expectations the exchange rate and the current account abstract a critical examination is undertaken of the relationship between the exchange rate and the current account in a small open economy theoretically the correlation between the exchange rate and the current account seems to be ambiguous in particular the association between movements in the exchange rate and the current account is likely to depend in an essential manner on the nature of exogenous disturbances affecting the two variables simultaneously lastly the question of the role of an optimal monetary policy and the choice of an exchange rate regime in an uncertain environment is raised

prospect theory explains newsvendor behavior the role of reference points current understanding in operations management is that prospect theory as a theory of decision making under uncertainty cannot systematically explain the ordering behavior observed in experiments on the newsvendor problem we suggest this is because the newsvendor s reference point is assumed to be the status quo i e zero payoff we propose an alternative based on newsvendor s salient payoffs and show that prospect theory can in fact account for experimental results this paper was accepted by serguei netessine operations management

currency and credit markets abstract in this paper we focus on two aspects of the relationship between exchange rates and interest rates which have not been widely discussed first the extent to which the forward premia discount in one market can be used to predict the speculative return in the other second the extent to which unanticipated changes in the speculative returns are correlated across markets so that positions in one market can be hedged using positions in the other our results demonstrate that these two linkages are also important factors behind the time variation in speculative risk premia

the purchasing power of money and nominal interest rates a re examination while it has been known for some time that under uncertainty the original version of the fisher hypothesis is not precisely correct empirical researchers have largely ignored this fact such an omission has possibly resulted in erroneous conclusions concerning other hypotheses most notably the impact of prices on the real economy this paper clarifies some of the previous interpretations of the existing empirical literature and provides a theoretical version of the relation between prices and interest rates empirical tests based on both the livingston survey data and data from time series forecasting models provide support for the fisher effect and the hypothesis that only covariance risk is priced in the treasury bill market one of the basic hypotheses concerning rationality in financial markets is based on statements generally attributed to fisher 18 fisher argued that the nominal or money rate of return on an asset should compensate an investor for his or her required real rate of return and changes in the purchasing power of money for the uncertainty case fisher replaced known purchasing power changes with the expected inflation rate whereas the fisher relationship under certainty is well defined his basic theorem under uncertainty is not precise as fama 15 has argued it is changes in the purchasing power of money not the inflation rate that should concern investors under uncertainty the expected value of one is not by jensen s inequality the inverse of the expected value of the other moreover fama and farber 16 grauer and litzenberger 20 and benninga and protopapadakis 3 have shown that when investors are risk averse the fisher relationship will generally not hold even after adjustment has been made for the distinction between purchasing power changes and the inflation rate in particular these authors show that an adjustment must be made for the fact that the real rate of return on nominal bonds is random while these issues have been discussed in the theoretical literature they have largely been ignored in the empirical work on this topic given the fact that nominal rates do not seem to adjust as rapidly to price changes as fisher hypothesized numerous empirical researchers have expanded the basic fisher model in an attempt to explain this empirical anomaly these extensions include the incorporation of a inflation rate variability and the growth in real output

deviations from purchasing power parity in the long run this paper demonstrates that deviations from purchasing power parity reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible rate periods for a wide variety of countries and in both monthly and annual data since this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper proposes an alternative explanation which instead relies on financial arbitrage in bonds as the underlying mechanism this paper will demonstrate that deviations from purchasing power parity ppp reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible exchange rate periods for a wide variety of countries and in both monthly and annual data this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper therefore proposes an alternative explanation which does not presuppose free trade in goods but which instead relies on financial arbitrage in bonds as the underlying mechanism the major implication of the theory and the results is that ppp is as likely to be violated in the long as in the short run as an empirical matter deviations from ppp can be observed for most currencies at any instant see kravis et al 21 stockman 37 and genberg 15 among others these deviations are typically both cumulative and persistent the real exchange rate can remain on either side of parity for lengthy but variable time intervals of a year or more as a consequence the current consensus shared

reasons for remitting this article presents a set of reflections on what gives rise to remittances which constitute a major part of the impact of migration on economic development in the migrants own countries the collage of reasons presented serves to illustrate that remittance behaviour is the outcome of an intricate interplay between the preferences and interests of migrants and their families

a model of international asset pricing under imperfect commodity arbitrage abstract this paper examines the effect of imperfect international commodity arbitrage i e violation of the law of one price modeled as the existence of non traded goods on the structure of purchasing power risk optimal portfolio rules of the risk averse investors and the equilibrium yield relationship among assets the major results of the paper include i there are two separate sources of purchasing power risk i e relative price risk and inflation risk relative price risk is specific to the country in which the investor resides ii in a world of n countries investors may hold n 1 hedge portfolios as vehicles to hedge against purchasing power risk facing different relative prices investors residing in different countries display divergent portfolio behavior iii in equilibrium investors are compensated in terms of excess return for bearing not only the systematic world market risk but also the systematic inflation and relative price risks

in search of the exchange risk premium a six currency test assuming mean variance optimization abstract a number of authors examining deviations of actual rates of currency depreciation from forward discounts have claimed to find evidence of risk premiums if these deviations are indeed partly due to risk premiums rather than being entirely due to expectational errors then they should be systematically related to those variables on which risk premiums are thought to depend finance theory tells us that if investors optimize with respect to mean and variance the risk premium depends in a specific way on 1 the supplies of assets denominated in the various currencies 2 the variance covariance matrix of the rates of return and 3 the coefficient of risk aversion the null hypothesis of this paper is that the coefficient of risk aversion is zero countries assets are perfect substitutes and risk premiums are nonexistent the alternative hypothesis is that rates of return are systematically related to asset supplies by a macroeconomic portfolio balance function the maximum likelihood technique used dominates previous attempts to find such a relationship in that the parameters of the portfolio balance function are constrained to depend on the variance covariance matrix as the finance theory says they should on the other hand the technique also dominates previous applications of the finance theory in that the expected returns are allowed to vary over time as the macroeconomic portfolio balance theory says they should the paper s finding is a statistical inability to reject the null hypothesis for a portfolio of six currencies although this could be due to low power in the test

the effects of inflation on real interest rates one of the most obvious facts of recent monetary history is that high inflation is associated with high nominal interest rates this association has been interpreted by many as supporting a superneutrality hypothesis that an increase in inflation will not affect real interest rates in the long run however the bulk of the evidence contradicts superneutrality beginning with irving fisher 1896 1930 most empirical investigations have found that fully anticipated inflation has less than a unit effect on nominal interest rates and thus reduces real interest rates even in the longest of runs this has been shown under the assumption that expectations are formed rationally douglas pearce 1979 that they take the form of an arbitrary distributed lag on past inflation rates fisher 1930 william gibson 1970 or that they are accurately represented by the livingstone expectations data pearce kajal lahiri 1976 lawrence summers 1983 attempted to measure the long run effect without an explicit theory of expectations regressing long swings in various nominal interest rates against long swings in inflation over various subintervals from 1860 to 1979 he found coefficients consistently less than unity for the post world war ii era as a whole the coefficients were in the range of 0 5 to 0 75 with standard deviations of 0 08 to 0 33 a few studies have found coefficients close to unity william yohe and denis karnosky 1969 martin feldstein and otto eckstein 1970 gibson 1972 lucas but as several authors have observed thomas sargent 1976 robert shiller 1980 john wood 1981 summers these findings are limited to a particular period of u s history approximately 1953 71 furthermore even a unitcoefficient would contradict superneutrality of the after tax real interest rate which would require a coefficient substantially greater than unity even taking into account the other inflation distortions in the tax system summers calculated that the coefficient ought to lie in the range of 1 3 to 1 5 far higher than observed these empirical findings pose a challenge to traditional monetary theory much of which implies that superneutrality should hold at least approximately for example the model of miguel sidrauski 1967 implies that the real interest rate should equal the marginal product of capital which in the long run should equal the representative household s marginal rate of time preference if this rate of time preference is a constant then in particular it will be independent of the rate of inflation if it is positively related to the household s wealth or utility then inflation can reduce the marginal product of capital somewhat through what are commonly called mundell tobin effects that is higher inflation can reduce the demand for real balances which reduces real wealth which lowers the rate of time preference and leads to further capital accumulation 2 but this real balance effect on saving is commonly recognized to be too small to make department of economics social science centre university of western ontario london canada n6a 5c2 we are grateful to charles adams norman cameron john chilton jacob frenkel david laidler ben mccallum baldev raj brad reid jack weldon john whalley ron winrck and two anonymous referees for helpful discussions and comments on earlier drafts all errors are attributable to transaction costs robert lucas 1980 finds empirical support for the hypothesis which he calls one of the central implications of the quantity theory of money it has also been adopted by a wide range of more eclectic economists as evidenced by its endorsement in two of the most popular macroeconomics textbooks rudiger dornbusch and stanley fischer 1981 pp 454 58 robert j gordon 1978 pp 289 91 2these implications of variable time preference can be drawn almost immediately from the work of hirofumi uzawa 1968 a graphical analysis is presented by david laidler 1969b who focuses on the logically equivalent question of the effects of paying interest on money

a note on exchange rate expectations and nominal interest differentials a test of the fisher hypothesis this note tests the hypothesis that nominal interest differentials between similar assets denominated in different currencies can be explained entirely by the expected change in the exchange rate over the holding period this proposition often called the fisher open hypothesis or the hypothesis of perfect asset substitutability has been a major component of recent theories of exchange rate determination and has important implications for monetary policy 1 the fisher hypothesis differs from the covered interest parity theorem enunciated by keynes 11 while covered interest parity equates the nominal interest differential between financial centers to a known premium or discount on forward foreign exchange and is thus in principle riskless fisher parity involves risk in an essential way the two conditions are equivalent only when forward exchange rates equal expected future spot rates recent theoretical work for example that of grauer litzenberger and stehle 8 kouri 12 and frankel 6 shows that this need not be the case when market participants are risk averse thus while covered interest parity must always hold exactly in an informationally efficient asset market with no transactions costs fisher parity need not nominal interest differentials may reflect risk premia in addition to expected exchange rate movements 2 it should be emphasized at the outset that the tests conducted in this paper are really joint tests of the fisher hypothesis and a weak form of foreign exchange market informational efficiency levich 14 has argued that tests of market efficiency are always joint tests involving some hypothesized structure of normal equilibrium returns below we assume informational efficiency and instead test fisher s hypothesized arbitrage condition that nominal interest differentials equal expected percentage changes in exchange rates

effects of monetary disturbances on exchange rates with risk averse speculation abstract this paper develops a macroeconomic model in which domestic and foreign bonds are perfect substitutes on a covered basis but in which speculators are assumed to be risk averse we analyze the effects of various transitory and permanent disturbances on the economy and show how the existence of the risk premium known to exist under such conditions has important implications for macroeconomic behavior most of our attention is devoted to how the economy responds to temporary and permanent changes in the money and bond supplies and in the central bank s forward market position the effects of disturbances in the foreign price level and interest rate are also briefly discussed

real effects of exchange rate volatility abstract in the presence of exchange rate volatility and internationally differing rates of time preference investment in the stock of domestic capital is shown to proceed beyond or to fall short of the point where the marginal productivity equals the respective rate of time preference if the national rate of time preference is comparatively low high the respective country winds up as a creditor debtor internationally upon an increases in exchange rate volatility domestic capital of a debtor country creditor country decreases increases the long run effect of increased exchange rate volatility on the trade balance cannot be determined unequivocally

money bonds and foreign exchange in the theory of finance capital markets provide securities which allow the ownership of productive assets to be allocated among investors according to their willingness to bear risk in exchange for return and independently of their tastes for the productive services provided by the assets this paper uses the theory of finance to study the role of money as a productive asset and the transformation of money into a portfolio asset true to its purpose the capital market provides securities nominal bonds that allow an allocation of the current services of the money supply according to its current productivity and without regard for its future purchasing power risk and an allocation of the future purchasing power risk of the money supply according to the willingness of investors to bear this risk in exchange for return and without regard for investor needs for the future transactions services of money in open

the overconfident and optimistic price setting newsvendor abstract overconfidence and optimism are behavioral biases known to impact newsvendor ordering decisions we develop a model that accounts for both effects by applying a probability weighting function from prospect theory pt we apply the model to a price setting newsvendor problem with reference effects contrary to previous work claiming that increased optimism leads a newsvendor to adopt a high margin and low volume strategy we find that greater optimism typically results in lower margins and higher inventory aligning with the more intuitive interpretation of optimism in addition we find that overconfidence and regret have similar impacts on both inventory levels and pricing

remittances and vulnerability in developing countries this paper examines how international remittances are affected by structural characteristics macroeconomic conditions and adverse shocks in recipient economies we exploit a novel rich panel data set covering bilateral remittances from 103 italian provinces to seventy nine developing countries over the period 2005 2011 we find that remittances are negatively correlated with the business cycle in recipient countries and in particular increase in response to adverse exogenous shocks such as large terms of trade declines this effect is stronger where the migrant communities have a larger share of newly arrived migrants finally we show that recipient country financial development is negatively associated with remittances suggesting that remittances help alleviate credit constraints

price uncertainty and the exchange rate risk premium abstract this paper develops a simple two country portfolio model of the exchange rate risk premium which incorporates price uncertainty in both countries it is shown how the risk premium depends on the world shares of outside assets and wealth as well as on the variance covariance matrix of prices and the exchange rate in particular when purchasing power parity holds the distribution of world wealth has no effect on equilibrium asset prices

pricing capital assets in an international setting an introduction this paper shows how differences across countries of 1 inflation rates 2 consumption baskets of investors and 3 investment opportunity sets of investors matter when one applies capital asset pricing models in an international setting in particular the fact that countries differ is shown to affect the portfolio held by investors the equilibrium expected returns of risky assets and the financial policies of firms

migration networks as a response to financial constraints onset and endogenous dynamics abstract a migration network is modeled as a mutually beneficial cooperative agreement between financially constrained individuals who seek to finance and expedite their migration the cooperation agreement creates a network established migrants contract to support the subsequent migration of others in exchange for receiving support themselves when the model is expanded to study cooperation between more than two migrants it emerges that there is a finite optimal size of the migration network consequently would be migrants in the sending country will form a multitude of networks rather than a single grand network

optimum consumption and portfolio rules with money as an asset this article generalizes merton s optimum consumption and portfolio rules in continuous time by introducing money as a capital asset and allowing for uncertain inflation assuming that prices are log normally distributed a three funds theorem is derived and the introduction of money is shown not to change the form of the standard inflation adjusted capm but to change the market price of risk the individual s consumption portfolio problem is completely solved under uncertain inflation if his utility function is iso elastic in its arguments comparative statics are used to assess the influence of changes in exogenous parameters on the individual s optimal rules

international asset pricing with time varying risk premia abstract recent empirical evidence that forward exchange rates are biased predictors of future spot rates can also be interpreted as evidence against the hypothesis of a constant risk premium consequently reconciliation of this evidence with efficient international capital markets requires the existence of time varying risk premia this paper modifies kouri s 1977 asset pricing model to allow time varying exected returns on assets eliminates the assumption of a risk free real asset and derives the characteristics of the risk premia in the forward market as well as the equilibrium yield relationships among the equities and riskless nominal bonds of all countries

do family ties with those left behind intensify or weaken migrants assimilation strong ties with the home country and with the host country can coexist an altruistic migrant who sends remittances to his family back home assimilates more the more altruistic he is and also more than a non remitting migrant

a model of uk real effective exchange rate behaviour an integrated model of the uk real effective exchange rate is examined which links purchasing power parity with trade flow and asset market mechanisms furthermore time series and econometric analysis using quarterly data from 1972 to 1987 are applied the results obtained are broadly consistent with this model and imply that the uk real effective exchange rate index is constant in the long run

forward foreign exchange rates expected spot rates and premia a signal extraction approach in this paper we implement a methodology to identify and measure premia in the pricing of forward foreign exchange that involves application of signal extraction techniques from the engineering literature diagnostic tests indicate that these methods are quite successful in capturing the essence of the time series properties of premium terms the estimated premium models indicate that premia show a certain degree of persistence over time and that more than half the variance in the forecast error that results from the use of current forward rates as predictors of future spot rates is accounted for by variation in premium terms the methodology can be applied straightforwardly to the measurement of unobservables in other financial markets there exists a growing body of empirical research on premia in the pricing of forward foreign exchange conditional on the hypothesis that the foreign exchange market is efficient or rational the existence of time varying premia has been documented in the literature by fama 6 hansen and hodrick 10 11 hodrick and srivastava 15 16 hsieh 171 and korajczyk 20 frankel 9 fails to identify such premia and domowitz and hakkio 51 obtain different results for different currencies

the forward exchange rate and macroeconomics abstract this paper discusses the conditions under which a risk premium is incorporated in the forward exchange rate a new condition for the existence of a risk premium is proposed we show that earlier models of the risk premium which emphasize either the role of net foreign investment or of the relative supplies of outside assets are not suited for assessing the effects of changes in macroeconomic policy

on the effects of sterilized intervention an analysis of weekly data abstract as the recent empirical studies surveyed here illustrate it is very difficult to demonstrate that the exchange rate risk premium depends through a portfolio balance channel on the currency composition of outside assets the existence of a portfolio balance effect is a necessary condition for sterilized intervention to be a genuinely independent tool of monetary policy this paper studies u s canadian data and attempts to improve on earlier studies by using higher frequency weekly data and by implementing an appropriate instrumental variables technique 2s2sls however we still fail to detect evidence of a portfolio balance effect

international portfolio diversification with estimation risk international portfolio diversification has long been advocated as a way of enhancing average returns while reducing portfolio risk for the investor who considers diversifying into foreign securities this proposition however relies on the assumption that the required inputs to the classical mean variance analysis are known with certainty typically expected returns variances and covariances are simply replaced by their ex post sample values and the optimal portfolio is derived without mentioning the uncertainty inherent in these parameter values but the rational investor should take this uncertainty into account when forming expectations and probably will consider estimators that are less subject to estimation error than the classical sample mean this paper investigates alternative estimators of expected returns and their implications for the alleged gains from diversification an important observation is the crucial influence that errors in estimating expected returns have on portfolio analysis a closer examiprevious studies of international portfolio diversification have relied on ex post meanvariance analysis without considering the problem of estimation risk typically past averages are substituted for expected returns and no allowance is made for the uncertainty inherent in these parameter values first i demonstrate the shortcomings of such an approach and second i investigate another method of estimating expected returns initially proposed by stein by shrinking the sample averages toward a common mean i find that the out of sample performance of the optimal portfolio is substantially increased one of the implications of this method is that the classical conclusions vastly overestimate the possible gains in average returns instead benefits from diversification are more likely to accrue from a reduction in risk this paper draws on part of my dissertation at the university of chicago i am grateful to arnold zellner michael mussa george constantinides and especially john bilson for useful discussions and comments numerous improvements were also suggested by the referee this research received the generous financial support of the college interuniversitaire d etudes doctorales dans les sciences du management

nominal rigidity and monetary uncertainty in a small open economy temporary nominal rigidity is introduced into a dynamic stochastic general equilibrium model of a small open economy the foreign country is also modelled and is the closed economy counterpart of the domestic country we examine whether a small open economy is more vulnerable than a closed economy to uncertainty over its monetary policy a signal of an increase in future variability which was not previously foreseen as a risk by agents is shown to weaken the current exchange rate and boost current output in the small open economy in the equivalent closed economy it has no effect on current variables

the optimal currency composition of external debt theory and applications to mexico and brazil the changes in exchange rates interest rates and commodity prices during the past decades have had large impacts on developing countries many developing countries have limited access to already incomplete international long term hedging markets thus the question arises whether the currency composition of external debt can be used to minimize exposures to external price risk using a utility maximizing framework this article shows that by choosing the optimal currency composition a country can indeed manage its external exposure the optimal risk minimizing currency composition depends on the relation between export receipts and the costs of borrowings in each currency and on the relations among the costs of borrowings in different currencies a simple methodology can be used to derive the optimal shares of individual currencies and is applied to mexico and brazil the results show that mexico and brazil could have lowered their external exposure to a limited degree by continuously alternating the currency composition of their debts the low correlations between the costs of borrowings and export and import prices make the currency composition of debt a very imperfect hedging tool and it is likely that hedging instruments directly linked to prices are preferable

reference dependence in multilocation newsvendor models a structural analysis we propose a behavioral theory to predict actual ordering behavior in multilocation inventory systems the theory rests on a well known stylized fact of human behavior people s preferences are reference dependent we incorporate reference dependence into the newsvendor framework by assuming that there are psychological costs of leftovers and stockouts we also hypothesize that the psychological aversion to leftovers is greater than the disutility for stockouts we then experimentally test the proposed theory in both the centralized and decentralized inventory structures using subjects motivated by substantial financial incentives consistent with the proposed theory actual orders exhibit the so called pull to center bias and the degree of bias is greater in the high profit margin than in the low profit margin condition these systematic biases are shown to eliminate the risk pooling benefit when the demands across store locations are strongly correlated because the proposed model nests the standard inventory and ex post inventory error minimization theories as special cases one can systematically evaluate the predictive power of each alternative using the generalized likelihood principle we structurally estimate all three theories using the experimental data and the estimation results strongly suggest that the proposed behavioral theory captures actual orders and profits better we also conduct two experiments to validate the behavioral model by manipulating the relative salience of the psychological costs of leftovers versus that of stockouts to alleviate the pull to center bias

trade in nominal assets monetary policy and price level and exchange rate risk in a previous paper trade in risky assets i have analyzed the pattern of international trade in risky real assets between barter economies relying on the law of comparative advantage and using autarky asset price differences to predict the pattern of asset trade in this paper the analysis is extended to international trade in nominal assets assets with returns paid in currencies between monetary economies the risk chracteristics of real returns on nominal assets depend on price level and exchange rate risk and therefore on monetary policy it is examined how different combinations of monetary policies and exchange rate regimes affect nominal assets return risk characteristics their autarky perices and hence their trade pattern when countries differ with respect to their outputs or their attitudes towards risk when world asset markets are incomplete different monetary policies and exchange rate regimes have dramatic effects on risk characteristics of home and foreign currency bonds and on the trade pattern in these assets as well as on aggregate capital and current accounts

stocking and pricing decisions under endogenous demand and reference point effects abstract in this paper we study the newsvendor s pricing and stocking decisions under reference point effects the demand faced by the newsvendor is endogenous and the customers may also decide to procure the product from an outside option we characterize the firm s optimal pricing and stocking decisions our analysis reveals a threshold policy on the firm s ordering and pricing decisions while considering the impact of reference point effects we also find that as the level of optimism increases the firm s optimal ordering level decreases and optimal price increases we further study the impact of loss aversion on the firm s ordering and pricing decisions

an analysis of intertemporal pricing for forward foreign exchange contracts an asset pricing model with an unobservable time varying risk premium is used to price forward foreign exchange contracts specifically the term spectrum of forward foreign exchange contracts is examined in order to focus on country specific and maturityspecific information the testable restrictions imposed by the model are consistent with both cross country and cross maturity forward contracts except at the short end of the maturity spectrum for cross country forward exchange rates this indicates that the intertemporal model is relatively robust in valuing forward contracts of different maturities and for different exchange rates but that it may fail when there are significant short term country specific shocks theoretical and empirical studies have demonstrated that the forward exchange rate incorporates a time varying risk premium in addition to an expected future spot exchange rate recent works by fama 9 and hodrick and srivastava 21 reveal the importance of the risk premium by showing that the variability in risk premiums exceeds the variability in expected change in spot exchange rates these results are very general in that they are based on the definition that equates the forward exchange rate to the expected future spot exchange rate and a risk premium term a logical but more demanding next step is to model and conduct specification tests of the risk premium itself the purpose of this paper is to use an intertemporal latent variable assetpricing model ilvm to examine the risk return characteristics of the term structure of forward foreign exchange contracts more specifically the ilvm is used to price various bilateral dollar forward exchange contracts for each maturity as well as the different maturities for each bilateral forward exchange contract the ilvm was first utilized by hansen and hodrick 16 and hodrick and srivastava 20 to examine forward exchange risk premiums the two studies are however confined to just one month forward exchange contracts in addition the studies yield conflicting results the application of the ilvm to other

home asset preference and productivity shocks abstract this paper presents sufficient conditions for the domestic investor consumer to hold in equilibrium a disproportionate share of domestic assets the analysis is carried out in a general equilibrium framework of products and assets markets when the source of the uncertainty is productivity shocks in the nontraded goods industries in the asset markets we allow trade in instruments with a payoff which is not necessarily positively correlated with the price of the consumption good as the instruments considered in the existing literature consequently in our analysis in contrast to the existing literature hedging against price uncertainty is neither necessary nor sufficient for home asset preference

decision bias in the newsvendor problem with a known demand distribution experimental evidence in the newsvendor problem a decision maker orders inventory before a one period selling season with stochastic demand if too much is ordered stock is left over at the end of the period whereas if too little is ordered sales are lost the expected profit maximizing order quantity is well known but little is known about how managers actually make these decisions we describe two experiments that investigate newsvendor decisions across different profit conditions results from these studies demonstrate that choices systematically deviate from those that maximize expected profit subjects order too few of high profit products and too many of low profit products these results are not consistent with risk aversion risk seeking preferences prospect theory preferences waste aversion stockout aversion or the consequences of underestimating opportunity costs two explanations are consistent with the data one subjects behave as if their utility function incorporates a preference to reduce ex post inventory error the absolute difference between the chosen quantity and realized demand two subjects suffer from the anchoring and insufficient adjustment bias feedback and training did not mitigate inventory order errors we suggest techniques to improve decision making

foreign exchange futures prices under fixed exchange rates abstract this paper develops three models for the determination of foreign exchange futures prices under fixed exchange rates and expectations of devaluation these models show that certain characteristics of futures prices behavior that have been used as proof of inefficiency may be present even if the market is efficient they also have several implications that are consistent with the observed behavior of mexican pesos futures prices

currency preferences purchasing power risks and the determination of exchange rates in an optimizing model most recent research on the theory of exchange rate determination treats the exchange rate as the relative price of two assets domestic money and foreign money the value of an asset depends on the distribution of its return however most of the research has dealt with models in which there is no uncertainty the present paper focuses on questions that cannot be addressed in a world of certainty because in such a world an asset is never risky it investigates how purchasing power risks affect the determination of exchange rates this investigation is pursued in a fairly general optimizing model the present research is related to some recent work in international economics and in financial economics it follows the approach of obstfeld 1981 and stockman 1980 in that it uses an optimizing model and takes into account the role of government transfers in the flow budget constraint of individuals as in calvo and rodriguez 1977 stockman 1980 and others the fact that holdings of foreign monies are useful to domestic individuals is taken into account finally the paper uses techniques developed in papers in the finance literature which build on merton s 1973 asset pricing model and use a concept of equilibrium developed in