a test of independence of discounting from quality of life the quality adjusted life years qaly model assumes quality and quantity of life can be multiplied into a single index and requires quality and quantity to be mutually independent which need not hold empirically this paper proposes a new test for measuring independence of utility of life duration from quality of life in a riskless setting we use a large representative sample of dutch citizens and include two health states generally considered better than dead btd and one health state considered worse than dead wtd independence cannot be rejected when comparing the btd health states but is rejected when comparing the btd states with the wtd state in particular utility of life duration becomes more concave for the wtd state this may suggest that independence holds only for btd health states this has implications for the qaly model and would require using sign dependent utility of life duration functions

new tests of qalys when health varies over time this paper performs new tests of the qaly model when health varies over time our tests do not involve confounding assumptions and are robust to violations of expected utility the results support the use of qalys at the aggregate level i e in economic evaluations of health care at the individual level there is less support for qalys the individual data are however largely consistent with a more general qaly type model that remains tractable for applications

s p 500 trading strategies and stock betas this paper shows that s p 500 stock betas are overstated and the non s p 500 stock betas are understated because of liquidity price effects caused by the s p 500 trading strategies the daily and weekly betas of stocks added to the s p 500 index during 1985 1989 increase on average by 0 211 and 0 130 the difference between monthly betas of otherwise similar s p 500 and non s p 500 stocks also equals 0 125 during this period some of these increases can be explained by the reduced nonsynchroneity of s p 500 stock prices but the remaining increases are explained by the price pressure or excess volatility caused by the s p500 trading strategies i estimate that theprice pressures accountfor 8 5 percent of the total variance of daily returns of a value weighted portfolio of nyse amex stocks the negative own autocorrelations in s p 500 index returns and the negative cross autocorrelations between s p 500 stock returns provide further evidence consistent with the price pressure hypothesis

decisions under uncertainty in social contexts abstract this paper theoretically and experimentally studies decision making in risky and social environments we explore the interdependence of two decisive behavioral determinants in such environments risk attitudes and social preferences in the form of inequality aversion our model and the data demonstrate that individual risk aversion is attenuated when lagging behind peers whereas it is amplified under favorable income inequality moreover people s choices are not only context dependent but they are sensitive to their degree of inequality aversion the majority of our experimental findings cannot be rationalized by rank dependent utility models or cumulative prospect theory our results contribute to the basic understanding of the underlying motives of social incentives in firms private households saving decisions employees career track choices or charitable giving under uncertainty

50th anniversary article option pricing valuation models and applications this paper surveys the literature on option pricing from its origins to the present an extensive review of valuation methods for european and american style claims is provided applications to complex securities and numerical methods are surveyed emphasis is placed on recent trends and developments in methodology and modeling

a consistency test of the time trade off this paper tests the internal consistency of time trade off utilities we find significant violations of consistency in the direction predicted by loss aversion the violations disappear for higher gauge durations we show that loss aversion can also explain that for short gauge durations time trade off utilities exceed standard gamble utilities our results suggest that time trade off measurements that use relatively short gauge durations like the widely used euroqol algorithm are affected by loss aversion and lead to utilities that are too high

increasing marginal utility of small increases in life expectancy results from a population survey abstract the standard practice in cost effectiveness analyses of health care is to assign a linear value to increasing lifetime gains the aim of the current study was to examine the possible existence of non linear utility for short life extensions a representative sample of the norwegian population aged 40 59 years n 2402 was asked to imagine that they had a limited remaining lifetime 1 year or 10 years and were offered a treatment that would increase lifetime by a specified amount of time from 1 week to 1 year in all scenarios the price per week of life extension was held constant the proportion of respondents that accepted the treatment increased with increasing extensions indicating a convex utility function the result suggests increasing marginal utility for life extensions up to 1 year

economics health and health economics hyes healthy years equivalent versus qalys quality adjusted live year this paper responds to culyer and wagstaff s cw and buckingham s b arguments we refute their claim about the equivalence of hyes and qalys they fail to distinguish between choice under uncertainty and under certainty cw assume that all individuals have a specific form of utility function which yields their conclusion of equivalence b s arguments confuse the measurement technique and the utility theory from which it stems his argument about the normative superiority of the qaly construct is inconsistent with economic thinking the hye by being compatible with the principles of economics is superior to the qaly for economic evaluations of health care interventions

time aggregation and the estimation of the market model empirical evidence data for heavily and lightly traded firms are used to evaluate the effects of temporal aggregation on beta estimates t values and r 2 estimates in addition to our analysis of the standard market model dynamic and random coefficient models are estimated this study evaluates differences in the short term and long term dynamic relationships between the market and each type of firm it is found that temporal aggregation has important effects on both the specification of a market model and the stability of beta estimates

prepayment and the valuation of mortgage backed securities this paper puts forward a valuation framework for mortgage backed securities rather than imposing an optimal value minimizing call condition we assume that at each point in time there exists a probability of prepaying this conditional probability depends upon the prevailing state of the economy to implement our valuation procedure we use maximum likelihood techniques to estimate a prepayment function in light of recent aggregate gnma prepayment experience by integrating this empirical prepayment function into our valuation framework we provide a complete model to value mortgagebacked securities given an optimal value minimizing call policy a mortgage should never be called when its market value is less than its call price similarly a mortgage should be called if it is worth more than its call price however mortgagors often call their loans when the prevailing refinancing rate exceeds the contract rate on the loan dunn and mcconnell 1981 in addition some mortgagors do not call their loans when the loan s contract rate exceeds the prevailing refinancing rate the purpose of this paper is to put forward a valuation framework for mortgagebacked securities consistent with these stylized facts associated with mortgage prepayments the mortgagor s prepayment decision is integral to our valuation framework however we do not impose an optimal value minimizing call condition to price these securities rather we assume that at each point in time there exists a probability of prepaying this conditional probability depending upon the prevailing state of the economy by integrating this prepayment function into our valuation framework we provide a complete model to value mortgage backed securities to implement our valuation procedures we estimate a prepayment function given recent gnma prepayment experience we follow green and shoven 1986 by using a proportional hazards model to estimate the influence of various explanatory variables or covariates on the mortgagor s prepayment decision distinct from green and shoven we explicitly model the effects of seasoning as well as investigating the influence of interest cost savings from refinancing in addition we also consider the effects of lagged refinancing rates heterogeneity

portfolio serial correlation and nonsynchronous trading common stock portfolios of large heavily traded firms exhibit daily first order serial correlation in excess of what would be expected given the individual security coefficients further this correlation rises as the number of securities in the portfolio increases the direct implication of this finding is that nonsynchronous trading is not the only cause of correlation in daily market indices related implications are also discussed

a transactions data analysis of nonsynchronous trading weekly returns of stock portfolios exhibit substantial autocorrelation analytical studies suggest that nonsynchronous trading is capable of explaining from 5 to 65 of the autocorrelation the varying importance of nonsynchronous trading in these studies arises primarily from differing assumptions regarding nontrading periods of stocks we simulate the effects of nonsynchronous trading by sampling stock returns from a return generating process using transactions data to obtain the precise time of each stock s last trade we find that simulated weekly portfolio returns exhibit autocorrelations that are roughly 25 that of their observed crsp weekly returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

further international evidence on asset pricing the case of the spanish capital market abstract a multivariate framework is used in order to study the price formation of risky assets in the spanish capital market issues regarding the efficiency of the spanish value weighted stock market index the validity of equilibrium considerations the size effect and the nature of the return generating process during january are analyzed

a test of the theory of reference dependent preferences eight alternative methods of eliciting preferences between money and a consumption good are identified two of these are standard willingness to accept and willingness to pay measures these methods differ with respect to the reference point used and the dimension in which responses are expressed the loss aversion hypothesis of tversky and kahneman s theory of reference dependent preferences predicts systematic differences between the preferences elicited by these methods these predictions are tested by eliciting individuals preferences for two private consumption goods the experimental design is incentive compatible and controls for income and substitution effects the theory s predictions are broadly confirmed

a new axiomatic approach to the evaluation of population health in this paper we explore the implications of normative principles for the evaluation of population health we formalize those principles as axioms for social preferences over distributions of health for a given population we single out several focal population health evaluation functions which represent social preferences as a result of combinations of those axioms our results provide new rationale for popular theories in health economics such as the unweighted aggregation of quality adjusted life years qalys or healthy years equivalents hyes and generalizations of the two aimed to capture concerns for distributive justice without resorting to controversial assumptions on individual preferences

loss aversion with a state dependent reference point this study investigates reference dependent choice with a stochastic state dependent reference point the optimal reference dependent solution equals the optimal consumption solution no loss aversion if the reference point is selected fully endogenously given that loss aversion is widespread we conclude that the reference point generally includes an important exogenously fixed component we develop a choice model in which adjustment costs can cause stickiness relative to an initial exogenous reference point using historical u s investment benchmark data we show that this model is consistent with diversification across bonds and stocks for a wide range of evaluation horizons despite the historically high risk premium of stocks compared to bonds this paper was accepted by peter wakker decision analysis

tests of utility independence when health varies over time in the conventional quality adjusted life year qaly model people s preferences are assumed to satisfy utility independence when health varies over time utility independence implies that the value attached to a health state is independent of the health state that arise before or after it two separate studies were conducted involving a total of 155 respondents in study one we conducted five tests of utility independence using a standard gamble question three of the tests of utility independence were repeated in study two after randomisation was introduced in order to take account of possible ordering effects utility independence holds in the majority of cases examined here and so our work generally supports the use of utility independence to derive more tractable models

corrections for trading frictions in multivariate returns when observed stock returns are obtained from trades subject to friction it is known that an individual stock s beta and covariance are measured with error univariate models of additive error adjustment are available and are often applied simultaneously to more than one stock unfortunately these multivariate adjustments produce nonpositive definite covariance and correlation matrices unless the return sample sizes are very large to prevent this restrictions on the adjustment matrix are developed and a correction is proposed which dominates the uncorrected estimator the estimators are illustrated with asset opportunity set estimates where daily returns have trading frictions a number of univariate nonsynchronous trading adjustments are available for beta but no multivariate adjustment has been specifically designed for a general covariance matrix for example the univariate trading friction adjustment of cohen hawawini maier schwartz and whitcomb chmsw 1983 is a generalization of scholes and williams 1977 the chmsw procedure adjusts beta to account for price adjustment delays exceeding one period where a portion of the true return is reflected in lagged returns the procedure is extended and applied in shanken 1987 to estimation of the daily multivariate covariance matrix of stocks returns observed covariances significantly understated true covariances by a factor of two suggesting that a daily covariance adjustment is necessary because of a large number of studies which employ multivariate daily stock returns it is therefore important that the adjustment results in a good estimator of the covariance matrix while no evidence is available regarding other properties it is shown in chmsw that their univariate adjusted estimator has the desirable statistical properties of consistency and unbiasedness unfortunately when the adjusted covariance estimator is applied in finite samples the resulting adjusted covariance matrix may not be a covariance matrix and the implied adjusted correlation matrix independently may not be a correlation matrix because the adjustment does not restrict the covariance and correlation matrices to be positive definite 1 when these matrices are not positive definite functions of these matrices can produce very unreliable inference results this paper provides empirical examples of the violations of the positive definite

friction in the trading process and the estimation of systematic risk abstract this paper considers how estimates of the market model beta parameter can be biased by friction in the trading process information decision and transaction costs that a leads to a distinction between observed and true returns b causes observed returns to be generated asynchronously for a set of interdependent securities and c thereby introduces serial cross correlation into security returns several propositions are derived from which consistent estimators of beta are obtained and the effect of differencing interval length on beta estimates is specified the formulation is contrasted with the related analyses of scholes williams 1977 and dimson 1979

hedge funds risk and return from a database that is relatively free of bias this article provides measures of the returns of hedge funds and of the distinctly nonnormal characteristics of the data the results include risk adjusted measures of performance and tests of the degree to which hedge funds live up to their claim of market neutrality the substantial attrition of hedge funds is examined the determinants of hedge fund demise are analyzed and results of tests of return persistence are presented the conclusion is that hedge funds are riskier and provide lower returns than is commonly supposed

risk risk versus standard gamble procedures for measuring health state utilities contingent valuation cv has been widely used to measure the potential benefits derived from different policy decisions however doubt now exists about the validity of the cv method and alternative approaches to benefit valuation have been proposed the paper reports on the results of a study which was designed to test the viability of two of the most prominent of the alternatives the risk risk rr and standard gamble sg approaches if individual preferences are consistent with the axioms of von neumann morgenstern expected utility theory eut then the two methods should generate the same interval scales for any given set of health states however the results show that sg utilities are substantially higher than rr ones thus casting doubt on these axioms the paper discusses alternatives to eut which might better expalin the discrepancies found it also considers whether the results might be explained in terms of status quo bias and or by the relative difficulty of rr questions the results presen

on lottery sales jackpot sizes and irrationality a cautionary note jackpot size has a greater impact than expected price as a determinant of lottery sales suggesting that agents exhibit irrational lotto mania we demonstrate why this conclusion is problematical by considering the reduced form obtained if agents are described by cumulative prospect theory

forecasting systematic risk estimates of raw beta that take account of the tendency of beta to change and the heteroskedasticity of residual returns in the application of modern portfolio theory the systematic risk of a security is of central importance beta the future regression coefficient of the return of the security on the return of the market is an index of that risk since the future is yet to be revealed nonclairvoyant practitioners and researchers must rely on estimated rather than actual values of beta and the estimates must be based on data that are currently available

prospect theory in the health domain a quantitative assessment it is well known that expected utility eu has empirical deficiencies cumulative prospect theory cpt has developed as an alternative with more descriptive validity however cpt s full function had not yet been quantified in the health domain this paper is therefore the first to simultaneously measure utility of life duration probability weighting and loss aversion in this domain we observe loss aversion and risk aversion for gains and losses which for gains can be explained by probabilistic pessimism utility for gains is almost linear for losses we find less weighting of probability 1 2 and concave utility this contrasts with the common finding of convex utility for monetary losses however cpt was proposed to explain choices among lotteries involving monetary outcomes life years are arguably very different from monetary outcomes and need not generate convex utility for losses moreover utility of life duration reflects discounting causing concave utility

the correction of tto scores for utility curvature using a risk free utility elicitation method this paper describes and employs a new method to correct time tradeoff tto scores for utility of life duration curvature in contrast to most previous attempts to do so it uses a risk free method that corresponds well to the risk free properties of the tto method in addition the method is robust to several biases that occur under methods that incorporate risk our results show a significant degree of curvature in utility of life duration and therefore a clear bias in tto scores the risk free method seems to be useful to correct tto scores for this influence and leads to significantly higher quality adjustment factors

an econometric model of serial correlation and illiquidity in hedge fund returns the returns to hedge funds and other alternative investments are often highly serially correlated in sharp contrast to the returns of more traditional investment vehicles such as long only equity portfolios and mutual funds in this paper we explore several sources of such serial correlation and show that the most likely explanation is illiquidity exposure i e investments in securities that are not actively traded and for which market prices are not always readily available for portfolios of illiquid securities reported returns will tend to be smoother than true economic returns which will understate volatility and increase risk adjusted performance measures such as the sharpe ratio we propose an econometric model of illiquidity exposure and develop estimators for the smoothing prole as well as a smoothing adjusted sharpe ratio for a sample of 908 hedge funds drawn from the tass database we show that our estimated smoothing coecien ts vary considerably across hedge fund style categories and may be a useful proxy for quantifying illiquidity exposure

the time trade off a note on the effect of lifetime reallocation of consumption and discounting this paper considers the extent to which responses to time trade off tto questions can provide unbiased estimates of ratios of individual marginal rates of substitution mrs of wealth for risk of various health state impairments relative to the corresponding mrs for risk of death it is shown that if there is reallocation of lifetime consumption and or discounting of future utilities then a tto response that is not adjusted for these effects will unambiguously overestimate the ratios of individual mrs while the effect of reallocation is likely to be very small discounting can lead to significant overestimation the magnitude of which depends in part upon the severity of the health state impairment

hypothesis testing with the sharpe and treynor portfolio abstract using the scholes and williams 1977 model consistent estimates of the variances and covariances of security returns under conditions of non synchronous trading are derived the effects of using such corrected estimates on the measurement of portfolio performance are illustrated by assessing the performance of a value and equally weighted portfolio of all the stocks issued under the quebec stock savings plan qssp

friction in the trading process and risk measurement abstract when stock returns are non synchronous ols estimates of market model parameters are biased we show that the unbiased estimators for beta which have recently been proposed are for practical purposes the same as the dimson 1979 estimator the choice of estimation method is therefore largely a matter of computational convenience

the validity of qalys under non expected utility this paper examines applications of non expected utility in the health domain the most widely used utility model in health economics the time linear qaly model assumes i separability of quality of life and life duration and ii linearity of the utility for life duration we perform new tests which are robust to violations of expected utility of these two assumptions the data support separability but show that the utility for life duration is concave rather than linear the finding of concave utility may not be surprising in itself the contribution of this paper is to demonstrate this empirically without being invalidated by violations of expected utility it has by now been widely recognised that expected utility is not valid as a descriptive theory of decision under uncertainty the descriptive violations of expected utility have led to the emergence of several non expected utility theories the increasing importance of non expected utility makes it necessary to reassess applications that were previously based on expected utility examples of such reassessments include karni and safra 1989 crawford 1990 and dekel et al 1991 for game theory machina 1995 and wakker et al 1997 for insurance theory and cubitt and sugden 1998 for the evolution of preferences see starmer 2000 for a review the present paper examines applications of non expected utility in the health domain we focus on the main utility model in health economics the quality adjusted life years qaly model and present new theoretical foundations for and empirical tests of this model under non expected utility qalys provide a simple way to combine the two dimensions of health life duration and health status into a single utility index they are intuitively appealing which facilitates communication to policy makers and analytically tractable which explains their widespread use in practical studies a disadvantage of qalys is that they only represent individual preferences over health under strong assumptions if these assumptions do not hold then the use of qalys may lead to incorrect policy recommendations to gain insight into the validity of qalys it is necessary to assess the restrictiveness of the assumptions that the qaly model imposes in the most common version of the qaly model the time linear qaly model the utility of the health outcome of spending t years in health state q is equal to tv g where v is a utility function over health states that is in the time linear qaly model the utility for duration is linear it is well known that under expected utility linearity of utility implies risk neutrality as it turns out risk neutrality with

estimating betas on daily data for a small stock market abstract this paper examines the properties of different market risk beta measures computed on daily data for a thin security market i e the helsinki stock exchange in finland in accordance with the results by dimson and marsh 1983 the paper shows that differences in trading frequency between different stocks produce a serious bias towards what appears to be stability in estimated betas furthermore the paper shows that when betas are computed the exclusive use of stock prices based on actual trades will not solve the problem of a thin trading bias in measured stability of these beta estimates in fact other methods proposed to cope with the thin trading problem seem to be at least as efficient as use of trade to trade returns finally betas corrected for differences in trading frequency are still shown to be statistically related for firm size

estimating and adjusting for the intervalling effect bias in beta the concept of beta as the measure of systematic risk has been widely accepted in the academic and financial community increasingly betas are being used to estimate the cost of capital for corporations despite this however biases are generally present in ordinary least squares ols estimates of beta in particular empirical estimates of beta are affected by friction in the trading process which delays the adjustment of a security s price to informational change and hence leads to an intervalling effect bias in this paper we present and empirically test two procedures for correcting this bias the first is to estimate the asymptotic value that ols beta approaches as the differencing interval is lengthened without bound the second procedure is to infer the value of beta by adjusting ols beta for cross sectional differences in the intervalling effect as a function of the depth of the market for a security as measured by its value of shares outstanding our results suggest that a substantial correction is needed to get true beta estimates from short differencing interval data

predicting risk some new generalizations existing adjustment techniques for forecasting systematic risk of individual firms have been based on relatively uniformative prior knowledge about the cross sectional distribution of risk estimates this study introduces prior information in the form of size and industry based cross sectional distributions of risk estimates such information is incorporated into forecasts using familiar and generalized adjustment techniques the latter being based on recently developed multiple shrinkage methods improved forecast performance results

econometric estimation of producers risk attitudes general methods are proposed for the identification and econometric estimation of the parameters of the distribution of risk attitudes in a producer population the proposed methods also provide the basis for the development of statistical tests of model specification and of behavioral hypotheses econometric risk attitude estimation is shown to be possible under less restrictive conditions than previously believed a moment based version of the general model is applied to indian data and the econometrically estimated risk attitudes are presented and compared to experimental results for a similar group of producers

the stability of uk risk measures and the problem of thin trading this paper examines the problems of estimating risk measures and their stability in thin markets it shows analytically that conventional approaches used in previous studies can lead to serious overestimates of the stability of risk measures when shares are subject to thin trading it then demonstrates using uk data that this is in fact a serious practical problem and that the resultant biases are of precisely the form predicted finally the paper presents reliable evidence on the stability of uk risk measures by using an estimation method designed to avoid thin trading bias using this approach risk measures are found to be as stable in the uk as they are in the usa this paper examines the stability of risk measures in the uk the focus is on providing reliable evidence in a market where many of the shares suffer from thin trading this is important because thin trading can seriously distort stability measures leading to incorrect conclusions indeed this is a problem which has almost certainly afflicted many previous studies of stability the paper makes four main contributions first it shows analytically that thin trading can lead to serious overstatements about stability second it uses uk data to illustrate that this is in fact a serious practical problem and that the biases are of precisely the form predicted this is important for anyone who wishes to interpret previous claims on beta stability in thin markets third the paper presents reliable evidence on the stability of uk betas by using an estimation method designed to avoid thin trading bias besides avoiding bias our

the intervalling effect bias in beta a note abstract based on a comprehensive sample of domestic securities traded on the brussels stock exchange this paper points out the intervalling effect in the estimated betas and examines the speed of convergence of these the results reveal that the estimated betas seem to converge to their asymptotic values and that their value depends on what day the differencing interval starts it also appears that the magnitude of the intervalling effect is inversely related to the market value of the firms

the relation between the return interval and betas abstract the size effect is sensitive to the length of the return interval used in estimating betas beta changes with the return interval because an asset s covariance with the market and the market s variance do not change proportionately as the return interval is changed we document beta sensitivity to the return interval evidence from cross sectional regressions of returns on monthly and annual betas is inconsistent with beta changes stemming only from the higher standard errors of the longer interval betas we provide evidence that the size effect becomes statistically insignificant when risk is measured by betas estimated using annual returns

expo power utility a flexible form for absolute and relative risk aversion a new utility function which i call expo power is proposed that exhibits decreasing constant or increasing absolute risk aversion and decreasing or increasing relative risk aversion depending on parameter values numerical analysis suggests that the expo power function performs well in incorporating these risk preference structures and that arbitrary risk preference specifications may lead to biased risk response estimates

the reaction of bank stock prices to the international debt crisis abstract in this paper we develop a cross sectional regression approach to estimate the impact of foreign loan exposure on the pricing of u s bank stocks a new approach is required because news about foreign loan problems may arrive incremently over time rather than reaching the market on a few specific dates the way earnings and dividend announcements do consistent with this interpretation we find that foreign loan exposure had a significant impact on the pricing of u s bank stocks during the years 1982 and 1983 but that the stock prices adjusted continually over the two year period rather than jumping on a few particular days

wtp and qaly based approaches to valuing health for policy common ground and disputed territory this paper discusses links between two approaches to the value of health the willingness to pay approach of environmental economics and the quality adjusted life year approach of health economics the approaches are used in cost benefit and cost effectiveness analyses of health interventions despite fundamental differences in the decision contexts and conceptual foundations of the two approaches in current practice they are likely to lead to similar policy decisions the paper also shows how research on the quality adjusted life year qaly can be used to fill in gaps in the willingness to pay literature the paper sketches a simple model that shows how to qaly fy the value of a statistical life i e how to combine qaly estimates with estimates of the value of a statistical life to estimate willingness to pay for morbidity risks

joint risk preference technology estimation with a primal system applied studies of the firm in a risky environment have concentrated either on the firm s technology or on its risk preferences these models result in generally inconsistent and inefficient parameter estimates a primal model is proposed which allows a firm s preferences and technology to be estimated jointly in the presence of risk the model is applied to iowa corn production and estimated technology parameters are compared with those from other approaches modest risk aversion leads to inelastic even backbending per acre supplies and input demands yield heteroskedasticity in inputs leads to supply heteroskedasticity in prices especially for risk neutral firms

a nonparametric elicitation of the equity efficiency trade off in cost utility analysis we performed an empirical elicitation of the equity efficiency trade off in cost utility analysis using the rank dependent quality adjusted life year qaly model a model that includes as special cases many of the social welfare functions that have been proposed in the literature our elicitation method corrects for utility curvature and therefore our estimated equity weights are not affected by diminishing marginal utility we observed a preference for equality in the allocation of health the data suggest that the elicited equity weights were jointly determined by preferences for equality and by insensitivity to group size a procedure is proposed to correct the equity weights for insensitivity to group size finally we give an illustration how our method can be implemented in health policy

a note on eliciting distributive preferences for health while in theory the strength of preferences for equity in health can be expressed in an inequality aversion parameter in practice analysts would have to obtain them from people s choices we are faced with a number of methodological problems when turning to this type of empirical research this note investigates which types of preference could explain the choices people make when responding to equity efficiency questions of this kind respondents may be heavily influenced by concerns that are not related to their equity preferences something which may lead them to choose distributions that are not consistent with models on the equity efficiency trade off specifically a threshold effect is identified which could explain why some people would rather prefer to concentrate than to diffuse health gains the second aim of this note is to offer some lessons from a survey which was designed for eliciting people s distributive preferences for health gains

discounting behavior a reconsideration we re evaluate the theory experimental design and econometrics behind claims that individuals exhibit non constant discounting behavior theory points to the importance of controlling for the non linearity of the utility function of individuals since the discount rate is defined over time dated utility flows and not flows of money it also points to a menagerie of functional forms to characterize different types of non constant discounting behavior the implied experimental design calls for individuals to undertake several tasks to allow us to identify these models and to several treatments such as multiple horizons and the effect of allowing for a front end delay on earlier payments the implied econometrics calls for structural estimation of the theoretical models allowing for joint estimation of utility functions and discounting functions using data collected from a representative sample of 413 adult danes in 2009 we draw striking conclusions assuming an exponential discounting model we estimate discount rates to be 5 6 on average this is significantly lower than all previous estimates using controlled experiments we also find no evidence to support quasi hyperbolic discounting or fixed cost discounting and only modest evidence to support other specifications of non constant discounting furthermore the evidence for non constant discounting while statistically significant is not economically significant in terms of the size of the estimated discount rates we undertake extensive robustness checks on these findings including a detailed review of the previous comparable literature

on the impact of infrequent trading on the apt systematic risk components evidence from a thin security market abstract the purpose of this note is to analyze the effects of infrequent trading on the apt systematic risk components using finnish data infrequent trading is reported to influence especially the first systematic risk component produced by factor analysis on stock returns

diminishing marginal utility of wealth and calibration of risk in agriculture expected utility theory eut has dominated the agricultural economics literature on behavior under risk particularly since the late 1970s in eut risk preferences are completely defined by the curvature of the utility function an expected utility maximizer with a concave utility curve would avoid choices that represent a greater wealth risk estimates of risk aversion coefficients based on assumed utility functional forms have been valued in predicting producers responses to proposed policy see saha shumway and talpaz for a review yet these estimates are biased if there are omitted variables such as knowledge understanding and managerial expertise that are related to the probability distribution of profit if the production function is jointly estimated with the utility function then the riskincreasing or risk reducing properties of production inputs may also wrongly be ascribed to the concavity of the utility function since allais substantial evidence has been accumulated to suggest systematic flaws in eut mostly in experimental settings with small stakes applied economists have regarded these violations as exceptions due to the special circumstances surrounding their observation recently rabin showed that attributing all risk behavior in small gambles solely to diminishing marginal utility of wealth leads to improbable levels of risk aversion his calibration theorem based on dichotomous choices suggests that a person who turns down a lottery with a 0 5 probability of winning 125 and 0 5 probability of losing 100 will always turn down any bet with a 0 5 chance of losing 600 no matter how large of a gain may be had with the remaining 0 5 probability we generalize rabin s work to continuous payoff distributions and continuous choice problems to show that his criticism extends to realistic risky situations the concavity problem is not limited to small money risks rather when risky choices have similar average payouts utility functions must display ridiculous levels of concavity to predict individual choices below we present our general calibration problem and apply the results to an empirical risk study in agricultural economics to illustrate the unintended consequences of using eut to explain risk response

when to refinance a mortgage a dynamic programming approach abstract when should one refinance a mortgage loan it is one of the most common finance questions in today s world there have been surprisingly few attempts to answer this question in a structured manner however moreover the existing guidelines for refinancing consist of a short list of very simple rules that have a limited application this article addresses the question through a dynamic programming model coupled with an analysis of historical interest rates the analysis reveals a more complex set of rules for an optional refinance decision oftentimes conflicting with the conventionally accepted idea that rate differences must be greater than two percent

risk aversion and land allocation between annual and perennial crops in semisubsistence farming a stochastic optimization approach this article analyzes the effect of production uncertainty on farmland allocation decisions between perennial and annual crops focusing on a representative farmer s attitude toward risk a dynamic stochastic optimization model that considers net planting the difference between new plantings and removals of perennial crops that achieve full production cycle is used the effect of uncertainty on the representative farmer s decisions to increase or decrease perennial crops acreage on the optimal path is examined our results reveal that the response of optimal path of net planting to uncertainty related to perennial crop production is highly affected by the farmer s attitude toward risk a risk averse or a low risk loving farmer tends to reduce land allocation to perennial crops under uncertainty while a high risk loving farmer will do exactly the opposite also due to disutility of farming the farmer tends to reduce land allocation to perennial crops when prices are high enough for him to attain a desired income level expectation one implication of this research is the need for mechanization in sub saharan countries in particular that increases per acreage yield and output in semisubsistence agriculture

eliciting von neumann morgenstern utilities when probabilities are distorted or unknown this paper proposes a new method the gamble tradeoff method for eliciting utilities in decision under risk or uncertainty the elicitation of utilities to be used in the expected utility criterion turns out to be possible even if probabilities are ambiguous or unknown a disadvantage of the tradeoff method is that a few more questions usually must be asked to clients also the lotteries that are needed are somewhat more complex than in the certainty equivalent method or in the probability equivalent method the major advantage of the tradeoff method is its robustness against probability distortions and misconceptions which constitute a major cause of violations of expected utility and generate inconsistencies in utility elicitation thus the tradeoff method retains full validity under prospect theory rank dependent utility and the combination of the two i e cumulative prospect theory the tradeoff method is tested for monetary outcomes and for outcomes describing life duration we find higher risk aversion for life duration but the tradeoff method elicits similar curvature of utility apparently the higher risk aversion for life duration is due to more pronounced deviations from expected utility

time to change what to sow risk preferences and technology adoption decisions of cotton farmers in china this paper examines the role of individual risk attitudes in the decision to adopt a new form of agricultural biotechnology in china i conducted a survey and a field experiment to elicit the risk preferences of chinese farmers who faced the decision of whether to adopt genetically modified bt cotton a decade ago in my analysis i expand the measurement of risk preferences beyond expected utility theory to incorporate prospect theory i find that farmers who are more risk averse or more loss averse adopt bt cotton later farmers who overweight small probabilities adopt bt cotton earlier

preferences for consumption streams scale invariance correlation aversion and delay aversion under mortality risk lifetime financial decisions often require a decision analyst to elicit a decision maker s preferences for consumption streams in assessing such preferences the analyst might look for a set of reasonable conditions to check when selecting a utility form we provide such a set of conditions and show that they lead to the multiplicative expo power mep utility form some of our conditions involve trade offs under certainty and others relate to choices under uncertainty in the deterministic setting we invoke increasingness continuous differentiability mutual preferential independence and preferential scale invariance in the uncertainty setting we invoke componentwise risk aversion a utility independence condition and correlation aversion we apply the mep utility in a life cycle consumption planning problem under mortality risk in this context we find that the correlation averse mep utility is more realistic than and as tractable as the popular correlation neutral additive power and additive exponential utilities we show that the correlation averse decision maker prefers to consume more in life and leave less behind in death in addition we demonstrate that the correlation averse decision maker is more averse to delaying consumption in the face of mortality risk

a new and more robust test of qalys previous empirical tests of quality adjusted life years qalys the most widely used outcome measure in economic evaluations of health care generally yielded negative results these tests were however for the most part based on expected utility which is now widely acknowledged to be descriptively inaccurate the observed violations might therefore have been caused by violations of expected utility we performed a new test of qalys which is valid under expected utility and under the two most influential non expected utility theories rank dependent utility and prospect theory and found considerable support for the qaly model our findings suggest that qalys may be valid if nonexpected utility formulas are used to compute health state utilities

resource management under production and output price uncertainty implications for environmental policy various environmental policies have been proposed to control agricultural runoff of nutrients and pesticides the impacts of these policies on input use are complicated because of the various sources of uncertainty farmers face and the precise nature of farmers risk attitude a risk averse farmer s response to changed profit input and output taxes under output price and production uncertainty is examined the impact of these policies on input use depends on the form of production uncertainty risk input relationships risk attitudes and degrees of output price and production uncertainty these results have implications for the design and implementation of environmental and other production related policies copyright 2002 oxford university press

mortgages and markov chains a simplified evaluation model this paper has two purposes the first is purely expository to introduce stochastic interest rate models and security evaluation methods in a simple mathematical setting specifically we assume the uncertainties in the model are represented by a discrete time finite state markov chain second using this framework we present a relatively simple model for the evaluation of mortgage backed securities

an evaluation of monetary and non monetary techniques for assessing the importance of biodiversity and ecosystem services to people in countries with developing economies abstract biodiversity supports a range of ecosystems services that are of fundamental importance to people in poor countries economic valuation of biodiversity is important for the development of policies that protect biodiversity and alleviate poverty this paper provides an evaluation of monetary and non monetary techniques for assessing the value of biodiversity to people in least developed countries ldcs specifically research questions include 1 to what extent have monetary and non monetary techniques been used to assess the value of biodiversity and ecosystem services in ldcs 2 what are the key methodological practical epistemological and policy challenges to assessing the value of biodiversity and ecosystem services in ldcs 3 how can valuation methods be improved to allow more accurate valuation in ldcs

the analytic relationship between intervaling and nontrading effects in continuous time empirical studies in finance generally use data defined over the shortest re turn period available originally data bases such as crsp tended to have data collected over monthly periods and most analyses tended to use monthly data rather than data compounded over periods greater than a month with the implicit argument that the more data the better since the development of data bases with data collected over shorter differencing intervals there has been a growing tendency in finance to use returns data defined over increasingly shorter differ encing intervals 1 this development is desirable but is not without problems the problem with using data defined over shorter differencing intervals is that although greater estimating efficiency will be achieved 2 nontrading effects could be introduced into the analysis these will lead to biased beta estimators and biases in tests of capital market efficiency the purpose of this paper is to investi gate analytically the interrelation of the intervaling and nontrading effects both in estimating beta factors and in testing capital market efficiency levhari and levy 9 demonstrated theoretically and empirically that beta will be dependent upon the return interval length when returns are measured in discrete time in continuous time this dependency will be removed due to the additivity of the return variables in this domain however several studies carried out on u s 15 french 1 and u k data 7 16 have demonstrated that beta factors estimated in continuous time increase with the differencing interval seemingly contradicting this invariance property this paper will demonstrate analytically how this phenomenon can arise in the presence of nontrading ef fects and how this intervaling effect relates to the estimators developed by scholes and williams 14 and dimson 7 for handling the nontrading problems manchester university england the author is grateful to two anonymous referees for their

on the perils of financial intermediaries setting security prices the mutual fund wild card option economic distortions can arise when financial claims trade at prices set by an intermediary rather than direct negotiation between principals we demonstrate the problem in a specific context the exchange of open end mutual fund shares mutual funds typically set fund share price nav using an algorithm that fails to account for nonsynchronous trading in the fund s underlying securities this results in predictable changes in nav which lead to exploitable trading opportunities a modification to the pricing algorithm that corrects for nonsynchronous trading eliminates much of the predictability however there are many other potential sources of distortion when intermediaries set prices copyright the american finance association 2001

data frequency and the number of factors in stock returns abstract determining the number of factors that explain stock returns plays an important role in empirical tests of the arbitrage pricing theory this paper examines the sensitivity of the number of factors to different data frequencies using daily weekly and monthly returns the empirical results are consistent with the null hypothesis that the number of factors is the same for different data frequencies once daily returns are adjusted for nonsynchronous trading the evidence also identifies only one or two factors

empirical estimation and use of risk preferences an appraisal of estimation methods that use actual economic decisions the topic addressed in this paper concerns the conceptual basis estimation procedures and resources required for implementation of methods for estimating risk preferences by observing behavior an attempt is made to review and appraise previous literature as well as to explore some alternative approaches to begin it is important to contrast four general types of empirical settings of interest these are micro farm level macro market or other aggregations descriptive positivistic and prescriptive normative studies the prescriptive or conditionally normative studies seemingly have dominated agricultural economic studies of risk these generally have been micro in nature and have focused on

the october 1987 s p 500 stock futures basis five minute changes in the s p 500 index and futures contract are examined over a ten day period surrounding the october 1987 stock market crash since nonsynchronous trading problems are severe in these data new index estimators are derived and used the estimators use the complete transaction history of all 500 stocks nonsynchronous trading explains part of the large absolute futures cash basis observed during the crash the remainder may be due to disintegration of the two markets even after adjustment for nonsynchronous trading the index displays more autocorrelation than does the futures and the futures leads the index

qalys standard gambles and the expected budget constraint this paper shows that when quality adjustment factors for use in constructing qaly indices are established through answers to standard gamble questions or similar methods the assumptions that are made by respondents about the financial consequences of changing probabilities of illness and death are critically important for the use of qalys in cost utility analysis cua it qualifies meltzer s journal of health economics 16 1997 33 result that the cost per quality adjusted life year qaly for life saving medical interventions should include the future consumption of those who would otherwise not have survived by showing that its validity depends on how the qaly index has been established the paper also shows that contrary to a widely held notion allocation of a fixed health care budget through cua does not generally result in a second best efficient allocation another finding is that failure to specify carefully what respondents to standard gamble questions are supposed to assume about the financial consequences of ill health may result in a bias against providing care to older individuals

beta changes around stock splits revisited recent papers by lamoureux and poon 1987 and brennan and copeland 1988 document a significant permanent increase in average beta subsequent to stock split ex dates this paper demonstrates that the shift in estimated beta following ex dates decays as the measurement interval is lengthened there is no statistically significant difference between pre and post split betas using the scholes williams 1977 estimator and weekly return data or using monthly returns we conclude that lamoureux and poon s and brennan and copeland s results can be attributed to a bias created by using too short a return measurement interval to estimate beta

a closing call s impact on market quality at euronext paris abstract the paris bourse currently euronext paris refined its trading system to include electronic call auctions at market closings in 1996 for its less liquid continuous b stocks and in 1998 for its more actively traded continuous a stocks this paper analyzes the effects of the innovation on market quality our empirical analysis of price behavior for two samples of firms 50 b stocks and 50 a stocks for two different calendar dates 1996 and 1998 indicates that introduction of the closing calls has lowered execution costs for individual participants and sharpened price discovery for the broad market we further observe that market quality is improved at market openings albeit to a lesser extent we suggest that a positive spillover effect explains the closing call s more pervasive impact

impact of bovine spongiform encephalopathy on agribusiness in the united kingdom results of an event study of equity prices this article assesses the impact on agribusinesses of the united kingdom government s announcement of a possible link between bovine spongiform encephalopathy and human health three approaches are employed to derive benchmark models against which abnormal returns are estimated a simple market model scholes williams approach and an autoregressive distributed lag model abnormal returns are estimated for single firms and for subsectors over an eight day event window the autoregressive distributed lag model performs best and indicates significant negative abnormal returns in the beef pet food animal feed and dairy sectors and positive abnormal returns in the other meats sector

the impact of the return interval on common factors in stock returns evidence from a thin security market abstract the purpose of this paper is to analyze the effect of the return interval on common factors estimated in finnish stock returns firstly common factors are identified by factor analysis using daily weekly and monthly return intervals the similarity of these factors is then studied applying transformation analysis it is discovered that the factors produced by alternative return intervals significantly differ from each other an exception is the first factor representing the market index of securities

on the potential for observational equivalence in experiments on risky choice when a power value function is assumed we demonstrate theoretically and illustrate the implications of assuming power utility when the true function is of the expo power form empirical results can appear to be consistent with cumulative prospect theory when they are in fact generated from a markowitz model

american option pricing under garch by a markov chain approximation abstract we propose a numerical method for valuing american options in general and for the garch option pricing model in particular the method is based on approximating the underlying asset price process by a finite state time homogeneous markov chain since the markov transition probability matrix can be derived analytically the price of an american option can be computed by simple matrix operations the markov transition probability matrix is typically sparse the use of a sparse matrix representation can substantially increase the dimension of the markov chain to obtain better numerical results the markov chain method works well for the garch option pricing framework and it serves as an alternative to the existing numerical methods for the valuation of american options in other pricing settings we provide a convergence proof for the markov chain method and analyze its numerical performance for the black scholes 1973 and garch option pricing models

implementing qalys in the analysis of air pollution regulations in recent years there has been growing interest in cost effectiveness analysis for environmental regulations using quality adjusted life years as the measure of effectiveness this paper explores the implications of the qaly approach for measuring the impacts of air pollution regulations with an example using the u s environmental protection agency s heavy duty engine diesel fuel regulations the paper also examines the issues surrounding the potential use of qaly measures in cost benefit analysis for air pollution regulations key findings are that compared with a cost benefit approach the qaly framework gives more weight to reductions in incidence of chronic disease relative to reductions in premature mortality risk especially when the mortality risk reductions occur in older populations in addition use of monetized qalys in cost benefit analysis is not recommended due to fundamental differences in the theoretical grounding of the different measures however application of monetized qalys based on age specific willingness to pay wtp for mortality risk reductions gives very similar results to typical cost benefit analysis for mortality risk reductions as opposed to using values for qalys based on non age specific wtp the paper concludes that in cases where mortality provide the majority of a regulation s impacts qaly based cost effectiveness analysis and wtp based cost benefit analysis may not differ in their conclusions however in cases where morbidity or non health outcomes are significant cost effectiveness and cost benefit analysis may result in different evaulations of the efficiency of the regulation

volume and turn of the year behavior abstract this paper studies the trading characteristics of listed companies by size and year end behavior there were no transactions on nearly 25 of the days for the smallest decile even at the turn of year which is an active trading period for small companies as a result of low levels of trading and the regulations governing exchange specialists transaction prices and quotations of small listed companies may require several days to fully reflect equilibrium price changes the data confirm the existence of a year end seasonal pattern in rates of return for small companies and suggest that there may be a seasonal pattern for large companies as well

conducting event studies with thinly traded stocks abstract procedures for measuring abnormal performance around events when securities do not trade daily are examined a rank test patterned after the statistic proposed by corrado corrado c j 1989 a nonparametne test for abnormal security price performance in event studies journal of financial economics 23 385 395 is derived the empirical frequency distributions of the rank test statistic and a conventional test statistic are assessed under different rules for handling missing stock returns the results suggest that the traditional procedures are reasonably well specified for thickly and moderately traded stocks but misspecified for thinly traded stocks the rank test however performs well for all trading frequencies and trade to trade returns are the best way to handle missing returns

loss aversion under prospect theory a parameter free measurement agrowing body of qualitative evidence shows that loss aversion a phenomenon formalized in prospect theory can explain a variety of field and experimental data quantifications of loss aversion are however hindered by the absence of a general preference based method to elicit the utility for gains and losses simultaneously this paper proposes such a method and uses it to measure loss aversion in an experimental study without making any parametric assumptions thus it is the first to obtain a parameter free elicitation of prospect theory s utility function on the whole domain our method also provides an efficient way to elicit utility midpoints which are important in axiomatizations of utility several definitions of loss aversion have been put forward in the literature according to most definitions we find strong evidence of loss aversion at both the aggregate and the individual level the degree of loss aversion varies with the definition used which underlines the need for a commonly accepted definition of loss aversion