rationality of preliminary money stock estimates earlier studies have presented mixed evidence on the rationality of the federal reserve s preliminary money stock estimates the authors investigate the rationality of m1a m1 m2 and m3 for both seasonally and not seasonally adjusted data they find preliminary growth rates of these aggregates to be rational for not seasonally adjusted data but irrational when data are seasonally adjusted using monte carlo studies the authors conclude that irrationality in seasonally adjusted data arises from the specific seasonal adjustment procedure used by the federal reserve as a result researchers conducting similar tests may want to focus exclusively on not seasonally adjusted data copyright 1995 by mit press

frontiers of real time data analysis in the past ten years researchers have explored the impact of data revisions in many different contexts researchers have examined the properties of data revisions how structural modeling is affected by data revisions how data revisions affect forecasting the impact of data revisions on monetary policy analysis and the use of real time data in current analysis this paper summarizes many of the questions for which real time data analysis has provided answers in addition researchers and institutions have developed better real time data sets around the world still additional research is needed in key areas and research to date has uncovered even more fruitful areas worth exploring jel c52 c53 c80 e01

an analysis of revisions to the industrial production index revisions to percentage changes in the total index of industrial production ip contain systematic components and are correlated with other information available at the time the provisional estimates are prepared indicating that the preliminary estimates are inefficient in particular revisions to percentage changes in ip i tend to be upward ii contain substantial seasonality iii generally increasse during periods in which ip is accelerating and iv revisions to the same month tend to be in the same direction filters for the provisional estimates that exploit these inefficiencies are estimated and the estimates generated from these filters pass the efficiencies are estimated and the estimates generated from these filters pass the efficiency test

high water marks high risk appetites convex compensation long horizons and portfolio choice we study the portfolio choice of hedge fund managers who are compensated by high water mark contracts we find that even risk neutral managers do not place unbounded weights on risky assets despite option like contracts instead they place a constant fraction of funds in a mean variance efficient portfolio and the rest in the riskless asset acting as would constant relative risk aversion crra investors this result is a direct consequence of the in de finite horizon of the contract we show that the risk seeking incentives of option like contracts rely on combining finite horizons and convex compensation schemes rather than on convexity alone

corporate conservatism and relative compensation this paper demonstrates that in a simple setting with managerial concern for reputation and asymmetric information on ability most managers may refrain from undertaking innovations that stochastically dominate an industry standard common components of uncertainty lead to market inferences of managerial ability based on relative performance managers who undertake the industry standard are consequently evaluated with a more accurate benchmark than those innovating discontinuities in compensation when performance is low because of firings lead managers to have differing valuations of an accurate benchmark depending on type in particular very high and very low ability managers are more likely to undertake superior innovations than those of average ability

a comparative analysis of the rationality of consensus forecasts of u s economic indicators the purpose of this article is to investigate the rationality of two survey forecasts of selective u s macroeconomic performance measures that were widely followed in the financial markets during the 1990 2000 period the research compares the rationality of survey forecast data from money market services inc and thomson financial this article extends prior research that has evaluated the rationality of money market services data for earlier time periods while also evaluating similar consensus forecast data from thomson financial that were widely reported in both barron s and the wall street journal during the 1990s

on the informational role of term structure in the us monetary policy rule abstract this paper uses a structural approach based on the indirect inference principle to estimate a standard version of the new keynesian monetary nkm model augmented with term structure using both revised and real time data the estimation results show that the term spread and policy inertia are both important determinants of the us estimated monetary policy rule whereas the persistence of shocks plays a small but significant role when revised and real time data of output and inflation are both considered more importantly the relative importance of term spread and persistent shocks in the policy rule and the shock transmission mechanism drastically change when it is taken into account that real time data are not well behaved

optimal asset allocation and risk shifting in money management this article investigates a fund manager s risk taking incentives induced by an increasing and convex relationship of fund flows to relative performance in a dynamic portfolio choice framework we show that the ensuing convexities in the manager s objective give rise to a finite risk shifting range over which she gambles to finish ahead of her benchmark such gambling entails either an increase or a decrease in the volatility of the manager s portfolio depending on her risk tolerance in the latter case the manager reduces her holdings of the risky asset despite its positive risk premium our empirical analysis lends support to the novel predictions of the model

are different vintages of data on the components of gdp co integrated some evidence for the united kingdom abstract the process of data revision is often an extensive one giving rise to different time series on the same variable with potentially different properties in this study we ask whether different vintages of data are cointegrated and find for our data set on the income components of united kingdom gdp that this is not always the case although in general later vintages are more likely than earlier vintages to be co integrated with the final vintage a lack of co integration favours rejection of the view that preliminary vintages are efficient forecasts of the final vintage

pooling forecasts in linear rational expectations models abstract estimating linear rational expectations models in a limited information setting requires replacing the expectations of future endogenous variables either with instrumented actual values or with forecast survey data applying the method of gottfries and persson empirical examinations of the information sets of economic agents quarterly journal of economics 103 251 259 i show how to augment these methods with actual future values of the endogenous variables to improve statistical efficiency the method is illustrated with an application to the us hybrid new keynesian phillips curve where traditional lagged instruments and the median forecast from the survey of professional forecasters both appear to miss significant information used by price setters so that forecast pooling with actual values improves the statistical fit to inflation

withering government spending multipliers the empirical literature has documented a weakening of the consumption and output responses to an increase in government spending during the last thirty years we show that a new keynesian model in which real government spending is observed with measurement errors can account for the reduction in the size of government spending multipliers the model implies consistent with empirical evidence presented by ilzeki et al 2009 that the evolution of monetary policy and greater globalization increasing international trade and decreasing capital controls are key factors in this development

information aggregation around macroeconomic announcements revisions matter abstract i show that an empirical relation exists between stock returns on macroeconomic news announcement days and the future revisions of the released data but that this link differs across the business cycle using three major macroeconomic series that undergo significant revisions nonfarm payroll gross domestic product and industrial production i present evidence that daily returns on the standard poor s 500 index and revisions are positively related in expansions and negatively related in recessions the results suggest that revisions do matter i e that investors care about the final revised value of a macroeconomic series that they infer accurate information from the release of the preliminary inaccurate report and that the more precise information is aggregated into prices on the day of the initial announcement the results are consistent with the predictions of rational expectations trading models around public announcements combined with well established empirical results on the asymmetric interpretation of information across the business cycle

an historical perspective on the forecasting performance of the treasury model forecasting the growth in uk consumers expenditure drawing upon treasury official economic forecasts vols i ii a series of treasury model tm forecasts of the percentage growth in real total consumers expenditure are derived for the period 1967 to 1989 the one two and three step ahead forecasts examined cover an interesting period which includes major shocks to the uk economy business cycle effects and changes in economic policy whilst a battery of forecast evaluation statistics and tests do not detect any evidence of forecast bias or irrationality over the whole sample split sample analysis provides evidence of a switch from overprediction to underprediction around 1977 in addition the application of modified versions of holden peel 1990 tests provides evidence of the longest horizon forecasts failing to capture the full movement of changes in consumption growth using simple regression and a selection of forecast encompassing tests shorter horizon forecasts are found to dominate longer horizon forecasts a feature which might be expe

the state dependence of output revisions abstract this paper investigates whether economic activity dynamics predict gdp revisions using panel data from 15 oecd countries we find that economic activity predicts gdp revisions early releases tend to overestimate gdp growth during slowdowns and vice versa we also find that the source of the predictability could be related to the sampling of information collection finally the predictability comes from short term economic activity dynamics rather than business cycle position

heterogeneity tournaments and hierarchies tournament contracts are characterized that simultaneously elicit first best efficient effort levels and self selection of risk neutral heterogeneous workers into ability specific contracts comparisons across self selected ability types are shown to be sometimes necessary to attain efficiency rationales are explored for not commonly observing such contracts in hierarchical organizations

are farrowing intentions rational forecasts this paper tests whether quarterly data on hog farmers sow farrowing intentions released in hogs and pigs are rational forecasts of actual farrowings the empirical results show that neither one nor two quarter ahead intentions are rational forecasts econometric methods and the implications of the empirical results for the rational expectations hypothesis are also discussed

monetary misperceptions output and inflation dynamics we revisit the contribution of misperceived money to business cycles and in particular to the inertial dynamics of inflation following a monetary policy shock we establish three things first the difference between preliminary and revised money data captures monetary misperceptions well second misperceived money is quantitatively substantial and also matters significantly for economic activity and third imperfect information about monetary aggregates can help the standard nk model exhibit inertial inflation dynamics

technological innovation and real investment booms and busts abstract we investigate why new high risk technologies can attract excessive and often unprofitable investment we develop an equilibrium model in which rational risk averse agents overinvest in a risky technology possibly to the point that its expected return is negative overinvestment results from relative wealth concerns which arise endogenously from the imperfect tradability of future endowments competition over future consumption leads to an indirect utility for wealth with keeping up with the joneses properties that can induce herding because overinvestment increases with the risk of the technology our model can explain why new risky technological innovations may promote investment bubbles

relative wealth concerns and financial bubbles we present a rational general equilibrium model that highlights the fact that relative wealth concerns can play a role in explaining financial bubbles we consider a finite horizon overlapping generations model in which agents care only about their consumption though the horizon is finite competition over future investment opportunities makes agents utilities dependent on the wealth of their cohort and induces relative wealth concerns agents herd into risky securities and drive down their expected return even though the bubble is likely to burst and lead to a substantial loss agents relative wealth concerns make them afraid to trade against the crowd

monetary information and monetary neutrality abstract the monetary theory of business fluctuations in market clearing models constructed under the rational expectations assumption as advanced by lucas and others involves the idea that suppliers and demanders will typically misinterpret movements in the general level of prices as representing more or less favorable relative opportunities for real activities the present paper examines the consequences of agents possessing contemporaneous monetary information of a potentially noisy variety for the non neutrality of unanticipated monetary events within such an equilibrium business cycle model this modification of the information structure has the strong testable implication that real activity will be uncorrelated with contemporaneous monetary data

competition reach for yield and money market funds abstract do asset managers reach for yield because of competitive pressures in a low rate environment i propose a tournament model of money market funds mmfs to study this question when funds care about relative performance an increase in the risk premium leads funds with lower default costs to increase risk taking while funds with higher default costs decrease risk taking without changes in the premium lower risk free rates reduce the risk taking of all funds i show that these predictions are consistent with mmf risk taking during the 2002 2008 period and that rank based performance is a key determinant of money flows to mmfs

production sales and the change in inventories an identity that doesn t add up we examine two measures of monthly manufacturing production the first is the index of industrial production the second is constructed from the accounting identity that output equals sales plus the change in inventories we show that the means variances and serial correlation coefficients of the log growth rates differ substantially between the two series and the cross correlations are in most cases less than 0 4 a model of classical measurement error indicates that in 15 of 20 two digit industries measurement error accounts for over 35 of the variation in the monthly growth rates of seasonally adjusted industrial production

do tournaments have incentive effects much attention has been devoted to studying models of tournaments or situations in which an individual s payment depends only on his or her output or rank relative to that of other competitors academic interest derives from the fact that under certain sets of assumptions tournaments have desirable normative properties because of the incentive structures they provide our paper uses nonexperimental data to test whether tournaments actually elicit effort responses we focus on professional golf tournaments because information on the incentive structure prize distribution and measures of individual output players scores are both available we find strong support for the proposition that the level and structure of prizes in pga tournaments influence players performance

data revisions are not well behaved we document the empirical properties of revisions to major macroeconomic variables in the united states our findings suggest that they do not satisfy simple desirable statistical properties in particular we find that these revisions do not have a zero mean which indicates that the initial announcements by statistical agencies are biased we also find that the revisions are quite large compared to the original variables and they are predictable using the information set at the time of the initial announcement which means that the initial announcements of statistical agencies are not rational forecasts

are preliminary announcements of the money stock rational forecasts abstract we develop a theoretical framework of analyzing preliminary announcements of economic data and then apply this framework to the money stock we find that preliminary announcements of the money stock are best characterized as measured with classical errors in variables that is the revision is not correlated with the true value of the series the revision is however forecastable using information available at the time of the preliminary announcement our ability to forecast the revision implies that preliminary announcements are not rational estimates of the true money stock

estimating time variation in measurement error from data revisions an application to backcasting and forecasting in dynamic models over time economic statistics are refined this implies that data measuring recent economic events are typically less reliable than older data such time variation in measurement error affects optimal forecasts measurement error and its time variation are of course unobserved our contribution is to show how estimates of these can be recovered from the variance of revisions to data using a behavioural model of the statistics agency we illustrate the gains in forecasting performance from exploiting these estimates using a real time dataset on uk aggregate expenditure data copyright 2009 john wiley sons ltd

asset pricing with heterogeneous beliefs and relative performance we propose an equilibrium asset pricing model in which agents with heterogeneous beliefs care about relative performance we find that the concern with relative performance leads agents to trade more similarly a development that has two effects first similar trading directly decreases volatility second similar trading decreases the impact of dominant agents the second effect dominates the first when agents expect large differences between their final performances and vice versa when agents expect small differences between their final performances compared with the case in which agents are unconcerned about relative performance the stock return volatility is higher when the second effect dominates and lower when the first effect dominates this paper also demonstrates that the concern about relative performance influences investors holdings stock prices and risk premia

can we improve upon preliminary estimates of payroll employment growth we explore the feasibility of improving upon the preliminary estimates of payroll employment growth from the u s bureau of labor statistics by predicting subsequent revisions to these estimates using the preliminary estimates themselves and other information available concurrently results of statistical tests suggest that the preliminary estimates can be improved upon that is they are not efficient forecasts of the revised estimates the improvement of preliminary estimates as indicators of estimates of employment growth following annual benchmarks is particularly large the unanticipated component of the revision based on the annual benchmarks is reduced by more than 22

monetary policy shocks what have we learned and to what end this paper reviews recent research that grapples with the question what happens after an exogenous shock to monetary policy we argue that this question is interesting because it lies at the center of a particular approach to assessing the empirical plausibility of structural economic models that can be used to think about systematic changes in monetary policy institutions and rules the literature has not yet converged on a particular set of assumptions for identifying the effects of an exogenous shock to monetary policy nevertheless there is considerable agreement about the qualitative effects of a monetary policy shock in the sense that inference is robust across a large subset of the identification schemes that have been considered in the literature we document the nature of this agreement as it pertains to key economic aggregates

monetary policy rules based on real time data this paper examines the magnitude of informational problems associated with the implementation and interpretation of simple monetary policy rules using taylor s rule as an example i demonstrate that real time policy recommendations differ considerably from those obtained with ex post revised data further estimated policy reaction functions based on ex post revised data provide misleading descriptions of historical policy and obscure the behavior suggested by information available to the federal reserve in real time these results indicate that reliance on the information actually available to policy makers in real time is essential for the analysis of monetary policy rules

of tournaments and temptations an analysis of managerial incentives in the mutual fund industry we test the hypothesis that when their compensation is linked to relative performance managers of investment portfolios likely to end up as losers will manipulate fund risk differently than those managing portfolios likely to be winners an empirical investigation of the performance of 334 growth oriented mutual funds during 1976 to 1991 demonstrates that mid year losers tend to increase fund volatility in the latter part of an annual assessment period to a greater extent than mid year winners furthermore we show that this effect became stronger as industry growth and investor awareness of fund performance increased over time

real time data and fiscal policy analysis a survey of the literature abstractthis paper surveys the empirical research on scal policy analysis based on real timedata this literature can be broadly divided in three groups that focus on 1 the statisticalproperties of revisions in scal data 2 the political and institutional determinants of scaldata revisions and of one year ahead projection errors by governments and 3 the reactionof scal policies to the business cycle it emerges that rst scal data revisions are largeand initial releases are biased estimates of nal values second the presence of strong scalrules and institutions leads to relatively more accurate releases of scal data and smalldeviations of scal outcomes from government plans third the cyclical stance of scalpolicies is estimated to be more counter cyclical when real time data are used instead ofex post data finally more work is needed for the development of real time datasets for scalpolicy analysis in particular a comprehensive real time dataset including scal variablesfor industrialized and possibly developing countries published and maintained by centralbanks or other institutions is still missing

difference in interim performance and risk taking with short sale constraints abstract absent much theory empirical works often rely on the following informal reasoning when looking for evidence of a mutual fund tournament if there is a tournament interim winners have incentives to decrease their portfolio volatility as they attempt to protect their lead while interim losers are expected to increase their volatility so as to catch up with winners we consider a rational model of a mutual fund tournament in the presence of short sale constraints and find the opposite interim winners choose more volatile portfolios in equilibrium than interim losers several empirical works present evidence consistent with our model however based on the above informal argument they appear to conclude against the tournament behavior we argue that this conclusion is unwarranted we also demonstrate that tournament incentives lead to differences in interim performance for otherwise identical managers and that mid year trading volume is inversely related to mid year stock return

international transmission of transitory and persistent monetary shocks under imperfect information abstract we analyze the transmission of monetary shocks in a new open economy macroeconomics model with one period nominal contracts and imperfect information shocks may have transitory and persistent components that can be disentangled only through the accumulation of information over time as a consequence the responses to shocks are significantly altered compared with the case of full information there are persistent effects on international relative prices and delayed exchange rate overshooting is possible following a persistent shock in some cases there are ex post excess returns as a positive interest rate spread is accompanied by an appreciating currency or vice versa lastly it is demonstrated that staggering reinforces persistence

equilibrium prices in the presence of delegated portfolio management abstract this paper analyzes the asset pricing implications of commonly used portfolio management contracts linking the compensation of fund managers to the excess return of the managed portfolio over a benchmark portfolio the contract parameters the extent of delegation and equilibrium prices are all determined endogenously within the model we consider symmetric fulcrum performance fees distort the allocation of managed portfolios in a way that induces a significant and unambiguous positive effect on the prices of the assets included in the benchmark and a negative effect on the sharpe ratios asymmetric performance fees have more complex effects on equilibrium prices and sharpe ratios with the signs of these effects fluctuating stochastically over time in response to variations in the funds excess performance

does cross sectional forecast dispersion proxy for macroeconomic uncertainty new empirical evidence we investigate the link between forecast dispersion and macroeconomic uncertainty resulting from the data revision structure of inflation and real output we find that disagreement is significantly related to data uncertainty however results are considerably more distinctive for inflation uncertainty

an integrated view of tests of rationality market efficiency and the short run neutrality of monetary policy abstract this paper analyzes an important class of models in which expectations play an important role topics included in the analysis are tests of 1 rationality of forecasts in either market or survey data 2 capital market efficiency 3 the short run neutrality of monetary policy and 4 granger causality in macroeconometric models the common elements of these tests are highlighted in particular cross equation tests for rationality or the short run neutrality of money are shown to be equivalent to more common regression tests in the literature these results demonstrate that the exact specification of the relevant information set used in rational forecasts is not necessary for the cross equation tests to have desirable asymptotic properties also discussed are the conditions for identification of coefficients and testability of hypotheses

risk taking behavior in mutual fund tournaments abstract we develop a two period model of a brown et al j finance 51 1996 85 mutual fund tournament in which two fund managers with unequal midyear performances compete for new cash inflows when one of the managers is an exogenous benchmark winning managers index and losing managers gamble however when both managers are active the winning manager is more likely to gamble expecially when the midyear performance gap is high or when stocks offer high returns and low volatility empirical evidence that winning managers gamble has been documented by other researchers but it has been interpreted as evidence against the tournament model with a dataset of weekly returns from 1984 to 1996 for 660 mutual funds we text for other tournament effects predicted by the model our results suggest a role for the theory of tournaments in studies of mutual fund behavior

are statistical reporting agencies getting it right data rationality and business cycle asymmetry this article provides new evidence on the rationality of early releases of industrial production ip and producer price index ppi data rather than following the usual practice of examining only first available and fully revised data we examine the entire revision history for each variable thus we are able to assess for example whether earlier releases of data are in any sense less rational than later releases and when data become rational our findings suggest that seasonally unadjusted ip and ppi become rational after approximately 3 4 months whereas seasonally adjusted versions of these series remain irrational for at least 6 12 months after initial release for all variables examined we find evidence that the remaining revision is predictable from its own past or from publicly available information in other economic and financial variables in addition we find a clear increase in the volatility of revisions during recessions suggesting that early data releases are less reliable in toughe

how tournament incentives affect asset markets a comparison between winner take all tournaments and elimination contests abstract we investigate the impact of investment managers tournament incentives on investment strategies and market efficiency distinguishing between winner take all tournaments wta where a minority wins and elimination contests ec where a majority wins theoretically we show that investment managers play heterogeneous strategies in wta and homogeneous strategies in ec and markets are more prone to mispricing in wta than in ec experimentally we find that investment managers play more heterogeneous strategies in wta than in ec but this does not trigger significant differences in prices moreover prices in wta and ec do not differ significantly from markets composed of linearly incentivized subjects

firm specific learning and the investment behavior of large and small firms we examine a model of size distribution and growth of firms where firms learn about idiosyncratic productivity parameters through their production experience aggregate shocks by adding noise to learning at the firm level can produce different responses across firms in particular young firms which are smaller on average than older firms and more uncertain about their productivity can overreact to aggregate shocks such differences across firm sizes and ages which arise here in a model with perfect financial markets are often attributed to financial frictions that hit small and large firms differently

real time prediction with u k monetary aggregates in the presence of model uncertainty a popular account for the demise of the u k s monetary targeting regime in the 1980s blames the fluctuating predictive relationships between broad money and inflation and real output growth yet ex post policy analysis based on heavily revised data suggests no fluctuations in the predictive content of money in this paper we investigate the predictive relationships for inflation and output growth using both real time and heavily revised data we consider a large set of recursively estimated vector autoregressive var and vector error correction models vecm these models differ in terms of lag length and the number of cointegrating relationships we use bayesian model averaging bma to demonstrate that real time monetary policymakers faced considerable model uncertainty the in sample predictive content of money fluctuated during the 1980s as a result of data revisions in the presence of model uncertainty this feature is only apparent with real time data as heavily revised data obscure these fluctua

forecasting substantial data revisions in the presence of model uncertainty a recent revision to the preliminary measurement of gdp e growth for 2003q2 caused considerable press attention provoked a public enquiry and prompted a number of reforms to uk statistical reporting procedures in this article we compute the probability of substantial revisions that are greater in absolute value than the controversial 2003 revision the predictive densities are derived from bayesian model averaging over a wide set of forecasting models including linear structural break and regime switching models with and without heteroscedasticity ignoring the nonlinearities and model uncertainty yields misleading predictives and obscures recent improvements in the quality of preliminary uk macroeconomic measurements

tests of equilibrium macroeconomics using contemporaneous monetary data abstract this paper uses contemporaneous monetary data to carry out econometric tests of the equilibrium approach to modelling the relation between monetary disturbances and macroeconomic fluctuations the theoretical analysis introduces into an equilibrium macroeconomic model the availability of preliminary data on current monetary aggregates and the process of accumulation of revised monetary data the econometric analysis tests two hypothesis derived from this extended model one hypothesis concerns the neutrality of perceived monetary policy the econometric results imply rejection of this hypothesis the other hypothesis concerns the non neutrality of errors in preliminary monetary data the econometric results fail to reject the contrary of this hypothesis these tests provide strong evidence against the reality of the equilibrium approach

evaluating the oecd s forecasts for economic growth the size and nature of the errors in gdp forecasts in the g 7 countries from 1968 to 1995 are examined these gdp estimates are published by the organization for economic cooperation and development in oecd economic outlook two alternative hypotheses are tested concerning why revisions arise the first hypothesis is that preliminary announcement is simply the true variable measured with error in this case the preliminary announcement is an unconditionally unbiased but irrational forecast of the true value that is the revision is correlated with known variables in particular it is correlated with the preliminary announcement itself the second hypothesis is that revisions arise because the early gdp estimates are a rational forecast of the true variable in this case the error is a rational forecast error and is therefore uncorrelated with known information

data revisions and the identification of monetary policy shocks abstract monetary policy research using time series methods has been criticized for using more information than the federal reserve had available to quantify the role of this criticism we estimate vars with real time data while accounting for the latent nature of many economic variables such as output our estimated monetary policy shocks are closely correlated with typically estimated measures the impulse response functions are broadly similar across estimation methods our evidence suggests that the use of revised data in var analyses of monetary policy shocks may not be a serious limitation for recursively identified systems but presents more challenges for simultaneous systems

news and noise in g 7 gdp announcements revisions to gdp announcements are known to be quite large in all g 7 countries quarterly growth rate revisions are regularly more than a full percentage point at an annualized rate we examine the predictability of these revisions using standard statistical tests of whether the preliminary announcement is a rational forecast of the subsequently revised data previous work suggests that u s gdp revisions are largely unpredictable as would be the case if the revisions reflect news not available at the time that the preliminary number is produced we find that the degree of predictability varies throughout the g 7 although we find little predictability in u s revisions the data revisions for several foreign countries are highly predictable we also perform a simple real time forecasting exercise showing that for several countries the predictability of data revision could be used to generate improved preliminary data

does option compensation increase managerial risk appetite this paper solves the dynamic investment problem of a risk averse manager compensated with a call option on the assets he controls under the manager s optimal policy the option ends up either deep in or deep out of the money as the asset value goes to zero volatility goes to infinity however the option compensation does not strictly lead to greater risk seeking sometimes the manager s optimal volatility is less with the option than it would be if he were trading his own account furthermore giving the manager more options causes him to reduce volatility managers with convex compensation schemes play an important role in financial markets this paper solves for the optimal dynamic investment policy for a risk averse manager paid with a call option on the assets he controls the paper focuses on how the option compensation impacts the manager s appetite for risk when he cannot hedge the option position on one hand the convexity of the option makes the manager shun payoffs that are likely to be near the money under the optimal policy the manager either significantly outperforms his benchmark or else incurs severe losses furthermore in examples of optimal trading strategies asset volatility goes to infinity as asset value goes to zero yet option compensation does not strictly lead to greater risk seeking as asset value grows large or if the evaluation date is far away the manager moderates asset risk for example if the manager has constant relative risk aversion crra asset volatility converges to the merton constant as asset value goes to infinity in some situations the manager actually chooses a lower asset volatility than he would if he were investing on his own because the leverage inherent in his option magnifies his exposure to the asset volatility in addition with all constant or decreasing absolute risk averse utility functions from the hyperbolic absolute risk averse hara class giving the manager more options causes him to reduce asset volatility in the crra case for example the manager targets a fixed volatility for his personal

digging for golden carrots an analysis of research tournaments contracting for research is often infeasible because research inputs are unobservable and research outcomes cannot be verified by a court sponsoring a research tournament can resolve these problems a model is presented in which contestants compete to find the innovation of highest value to the tournament sponsor the winner receives a prespecified prize the tournament game has a unique subgame perfect equilibrium free entry is not optimal because equilibrium effort by each researcher decreases in the number of contestants an optimally designed research tournament balances the probability of overshooting the first best quality level against the probability of falling short copyright 1995 by american economic association

do markets respond more to more reliable labor market data a test of market rationality since 1979 the bureau of labor statistics bls has nearly quadrupled the size of the sample used to estimate monthly employment changes although first reported employment estimates are still noisy the magnitude of sampling variability has declined in proportion to the increase in the sample size a model of rational bayesian updating predicts that investors would assign more weight to the bls employment survey as it became more precise however a regression analysis of changes in interest rates on the day the employment data are released finds no evidence that the bond market s reaction to employment news intensified in the late 1980s or early 1990s for the time period as a whole an unexpected increase of 200 000 jobs is associated with an 8 basis point increase in the interest rate on 30 year treasury bonds and a 9 basis point increase in the interest rate on 3 month bills all else equal additionally announced hourly wage increases are associated with higher long tern interest rates while announced changes in the unemployment rate and revisions to past months employment estimates have a statistically insignificant effect on long term interest rates