what explains household stock holdings abstract this is an empirical study of the determinants of stock holdings using data from the us survey of consumer finances from 1992 to 2001 there is a great heterogeneity in the way households form their portfolios stock ownership is positively correlated with various measures of wealth age retirement savings and having sought financial advice it is negatively correlated with holdings of alternative risky investments such as investments in private businesses and with the willingness to undertake non financial investments in the future while we can predict reasonably well who holds stocks we have less predictive power about the share of stocks owned by those who hold positive amounts

longevity risk subjective survival expectations and individual saving behavior abstract we provide evidence of individuals awareness of longevity risk the uncertainty about future survival probabilities based on subjective survival expectations elicited in the survey of health ageing and retirement in europe share and matching data on longevity risk from the human mortality database we find a positive relationship between the forecast dispersion in subjective survival estimates and longevity risk which indicates that individuals are to some extent aware of longevity risk our analysis of savings behavior shows that the dispersion in survival estimates is primarily explained by individuals disagreeing on the survival probability and not by their true awareness of the underlying uncertainty individuals do not save more on average when faced with longevity risk although theory suggests they should

more mortgages lower growth in newly collected data on 46 economies over 1990 2011 we show that financial development since 1990 was mostly due to growth in credit to real estate and other asset markets which has a negative growth coefficient we also distinguish between growth effects of stocks and flows of credit we find positive growth effects for credit flows to nonfinancial business but not for mortgage and other asset market credit flows by accounting for the composition of credit stocks and for the effect of credit flows we explain the insignificant or negative growth effects of financial development in recent times what was true in the 1960s 1970s and 1980s when the field of empirical credit growth studies blossomed is no longer true in the 1990s and 2000s new bank lending is not primarily to nonfinancial business and financial development may no longer be good for growth these trends predate the 2008 crisis they prompt a rethink of the role of banks in the process of economic growth jel e44 o16 o40 c33

ramsey optimality and a regulatory algorithm for optimal pricing by regulated multiproduct firms abstract this paper describes in a general equilibrium framework an algorithm which determines ramsey optimal prices for a regulated multiproduct monopoly

pension regulation and the market value of pension liabilities a contingent claims analysis using parisian options abstract we analyze the market consistent valuation of pension liabilities in a contingent claim framework whereby a knock out barrier feature is applied to capture early regulatory closure of a pension plan we investigate two cases which we call immediate closure procedure and delayed closure procedure in an immediate closure procedure when the assets value hits the regulatory boundary the pension plan is terminated immediately whereas in a delayed closure procedure a grace period is given to the pension fund for reorganization and recovery before premature closure is executed the framework is then used to construct fair pension deals furthermore we provide rules for deriving the optimal recovery period in pension regulation using utility analysis and interconnect the recovery period to the regulatory liquidation probability

debt deleveraging and the liquidity trap a fisher minsky koo approach in this paper we present a simple new keynesian style model of debt driven slumps that is situations in which an overhang of debt on the part of some agents who are forced into rapid deleveraging is depressing aggregate demand making some agents debt constrained is a surprisingly powerful assumption fisherian debt deflation the possibility of a liquidity trap the paradox of thrift a keynesiantype multiplier and a rationale for expansionary fiscal policy all emerge naturally from the model we argue that this approach sheds considerable light both on current economic difficulties and on historical episodes including japan s lost decade now in its 18th year and the great depression itself

time frequency characterization of the u s financial cycle despite an increase in research motivated by the global financial crisis of 2007 08 empirical studies on the financial cycle are rare compared to those on the business cycle this paper adds some new evidence to this scarce literature by using a different empirical methodology wavelet analysis to extract financial cycles from the data our results confirm that the u s financial cycle is much longer than the business cycle but we do not find strong evidence supporting the view that the financial cycle has lengthened during the great moderation period

the longevity annuity an annuity for everyone as of 2005 u s individuals had an estimated 7 4 trillion invested in iras and employer sponsored retirement accounts many retirees will thus face the difficult problem of turning a pool of assets into a stream of retirement income purchasing an immediate annuity is a common recommendation for retirees trying to maximize retirement spending the vast majority of retirees however are unwilling to annuitize all their assets this research demonstrates that a longevity annuity which is distinct from an immediate annuity in that payouts begin late in retirement is optimal for retirees unwilling to fully annuitize for a typical retiree allocating 10 15 percent of wealth to a longevity annuity creates spending benefits comparable to an allocation to an immediate annuity of 60 percent or more

the impact of risk regulation on price dynamics most financial risk regulations assume that asset returns are exogenous where risk is estimated from historical data this assumption fails to take into account the feedback effect of trading decisions on prices we investigate the consequences of risk constrained trading by means of simulations of a general equilibrium model with a value at risk constraint and compare the results to the case when risk constraints are not present prices are lower on average in the presence of risk regulation while volatility is higher risk regulation may have the perverse effect of exacerbating price fluctuations

asset allocation and location over the life cycle with investment linked survival contingent payouts abstract this paper shows how survival contingent investment linked payouts can enhance investor wellbeing in the context of a portfolio choice model which integrates uninsurable labor income and asymmetric mortality expectations in exchange for illiquidity these products provide the consumer with access to mutual fund style portfolio choice as well as the survival credit generated from pooling mortality risk our model generates optimal asset location patterns indicating how much to hold in liquid versus illiquid survival contingent payouts over the lifetime and also asset allocation paths showing how to invest in stocks versus bonds we show that the investor who moves her money out of liquid saving into survival contingent assets gradually from middle age to retirement and beyond will enhance her welfare by as much as 50 the results are robust to the introduction of uninsurable consumption shocks in housing expenses income flows during the worklife and retirement sudden changes in health status and medical expenses

zombie lending and depressed restructuring in japan this paper explores the role that misdirected bank lending played in prolonging the japanese macroeconomic stagnation that began in the early 1990s the investigation focuses on the wide spread practice of japanese banks of continuing to lend to otherwise insolvent firms we docu ment the prevalence of this forbearance lending and show its distorting effects on healthy firms that were competing with the impaired firms the paper by hoshi 2000 was the first to call attention to this phenomenon and its ramifi

leverage and the central banker s put among the many unusual aspects of the ongoing financial crisis is the unprecedented provision of backstop liquidity by central banks around the world the federal reserve alone had committed 4 400 billion by mid novem ber 2008 the fed funds rate is almost equal to zero these are extraordinary numbers this paper establishes a formal relationship between the recent monetary developments and the trends in private leverage and its structure over the last few years some traditional insti tutions for example broker dealers have relied more and more on markets securitization money market for their funding some banks have also increased their dependence on mar kets the standard illustration is northern rock a uk mortgage bank which prior to its bailout relied on short term wholesale markets for 75 percent of its funding a second factor contributing to the reliance on wholesale markets is the overall shift from a bank based system to a market based one the expanding so called shadow banking system conduits hedge funds investment banks monolines has engaged in substantial transfor mation and unlike commercial banks could not avail itself of stable insured deposits mutual funds are under the threat of redemptions and may well face liquidity shortages as well adding subprime borrowers who are heavily dependent on high housing prices and for those with adjustable rate mortgages arms on low short term interest rates and highly lever

optimal portfolio choice for long horizon investors with nontradable labor income this paper examines how risky labor income and retirement affect optimal portfolio choice with idiosyncratic labor income risk the optimal allocation to stocks is unambiguously larger for employed investors than for retired investors consistent with the typical recommendations of investment advisors increasing idiosyncratic labor income risk raises investors willingness to save and reduces their stock portfolio allocation towards the level of retired investors positive correlation between labor income and stock returns has a further negative effect and can actually reduce stockholdings below the level of retired investors financial advisors typically recommend that their customers invest more in stocks than in safe assets when they are working and to shift their investments towards safe assets when they retire jagannathan and kocherlakota 1996 malkiel 1996 by contrast the standard academic models of portfolio choice merton 1969 1971 samuelson 1969 show that retirement is irrelevant for portfolio decisions if investment opportunities are constant and human capital is tradable in this case the fraction of wealth optimally invested in risky assets should be constant over the lifetime of an individual recent research building on the pioneering work by merton 1971 shows that time varying investment opportunities result in portfolio rules with an intertemporal hedging component whose magnitude depends on the investment horizon of the investor kim and omberg 1996 balduzzi and lynch 1997 brennan schwartz and lagnado 1997 brandt 1999 campbell and viceira 1999 2001 barberis 2000 with time variation in investment opportunities retirement and death play an instrumental role as events that exogenously fix the individual s investment horizon more importantly retirement also marks the time at which individuals stop working and thereafter must live off their lifetime savings and possibly transfers from this perspective retirement matters for portfolio choice

money in a theory of banking we introduce money in a model of banking in order to examine how open market operations can affect aggregate bank lending and output we see two important ways changes in money supply affect the banking system first by changing prices and interest rates it affects the wealth of demanders of real liquidity and thus the equilibrium production of liquid assets aggregate output and the health of the banking system second it changes the value of money as a means of payment and thus the attractiveness of moving from deposits to currency the demand for financial liquidity again this impacts the health of the banking system and thus bank lending and aggregate output we use this understanding to see how changes in money supply can create alleviate or be ineffective in banking crises

sudden stops and phoenix miracles in emerging markets a decade has passed since the salvos from mexico s tequila crisis of 1994 1995 echoed around the financial world since then many more crises have taken place in emerging market economies ems furthermore crises have tended to bunch together bringing to the forefront the systemic nature of these events true every new crisis has its own idiosyncratic features but useful policy lessons must be derived from robust empirical regularities this is the research strategy we have pursued in the last few years we will report on two types of regularities that strike us as highly robust across em crises a sudden stops of capital inflows and b phoenix miracles a sudden stop is a sharp fall in capital inflows relative to their past trajectory sudden stops are not a common feature in developed economies and display a large degree of temporal bunching suggesting that global capital market turmoil acts as a coordinating factor external to ems as shown in section i however balance sheet effects namely the interaction of large changes in the real exchange rate during sudden stops and liability dollarization i e foreign exchange denominated debts are key in influencing the likelihood of a sudden stop thus even though the initial shock is in principle exogenous to the economy whether or not it materializes into a sudden stop depends on domestic financial vulnerabilities on the other hand a phoenix miracle is defined as a case in which output recovers relatively quickly from a sharp collapse with virtually no recovery in credit or capital inflows and a very weak recovery in investment hence the reference to the mythical bird rising from the ashes the existence of phoenix like recoveries suggests that financial frictions play a key role in pushing economies to the abyss from which in some way or another they can crawl back to safe ground by means less than apparent to the conventional observer looking for standard fundamentals and thus may appear miraculous interestingly the great depression of the 1930s shares some of the key features of phoenix miracles in ems but shows salient differences as well that suggest nominal labor market rigidities are not crucial in explaining output collapse in ems understanding these regularities could and we believe does shed light on policies aimed at preventing crises and attenuating their effects

health and mortality delta assessing the welfare cost of household insurance choice we develop a pair of risk measures health and mortality delta for the universe of life and health insurance products a life cycle model of insurance choice simplifies to replicating the optimal health and mortality delta through a portfolio of insurance products we estimate the model to explain the observed variation in health and mortality delta implied by the ownership of life insurance annuities including private pensions and long term care insurance in the health and retirement study for the median household aged 51 to 57 the lifetime welfare cost of market incompleteness and suboptimal choice is 3 2 of total wealth

monetary analysis the equilibrium method and keynes s general theory compared with the work of his contemporaries keynes s general theory represented a radical change in theoretical method from sequence analysis to the method of equilibrium the nature of this change is discussed together with its implications for the substance of keynes s message and for the subsequent development of macroeconomics

valuation of mortality risk via the instantaneous sharpe ratio applications to life annuities we develop a theory for valuing non diversifiable mortality risk in an incomplete market by assuming that the company issuing a mortality contingent claim requires compensation for this risk in the form of a pre specified instantaneous sharpe ratio we apply our method to value life annuities one result of our paper is that the value of the life annuity is identical to the upper good deal bound of cochrane and saa requejo 2000 beyond arbitrage good deal asset price bounds in incomplete markets journal of political economy 108 79 119 and of bjork and slinko 2006 towards a general theory of good deal bounds review of finance 10 221 260 applied to our setting a second result of our paper is that the value per contract solves a linear partial differential equation as the number of contracts approaches infinity one can represent the limiting value as an expectation with respect to an equivalent martingale measure and from this representation one can interpret the instantaneous sharpe ratio as an annuity market s price of mortality risk

portfolio choice and mortality contingent claims the general hara case abstract we solve a portfolio choice problem that includes mortality contingent claims and labor income under general hara preferences our contribution beyond existing literature is to i focus on the covariance between shocks to human capital and financial capital to ii model the utility of a family with basic needs and iii include life insurance and pension annuity claims in one unified life cycle model our solution employs a similarity reduction mapping which reduces the two dimensional hjb equation into one dimension this allows for the implementation of a quick numerical scheme and when shocks to human capital and financial capital are perfectly correlated a closed form expression is obtained as a special case

good bye financial repression hello financial crash some unintended consequences of financial liberalization in latin america are analyzed in this paper intrinsic imperfectious in financial markets and the policy dilemmas they pose are reviewed first the stylized facts of southern cone experiments in financial liberization are then presented alternative ways of organlzing domestic capital markets under latin american conditions are discussed and an eclectic reform mongering program is proposed

the financial cycle and macroeconomics what have we learnt abstract it is high time we rediscovered the role of the financial cycle in macroeconomics in the environment that has prevailed for at least three decades now it is not possible to understand business fluctuations and the corresponding analytical and policy challenges without understanding the financial cycle this calls for a rethink of modelling strategies and for significant adjustments to macroeconomic policies this essay highlights the stylised empirical features of the financial cycle conjectures as to what it may take to model it satisfactorily and considers its policy implications in the discussion of policy the essay pays special attention to the bust phase which is less well explored and raises much more controversial issues

life cycle asset allocation with annuity markets abstract this paper derives the optimal consumption and portfolio choice pattern over the life cycle for households facing uninsurable labor income risk ruin risk stochastic capital markets and uncertain lifetime our model posits a dynamic utility maximizer with crra and epstein zin preferences who has access to liquid stocks bonds and illiquid life annuities we show that a considerable fraction of wealth is gradually annuitized until retirement and beyond to skim the mortality credit the remaining liquid wealth is mainly invested in stocks to compensate for riskless investment in life annuities the model allows us to assess the economic importance of common explanations for the empirically low annuity demand by analyzing participations rates annuitization fractions and welfare effects

uncertainty resolution and the timing of annuity purchases abstract this paper considers the question of why the annuity market is thin a model is presented in which consumers have the option of purchasing annuities before discovering their survival probability they can then recontract the initial choice after the resolution of this form of uncertainty it is shown that consumers purchase insurance against their own survival probability type at a very young age and do not undertake further transactions this characterization is then used to analze the effects of introducing future income uncertainty and to investigate the trade off between old age insurance motive and portfilio flexibility

behavioral obstacles in the annuity market as baby boomers enter retirement they will look to the investment industry for ways to generate income from accumulated savings why most retirees do not purchase longevity insurance in the form of lifetime annuities is a long standing puzzle mental accounting and loss aversion can explain the unpopularity of annuities by framing them as risky gambles where potential losses loom larger than potential gains moreover behavioral anomalies can explain the prevalence of period certain annuities which guarantee a minimum number of payouts finally investors may prefer longevity annuities purchased today to begin payouts in the future to immediate annuities because investors overweight the small probability of living long enough to receive large future payouts

effective macroprudential policy cross sector substitution from price and quantity measures macroprudential policy is increasingly being implemented worldwide key questions are its effectiveness in influencing bank credit and substitution effects beyond banking our results confirm the expected effects of macroprudential policies on bank credit both for advanced economies and emerging market economies but results also confirm substitution effects towards non bank credit especially in advanced economies reducing the policies effect on total credit quantity restrictions are particularly potent in constraining bank credit but also cause the strongest substitution effects policy implications indicate a need to extend macroprudential policy beyond banking especially in advanced economies

efficient portfolios when housing needs change over the life cycle abstract we address the issue of the efficiency of household portfolios in the presence of housing risk we treat housing stock as an asset and rents as a stochastic liability stream over the life cycle households can be short or long in their net housing position efficient financial portfolios are the sum of a standard markowitz portfolio and a housing risk hedge term that multiplies net housing wealth our empirical results show that net housing plays a key role in determining which household portfolios are inefficient the largest proportion of inefficient portfolios obtains among those with positive net housing who should invest more in stocks

adverse selection in insurance markets policyholder evidence from the u k annuity market in this paper we investigate the importance of adverse selection in insurance markets we use a unique data set consisting of all annuity policies sold by a large u k insurance company since the early 1980s to analyze mortality differences among individuals who purchased different types of policies we find systematic relationships between ex post mortality and annuity policy characteristics such as whether the annuity will make payments to the estate in the event of an untimely death and whether the payments from the annuity rise over time these mortality patterns are consistent with the presence of asymmetric information in the annuity market we find no evidence of substantive mortality differences however across annuities of different size even though models of insurance market equilibrium with asymmetric information would predict such differences we also find that the pricing of various features of annuity contracts is consistent with the self selection patterns we find in mortality rates our results therefore suggest that selection may occur across many specific features of insurance contracts and that the absence of selection on one contract dimension does not preclude its presence on others this highlights the importance of considering the detailed features of insurance contracts when testing theoretical models of asymmetric information

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

trilemma dilemma and global players abstract this paper investigates the debate between the mundellian trilemma and the dilemma overall the global financial cycle magnifies the binding effect of financial openness on monetary policy autonomy and reduces the effectiveness of the floating exchange rate regime in isolating the domestic economy against financial pressures i provide empirical evidence that the trilemma does not morph into a dilemma furthermore the sensitivity to the global financial cycle depends more on the presence of global investors and global players than on the fluctuations of these financial forces

dynamic portfolio choice with deferred annuities abstract we derive the optimal life cycle portfolio choice and consumption pattern for households facing uncertain labor income risky capital market and mortality risk in addition to stocks and bonds the households have access to deferred annuities deferred payout life annuities are financial contracts providing life long income to the annuitant after a specified period of time conditional on survival we find that deferred annuities play an important role in household portfolios and generate significant welfare gains households with high benefits from state pensions moderate risk aversion and moderate labor income risk purchase deferred annuities from age 40 and gradually increase their portfolio share at retirement deferred annuities account for 78 of total financial wealth households with low state pensions and high labor income risk purchase more annuities and earlier uncertainty with respect to future mortality rates has the same effect i e household hedge against longevity risks using deferred annuities

austerity and private debt this study provides empirical evidence that the costs of austerity crucially depend on the level of private indebtedness in particular fiscal consolidations lead to severe contractions when implemented in high private debt states contrary fiscal consolidations have no significant effect on economic activity when private debt is low these results are robust to alternative definitions of private debt overhang the composition of fiscal consolidations and controlling for the state of the business cycle and government debt overhang i show that deterioration in household balance sheets is important to understand private debt dependent effects of austerity

labor supply flexibility and portfolio choice in a life cycle model abstract this paper examines the effect of the labor leisure choice on portfolio and consumption decisions over an individual s life cycle the model incorporates the fact that individuals may have considerable flexibility in varying their work effort including their choice of when to retire given this flexibility the individual simultaneously determines optimal levels of current consumption labor effort and an optimal financial investment strategy at each point in his life cycle we show that labor and investment choices are intimately related the ability to vary labor supply ex post induces the individual to assume greater risks in his investment portfolio ex ante

measuring business cycle time the business cycle analysis of arthur f burns and wesley c mitchell and the national bureau of economic research presumed that aggregate economic variables evolve on a time scale defined by business cycle turning points rather than by months or quarters do macroeconomic variables appear to evolve on an economic rather than a calendar time scale evidence presented here suggests that they do however the estimated economic time scales are only weakly related to business cycle time scales providing evidence against the view underlying traditional business cycle analysis copyright 1987 by university of chicago press

fiscal policy in good times and bad in the 1980s several countries with large government debt or deficit implemented substantial and in some cases drastic deficit cuts contrary to widespread expectations in many cases private consumption boomed rather than contracted this paper shows that in times of fiscal stress shocks to government revenues and especially expenditure have very different effects on private consumption than in normal times

unnatural selection perverse incentives and the misallocation of credit in japan we examine the misallocation of credit in japan associated with the perverse incentives faced by banks to provide additional credit to the weakest firms firms are more likely to receive additional bank credit if they arein poor financial condition because troubled japanese banks have an incentive to allocate credit to severely impaired borrowers in order to avoid the realization of losses on their own balance sheets this evergreening behavior is more prevalent among banks that have reported capital ratios close to the required minimum and is compounded by the incentives arising from extensive corporate affiliations

explaining and forecasting bank loans good times and crisis abstractthis article aims to develop a parsimonious model to explain and forecast bank loans to nonfinancial companies during calm periods as well as in situations of financial turmoil it focuses on the french context over a period including financial banking and sovereign debt crises theoretical views and intuitions led us to gauge the marginal informational content of a large set of leading indicators in var and vecm models and to investigate potential nonlinearity in credit dynamics in accordance with firms and banks balance sheet effects the growth rate of equity prices appears to be one of the most interesting leading indicator as well as a significant threshold variable for explaining regime switching however it appears difficult to accurately predict the right credit dynamics regimes a simple var model finally performs better

annuitization and asset allocation this paper examines the optimal annuitization investment and consumption strategies of a utility maximizing retiree facing a stochastic time of death under a variety of institutional restrictions we focus on the impact of aging on the optimal purchase of life annuities which form the basis of most defined benefit pension plans due to adverse selection acquiring a lifetime payout annuity is an irreversible transaction that creates an incentive to delay under the institutional all or nothing arrangement where annuitization must take place at one distinct point in time i e retirement we derive the optimal age at which to annuitize and develop a metric to capture the loss from annuitizing prematurely in contrast under an open market structure where individuals can annuitize any fraction of their wealth at anytime we locate a general optimal annuity purchasing policy in this case we find that an individual will initially annuitize a lump sum and then buy annuities to keep wealth to one side of a separating ray in wealth annuity space we believe our paper is the first to integrate life annuity products into the portfolio choice literature while taking into account realistic institutional restrictions which are unique to the market for mortality contingent claims

budgetary risks from real estate and stock markets fiscal revenues and government expenditures are affected by asset price changes in ways that are not accounted for by standard cyclical adjustment methods revenues are influenced by capital gains and turnover taxation as well as by output changes determined by the effect of wealth changes on consumption and investment and outlays may also be affected if collapsing asset prices prompt fiscal authorities to bail out private sector balance sheet problems we point out that these effects can be asymmetric resulting in deficit and debt biases and we find support for this phenomenon in panel estimates for a sample of 20 industrialized countries over 1982 2002 the estimated coefficients indicate that 30 40 of the dramatic early 1990s fiscal balance deteriorations in the uk and sweden was due to asset price effects with a particularly relevant role for real estate price changes if financial markets experience boom bust cycles prudent management of fiscal windfalls in boom phases is needed to ensure fiscal and financial sustainability in bust phases and budgetary rules may need to account explicitly for a separate role of asset price related effects felix eschenbach and ludger schuknecht

new evidence on the money s worth of individual annuities this paper presents new information on the expected present discounted value of payouts on individual life annuities the annuity we examine is the single premium immediate life annuity an insurance product that pays out a nominal level sum as long as the covered person lives in exchange for an initial lump sum premium this annuity offers protection against the risk of someone outliving his saving given uncertainty about longevity for reasonable estimates of behavioral parameters we calculate that individual annuities are currently priced so that retirees without bequest motives should find these policies of substantial value in configuring their portfolios to smooth retirement consumption we also find that the expected present discounted value of payouts relative to the initial cost of the annuity has increased over the last decade these findings bear on the policy debate regarding the role of individual choice and self reliance in retirement planning this abstract was borrowed from another version of this item