the impact of fat tails on equilibrium rates of return and term premia abstract we investigate the impact of ignoring fat tails observed in the empirical distributions of macroeconomic time series on the equilibrium implications of the consumption based asset pricing model with habit formation fat tails in the empirical distributions of consumption growth rates are modeled as a dampened power law process that nevertheless guarantees finiteness of moments of all orders this renders model implied mean equilibrium rates of return and equity and term premia finite comparison with a benchmark gaussian process reveals that accounting for fat tails lowers the model implied mean risk free rate by 20 percent raises the mean equity premium by 80 percent and the term premium by 20 percent bringing the model implications closer to their empirically observed counterparts fat tails also increase the model implied volatility of the risk free rate and the equity premium

intrinsic bubbles the case of stock prices several puzzling aspects of the behavior of united states stock prices may be explained by the presence of a specific type of rational bubble that depends exclusively on aggregate dividends the authors call bubbles of this type intrinsic bubbles because they derive all of their variability from exogenous economic fundamentals and none from extraneous factors intrinsic bubbles provide a more plausible empirical account of deviations from present value pricing than do the traditional examples of rational bubbles their explanatory potential comes partly from their ability to generate persistent deviations that appear to be relatively stable over long periods copyright 1991 by american economic association

surveys in public sector economics part i public sector production 2 shadow pricing in the public sector peter hammond professor of economics stanford university 3 regulation of public utilities and nationalized industries ingo vogelsang professor of economics boston university 4 economics of publicly provided goods and services paul hare professor of economics heriot watt university part ii distribution and welfare 5 the political economy of fiscal policy daniel ingberman and robert inman respectively assistant professor of public policy and management wharton school university of pennsylvania and professor of finance economics and public management university of pennsylvania 6 policy targetting in a new welfare framework with poverty john beath geoff lewis and david ulph both john beath and geoff lewis are lecturers in economics bristol university david ulph is professor of economics bristol university 7 the structure of income and commodity taxation christopher heady lecturer in economics university college london part iii estimation and computation 8 econometric issues in public sector economics richard blundell director of the institute for fiscal studies 9 general equilibrium computation applied to public sector issues john piggot professor of economics university of sydney with appendix by jon fuller

review essay on charles f manski s public policy in an uncertain world analysis and decisions public policy setting often involves quantitative choices with quantitative outcomes yet unqualified statements about the precise consequences of alternative choices characterize much of the policy analysis bearing on these decisions public policy in an uncertain world analysis and decisions by charles f manski characterizes and richly illustrates the nature of this unwarranted certitude it details specific constructive alternatives on which the economics profession has achieved varying degrees of consensus those in our profession charged with the education of future policy analysts should consider using it and how to round out its presentation of decision making from their own perspective jel d02 d04 d80 e61

reversing disbursement rates to estimate stationary wealth processes for endowments with recursive preferences endowments have been accused of hoarding their wealth however the theoretically ideal spending plan remains unclear and in practice endowments follow a range of rules here we derive and estimate the optimal spending plans of an infinitely lived charity or endowment with an epstein zin weil utility function given general markovian returns to wealth we analyse two special cases first where spending is a power function of last period s wealth and second where the endowment uses payout smoothing via non linear least squares we estimate the optimal spending rate and the elasticity of inter temporal substitution for an endowment with a typical diversified portfolio and for a portfolio of hedge funds in a new approach we use maximum entropy methods to characterize the returns distribution of an endowment whose spending plan conforms with the optimality condition we confirm that the estimated returns distribution is largely consistent with the optimal spending plan

a new framework integrating environmental effects into technology evaluation this study aims to propose a framework considering both economic issues and environmental effects in technology evaluation in order to provide firms decision makers a useful reference in adopting technologies that will enable them to fulfill corporate social responsibilities and get competitive advantages at the same time recently the demands for technology evaluation have increased with the flourishing development of technology licensing technology transaction or joint venture on the one hand and with the pressing needs of environmental protection for human beings sustainable development on the other hand under such conditions it thus goes without saying that firms decision makers are propelled to take into account both economic benefits and environmental effects in evaluating technologies by choosing low or nonpolluting technologies for manufacturing products although technology evaluation is not a new and emerging subject currently besetting scholars in the field of management previous research on this topic has unwittingly left behind the pressing issue of environmental effects based on this observation this study purports to develop a new framework for technology evaluation by taking both economic benefits and environmental perspectives into consideration in it we seek to demonstrate that our proposed framework will not only be a workable model but also can serve as a useful point of reference for technology appraisers and firms decision makers

on welfare frameworks and catastrophic climate risks recent theoretical work in the economics of climate change has suggested that climate policy is highly sensitive to fat tailed risks of catastrophic outcomes weitzman 2009 68 such risks are suggested to be an inevitable consequence of scientific uncertainty about the effects of increased greenhouse gas concentrations on climate criticisms of this controversial result fall into three categories the first suggests that it may be irrelevant to cost benefit analysis of climate policy the second challenges the fat tails assumption and the third questions the behavior of the utility function assumed in the result this paper analyses these critiques and suggests that those in the first two categories have formal validity but that they apply only to the restricted setup of the original result which may be extended to address their concerns they are thus ultimately unconvincing critiques in the third category are shown to be robust however they open up new ethical and empirical challenges for climate economics that have thus far been neglected how should we value catastrophes as a society i demonstrate that applying results from social choice to this problem can lead to counterintuitive results in which society values catastrophes as infinitely bad even though each individual s utility function is bounded finally i suggest that the welfare functions traditionally used in climate economics are ill equipped to deal with climate catastrophes in which population size changes drawing on recent work in population ethics i propose an alternative welfare framework with normatively desirable properties which has the effect of dampening the contribution of catastrophes to welfare

solving asset pricing models when the price dividend function is analytic we present a new method for solving asset pricing models which yields an analytic price dividend function of one state variable to illustrate our method we give a detailed analysis of abel s asset pricing model a function is analytic in an open interval if it can be represented as a convergent power series near every point of that interval in addition to allowing us to solve for the exact equilibrium price dividend function the analyticity property also lets us assess the accuracy of any numerical solution procedure used in the asset pricing literature

privatisation and liberalisation in an industry with network externalities abstract network externalities and sunk costs can make a profit maximising monopoly superior to competition even if a large number of firms can enter competition can outperform a public monopoly only if sunk costs become significantly lower

the benefit cost ratio as a decision criteria when managing catastrophes previous work has shown that when projects are non marginal it creates an interdependence among projects this implies that policies to manage catastrophes should not be evaluated in isolation but in conjunction with each other as long as relative risk aversion is sufficiently high the benefits of averting one catastrophe depend positively on the background risk created by other catastrophes this specific bias makes it possible to create upper and lower boundaries on the willingness to pay to manage catastrophes and the optimal policy these boundaries can be used to make inferences on which catastrophes should be averted and not and in which order the upper and lower boundaries depend only on the individual catastrophe s benefit cost ratio and the coefficient of risk aversion which both are easy to identify using standard economic frameworks

a simple state contingent pricing rule for complex intertemporal externalities abstract some externalities such as global warming involve complex relationships between emissions and an environmental state variable with effects over lags of uncertain length coming up with theoretically motivated and practical policy options in such cases has proven difficult deterministic intertemporal general equilibrium models yield what appear to be feasible optimal price paths but only by assuming away many key uncertainties nor do they specify how the possibility of new information should affect the policy path bayesian models allow limited uncertainty and optimal learning based on observed effects of policy changes but suggest a discouraging delay before optimal policy can be identified a full insurance model suggests that risk aversion and fat tailed probabilities of catastrophe imply an implausibly or at least impractically large risk premium implying that practical policy decisions depend so critically on uncertain parameters as to be unavoidably arbitrary this paper proposes an entirely new approach based on the observation that the situation giving rise to a complex intertemporal externality also yields an observable state variable that contains information relevant to the identification of the optimal policy path i derive a simple transformation by which the state variable can yield a good approximation to the optimal externality price i outline assumptions sufficient to yield the transformation and present numerical examples that illustrate its ability to follow linear and nonlinear first best price paths a specific application to greenhouse gases is proposed

nonlinear dynamics and stock returns simple deterministic systems are capable of generating chaotic output that mimics the output of stochastic systems for this reason algorithms have been developed to distinguish between these two alternatives these algorithms and related statistical tests are also useful in detecting the presence of nonlinear dependence in time series in this article the authors apply these procedures to stock returns and find evidence that indicates the presence of nonlinear dependence on weekly returns from the center for research in security prices value weighted index copyright 1989 by the university of chicago

on the size distribution of macroeconomic disasters confidence interval of 2 to 4 the results are robust to uncertainty about the values of the disaster probability and the equity premium and can accommodate seemingly paradoxical situations in which the equity premium may appear to be infinite

learning and climate feedbacks optimal climate insurance and fat tails we study the effect of potentially severe climate change on optimal climate change policy accounting for learning and uncertainty in the climate system in particular we test how fat upper tailed uncertainty over the temperature change from a doubling of greenhouse gases the climate sensitivity affects economic growth and emissions policy in addition we examine whether and how fast uncertainties could be diminished through bayesian learning our results indicate that while overall learning is slow the mass of the fat tail diminishes quickly since observations near the mean provide evidence against fat tails we denote as partial learning the case where the planner rejects high values of the climate sensitivity with high confidence even though significant uncertainty remains fat tailed uncertainty without learning reduces current emissions by 38 relative to certainty indicating significant climate insurance or paying to limit emissions today to reduce the risk of very high temperature changes is optimal however learning reduces climate insurance by about 50 the optimal abatement policy is strongly influenced by the current state of knowledge even though greenhouse gas ghg emissions are difficult to reverse non fat tailed uncertainty is largely irrelevant for optimal emissions policy

internal rationality imperfect market knowledge and asset prices we present a decision theoretic framework in which agents are learning about market behavior and that provides microfoundations for models of adaptive learning agents are internally rational i e maximize discounted expected utility under uncertainty given dynamically consistent subjective beliefs about the future but agents may not be externally rational i e may not know the true stochastic process for payoff relevant variables beyond their control this includes future market outcomes and fundamentals we apply this approach to a simple asset pricing model and show that the equilibrium stock price is then determined by investors expectations of the price and dividend in the next period rather than by expectations of the discounted sum of dividends as a result learning about price behavior affects market outcomes while learning about the discounted sum of dividends is irrelevant for equilibrium prices stock prices equal the discounted sum of dividends only after making very strong assumptions about agents market knowledge

large shocks small shocks and economic fluctuations outliers in macroeconomic time series summary we analyse fifteen post world war i1 us macroeconomic time series using a modified outlier identification procedure based on tsay 1988a large shocks appear to be present in all the series we examined furthermore there are three basic outlier patterns i outliers seem to be associated with business cycles 2 outliers are clustered together both over time and across series 3 there appears to be a dichotomy between outlier behaviour of real versus nominal series also after controlling for outliers much of the evidence of non linearity in many of the time series is eliminated

consumption asset pricing with stable shocks exploring a solution and its implications for mean equity returns abstract we study the consumption based asset pricing model due to lucas econometrica 46 1978 1429 the exogenous endowment sequence is modeled as a linear stochastic process driven by stable shocks in an otherwise standard framework the gaussian process emerges as a special case we derive exact analytical solutions for asset prices and returns and provide conditions under which these exist we also study the ability of the model to generate realistic values of observed mean rates of return

solving asset pricing models with stochastic volatility abstract this paper provides a closed form solution for the price dividend ratio in a standard asset pricing model with stochastic volatility the growth rate of the endowment is a first order gaussian autoregression while the stochastic volatility innovations can be drawn from any distribution for which the moment generating function exists the solution is useful in allowing comparisons among numerical methods used to approximate the nontrivial closed form the closed form solution reveals that when using perturbation methods around the deterministic steady state the approximate solution needs to be sixth order accurate in order for the parameter capturing the conditional standard deviation of the stochastic volatility process to be present

solving asset pricing models with gaussian shocks this paper provides a closed form solution for the price dividend ratio in a standard asset pricing model when the growth rate of the endowment is a first order gaussian autoregression it determines the conditions under which this solution is bounded the findings are useful in allowing comparisons among numerical methods used to approximate the nontrivial closed form the solution method is extended to accommodate multivariate and higher ordered autoregressive processes

understanding japanese csr the reflections of managers in the field of global operations this paper examines how japanese multinational companies manage corporate social responsibility csr it considers how the concept has come to be framed within japanese business which is increasingly globalized and internationally focused yet continues to exhibit strong cultural specificities the discussion is based on interviews with managers who deal with csr issues and strategy on a day to day basis from 13 multinational companies in looking at how csr practice has been adopted and adapted by japanese corporations we can begin to see what implications arise from the fact that csr is a western led concept so opening up critical questions about the future development and evolution of csr practice within a global context in being exposed to the concept of csr as practiced vigilantly in western countries japanese multinational company managers have certainly come to re evaluate aspects of business likely to need rectifying with potential concerns being gender inequalities discrepancies in employee conditions and issues over human rights and supply chains japan can be thought to be lagging behind in its understanding and adoption of csr in part because corporations do not necessarily state their policies as formally as might be expected yet by analyzing more deeply the kinds of responses gained from csr managers in japan and by placing their remarks within a broader context of japanese culture and business practices a far more subtle and revealing picture becomes apparent not least a more complex picture of the local global interaction of the frames of reference of corporate responsibility

asset pricing in a lucas fruit tree economy with the best and worst in mind this paper studies a lucas 1978 fruit tree economy under the assumption that the agents are choquet expected utility ceu rather than standard expected utility decision makers more speci cally the agents non additive beliefs about the economy s dividend payment process are modelled as neo additive capacities so that the agents decision behavior emphasizes the best respectively worst possible economic scenarios in contrast to existing models of lucas type economies with ambiguity averse agents epstein and wang 1994 which ensure dynamic consistency through heavy restrictions on admissible ambiguity attitudes my ap

shifting trends segmented trends and infrequent permanent shocks abstract a stochastic trend model is considered in which permanent shocks occur infrequently and randomly we show that this model is observationally equivalent to shifting segmented deterministic trend models moreover we show that standard full sample time series methods are incapable of distinguishing between small frequent permanent shocks and large infrequent permanent shocks an outlier search however reveals substantial evidence of large infrequent shocks to the gnp deflator and that these shocks account for most of the persistence in the gnp deflator for real gnp evidence of infrequent permanent shocks is weaker

integration oriented strategies host market corruption and the likelihood of foreign subsidiary exit from emerging markets extant research has found that more pronounced levels of corruption in foreign host emerging markets increase the likelihood that subsidiaries established by multinational enterprises mnes from developed countries will exit we synthesize insights from the organizational perspective of corruption and the integration responsiveness paradigm to propose that integration oriented strategies will weaken the positive relationship between corruption and the likelihood of exit at high levels of host market corruption we develop and test hypotheses pertaining to the main effect of corruption on the likelihood of subsidiary exit as well as the moderating impacts of a firm s equity ownership strategy and its expatriate staffing strategy upon this relationship we theorize that uncertainty operates as the mechanism that underpins the corruption market exit relationship and that an mne s strategic choices with respect to its subsidiary investments contribute to reducing this uncertainty we find that an increase in the foreign investing mne s equity ownership share negatively moderates the positive relationship between corruption and the likelihood that foreign subsidiaries established by developed market mnes will exit host emerging markets when corruption is high however the marginal effects results do not support the expatriate staffing strategy hypothesis our work provides guidance to developed country mnes that seek insights with respect to the utility of strategies that might be implemented in host emerging markets characterized by more pronounced levels of corruption

exact solution of asset pricing models with arbitrary shock distributions abstract the paper provides an exact solution to standard asset pricing models for any distribution of shocks to endowment s growth rate it determines the conditions that guarantee the existence of a stationary bounded equilibrium and examines these conditions for an edgeworth expansion distribution of the shocks the results are extended to the case of multivariate asset pricing models

dampened power law reconciling the tail behavior of financial security returns this article proposes a stylized model that reconciles several seemingly conflicting findings on financial security returns and option prices the model is based on a pure jump levy process wherein the jump arrival rate obeys a power law dampened by an exponential function the model allows for different degrees of dampening for positive and negative jumps and also for different pricing for upside and downside market risks calibration of the model to the s p 500 index shows that the market charges only a moderate premium on upward index movements but the maximally allowable premium on downward index movements

on the stability of the constant relative risk aversion crra utility under high degrees of uncertainty growth models under uncertainty and constant relative risk aversion crra utility are fragile in explaining consumers choice as equilibrium consumption is dependent on distributional assumptions we show that under semi nonparametric distributions general equilibrium models are stable as the existence of expected utility is guaranteed

mean reversion in equilibrium asset prices this paper demonstrates that negative serial correlation in long horizon stock returns is consistent with an equilibrium model of asset pricing when investors display only a moderate desire to smooth their consumption commonly used measures of mean reversion in stock prices calculated from historical returns data nearly always lie within a 60 percent confidence interval of the median of the monte carlo distributions implied by the authors equilibrium model from this evidence the authors conclude that the degree of serial correlation in the data could plausibly have been generated by their model copyright 1990 by american economic association

a note on some limitations of crra utility abstract in a standard environment for choice under uncertainty with constant relative risk aversion crra the existence of expected utility is fragile with respect to changes in the distributions of random variables changes in prior information or the assumption of rational expectations

is the market price of risk infinite abstract in a bayesian model a rational expectations euler equation involves a learning wedge that disconnects the consumer s imrs from the rational expectations pricing kernel the wedge is extremely volatile and explains the high volatility of the rational expectations pricing kernel

on modeling and interpreting the economics of catastrophic climate change with climate change as prototype example this paper analyzes the implications of structural uncertainty for the economics of low probability high impact catastrophes even when updated by bayesian learning uncertain structural parameters induce a critical tail fattening of posterior predictive distributions such fattened tails have strong im plications for situations like climate change where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages this paper shows that the economic consequences of fat tailed structural uncertainty along with unsureness about high temperature damages can readily outweigh the effects of discounting in climate change policy analysis

on the existence of expected utility with crra under stur abstract this note shows that in a standard framework for choice under uncertainty expected utility fails to exist with constant relative risk aversion crra when the endowment follows a stochastic unit root stur process

an empirical re examination of extreme tail behavior testing the assumptions of the power laws and the generalized pareto distribution on the financial series this study investigates whether the power laws and the associated generalized pareto distribution gpd exist in the extreme tail behavior of financial return series we include 10 series of five m