investment horizon risk and compensation in the banking industry this paper examines the relation between the investment horizon of banks and their ceo compensation and its consequences for risk and performance we find that banks with short term investment intensity pay more cash bonus exhibit higher risk and perform more poorly than banks with longer term investment intensity this evidence is broadly consistent with the view that short term means of compensation encouraged a short term investment focus which in turn led to both higher risk and resulted in poorer performance culminating in the sub prime crisis the inverse risk performance relation suggests pay schemes were incongruent with shareholders interest moreover pay arrangements used in banks prior to the subprime crisis exposed banks to the ex post settling up problem the clawback problem

asymmetric benchmarking in compensation executives are rewarded for good luck but not penalized for bad abstract principal agent theory suggests that a manager should be paid relative to a benchmark that removes the effect of market or sector performance on the firm s own performance recently it has been argued that such indexation is not observed in the data because executives can set pay in their own interests that is they can enjoy pay for luck as well as pay for performance we first show that this argument is incomplete the positive expected return on stock markets reflects compensation for bearing systematic risk if executives pay is tied to market movements they can only expect to receive the market determined return for risk bearing this argument however assumes that executive pay is tied to bad luck as well as to good luck if executives can truly influence the setting of their pay they will seek to have their performance benchmarked only when it is in their interest namely when the benchmark has fallen using industry benchmarks we find significantly less pay for luck when luck is down in which case pay for luck would reduce compensation than when it is up these empirical results are robust to a variety of alternative hypotheses and robustness checks and they suggest that the average executive loses 25 45 less pay from bad luck than is gained from good luck

executive compensation strategic competition and relative performance evaluation theory and evidence we examine compensation contracts for managers in imperfectly competitive product markets we show that strategic interactions among firms can explain the lack of relative performance based incentives in which compensation decreases with rival firm performance the need to soften product market competition generates an optimal compensation contract that places a positive weight on both own and rival performance firms in more competitive industries place greater weight on rival firm performance relative to own firm performance we find empirical evidence of a positive sensitivity of compensation to rival firm performance that is increasing in the degree of competition in the industry

the limits of central bank policy economic crisis and the challenge of effective solutions the paper examines the development of central bank policy prior to and during the recent financial crisis the argument is made that it contained multiple failures that not only generated constraints on adequately identifying and addressing the crisis but also contributed to that crisis those failures derived from a combination of theory and institutional practice specifically the use of forms of inflationary targeting based on broad adherence to the taylor rule framework and the use of versions of a conventional theoretical macro model ctmm were both problematic this was particularly so in the way policy was focused through issues of the primacy of price stability the institutional arrangements of the central banks were also problematic the division of labour between the central banks and other regulatory bodies and the limited information available within a liberalised finance system hampered efforts to fully appreciate the gravity of the situation partly due to the constraints imposed by the thinking and strategies that had been developed the central banks never got to grips with the fundamental problems of the crisis interest rate policy and liquidity provision were undertaken in ways that steadily radicalised the approaches of the banks but always in a way that was event led and always in ways that could not resolve those fundamental problems the nature of the crisis highlights the importance of transforming the approach and institutional framework of the central banks relatedly it highlights the need for a more keynesian and heterodox approach to economics within decision making bodies at central banks

interest rate volatility and the term structure a two factor general equilibrium model we develop a two factor general equilibrium model of the term structure the factors are the short term interest rate and the volatility of the short term interest rate we derive closed form expressions for discount bonds and study the properties of the term structure implied by the model the dependence of yields on volatility allows the model to capture many observed properties of the term structure we also derive closed form expressions for discount bond options we use hansen s generalized method of moments framework to test the cross sectional restrictions imposed by the model the tests support the two factor model there are essentially two approaches to the modeling of the term structure of interest rates in continuous time the equilibrium approach pioneered by

evaluating unemployment policies what do the underlying theories tell us the paper surveys unemployment policies for advanced market economies and evaluates them by examining the predictions of the underlying macroeconomic theories the basic idea is that for the most part different unemployment policy prescriptions rest on different macroeconomic theories and our confidence in the prescriptions should depend at least in part on theories ability to predict some salient stylized facts about unemployment behavior the paper considers four types of policies laissez faire demand management policies supply side policies and structural policies copyright 1995 by oxford university press

the repricing of executive stock options abstract we examine a sample of firms that reset the exercise prices on their executive options these repricings follow a period of about one year of poor firm specific performance in which the average firm loses one fourth of its value no other offsetting changes to option terms or compensation are made and many firms reprice more than once without repricing a majority of the options would have been at the money within two years we find that when faced with circumstances in which repricing might be chosen firms with greater agency problems smaller size and insider dominated boards are more likely to reprice

term premiums in bond returns abstract this paper examines expected returns on u s treasury bills and on u s government bond portfolios expected bill returns are estimated from forward rates and from sample average returns both estimation methods indicate that expected returns on bills tend to peak at eight or nine months and never increase monotonically out to twelve months reliable inferences are limited to treasury bills and thus to maturities up to a year the variability of longer term bond returns preempts precise conclusions about their expected returns

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle fluctuations

selection and monetary non neutrality in time dependent pricing models for a given frequency of price adjustment monetary non neutrality is smaller if older prices are disproportionately more likely to change selection for the age of prices provides a complete characterization of price setting frictions in time dependent models selection for older prices is weaker and non neutralities are larger if the hazard function of price adjustment is less strongly increasing selection is weaker if there is heterogeneity in price stickiness finally selection is weaker if durations of price spells are more variable in particular the taylor 1979 model exhibits maximal selection for older prices whereas the calvo 1983 model exhibits no selection

an empirical analysis of term premiums using stochastic dominance abstract this paper examines term premiums in u s treasury bill monthly holding period returns several techniques are employed to ascertain whether the observed term premiums are economically meaningful no second order stochastic dominance is found in the first five month maturities when a riskless asset is assumed the first two maturities are dominated therefore we conclude that although there are statistically significant term premiums they are not economically meaningful if there is no riskless borrowing and lending the term premiums are economically meaningful in the sense that the longer maturities dominate the shorter maturities when a riskless asset is available

the disciplinary role of takeovers this paper presents a theory of the disciplinary role of takeovers based on an explicit model of managerial incentive problems stemming from asymmetric information it is argued that an informed raider can reduce incentive problems by making managerial compensation more sensitive to information unavailable to shareholders the paper also highlights the importance of specifying the source of contractual inefficiencies when analyzing the effect of takeovers on incentives

are incentive contracts rigged by powerful ceos we argue that some powerful ceos induce boards to shift the weight on performance measures toward the better performing measures thereby rigging incentive pay a simple model formalizes this intuition and gives an explicit structural form on the rigged incentive portion of ceo wage function using u s data we find support for the model s predictions rigging accounts for at least 10 of the compensation to performance sensitivity and it increases with ceo human capital and firm volatility moreover a firm with rigged incentive pay that is one standard deviation above the mean faces a subsequent decrease of 4 8 in firm value and 7 5 in operating return on assets

board structure and executive pay evidence from the uk we examine the impact of board structure on executive pay for 1 880 uk public firms over the period 1983 2002 using panel data analysis first the proportion of non executive directors tends to decrease the rate of increase in executive pay whereas board size tends to increase it second the proportion of non executives strengthens the relation between the rate of increase in executive pay and changes in performance in particular although for firms in general the pay performance link is much weaker when performance is poor a higher proportion of non executives strengthens this link considerably finally firms that increase the number of nonexecutives in order to comply with the cadbury code of 1992 experience both a decline in the rate of increase in executive pay and an increase in pay performance sensitivity

thirty five years of model building for monetary policy evaluation breakthroughs dark ages and a renaissance ion from wage rigidities there are important exceptions including work at the federal reserve board by erceg henderson and levin 2000 but the approach of the more recent golosov lucas paper with perfectly flexible wages is more common in my view wage determination is still a source of inflation dynamics though not in the same rigid ways as the models in the econometrics of price determination conference while the s s model makes sense for prices it does not seem accurate for the timing of most wage changes i think that the study of wage determination needs to be put on the front research burner again a very important task for future research is an exploration of microeconomic wage data in the bls s employment cost index comparable to what klenow and kryvtsov 2005 are doing with the cpi my guess is that the characteristics of the micro wage data will look much different this content downloaded from 207 46 13 183 on thu 21 apr 2016 05 12 45 utc all use subject to http about jstor org terms john b taylor 199 from the price data moreover the micro wage data will permit one to discriminate between different staggered wage setting models as levin et al 2005 show the shape of the distribution of wage contracts in staggered wage setting models matters significantly for monetary policy econometric policy evaluation models are still too rarely used for forecasting in my view one of the best tests of a model is its ability to forecast but most forecasting models are still of the reduced form variety and only loosely connected with structural models as the stock and watson paper at this conference illustrates efforts to use the models for forecasting this will probably require more details for the simple three equation models would be very worthwhile 5 impact on actual policy what has been the impact on policy of the development of policy evaluation models described here one might ask if it was influential in building the consensus that led to the end of the great inflation perhaps the finding that inflation could be reduced with less disruption than traditional models suggested helped reduce some policymakers reluctance to take the steps to end inflation but it seems to me that people supported paul volcker s disinflation efforts mainly because they were fed up with inflation perhaps more relevant have been the simulations of alternative monetary policy rules clearly it would not have been possible to even consider such rules systematically if it were not for these models but the impact of the policy rule research itself is more difficult to prove policy rule research has of course been useful in comparing policy in different countries and in different time periods or to characterize good policy versus bad policy it has enabled central bank staff to work with interest rates as an instrument and to do so with an analytical framework it has shown that certain monetary policy principles are important such as reacting in a preemptive fashion to forecasted increases in inflation it has shown that targeting asset prices can lead to poor results and it has been helpful anytime forward looking expectations are important as in formulating a communication policy during the recent considerable period or measured pace phases it is hard to imagine these types of policy issues being analyzed rigorously without the models with rational expectations and sticky prices and wages 6 future policy issues there are many important policy issues that these types of models or their successors can be called on to analyze in the future understanding the reason for the recent reduction in pass through coefficients for exchange rates and energy prices is important for monetary policy the models that incorporate sticky prices market power and rational expectations such as golosov and lucas 2005 can be helpful this content downloaded from 207 46 13 183 on thu 21 apr 2016 05 12 45 utc all use subject to http about jstor org terms 200 money credit and banking here determining when appropriate deviations from policy rules should start and when they should end is another important practical topic finding better ways to incorporate asset prices into policy formulation is yet another nailing down the key reasons among the many conjectures for the recent improvements in output volatility is also important for future policy in my homer jones lecture taylor 1998 i argued that it was improvements in monetary policy but many other explanations have been raised but whether the future policy issues are on this list of policy examples or not it is important to keep future monetary research focused on policy issues i think this brief history of econometric policy model development clearly illustrates that economic research is most exciting and productive when it is policy driven

the other side of the trade off the impact of risk on executive compensation the principal agent model of executive compensation is of central importance to the modern theory of the firm and corporate governance yet the exiting empirical evidence supporting it is quite wea

a multi country study of the information in the shorter maturity term structure about future inflation abstract empirical analysis of data from ten oecd countries indicates that except for france the united kingdom and germany the shorter maturity term structure does not contain a great deal of information about the future path of inflation on the other hand except for the united kingdom there is a great deal of information in the term structure of nominal interest rates at shorter maturities about the term structure of real interest rates these results are explained by differences in the relative variability of expected future inflation changes and real term structure slopes for the different countries

why do firms use incentives that have no incentive effects this paper illustrates why firms might choose to implement stock option plans or other pay instruments that reward luck i consider a model where adjusting compensation contracts is costly and where employees outside opportunities are correlated with their firms performance the model may help to explain the use and recent rise of broad based stock option plans as well as other financial instruments even when these pay plans have no effect on employees on the job behavior the model suggests that agency theory s often overlooked participation constraint may be an important determinant of some common compensation schemes particularly for employees below the highest executive ranks many compensation plans reward or punish employees for factors they cannot control an often discussed example of this phenomenon is executive compensation where stock options are not generally indexed to the overall market however many firms also offer firm wide stock options and profit sharing plans that provide even weaker incentives than executive plans after all most workers can expect to reap trivial personal gain from their contribution to firm value or profits i consider an explanation for this phenomenon in which firms contract with employees as a means of indexing wages to market rates rather than to provide incentives while much of the agency literature has concentrated on inducing optimal effort i consider the importance of the generally overlooked participation constraint i study a model in which employees outside opportunities are correlated with firm profits or stock price and in which both turnover and adjusting the pay scheme parameters are costly given these assumptions the firm may find it most profitable to pay the employee in a way that is correlated with the outside options presented by the outside labor market despite the requisite risk premium rather than pay a fixed wage that insures participation in all states the model derived below starts from the assumption that wage adjustments are costly but that workers are willing to make part of their pay contingent

on risk rationality and the predictive ability of european short term adjusted yield spreads abstract in this paper a rolling vector error correction model vecm is proposed to construct measures of the market s time varying conditional expectations of the 3 month money rates starting 13 weeks hence for several major ems member countries vecm based predictions provide the basis for computing ex ante out of sample estimates of the term premia these term premia are then used to adjust the yield spreads as a prelude to investigating their ability to predict future interest rates the source s of the yield spread bias are discussed while the expectations hypothesis is resoundingly rejected using the standard test specification yield spreads adjusted for time varying term premia are found to possess substantial predictive ability and in many instances the expectations hypothesis is not rejected the robustness of the results across the different european money markets and sample periods is highly encouraging the test results underscore the importance of incorporating into the test specification the equilibrium cointegrating constraints if they exist jel g15 1997 elsevier science ltd

the puzzling price behavior of treasury bills that mature at the turn of calendar months abstract this paper documents the unusual price behavior of treasury bills that mature at the turn of calendar months there is a kink in the yield curve as it crosses calendar months and this kink is most pronounced as the yield curve crosses between calendar years potential seasonality in the spot rate of interest could not explain these results nor could they be explained by the mispricing of either the last bill or first bill in a month the exceptionally large premium on the first bill in a month tended to be earned throughout the lifetime of the bill

time varying term premia on u s treasury bills and bonds abstract we use instrumental variables estimation to document variation in ex ante term premia on u s treasury bills and bonds of maturities ranging from two months to twenty years for the april 1959 to december 1989 sample period ex ante term premia are found to be positively related to the ex ante variability in the nominal one month risk free rate of interest significant shifts in the stochastic process generating term premia are documented subsequent to the october 1979 and october 1982 shifts in monetary policy subperiod results document variation in ex ante tenn premia in each of the three monetary regimes

are ceos really paid like bureaucrats a common view is that there is little correlation between firm performance and ceo pay using a new fifteen year panel data set of ceos in the largest publicly traded u s companies we document a strong relationship between firm performance and ceo compensation this relationship is generated almost entirely by changes in the value of ceo holdings of stock and stock options in addition we show that both the level of ceo compensation and the sensitivity of compensation to firm performance have risen dramatically since 1980 largely because of increases in stock option grants

monopolistic competition and the effects of aggregate demand how important is monopolistic competition to an understanding of the effects of aggregate demand on output we ask the question at three levels can monopolistic competition by itself explain why aggregate demand movements affect output can it together with other imperfections generate effects of aggregate demand in a way that perfect competition cannot if so can it give an accurate account of the response of the economy to aggregate demand movements the answers are no yes and yes

sticky goods prices flexible asset prices monopolistic competition and monetary policy a monetary general equilibrium asset pricing model with sticky goods prices is developed goods prices are set by monopolistically competitive firms that maximize stock market value equilibria with underutilization of resources excess capacity in some states result in contrast to previous monetary asset pricing models the degree of competition affects capacity utilization monetary policy can affect output and resource utilization in addition to real asset prices depending upon the amount of information available to the monetary authority

paying for observable luck this article examines why ceos are rewarded for luck namely for observable shocks beyond their control i propose a simple hidden action model where the agent has implicit incentives to avoid bankruptcy after signing the contract but before acting the agent observes a signal on future luck implicit incentives are weaker after good news and call for higher pay for performance sensitivity in good times as a result managerial pay is tied to luck the model is also consistent with recent evidence of asymmetric pay for luck that is a larger exposure of managerial pay to good luck than to bad

optimal corporate governance and compensation in a dynamic world we model long run firm performance management compensation and corporate governance in a dynamic nonstationary world many features of governance and compensation that have caused consternation among commentators arise naturally in this dynamic setting even though boards are rational and managers are powerless compensation changes depend on changes in the evolution of a latent state variable outside the manager s control board passivity is positively correlated with both the value of management compensation and the firm s good fortune managerial opportunism tends to follow sudden reversals of good fortune moreover managerial private benefits by increasing managers stake in the long run viability of the firm may actually ameliorate agency conflicts

state dependent or time dependent pricing does it matter for recent u s inflation in the 1988 2004 micro data collected by the u s bureau of labor statistics for the cpi price changes are frequent every 4 7 months depending on the treatment of sale prices and large in absolute value on the order of 10 the size and timing of price changes varies considerably for a given item but the size and probability of a price change are unrelated to the time since the last price change movements in aggregate inflation reflect movements in the size of price changes rather than the fraction of items changing price due to offsetting movements in the fraction of price increases and decreases neither leading time dependent models taylor or calvo nor 1 st generation state dependent models match all of these facts some 2 nd generation state dependent models however appear broadly consistent with the empirical patterns

endogenously chosen boards of directors and their monitoring of the ceo author s hermalin benjamin e abstract this paper develops a model in which the effectiveness of a board s monitoring of the ceo depends on the board s independence the independence of new directors is determined through negotiations implicit or explicit between the existing directors and the ceo the ceo s bargaining position and thus influence over the board selection process depends on an updated estimate of the ceo s ability based on prior performance many empirical findings about board structure and performance arise as equilibrium phenomena in this model we also explore the implications of this model for proposed regulations of corporate governance structures please contact the program in law and economics at boalt hall school of law uc berkeley berkeley ca 94720 for a copy of this paper

asymmetric sensitivity of ceo cash compensation to stock returns abstract we document that ceo cash compensation is twice as sensitive to negative stock returns as it is to positive stock returns since stock returns include both unrealized gains and unrealized losses we expect cash compensation to be less sensitive to stock returns when returns contain unrealized gains positive returns than when returns contain unrealized losses negative returns this is consistent with boards of directors exercising discretion to reduce costly ex post settling up in cash compensation paid to ceos

ceo replacement under private information this article examines the optimal ceo compensation and replacement policy when the ceo is privately informed about the firm s continuation value under his leadership ex ante moral hazard implies that the ceo must receive ex post quasi rents which endogenously biases him toward continuation our model shows that to induce bad ceos to quit it may be best to make continuation costly through steep incentive pay rather than simply rewarding quitting through severance pay incentive pay makes continuation attractive for good ceos who can expect high future on the job pay but unattractive for bad ceos who may instead prefer to take their outside option payoff our model generates novel empirical implications that jointly relate ceo compensation and turnover to corporate governance firm size cash flow risk and the informativeness of performance measurement jel g34

are bureaucrats paid like ceos performance compensation and turnover of top civil servants abstract recent research explores the effect of financial and career incentives on public sector hiring processes and subsequent performance the reverse relation between performance and bureaucrats compensation and turnover has received only limited attention due to the distinct features of public sector organizations bureaucrats are traditionally argued to require either permanent positions and fixed wages or low powered performance incentives this article studies how the performance of top civil servants in norwegian local governments affects their compensation and turnover we thereby build on a unique new dataset over the period 1991 2014 our results indicate that better performing top civil servants obtain a higher compensation and are less likely to be replaced nonetheless these incentives remain low powered in line with agency theory prescriptions

contractual externalities and systemic risk we study effort and risk taking behaviour in an economy with a continuum of principal agent pairs where each agent exerts costly hidden effort principals write contracts based on both absolute and relative performance evaluations ape and rpe respectively to make individually optimal risk return trade offs but do not take into account their impact on endogenously determined aggregate variables this results in contractual externalities when these aggregate variables are used as benchmarks in contracts contractual externalities have welfare changing effects when principals put too much weight on ape or rpe due to information frictions relative to the second best if the expected productivity is high risk averse principals over incentivize their own agents triggering a rat race in effort exertion resulting in over investment in effort and excessive exposure to industry risks the opposite occurs when the expected productivity is low inducing pro cyclical investment and risk taking behaviours

inertial inflation indexation and price stickiness evidence from brazil abstract this paper evaluates the inertial inflation hypothesis for brazil the hypothesis posits that indexation created a feedback mechanism such that one time supply shocks were fully transmitted into permanent changes in inflation a theoretical model is used to show that this outcome is based on the assumption of perfect price flexibility however with price stickiness indexation does not produce inertial inflation the degree of inertia is then compared for two periods one without indexation 1945 1963 and one with indexation 1969 1985 finally vector autoregressive representations are estimated for the latter period allowing for price stickiness the empirical results do not support the hypothesis

macroeconomic fluctuations as sources of luck in ceo compensation macroeconomic fluctuations in interest rates exchange rates and inflation can be considered sources of good or bad luck for corporate performance if management is unable to adjust operations to these fluctuations based on a sample of 2 091 us firms we decompose the impacts of macroeconomic fluctuations on three measures of ceo compensation our study provides empirical support for the importance of considering macroeconomic fluctuations in designing ceo incentive schemes it adds to the managerial power literature on moral hazard and ceo compensation by pinpointing the obvious risk that the ceo in an asymmetric and non linear reward system will be inclined to prioritize his her own cash flow at the expense of fulfilling an assumed agency role the policy conclusion for remuneration committees and board of directors is to filter out macroeconomic influences on performance to be rewarded whenever an asymmetric compensation scheme has been opted for

monetary targets real exchange rates and macroeconomic stability abstract in this paper i develop a model to determine the optimal degree of flexibility in attaining monetary targets in an economy that is affected by shocks in the labor and financial markets i then simulate the model to assess the optimal degree of monetary policy flexibility in spain a country that has adopted monetary targets rigidly since 1978 i show that the model supports the policy choice of that country i also show that the monetary authorities should attribute more importance to real exchange rate movements in choosing their policies if the spanish economy becomes more open to international trade or if the labor market becomes more flexible

services inflation dynamics and persistence puzzle in brazil a time varying parameter approach this article analyses services inflation dynamics in brazil focusing on the services inflation persistence puzzle for monthly data from january 2004 to february 2016 we apply a time varying para

market forces and ceo pay shocks to ceo demand induced by ipo waves i develop a simple competitive equilibrium model and derive the prediction that ceo pay size elasticity increases when more firms compete for an inelastic supply of managers using industry level ipo waves as a proxy for increased competition for ceos i find that pay size elasticity increases by 6 with a one standard deviation increase in ipo activity this effect is stronger in specialized industries in addition increased ipo activity leads to a greater likelihood of executive transitions between firms these findings indicate that market forces play a key role in the determination of ceo pay received august 6 2015 editorial decision september 24 2016 by editor francesca cornelli

on the expectations view of the term structure term premia and survey based expectations in this paper uk disaggregate survey data of expected future interest rates are used to test the expectations model of the term structure of interest rates at the short end of the maturity spectrum in the aggregate the expectations model is rejected and both time varying term premia and expected interest rate changes are demonstrated to be important in explaining the slope of the yield curve within the aggregate data however we demonstrate that there are some differences with respect to the views of the term structure held for example for some individuals the pure expectations model cannot be rejected

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

do forecast errors or term premia really make the difference between long and short rates abstract forward rates in the term structure of interest contain predictions of future spot rates plus possibly term premia realized spot rates contain predicted spot rates plus forecast errors under rational expectations forecast errors are not predictable by forecasting spot rates using publicly available information bounds on the variation of forecast errors and term premia are obtained for one month treasury bill rates one to two thirds of the variation in the difference between forward rates and realized spot rates is due to variation in term premia

an unobserved components model of the yield curve we develop an unobserved component model in which the short term interest rate is composed of a stochastic trend and a stationary cycle using the nelson siegel model of the yield curve as inspiration we estimate an extremely parsimonious state space model of interest rates across time and maturity the time series process suggests a specific functional form for the yield curve we use the kalman filter to estimate the time series process jointly with observed yield curves greatly improving empirical identification our stochastic process generates a three factor model for the term structure at the estimated parameters trend and slope factors matter while the third factor is empirically unimportant our baseline model fits the yield curve well model generated estimates of uncertainty are positively correlated with estimated term premia an extension of the model with regime switching identifies a high variance regime and a low variance regime where the high variance regime occurs rarely after the mid 1980s the term premium is higher and more so for yields of short maturities in the high variance regime than in the low variance regime the estimation results support our model as a simple and yet reliable framework for modeling the term structure

ceos outside employment opportunities and the lack of relative performance evaluation in compensation contracts although agency theory suggests that firms should index executive compensation to remove market wide effects i e rpe there is little evidence to support this theory oyer 2004 journal of finance 59 1619 1649 posits that an absence of rpe is optimal if the ceo s reservation wages from outside employment opportunities vary with the economy s fortunes we directly test and find support for oyer s 2004 theory we argue that the ceo s outside opportunities depend on his talent as proxied by the ceo s financial press visibility and his firm s industry adjusted roa our results are robust to alternate explanations such as managerial skimming oligopoly and asymmetric benchmarking

time varying term premia and traditional hypotheses about the term structure empirical evidence of time varying term premia in bond returns is frequently interpreted as evidence against the expectations hypothesis this paper shows that the expectations hypothesis can actually imply time varying term premia if the time frame for which the expectations hypothesis holds differs from the return measurement period furthermore many of the properties of these term premia are consistent with those of observed term premia these results are important because they imply that the case against the expectations hypothesis is weaker than claimed in the empirical literature many recent studies have presented empirical evidence that term premia in bond returns are time varying for example fama and bliss 1987 document that term premia in treasury bond returns vary reliably through time and can be forecast using the information in forward rates similar evidence of variation through time in term premia is given by shiller 1979 startz 1982 shiller campbell and schoenholtz 1983 fama 1984 mankiw 1986 shiller 1986 campbell 1987 engel lilien and robins 1987 shiller and mcculloch 1987 froot 1989 simon 1989 and others these empirical results have been interpreted in the literature as strong evidence against the expectations hypothesis eh 1 the reason for this interpretation is the widely held view that the eh is consistent only with term premia that are constant through time 2 in this paper we show that the eh need not imply constant term premia specifically we present an example in which an important form of the eh implies nonzero term premia that vary randomly through their dependence on the volatility of the term structure we show that the variation in these term premia can be significant relative to the variation in expected returns for longer maturity bonds furthermore we show that these term premia are directly related to the forward spot rate differential the key insight of this example is that the empirical implications of the eh depend critically on the length of the period over which the eh is assumed to hold if this interval is shorter than the period over which bond returns are measured aggregation over time can induce rich patterns of variation in observable term premia

on inflation and output with costly price changes a simple unifying result this paper determines the real effects of credible disinflation when price setting is staggered the results are surprising a fairly quick disinflation causes a boom this finding suggests that nominal price rigidity alone does not explain why disinflation is costly in actual economies this abstract was borrowed from another version of this item

optimal strike prices of stock options for effort averse executives abstract this paper evaluates the common practice of setting the strike prices of executive option plans at the money hall and murphy hall brian murphy kevin j 2000 optimal exercise prices for executive stock options american economic review 90 2 209 214 claim this practice to be optimal since it maximizes the sensitivity of compensation to firm performance however they do not incorporate effort and the possibility that managers are effort averse into their model we revisit this question while explicitly introducing these factors and allowing the reward package to include fixed wages options and stock grants we simulate the manager s effort choice and compensation as well as the value of shareholders equity under alternative compensation schemes and identify schemes that are optimal our simulations indicate that when abstracting from tax considerations it is optimal to award managers with options that will most likely be highly valuable i e substantially in the money on their expiration date prior to 2006 the tax code and financial reporting standards provided incentives to award options that are closer to the money when issued than the options that were optimal in the absence of these considerations recent tax and reporting changes voided these incentives and thus we predict that these changes will induce firms to issue options with lower strike prices than those that were issued prior to 2006

what does the term structure tell us about future inflation abstract this empirical analysis indicates that for maturities of six months or less the term structure of nominal interest rates provides almost no information about the future path of inflation but does provide information about the term structure of real interest rates however as maturities lengthen to nine and twelve months the nominal term structure begins to contain information about future inflation but ceases to provide information about the real term structure these results are explained by differences in the relative variability of expected future inflation changes and real term structure slopes at different points in the term structure

the phillips curve the persistence of inflation and the lucas critique evidence from exchange rate regimes comment we present evidence from the united states and the united kingdom that the persistence of price inflation is significantly higher under managed exchange rate regimes than under gold based fixed exchange rate regimes these differences are also reflected in expectations augmented phillips curves we use a two country macro model with forward looking price setters to demonstrate that higher monetary accommodation of inflation and exchange rate accommodation of inflation differentials increase inflation persistence the evidence does not contradict this hypothesis it supports the hypothesis of forward looking price setters and highlights the empirical significance of the lucas critique jel e31 e42 f33

ceo incentives and firm size we develop a model that clarifies how to measure ceo incentive strength and how to reconcile the enormous differences in pay sensitivities between executives in large and small firms the crucial parameter is shown to be the elasticity of ceo productivity with respect to firm size we find that ceo marginal products rise significantly with firm size confirming rosen s conjecture that ceos of large firms have a chain letter effect on firm performance and overall ceo incentives are roughly constant or decline slightly with firm size we employ a multitask model to discuss implications for the design of control systems

on the term structure of interest rates abstract this paper tests the one good stochastic growth model with respect to its ability to explain the term structure of real interest rates we undertake both a qualitative and quantitative analysis first we assess the changing shape of the yield curve over the model economy s business cycle and compare our results with what is empirically observed second we employ the model to study various implications of informational and allocative efficiency properties which the artificial economy must possess it is found for example that long term rates are less volatile than short term rates and that holding premia can be highly correlated over time third we study the time varying risk premium implicit in the economy s forward rate structure a purely quantitative assessment of the model s explanatory power is also provided