proper risk aversion on introduit et on etudie une condition comportementale significative sur les fonctions d utilite pour les richesses qui signifie qu une loterie indesirable ne peut jamais etre rendue desirable par la presence d une loterie indesirable independante

a simple asset pricing model with heterogeneous agents uninsurable labor income and limited stock market participation abstract in this paper we study a simple two period asset pricing model to understand the implications of uninsurable labor income risk and or borrowing constraints limited stock market participation heterogeneous labor income volatilities and heterogeneous preferences we appraise the performance of each of these in matching moments of asset returns to the data and show that limited stock market participation generates a significantly large equity premium we also show that the distribution of wealth between stock market participants and non participants plays an important role in asset pricing and that the effect of borrowing constraints on asset returns are similar to that of limited participation finally we discuss the practical implications of our investigation providing an appraisal of ongoing changes in asset returns

risk and return in an equilibrium apt application of a new test methodology abstract we use an asymptotic principal components technique to estimate the pervasive factors influencing asset returns and to test the restrictions imposed by static and intertemporal equilibrium versions of the arbitrage pricing theory apt on a multivariate regression model the empirical techniques allow for fairly arbitrary time variation in risk premiums we find that the apt provides a better description of the expected returns on assets than the capital asset pricing model capm however some statistically reliable mispricing of assets by the apt remains

policy variability and economic growth this paper explores the effect of policy variability or frequency of regime switching on economic growth and welfare we study a one sector growth model where investment can be subsidized at either a positive rate or not subsidized at all we find that the lack of persistence in policies per se need not be welfare reducing and that it is likely to decrease growth higher variability implies more frequent changes in consumption and investment but by creating a stronger intertemporal link across regimes variability reduces the fluctuation in investment rates thus decreasing the magnitude of changes in consumption and increasing welfare

new keynesian models durable goods and collateral constraints abstract econometric evidence suggests that in response to monetary policy shocks durable and non durable spending co move positively and durable spending exhibits a much larger sensitivity to the shocks a standard two sector new keynesian model with perfect financial markets is at odds with these facts the introduction of a borrowing constraint where durables play the role of collateral assets helps in reconciling the model with the empirical evidence

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

labor income and risky assets under market incompleteness evidence from italian data abstract theory suggests that uninsurable income risk induces individuals to accumulate assets as a precautionary reserve of value most assets however bear rate of return risk that can be diversified only if every asset is traded by a large number of individuals and arbitrage is frictionless using italian micro data we find evidence of income and asset risks that affect consumption italian households are particularly well insured against illness but not against job losses moreover we detect a positive yet weak effect of asset holding on the variability of consumption streams across households

nontraded assets and the capm abstract asset pricing models that rely on the presence of non tradable assets such as human wealth to solve the equity premium puzzle have to confront the effect of decreasing absolute risk aversion rich investors who according to micro data hold the stock market and whose behavior is the one that matters at the margin for the determination of equilibrium asset prices are less risk averse ceteris paribus than the average consumer this paper highlights a channel through which the effect of decreasing absolute risk aversion can be overcome the existence of a positive correlation between the rates of return on traded assets and on the human capital of marginal investors

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

dynamic equilibrium with liquidity constraints this article studies an intertemporal economy with liquidity constrained and unconstrained individuals we use a stopping time approach to solve the finite horizonconstrained consumption portfolio problem with constant relative risk aversion and to examine the structure of equilibrium the impact of the constraint on the optimal consumption and the financing portfolio is assessed the equilibrium state price density is related to the exercise boundary of an american style contingent claim with nonlinear payoff this stopping time characterization enables us to prove the existence of an equilibrium and can be implemented numerically properties of equilibrium bond and stock returns are examined copyright 2003 oxford university press

investor heterogeneity market segmentation leverage and the equity premium puzzle abstract financial economists for the past two decades have attempted to explain why the equity premium is so high now known as the equity premium puzzle epp we model investor heterogeneity market segmentation and optimal leverage using the time separable standard power utility market completeness and ignoring transaction costs to explain the epp we explain both the epp and the related risk free rate puzzle without resorting to preference modification furthermore we show a unique interior equilibrium for the debt ratio contrary to the work by f modigliani m h miller the cost of capital corporation finance and the theory of investment american economic review 48 1958 261 297 corporate income taxes and the cost of capital american economic review 53 1963 433 443 and s c myers presidential address the capital structure puzzle journal of finance 39 1984 575 592 our simulations show the relevance of our models

representative consumer s risk aversion and efficient risk sharing rules abstract we study the representative consumer s risk attitude and efficient risk sharing rules in a single period single good economy in which consumers have homogeneous probabilistic beliefs but heterogeneous risk attitudes we prove that if all consumers have convex absolute risk tolerance so must the representative consumer we also identify a relationship between the curvature of an individual consumer s individual risk sharing rule and his absolute cautiousness the first derivative of absolute risk tolerance furthermore we discuss some consequences of these results and refinements of these results for the class of hara utility functions

wealth inequality and asset pricing in an arrow debreu exchange economy with identical agents except for their initial endowment we examine how wealth inequality affects the equilibrium level of the equity premium and the risk free rate we first show that wealth inequality raises the equity premium if and only if the inverse of absolute risk aversion is concave in wealth we then show that the equilibrium risk free rate is reduced by wealth inequality if the inverse of the coefficient of absolute prudence is concave we also prove that the combination of a small uninsurable background risk with wealth inequality biases asset pricing towards a larger equity premium and a smaller risk free rate the model of the representative consumer a la lucas 1978 failed to explain observed security prices more specifically as first stated by mehra and prescott 1985 the model predicts an equity premium that is too low and a risk free rate that is too high given the observed low variability of consumption growth a recent strand of the literature with papers by constantinides and duffie 1996 heaton and lucas 1996 and krusell and smith 1997 for example explores whether incomplete asset markets and heterogeneity among consumers can explain these puzzles constantinides and duffie 1996 in particular conclude that it is at least in principle possible to generate larger equity premia when such ingredients are introduced the aim of this paper is not to provide another explanation of the puzzles but rather to better understand the relationship between asset prices the heterogeneity of consumers wealth and the market incompleteness when markets are complete heterogeneous consumers are able to equalize their marginal rates of substitution across states and across time as shown by constantinides 1982 this implies that the equilibrium of the heterogeneous consumer economy can be duplicated by the equilibrium in a lucas economy with a representative agent this means that taking account of the heterogeneity in the population alone cannot explain why the representative agent model is rejected hansen and singleton 1982 this does not mean however that the distribution of wealth in the population for example has no effect on asset prices in general in order to understand this consider the departure from an egalitarian distribution of wealth by introducing a mean preserving transfer of endowment under decreasing absolute risk aversion poorer agents will be more risk averse whereas wealthier people will be less risk averse there is no reason a priori for that the group s attitude towards risk be unaffected by this transfer we first show that if absolute risk tolerance i e the inverse of the arrow pratt coefficient of absolute risk aversion is concave then the risk aversion of the agent with the mean wealth will be smaller than the risk aversion of the representative agent thus if an outside observer overlooks wealth inequality he consequently underestimates the aversion to risk of society this leads to

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

portfolio choice in the presence of personal illiquid projects personal projects such as a private business or the purchase of a home influence individuals portfolio choice we conduct a theoretical analysis of this influence when financial assets are required to provide liquidity to personal projects due to this liquidity consideration individuals behave in a more risk averse fashion when there is a large penalty for discontinuing or underinvesting in the final stages of the projects in addition using data from the 1995 survey of consumer finances we find that households that are saving to invest in their own businesses or in their own homes indeed have significantly safer financial portfolios a large portion of private assets are invested in personal illiquid projects these are projects that must be partly self financed and are costly to sell according to the 1995 survey of consumer finances scf residential housing and capital invested in unincorporated businesses account for 41 2 percent and 19 1 percent respectively of household wealth in this paper we study the impact of these personal illiquid projects on individuals portfolios of financial assets personal projects influence portfolio choice in two ways first financial assets can be used to provide diversification against bad outcomes of personal projects this interaction is well recognized in the literature as it emanates from standard portfolio theory second financial assets can be used to provide liquidity to personal projects when the timing of investment in these projects is important this latter interaction is the focus of our paper we show that it helps explain why individuals particularly young investors and entrepreneurs have larger than expected holdings of safe financial assets in the financial planning literature young investors are advised to hold a larger share of risky assets in their financial portfolios in order to capture the superior expected return of these assets as investors grow older they are advised to gradually reduce their holdings of risky assets jagannathan and kocherlakota 1996 show that this advice is economically sound as long as the investor s human wealth is relatively uncorrelated with stock returns

a note on labor share price markup and monetary policy abstract this paper extends kaplan and zoch s 2020 insight that the total labor share is neither solely nor inversely determined by the price markup in a medium scale dynamic stochastic general equilibrium dsge model with nondurables and durables our calibration results show that when monetary policy shocks and markup shocks are set to be positively negatively correlated monetary contraction increases decreases total labor share and price markup the total labor share is countercyclical procyclical conditional on a monetary policy shock

the effects of moral hazard on asset prices when financial markets are complete abstract this paper discusses the implications for prices and quantities of an alternative trading arrangement in kahn s 1990 economic environment with moral hazard unlike kahn s model of asset trade my model does not impose any unmotivated restrictions on short sales instead it features complete markets and publicly observable asset transactions like kahn s model my model implies that allocations are constrained pareto optimal however the implications of my model for asset prices are considerably different in particular when all agents have log utility asset prices satisfy an aggregation theorem also unlike kahn s model the model in this paper does worse than the standard representative agent model in terms of explaining the equity premium

preserving preference rankings under background risk abstract for any random vector of wealth payoffs x 1 x 2 let the random variable z be mutually independent of x 1 and x 2 with e z 0 the basic question we address in this paper is the following when can we say that x 1 z is preferred by an expected utility maximizer to x 2 z whenever x 1 is preferred to x 2 in other words when can we guarantee that the addition of an arbitrary independent background noise z will not affect the preference ranking between other risks

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

asset pricing in open economies with incomplete markets implications for foreign currency returns abstract this paper extends the incomplete markets model in constantinides and duffie 1991 asset pricing with heterogenous consumers good news and bad news manuscript university of chicago to a two country two goods framework adding another dimension to heterogeneity viz cross country heterogeneity the paper combines the heterogenous agent economy specified in constantinides and duffie with cobb douglas preferences as in cole and obstfeld 1991 commodity trade and international risk sharing how much do financial markets matter journal of monetary economics the combination of iso elastic preferences with an income process that incorporates permanent shocks that are heteroscedastic results in an equilibrium where agents do not trade both within and across countries the results on asset prices are similar to the one country one good model as in constantinides and duffie 1991 despite heterogeneity asset prices depend on aggregate endowments prices differ from those in the representative agent case on account of differences in the effective risk aversion and time preference rates effective risk aversion could be higher and the effective time preference lower compared to the complete markets case the results on portfolio choice are similar to cole and obstfeld 1991 in that agents do not trade assets across countries

international business cycles world region and country specific factors the paper investigates the common dynamic properties of business cycle fluctuations across countries regions and the world we employ a bayesian dynamic latent factor model to estimate common components in macroeconomic aggregates output consumption and investment in a 60 country sample covering seven regions of the world the results indicate that a common world factor is an important source of volatility for aggregates in most countries providing evidence for a world business cycle we find that region specific factors play only a minor role in explaining fluctuations in economic activity we also document similarities and differences across regions countries and aggregates jel f41 e32 c11 c32

stages of diversification this paper studies the evolution of sectoral concentration in relation to the level of per capita income we show that various measures of sectoral concentration follow a u shaped pattern across a wide variety of data sources countries first diversify in the sense that economic activity is spread more equally across sectors but there exists relatively late in the development process a point at which they start specializing again we discuss this finding in light of existing theories of trade and growth which generally predict a monotonic relationship between income and diversification

asset returns with transactions costs and uninsured individual risk abstract we explore whether incorporating an explicit motive for holding liquid assets within an equilibrium asset pricing model helps explain the following features of asset returns and turnover in the post war u s economy i the low risk free real interest rate ii the large spread between returns on liquid assets and stocks and iii the greater transaction velocity of liquid assets relative to stocks we introduce a demand for liquid assets by adding uninsured individual risk together with differential costs of trading securities numerical simulations attempting to match the return data generate a ratio of liquid assets to income considerably below observed levels

incomplete markets and volatility abstract this paper shows that the precautionary motive combined with asset incompleteness is a major source of volatility and indeterminacy in financial markets price fluctuations originate from agents efforts to insure themselves through time by borrowing and lending instead of shifting income across states of nature by trading risky assets a high interest rate at a future date reduces the potential for future consumption smoothing via borrowing which leads to a strong precautionary motive and a low interest rate in the current period the negative feedback between future and current rates generates fluctuations this logic is developed in spec a cara normal exchange economy with many periods and endogenous interest rates when there is an intermediate level of market incompleteness and sufficient investor impatience fluctuations in the real interest rate can be large even though the aggregate endowment is constant spec has a unique equilibrium under a finite horizon on the other hand with a finite number of infinitely lived agents there exists a robust continuum of equilibria that are neither bubbles nor sunspots journal of economic literature classification numbers c61 d52 d58 g11 g12

are people risk vulnerable we report on a within subject experiment with substantial monetary incentives designed to test whether or not people are risk vulnerable in the experiment subjects face the standard portfolio choice problem in which the investor has to allocate part of his wealth between one safe asset and one risky asset we elicit risk vulnerability by observing each subject s portfolio choice in two different contexts that differ only by the presence or absence of an actuarially neutral background risk our main result is that most of the subjects are risk vulnerable 81 chose a less risky portfolio when exposed to background risk more precisely 47 invested a strictly smaller amount in the risky asset whereas 34 were indifferent furthermore contrasting the predictions provided by competing decision theoretic models we conclude that expected utility theory best fits our experimental data this paper was accepted by uri gneezy behavioral economics

financial development growth and the distribution of income a paradigm is presented in which both the extent of financial intermediation and the rate of economic growth are endogenously determined financial intermediation promotes growth because it allows a higher rate of return to be earned on capital and growth in turn provides the means to implement costly financial structures thus financial intermediation and economic growth are inextricably linked in accord with the goldsmith mckinnon shaw view on economic development the model also generates a development cycle reminiscent of the kuznet hypothesis in particular in the transition from a primitive slow growing economy to a developed fast growing one a nation passes through a stage in which the distribution of wealth across the rich and poor widens

heterogeneity aggregate uncertainty and the short term interest rate this article analyzes the relationship between the short term interest rate and diversity i e the number of types in models with heterogeneous agents and incomplete markets the number of types needed to approximate a continuum varies across examples in all cases however the number of types has little effect on the average interest rate and consumption variability in these models the set of state variables is large because the equilibrium law of motion depends on the cross sectional wealth distribution the article shows how to solve these models numerically by approximating the distribution using moments or percentiles

equilibrium asset prices with undiversifiable labor income risk abstract in a two period lucas tree economy in which ex ante identical but ex post dissimilar agents face undiversifiable labor income risk calibrating a wrong representative agent model results in overstating the equilibrium riskfree rate and in understating the equilibrium equity premium if the utility function exhibits decreasing absolute risk aversion and decreasing absolute prudence these behavioral assumptions provide as a consequence a theoretical rationale for the often advanced conjecture that nontraded risk contributes to the solution of the riskfree rate and equity premium puzzles

risk aversion wealth and background risk we use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay for a risky security we relate this measure to consumer s endowments and attributes and to measures of background risk and liquidity constraints we find that risk aversion is a decreasing function of the endowment thus rejecting cara preferences we estimate the elasticity of risk aversion to consumption at about 0 7 below the unitary value predicted by crra utility we also find that households attributes are of little help in predicting their degree of risk aversion which is characterized by massive unexplained heterogeneity we show that the consumer s environment affects risk aversion individuals who are more likely to face income uncertainty or to become liquidity constrained exhibit a higher degree of absolute risk aversion consistent with recent theories of attitudes toward risk in the presence of uninsurable risks jel d1 d8

consumption liquidity constraints and asset accumulation in the presence of random income fluctuations recent empirical research flavin 1981 hagashi 1982 has rejected the certainty equivalent formulation of permanent income hypothesis hall 1978 these findings are often attributed to households inability to borrow completely against expected future labor income this paper is a theoretical investigation of optimal consumption behavior under risk aversion random income fluctuations and borrowing restrictions our principle objective is to establish the existence and to investigate the properties of the stationary probability distribution which characterizes the asymptotic behavior of consumption under these conditions this abstract was borrowed from another version of this item

concentrating on the fall of the labor share in this paper we discuss an explanation for the fall in share of labour in gdp based on the rise of superstar firms if globalization or technological changes advantage the most productive firms in each industry product market concentration will rise as industries become increasingly dominated by superstar firms with high profit margins and a low share of labor in firm value added and sales as the importance of superstar firms increases the aggregate labour share will fall this hypothesis suggeststhat sales will increasingly concentrate in a small number of firms and that industries where concentration rises most will have the largest declines in the labour share we find support for these predictions aggregating up micro data from the us census 1982 2012

asset pricing with jump diffusion permanent income shocks abstract by assuming that all uninsurable risk is permanent a closed form multi period multiple agent and multiple asset incomplete market asset pricing model is presented that allows for jump as well as diffusion risk to personal income

incomplete markets liquidation risk and the term structure of interest rates we analyse the term structure of interest rates in a general equilibrium model with incomplete markets borrowing constraint and positive net supply of government bonds uninsured idiosyncratic shocks generate bond trades while aggregate shocks cause uctuations in the trading price of bonds long bonds command a liquidation risk premium over short bonds because they may have to be liquidated before maturity following a bad idiosyncratic shock precisely when their resale value is low due to the simultaneous occurrence of a bad aggregate shock our framework endogenously generates limited cross sectional wealth heterogeneity among the agents despite the presence of uninsured idiosyncratic shocks which allows us to characterise analytically the shape of the entire yield curve including the yields on bonds of arbitrarily long maturities agents desire to hedge the idiosyncratic risk together with their fear of having to liquidate long bonds at unfavourable terms imply that a greater bond supply raises the level of the yield curve while an increase in the relative supply of long bonds raises its slope

the interaction between the equity premium and the risk free rate abstract the equity premium arises from the interaction between the atemporal risk premium for equity the risk free rate of intertemporal substitution and the impact of risk on the precautionary motive for saving depending on parameter values the equity premium may either be increased or reduced by the presence of undiversifiable background risk

the risk premium for equity implications for the proposed diversification of the social security fund any meaningful reform of the us social security system must deal with the system s current outstanding accumulated unfunded liabilities we model these as a once off financial liability payble tomorrow we show that if the equity premium puzzle arises from adverse selection problems which prevent risk spreading through market transactions then the government can improve the welfare of the young today by acquiring equity today to assist in financing its obligations to meet social security payments to the old tomorrow

when can expected utility handle first order risk aversion abstract expected utility functions are limited to second order conditional risk aversion while non expected utility functions can exhibit either first order or second order conditional risk aversion we extend the concept of orders of conditional risk aversion to orders of conditional dependent risk aversion we show that first order conditional dependent risk aversion is consistent with the framework of the expected utility hypothesis our theoretical result proposes new insights into economic and financial applications such as the equity premium puzzle the cost of business cycles and stock market participation our model is compared to the rank dependent expected utility model

quantitative asset pricing implications of endogenous solvency constraints we study the asset pricing implications of an economy where solvency constraints are endogenously determined to deter agents from defaulting while allowing as much risk sharing as possible we solve analytically for efficient allocations and for the corresponding asset prices portfolio holdings and solvency constraints for a simple example then we calibrate a more general model to u s aggregate as well as idiosyncratic income processes we find equity premia risk premia for long term bonds and sharpe ratios of magnitudes similar to the u s data for low risk aversion and a low time discount factor article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

distributional national accounts methods and estimates for the united states this article combines tax survey and national accounts data to estimate the distribution of national income in the united states since 1913 our distributional national accounts capture 100 of national income allowing us to compute growth rates for each quantile of the income distribution consistent with macroeconomic growth we estimate the distribution of both pretax and posttax income making it possible to provide a comprehensive view of how government redistribution affects inequality average pretax real national income per adult has increased 60 from 1980 to 2014 but we find that it has stagnated for the bottom 50 of the distribution at about 16 000 a year the pretax income of the middle class adults between the median and the 90th percentile has grown 40 since 1980 faster than what tax and survey data suggest due in particular to the rise of tax exempt fringe benefits income has boomed at the top the upsurge of top incomes was first a labor income phenomenon but has mostly been a capital income phenomenon since 2000 the government has offset only a small fraction of the increase in inequality the reduction of the gender gap in earnings has mitigated the increase in inequality among adults but the share of women falls steeply as one moves up the labor income distribution and is only 11 in the top 0 1 in 2014

the importance of the number of different agents in a heterogeneous asset pricing model abstract models with heterogeneous agents and incomplete markets often only have two types of agents to limit the computational complexity the question arises whether equilibrium models with a realistic number of types have the same implications as models with a small number of types in the asset pricing model considered in this paper several properties depend crucially on the number of types for example in the economy with only two types interest rates respond to idiosyncratic income shocks which makes it easier to smooth consumption moreover these effects can be so strong that it is possible that a relaxation of the borrowing constraint reduces an agent s utility average interest rates on the other hand are not very sensitive to the number of types

loss aversion and the term structure of interest rates this article studies how the loss averse behaviour affects the term structure of real interest rates since the pro cyclical conditional expected marginal rate of substitution implied from the us consumption data is consistent with the proposition of loss aversion we incorporate the loss averse behaviour of prospect theory into the consumption based asset pricing model motivated by the similarity between habit formation and the prospect theory utility habit formation is exploited to determine endogenously the reference point of this behavioural finance utility the highly curved characteristic of the term structure of real interest rates can thus be captured by the additional consideration of loss aversion this model also fits the downward sloping volatility of the real yield curve in the data of us treasury inflation protection securities tips moreover depending on the effective risk attitude of the representative agent with the loss averse behaviour of prospect theory our model is capable of

volatility and development why is gdp growth so much more volatile in poor countries than in rich ones we identify four possible reasons i poor countries specialize in more volatile sectors ii poor countries specialize in fewer sectors iii poor countries experience more frequent and more severe aggregate shocks e g from macroeconomic policy and iv poor countries macroeconomic fluctuations are more highly correlated with the shocks of the sectors they specialize in we show how to decompose volatility into these four sources quantify their contribution to aggregate volatility and study how they relate to the stage of development we document the following regularities first as countries develop their productive structure moves from more volatile to less volatile sectors second the level of specialization declines with development at early stages and slowly increases at later stages of development third the volatility of country specific macroeconomic shocks falls with development fourth the covariance between sector specific and country specific shocks does not vary systematically with the level of development we argue that many theories linking volatility and development are not consistent with these findings and suggest new directions for future theoretical work

idiosyncratic production risk growth and the business cycle we introduce a neoclassical growth economy with idiosyncratic production risk and incomplete markets each agent is an entrepreneur operating her own technology with her own capital stock the general equilibrium is characterized by a closed form recursion in the cara normal case incomplete markets introduce a risk premium on private equity which reduces the demand for investment as compared to complete markets the steady state can thus have both a lower capital stock due to investment risk and a lower interest rate due to precautionary savings furthermore the anticipation of high real interest rates in the future feeds back into high risk premia and low investment in the present thus slowing down convergence to the steady state our results highlight the importance of private risk premia for capital accumulation and business cycles

a note on an interpretation to consumption based capm abstract the consumption based capm pricing rule is sometimes interpreted as implying that the price of an asset with a random payoff falls short of its expected payoff if and only if the random payoff positively correlates with consumption this note demonstrates that this interpretation to c capm is not generally correct more importantly it investigates under what qualifications this intuitive interpretation still holds

a simple model of incomplete insurance the case of permanent shocks this paper constructs a simple model of incomplete insurance by introducing permanent idiosyncratic shocks into an ak type endogenous growth model as in the exchange economy of constantinides and duffie 1996 we define a no trading equilibrium using this model exploiting a simple closed form solution the paper examines several important implications including the effect of precautionary savings caused by uninsured shocks on consumption growth and asset pricing in particular on risk free rates of return the relation with representative agent models and the cross sectional consumption distribution

information and the equity premium we determine how better information aects the average equity premium in a standard representative agent exchange economy perfect information obviously eliminates the equity premium and we show that a particular kind of information about the level of future consumption always lowers the average equity premium surprisingly information must sometimes raise the average equity premium no matter what the preferences of the representative agent information purely about the volatility either of consumption or the marginal utility of consumption raises the equity premium for a wide class of preferences moreover information can raise the average equity premium by an arbitrarily large percentage while still matching important magnitudes such as average growth and the risk free rate we consider two dierent economies a two period economy with arbitrary preferences for the representative agent and an infinite horizon economy with standard additive separable ces utility with independent growth rates through time

cross country evidence on the link between volatility and growth this paper presents empirical evidence against the standard dichotomy in macroeconomics that separates growth from the volatility of economic fluctuations in a sample of ninety two countries as well as a sample of oecd countries the authors find that countries with higher volatility have lower growth the addition of standard control variables strengthens the negative relationship the authors also find that government spending induced volatility is negatively associated with growth even after controlling for both time and country fixed effects copyright 1995 by american economic association

hedging derivative securities and incomplete markets an e arbitrage approach given a european derivative security with an arbitrary payoff function and a corresponding set of underlying securities on which the derivative security is based we solve the optimal replication problem find a self financing dynamic portfolio strategy involving only the underlying securities that most closely approximates the payoff function at maturity by applying stochastic dynamic programming to the minimization of a mean squared error loss function under markov state dynamics we derive recursive expressions for the optimal replication strategy that are readily implemented in practice the approximation error or e of the optimal replication strategy is also given recursively and may be used to quantify the degree of market incompleteness to investigate the practical significance of these e arbitrage strategies we consider several numerical examples including path dependent options and options on assets with stochastic volatility and jumps