations the article identifies observable variables that may affect either the potential gains or the transactions costs uses them to construct a simple probit decision making model and tests the model using data from fifteen developing countries over a twenty year period

welfare gains from international risksharing abstract this paper uses consumption data to compute yet unexploited welfare gains that can be achieved through risksharing among twenty oecd countries there is both aggregate national consumption risk and nondiversifiable individual specific risk countries engage in an optimal risksharing arrangement to pool risk associated with the aggregate consumption endowment streams welfare gains are associated with reduced consumption variability and with the international pricing of the consumption streams of individual countries the paper considers the standard vnm time additive preferences as well as nonexpected utility and habit formation preferences large unexploited gains are found under all sets of preferences leading to an international risksharing puzzle

the ability of global stock exchange mechanisms to mitigate home bias evidence from euronext this paper examines the effects on equity home bias of two mechanisms adopted by euronext when it was formed by the merger of four european countries stock exchanges in 2002 the two structural mechanisms are the integration of trading platforms across the four predecessor exchanges and the creation of named segments of the integrated exchange on which firms could voluntarily list by precommitting to enhanced disclosure and transparency employing a difference in differences research design using other european union companies as a control group we document that the integration of the euronext market was associated with a reduction in home bias for firms listed on the named segments of the euronext exchange but not for the nonsegment euronext firms our results suggest that the reduction in transaction costs from the integration of the trading platforms did not make the nonsegment euronext firms more attractive to the specific investors for whom the transaction costs were reduced on the other hand the decrease in information costs due to the precommitments to enhanced transparency made the segment firms more attractive to all categories of foreign investors consistent with the information costs hypothesis this paper was accepted by mary barth accounting

what can explain the apparent lack of international consumption risk sharing recent research in international business cycles finds that international consumption comovements do not match the risk sharing predictions of standard complete markets models in this paper i ask whether two different types of explanations can help explain this result 1 nonseparabilities between tradables and nontradable leisure or goods and 2 the effects of capital market restrictions on consumption risk sharing i find that risk sharing cannot be resolved by either explanation alone however when i allow for both nonseparabilities and certain market restrictions risk sharing among unrestricted countries cannot be rejected this evidence suggests that a combination of these two effects may be necessary to explain consumption risk sharing across countries

evaluating risky consumption paths the role of intertemporal substitutability abstract in dynamic stochastic welfare comparisons a failure clearly to distinguish between risk aversion and intertemporal substitutability can result in misleading assessments of the impact of risk aversion on the welfare costs of consumption risk changes the problem arises in any setting in which uncertainty is propagated over time notably but not exclusively in economies with stochastic consumption trends regardless of the preference setup adopted an increase in risk aversion amplifies the per period costs of risks the weights consumers use to cumulate the per period costs of risks with persistent effects should however depend on intertemporal substitutability as well as on risk aversion under time separable expected utility preferences an increase in the period utility function s curvature therefore alters the welfare effect of risk for reasons that are in part unrelated to risk aversion to illustrate these points i reconsider lucas s estimate of the cost of consumption instability for the postwar united states

are correlations of stock returns justified by subsequent changes in national outputs abstract in an integrated world capital market the same pricing kernel is applicable to all securities we apply this idea to the stock returns of different countries we investigate the underlying determinants of cross country stock return correlations first we determine for a given measured degree of commonality of country outputs what should be the degree of correlation of national stock returns we propose a framework that contains a statistical model for output and an intertemporal financial market model for stock returns we then attempt to match the correlations generated by the model with measured correlations our results show that under the hypothesis of market segmentation the model correlations are much smaller than observed correlations however assuming world markets are integrated our model correlations can be matched with observed correlations

the state and industrial strategy abstract the debate about the role of the state in promoting industrial growth in developing economies is reviewed we begin with the ideas of the early development economists of the 1950s and 1960s then take up two waves of neoclassical criticism respectively emphasizing the primacy of the market and the lack of autonomy and competence of the developmentalist state and sketch the elements of a countercritique the fact that all successfully developing economies apply industrial strategies incorporating institutional change is emphasized and boundary conditions and lessons from experience which delimit sensible strategic choices are pointed out

controls corruption and competitive rent seeking in ldcs the paper establishes that equality between the average return of factors engaged in rent seeking and those in productive activity does not generally imply equality between the efficiency losses from rent seeking and the rents themselves such equality is often assumed in the literature a stylized cge model is used to illustrate the sensitivity of the estimated losses to the specification of the rent seeking mechanism it also illustrates the interdependence between the effects of taxes or subsidies and rent seeking for example when rent seeking involves post secondary graduates competing for government jobs which yield incomes from corruption the efficiency losses are affected by subsidies to education

international investment restrictions and closed end country fund prices some closed end country funds trade at large premiums relative to their net asset values this paper examines whether international investment restrictions raise country fund price net asset value ratios by segmenting international capital markets we test whether a relation exists between announcements of changes in investment restrictions and changes in these ratios using weekly data from may 1981 to january 1989 the results provide evidence that some foreign markets are at least partially segmented from the u s capital market

asset pricing puzzles and incomplete markets the representative agent theory of asset pricing is modified to incorporate heterogeneous agents and incomplete markets the model features two types of agents who differ up to a nontradable idiosyncratic component in their endowment processes numerical solutions indicate that individuals are able to diversify a substantial portion of their idiosyncratic income risk through riskless borrowing and lending alone restrictions on the variability of intertemporal marginal rates of substitution hansen and jagannathan 1991 are used to argue that incomplete markets as modeled here cannot account for the properties of asset returns that are anomalous from the perspective of representative agent theory a large literature in financial economics has investigated the extent to which variants of the lucas 1978 general equilibrium theory of asset pricing can account for the joint behavior of aggregate u s consumption and asset returns by and large this literature has concluded that a theory based upon frictionless arrow debreu markets and or a representative agent makes strongly counterfactual predictions regarding even the simple unconditional properties of this relationship mehra and prescott 1985 for instance show that the theory drastically underpredicts the average excess rate of return on u s stocks the so called equity premium puzzle weil 1989 points out as did mehra and prescott that the magnitude of the average risk free rate is far below that predicted by the theory this has been dubbed the risk free rate puzzle numerous authors including grossman melino and shiller 1987 and backus gregory and zin 1989 show that the theory cannot account for term premia inherent in the yield curve hodrick 1987 surveys a large literature which documents the theory s shortcomings in accounting for excess expected returns in foreign exchange markets the notion that the representative agent model cannot account for excess returns across a wide array of asset markets can be made more precise by using tools developed by hansen and jagannathan 1991 and shiller 1982

loss aversion asymmetric market comovements and the home bias abstract loss aversion has been used to explain why a high equity premium might be consistent with plausible levels of risk aversion the intuition is that the first order different utility impact of wealth gains and losses leads loss averse investors to behave similarly to investors with high risk aversion but if so should those agents not perceive larger gains from international diversification than standard expected utility investors with plausible levels of risk aversion they might not because comovements in international stock markets are asymmetric correlations are higher in market downturns than in upturns this asymmetry dampens the gains from diversification relatively more for loss averse investors we analyze the portfolio problem of such an investor who has to choose between home and foreign equities in the presence of asymmetric comovement in returns perhaps surprisingly in the context of the home bias puzzle we find that loss averse investors behave similarly to those with standard expected utility preferences and plausible levels of risk aversion we argue that preference specifications that appear to perform well with respect to the equity premium puzzle should be subjected to this test

exchange rate volatility and deviations from unbiasedness in a cash in advance model abstract this paper examines time series properties of exchange rate changes the forward premium and the forward bias in the context of a variant of svensson s cash in advance model the model is solved and simulated using realistic forcing processes whose law of motion is estimated from u s japan data and then approximated by a markov chain although method of moments estimation shows that the over identifying restrictions implied by the model are not rejected it fails dramatically in producing a sufficiently variable risk premium on forward market speculation this result is robust to various pertubations to the model s parameters forcing processes and preference structure the model also fails to match exchange rate and forward premium volatility simultaneously

progressive estate taxation we present a model with altruistic parents and heterogeneous productivity we derive two key properties for optimal estate taxation first the estate tax should be progressive so that parents leaving a higher bequest face a lower net return on bequests second marginal estate taxes should be negative so that all parents face a marginal subsidy on bequests both properties can be implemented with a simple nonlinear tax on bequests levied separately from the income tax these results apply to other intergenerational transfers such as educational investments and are robust to endogenous fertility choices both estate or inheritance taxes can implement the optimal allocation but we show that the inheritance tax has some advantages finally when we impose an ad hoc constraint requiring marginal estate taxes to be nonnegative the optimum features a zero tax up to an exemption level and a progressive tax thereafter

the elasticity of intergenerational substitution parental altruism and fertility choice dynastic models common in macroeconomics use a single parameter to control the willingness of individuals to substitute consumption both intertemporally or across periods and intergenerationally or across parents and their children this article defines the concept of elasticity of intergenerational substitution egs and extends a standard dynastic model in order to disentangle the egs from the eis or elasticity of intertemporal substitution a calibrated version of the model lends strong support to the notion that the egs is significantly larger than one in contrast estimates of the eis suggests that it is at most one what disciplines the identification is the need to match empirically plausible fertility rates for the u s we illustrate the potential role of the egs in macroeconomics

rent seeking and the two track price system in china a simple general equilibrium model is specified to analyse the impact on the chinese economy of the introduction of a two track price system on to a centrally planned economy it is shown that national income will rise as a result together with a fall in the costs associated with rent seeking some estimates of welfare gains and costs of rent seeking are provided for seven commodities within a partial equilibrium framework they are shown to be dependent on the price elasticities of demand and supply the latter determine the ratio of plan to market prices and the share of plan in total output

location matters an examination of trading profits the electronic trading system xetra of the german security exchange provides a unique data source on the equity trades of 756 professional traders located in 23 different cities and eight european countries we explore informational asymmetries across the trader population traders located outside germany in non german speaking cities show lower proprietary trading profit their underperformance is not only statistically significant it is also of economically significant magnitude and occurs for the 11 largest german blue chip stocks we also examine whether a trader location in frankfurt as the financial center or local proximity of the trader to the corporate headquarters of the traded stock or affiliation with a large financial institution results in superior trading performance the data provide no evidence for a financial center advantage or of increasing institutional scale economies in proprietary trading however we find evidence for an information advantage due to corporate headquarters proximity for high frequency intraday trading

is full banking integration desirable abstract we analyze the links between banking integration and economic development for a sample of oecd countries we measure banking integration considering indicators that merge not only openness but also connectedness with other banking systems we plug these indicators into income regressions also controlling for other relevant variables considered by the literature in contrast to previous initiatives this second stage explicitly takes into account the differing levels of economic development of the countries in our sample since the benefits of enhanced banking integration might not be generalizable to this end we implement quantile regression also considering the presence of endogenous regressors results show that bank connectedness is more important for economic development than bank openness but the combined effect i e banking integration overall is positive and significant the quantile regression models used in the second stage show that the effects are stronger for the poorest economies

does home bias affect firm value evidence from holdings of mutual funds worldwide this study finds strong evidence that home bias affects firm valuation at both country and firm levels at the country level increasing the bias of domestic investors toward home equity lowers the market valuation of home equity at the firm level firm value increases as the compositions of local equities held by domestic and foreign investors tend toward the firms global market capitalization weights but decreases as their weights deviate from global weights overall the evidence is consistent with the optimal global risk sharing hypothesis that the greater risk sharing between domestic and foreign investors in international capital markets reduces the cost of capital and hence enhances market valuation

the dynamics of international equity market expectations this paper develops a noisy rational expectations model of the way in which international investors adjust their expectations of asset payoffs in a given country in response not only to public information signals but also to private information signals whose precision differs across investors the model predicts that the perceptions of investors in one country about the future market returns in another country are related differently to realized past returns depending on their informational disadvantage relative to other investors the greater is that informational disadvantage the greater is the change in perception associated with returns the predictions are confirmed by monthly survey data of institutional money managers investing in developed markets from 1995 to 2000

inequality and social discounting we explore steady state inequality in an intergenerational model with altruistically linked individuals who experience privately observed taste shocks when the welfare function depends only on the initial generation efficiency requires immiseration inequality grows without bound and everyone s consumption converges to zero we study other efficient allocations in which the welfare function values future generations directly placing a positive but vanishing weight on their welfare the social discount factor is then higher than the private one and for any such difference we find that consumption exhibits mean reversion and that a steady state cross sectional distribution for consumption and welfare exists with no one trapped at misery

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

direct foreign ownership institutional investors and firm characteristics in this paper we characterize foreign ownership using a dataset of ownership and attributes of swedish rms the analysis reveals that foreigners show a preference for large rms rms paying low dividends and rms with large cash positions on their balance sheets when we further analyze the preference for large rms we nd that market liquidity and presence in international markets measured through export sales or listings on other exchanges seem to characterize foreign holdings better than rm size alone foreigners also tend to underweight rms with a dominant owner importantly we demonstrate that most of the features associated with foreign ownership are driven by the fact that foreign investors typically are mutual funds or other institutional investors hence we identify an institutional investor bias rather than a foreign investor bias finally using ownership data on a country level we conclude that the results are particularly strong among u s investors who comprise the largest institutions among foreign investors 2001 elsevier science s a all rights reserved jel classixcation g1 g15

gains from international diversification 1968 85 returns on portfolios of stocks and bonds this paper applies the multi period investment model to a universe of international securities on the basis of the simple probability assessment approach our principal findings are 1 the gains from including non u s asset categories in the universe were remarkably large in some cases statistically significant especially for the highly risk averse strategies 2 the gains from removing the no leverage constraint were more substantial than they were in the absence of non u s securities and 3 there is strong evidence of market segmentation in that the optimal levels of investment in u s securities were mostly zero in the presence of the non u s asset categories