asset pricing with loss aversion using standard preferences for asset pricing has not been very successful to match asset price characteristics such as the risk free interest rate equity premium and the sharpe ratio to time series data behavioral nance has recently proposed more realistic preferences such as preferences with loss aversion to model asset pricing research has now started to explore the implications of behaviorally founded preferences for asset price characteristics encouraged by some studies of benartzki and thaler 1995 and barberis et al 2001 we study asset pricing with loss aversion in a production economy we here employ a stochastic growth model and use a stochastic version of a dynamic programming method with adaptive grid scheme to compute the above mentioned asset price characteristics of a model with loss aversion in preferences as our results show a model with loss aversion performs considerably better than pure consumption based asset pricing models

the real consequences of financial stress abstract we introduce a dynamic banking macro model which abstains from conventional mean reversion assumptions and in which similar to brunnermeier and sannikov 2010 adverse asset price movements and their impact on risk premia and credit spreads can induce instabilities in the banking sector to assess such phenomena empirically we employ a multi regime vector autoregression mrvar approach rather than conventional linear vector autoregressions we conduct bivariate empirical analyses using country specific financial stress indices and industrial production for the u s the uk and the four large euro area countries our mrvar based impulse response studies demonstrate that compared to a linear specification response profiles are dependent on the current state of the economy as well as the sign and size of shocks previous multi regime based studies focusing solely on the regime dependence of responses conclude that during a high stress period stress increasing shocks have more dramatic consequences for economic activity than during low stress conducting size dependent response analysis we find that this holds only for small shocks and reverses when shocks become sufficiently large to induce immediate regime switches our findings also suggest that in states of high financial stress large negative shocks to financial stress have sizeable positive effects on real activity and support the idea of unconventional monetary policy measures in cases of extreme financial stress

boom bust cycles leveraging complex securities and asset prices abstract recent history suggests that many boom bust cycles are naturally driven by linkages between the credit market and asset prices additionally new structured securities have been developed e g mbs cdos and cds which have acted as instruments of risk transfer we show that there is a certain non robustness in the pricing of these instruments and we create a model in which both their role in the recent financial market meltdown and in which the mechanism by which they exacerbate leverage cycles is explicit we first discuss the extent to which complex securities can amplify boom bust cycles then we propose a model in which distinct financial market boom bust cycles emerge naturally we demonstrate the interaction of leveraging and asset pricing in a dynamical model and spell out some implications for monetary policy

fairness price stickiness and history dependence in decentralized trade this chapter investigates the implications that social preferences have for the stationary strategic equilibrium of such a decentralized market agents are supposed to be averse to unfairly unfavorable as well as unfairly favorable deals in the spirit of fehr and schmidt 1999 but we stay rather close to standard individualistic preferences the negative weights on advantageous and disadvantageous deviations from what is considered as the fair benchmark are such that utility remains strictly increasing in own surplus share and in contrast to the original fehr schmidt model the fair split need not automatically be a 50 50 division any price between sellers cost and buyers willingness to pay may be the one which for whatever reasons is agents reference point in a given market this makes it possible to consider a more flexible notion of fairness than is usually done it is in line with cognitive dissonance theory from psychology and the noteworthy experiments of binmore et al 1991 1993 where subjects who were triggered to play different bargaining equilibria ended up considering very different surplus distributions as fair

explosive oil prices spectacular oil price increases occur on a regular basis the most recent one is dated july 2008 this paper puts forward the notion that extreme oil price movements of this type can be described as temporary explosive the paper applies a forward recursive unit root tests and finds evidence of explosive behavior in the following periods 1990 1991 2005 2006 and 2007 2008 currently existing oil price models are not capable of appropriately describing this type of behavior a thorough discussion of the underlying reasons of these price hikes indicates these oil price episodes even though extreme are mainly fundamentally explained this finding is insufficiently acknowledged in the literature on speculative oil price bubbles thus policy interventions as response to extreme movements of this kind need to be very carefully thought through

the role of fiscal policy in an incomplete markets framework a general equilibrium model is developed to highlight the link between neo keynesian models of unemployment and recent results on the constrained sub optimality of competitive economies with incomplete asset markets although the model deviates from the arrow debreu paradigm only by the absence of some contingent claims the competitive equilibrium exhibits under employment and balanced budget fiscal policies have keynesian effects which are pareto improving will a market economy left to itself fully employ its resources in the general theory keynes exploited several mechanisms through which real economies differ from the classical paradigm where unemployment is either voluntary or non existent a common characteristic of these mechanisms is the difficulty of coordinating production and consumption plans in a decentralized economy in recent years neo keynesians have sought to develop general equilibrium models from micro foundations where this coordination problem can be analyzed these efforts are of interest for two reasons first as an intellectual exercise it is of interest to explore which deviations from the classical paradigm are necessary and or sufficient to generate keynesian effects second from a policy perspective it is important to start from micro foundations to verify the welfare implications of policy the neo keynesian literature has gone in several directions we will not review them here at this point it is sufficient to note that the argument developed below is based on incomplete financial markets and thus is related to the asymmetric information models of greenwald and stiglitz 2 the main contribution of this paper is the development of a model where we can make the following three points 1 the keynesian coordination problem can arise naturally in a competitive system with perfectly flexible prices and rational expectations 2 the mechanism underlying the coordination problem is related to recent work on the constrained sub optimality of competitive equilibria with incomplete markets as such the coordination problem is generic to this and other models with incomplete financial markets 3 familiar and feasible policies can be welfare improving even though they do not directly address the fundamental microeconomic causes of the coordination failure we study in detail the welfare effects of two fiscal policies and discuss briefly how other policies can be studied within this model

prospect theory for stock markets empirical evidence with time series data abstract based on the loss aversion model of asset pricing this paper explores empirical evidence on the prospect theory for stock markets with time series data the analysis using a state space model shows that previous gains and losses may have asymmetric effects on investment behavior pointing to the possibility of break even effects ignored by asset pricing models using prospect theory

are there bubbles in the sterling dollar exchange rate new evidence from sequential adf tests there has been mixed evidence regarding the existence of rational bubbles in the foreign exchange markets this paper introduces recently developed sequential unit root tests into the analysis of exchange rates bubbles we find strong evidence of explosive behavior in the nominal sterling dollar exchange rate however this explosive behavior should not be simply interpreted as evidence of rational bubbles as we show that it might be driven by the relative prices of traded goods

equilibrium portfolios in the neoclassical growth model abstract this paper studies equilibrium portfolios in the standard neoclassical growth model under uncertainty with heterogeneous agents and dynamically complete markets preferences are purposely restricted to be quasi homothetic the main source of heterogeneity across agents is due to different endowments of shares of the representative firm at date 0 fixing portfolios is the optimal equilibrium strategy in stationary endowment economies with dynamically complete markets however when the environment displays changing degrees of heterogeneity across agents the trading strategy of fixed portfolios cannot be optimal in equilibrium very importantly our framework can generate changing heterogeneity if and only if either minimum consumption requirements are not zero or labor income is not zero and the value of human and non human wealth are linearly independent

speculative bubbles in recent oil price dynamics evidence from a bayesian markov switching state space approach abstract motivated by repeated spikes and crashes during previous decades we investigate whether the heavily financialized market for crude oil has been driven by speculative bubbles in our theoretical modeling we draw on the convenience yield approach in order to approximate the fundamental value of the oil price we separate the oil price fundamental from the bubble component by expressing a standard present value oil price model in state space form we then introduce two markov regimes into the state space representation in order to distinguish between two distinct phases in the bubble process namely one in which the oil price bubble is a stable process and one in which the bubble explodes we estimate the entire markov switching state space specification using an econometrically robust bayesian markov chain monte carlo mcmc methodology based on inferential techniques designed for statistically separating both markov regimes in the bubble process from each other we find robust evidence for the existence of speculative bubbles in recent oil price dynamics

the effect of myopia and loss aversion on risk taking an experimental test myopic loss aversion is the combination of a greater sensitivity to losses than to gains and a tendency to evaluate outcomes frequently two implications of myopic loss aversion are tested experimentally 1 investors who display myopic loss aversion will be more willing to accept risks if they evaluate their investments less often 2 if all payoffs are increased enough to eliminate losses investors will accept more risk in a task in which investors learn from experience both predictions are supported the investors who got the most frequent feedback and thus the most information took the least risk and earned the least money language en

a quartet of asset pricing models in nominal and real economies abstract this paper studies the equity premium implications of a canonical new keynesian model with investment we find that the presence of a time varying marginal cost dampens the expansionary impact of a positive technology shock with a given fraction of firms standing ready to satisfy demand at predetermined prices the variations in the marginal utility of consumption attributed to technology shocks can easily be smoothed thus technology shocks contribute little to the equity premium under a standard monetary policy rule the real effect of monetary policy shocks is too weak and short lived to generate a reasonable equity premium

time varying persistence in real oil prices and its determinant abstract we provide empirical evidence for pronounced time variation in the persistence of real oil prices in particular we find episodes of mild explosiveness next to periods with random walk and also mean reverting behavior we address the question whether dynamic persistence can be directly related to macro financial variables spot futures spreads spill over effects from commodities and global real economic activity alongside these variables we use a large data set of more than one hundred fifty potential determinants featuring for example further oil related variables production and inventories and key macroeconomic series for the g7 countries by using model averaging techniques we robustly account for the inherent model uncertainty when dealing with such many potential explanatory variables as it turns out the one and only significant measure to explain time varying oil price persistence is the index of global real economic activity by kilian 2009 other variables related to e g supply shocks or speculation are however insignificant in line with recent findings we argue that fundamentals rather than speculation were the drivers of the explosive oil price in the 2000s

bubbles in food commodity markets four decades of evidence abstract we use daily prices from individual futures contracts to test whether speculative bubbles exist in 12 agricultural markets and to identify whether patterns of bubble behavior exist over time the samples begin as far back as 1970 and run through 2011 the findings demonstrate that all 12 agricultural markets experienced multiple periods of price explosiveness however bubble episodes represent a very small portion between 1 5 and 2 of price behavior during the 42 year period in addition most bubbles are short lived with 80 90 lasting fewer than 10 days though receiving far less attention negative bubbles contribute significantly to price behavior accounting for more than one third of explosive episodes markets over react during both positive and negative explosive episodes leading to a correction as they return to a random walk this adjustment back to fundamental values is most pronounced with positive bubbles particularly in the earlier part of the sample while the magnitudes of the corrections are generally small there were a few instances of significant increases in prices and large over reactions most notably in the softs e g cocoa 1973 coffee 1994 cotton 2010 we also find that explosive periods did not become more common or last longer in the second half of the sample period and that the most recent bubble episodes may not have been as severe as in mid 1970s

date stamping historical periods of oil price explosivity 1876 2014 article i nfo this paper sets out to date stamp periods of historic oil price explosivity using the generalized sup adf gsadf test procedure developed by phillips shi and yu 2013 the date stamping procedure used in this paper is ef fective at identifying periodically collapsing bubbles a feature found lacking with previous bubble detection methods weset out to identify periods of oilpriceexplosivity relative to the general price leveland oilinventory supplies in the us since 1876 and 1920 respectively the recursive identification algorithms used in this study identify multiple periods of price explosivity and as such provides future researchers with a reference for study ing the macroeconomic impact of historical periods of significant oil price build ups

the statistics of sharpe ratios the building blocks of the sharpe ratio expected returns and volatilities are unknown quantities that must be estimated statistically and are therefore subject to estimation error this raises the natural question how accurately are sharpe ratios measured to address this question i derive explicit expressions for the statistical distribution of the sharpe ratio using standard asymptotic theory under several sets of assumptions for the return generating process independently and identically distributed returns stationary returns and with time aggregation i show that monthly sharpe ratios cannot be annualized by multiplying by 12 except under very special circumstances and i derive the correct method of conversion in the general case of stationary returns in an illustrative empirical example of mutual funds and hedge funds i find that the annual sharpe ratio for a hedge fund can be overstated by as much as 65 percent because of the presence of serial correlation in monthly returns and once this

animal spirits financial crises and persistent unemployment this article uses a rational expectations model with multiple equilibrium unemployment rates to explain financial crises the model has equilibria where asset prices are unbounded above i argue that this is an important feature of any rational agent explanation of a financial crisis since for the expansion phase of the crisis to be rational investors must credibly believe that asset prices could keep increasing forever with positive probability i explain the sudden crash in asset prices that precipitates a financial crisis as a large shock to expectations that leads to a permanent increase in the unemployment rate

an application of models of speculative behaviour to oil prices abstract we estimate three different models of speculative behaviour using oil price data our findings provide support for the claim by phillips and yu 2011 and gilbert 2010 that a bubble in oil prices existed for a short period in 2008

exchange rate variability and wage formation in open economies abstract exchange rate variability is shown to influence wage formation in open economies with strong unions increased exchange rate variability may thus increase real and product wages and lower employment hence a stable and predictable exchange rate policy may have some gain

capital market equilibrium with externalities production and heterogeneous agents abstract the paper studies general equilibrium in an economy with externalities production and heterogeneous agents the model developed builds on brock brock w a 1982 asset prices in a production economy in mccall j j ed the economics of information and uncertainty university of chicago press chicago pp 1 43 and merton merton r c 1987 a simple model of capital market equilibrium with incomplete information journal of finance 42 483 510 it involves both a stock market and a market for loans together with negative externalities produced by a subset of firms importantly the technological production structure of the firms is reflected in the properties of the shares traded in the stock market agents are heterogeneous in their financial choices potentially discriminating against the firms producing a negative externality the model sheds light on the utility costs of the discriminating behavior and on the impact on the price of the stock issued by the firm which is responsible for the externality the model is used to study the factors which may magnify or reduce the impact of discrimination a set of discriminated firms may be seriously affected only if the discriminating investors command a large portion of overall wealth and or they do not represent important diversification instruments the model can be applied to understanding the effects of socially responsible investment whereby investors discriminate against companies belonging to some sectors which are perceived as socially dangerous or unethical

a neoclassical model of unemployment and the business cycle this paper investigates a general equilibrium model of unemployment and the business cycle in which specialization of labor plays a key role a rational expectations equilibrium with fully flexible wages and prices can exhibit unemployment in which the marginal product of employed workers exceeds the reservation wage of those who are without jobs workers are unemployed either because they are in the process of relocating for a better job or because they are waiting for conditions in the depressed sector to improve moreover seemingly small disruptions in the supplies of primary commodities such as energy could be the source of fluctuations in aggregate employment and can exert surprisingly large effects on real output

expected gain loss pricing and hedging of contingent claims in incomplete markets by linear programming abstract we analyze the problem of pricing and hedging contingent claims in the multi period discrete time discrete state case using the concept of a gain loss ratio opportunity pricing results somewhat different from but reminiscent of the arbitrage pricing theorems of mathematical finance are obtained our analysis provides tighter price bounds on the contingent claim in an incomplete market which may converge to a unique price for a specific value of a gain loss preference parameter imposed by the market while the hedging policies may be different for different sides of the same trade the results are obtained in the simpler framework of stochastic linear programming in a multi period setting and have the appealing feature of being very simple to derive and to articulate even for the non specialist they also extend to markets with transaction costs

dynamic portfolio choice and asset pricing with narrow framing and probability weighting this paper shows that the framework proposed by barberis and huang 2009 to incorporate narrow framing and loss aversion into dynamic models of portfolio choice and asset pricing can be extended to also account for probability weighting and for a value function that is convex on losses and concave on gains we show that the addition of probability weighting and a convex concave value function reinforces previous applications of narrow framing and cumulative prospect theory to understanding the stock market non participation puzzle and the equity premium puzzle moreover we show that a convex concave value function generates new wealth effects that are consistent with empirical observations on stock market participation

oil and energy price volatility it is commonly believed that since the 1973 oil crisis oil and energy prices have been more volatile than other commodity prices this study examines monthly producer prices for thousands of products over the period january 1945 through august 2005 the results show that crude oil refined petroleum and natural gas prices are more volatile than prices for about 95 of products sold by domestic producers relative to crude commodities however crude oil prices are currently more volatile than about 65 of other products and oil price volatility first exceeded the median for crude commodities following the 1986 drop in oil prices

statistical estimation and moment evaluation of a stochastic growth model with asset market restrictions abstract this paper estimates the parameters of a stochastic growth model with asset market and contrasts the model s moments with moments of the actual data we solve the model through log linearization along the line of campbell 1994 journal of monetary economics 33 3 463 and estimate the model without and with asset pricing restrictions as asset pricing restrictions we employ the riskfree interest rate and the sharpe ratio to estimate the parameters we employ as in semmler and gong 1996a journal of economics behavior and organization 30 301 a ml estimation the estimation is conducted through the simulated annealing we introduce a diagnostic procedure which is closely related to watson 1993 journal of political economy 101 6 1011 and diebold et al 1995 technical working paper no 174 national burea of economic research to test whether the second moments of the actual macroeconomic time series data are matched by the model s time series several models are explored the overall results are that sensible parameter estimates may be obtained when the actual and computed riskfree rate is included in the moments to be matched the attempt however to include the sharpe ratio as restriction in the estimation does not produce sensible estimates the paper thus shows by employing statistical estimation techniques that the baseline real business cycle rbc model is not likely to give correct predictions on asset market pricing when parameters are estimated from actual time series data

on the adjustment speed of smes to their optimal capital structure the aim of this paper is to analyse the speed of adjustment of small and medium sized enterprises smes to the target leverage by applying a system gmm technique to spanish panel data collected during the period 1995 2005 we estimate a partial adjustment model in which both target leverage and speed of adjustment are simultaneously endogenized we provide empirical evidence on the determinants of target leverage and the speed of adjustment more specifically the rate of financial flexibility growth opportunities and size are positively related to the speed of adjustment whereas the distance to the optimal ratio of debt shows a negative impact our findings demonstrate that in terms of sample mean a high percentage of spanish smes adjust rationally to their target additionally the smes analysed appeared to be over levered and fairly motivated to adjust annual adjustment speed 26

technological competition uncertainty and oligopoly abstract in an oligopoly context the present technological choice of a firm which expects to receive private revelant information just prior to the uncertain market stage has both a flexibility value and a strategic commitment value in contrast to some common wisdom ideas we provide a natural two stage competition framework in which an increase in uncertainty always raises the commitment value of the technological choice of the firm and may decrease its flexibility value when the increased uncertainty takes the form of more variable beliefs the first result tends to reinforce therefore the findings of the strategic commitment literature under certainty

the relationship between crude oil spot and futures prices cointegration linear and nonlinear causality the present study investigates the linear and nonlinear causal linkages between daily spot and futures prices for maturities of one two three and four months of west texas intermediate wti crude oil the data cover two periods october 1991 october 1999 and november 1999 october 2007 with the latter being significantly more turbulent apart from the conventional linear granger test we apply a new nonparametric test for nonlinear causality by diks and panchenko after controlling for cointegration in addition to the traditional pairwise analysis we test for causality while correcting for the effects of the other variables to check if any of the observed causality is strictly nonlinear in nature we also examine the nonlinear causal relationships of vecm filtered residuals finally we investigate the hypothesis of nonlinear non causality after controlling for conditional heteroskedasticity in the data using a garch bekk model whilst the linear causal relationships disappear after vecm cointegration filtering nonlinear causal linkages in some cases persist even after garch filtering in both periods this indicates that spot and futures returns may exhibit asymmetric garch effects and or statistically significant higher order conditional moments moreover the results imply that if nonlinear effects are accounted for neither market leads or lags the other consistently videlicet the pattern of leads and lags changes over time

do capm results hold in a dynamic economy a numerical analysis in this research we use the projection method reported by judd to find numerical solutions to the euler equations of a stochastic dynamic growth model the mode1 that we solve is brock s asset pricing model for a variety of parameterizations of the production functions using simulated data from the model conjectures which are not analytically tractable can be verified we show that the market portfolio is mean variance efficient in this dynamic context we also show a result that is not available from the static capm theory the efficient frontier shifts up and down over the business cycle

pitfalls in testing for explosive bubbles in asset prices a number of studies e g robert j shiller 1981 olivier j blanchard and mark watson 1982 kenneth d west 1988 have argued that dividend and stock price data are not consistent with the market fundamentals hypothesis in which prices are given by the present discounted values of expected dividends these results have often been construed as evidence for the existence of bubbles or fads related arguments have been made with respect to gold bonds and foreign exchange a major problem with such arguments e g james hamilton and charles whiteman 1985 is that apparent evidence for bubbles can be reinterpreted in terms of market fundamentals that are unobserved by the researcher behzad t diba and herschel i grossman 1984 1988b and hamilton and whiteman 1985 have recommended the alternative strategy of testing for rational bubbles by investigating the stationarity properties of asset prices and observable fundamentals 1 in essence the argument for equities is that if stock prices are not more explosive than dividends then it can be concluded that rational bubbles are not present since they would generate an explosive component to stock prices 2 using unit root tests autocorrelation patterns and cointegration tests to implement this procedure diba and grossman 1988b p 529 state that the analysis supports the conclusion that stock prices do not contain explosive rational bubbles this paper shows that the above battery of tests is in fact unable to detect an important class of rational bubbles the point is demonstrated by constructing rational bubbles that appear to be stationary when unitroot tests are applied even though they are explosive in the relevant sense simulations show that when such bubbles are present stock prices will not appear to be more explosive than dividends on the basis of these tests even though the bubbles are substantial in magnitude and volatility the presence of rational bubbles in actual stock prices thus remains an open question

active stabilization policy and uninsurable risks abstract active demand management policies may have positive welfare effects through the implicit social insurance provided by stabilizing wrt to uninsurable risks the present paper presents an intertemporal general equilibrium model for an economy with a capital market imperfection and shows that monetary policy is effective and that there is a positive welfare effect of an active stabilization policy the welfare effect arises via a reduction of risk premia in wages