interpreting economic time series this paper explores some of the implications for econometric practice of the principle that people s observed behavior will change when their constraints change in dynamic contexts a proper definition of people s constraints includes among them laws of motion that describe the evolution of the taxes they must pay and the prices of the goods that they buy and sell changes in agents perceptions of these laws of motion or constraints will in general produce changes in the schedules that describe the choices they make as a function of the information that they possess until very recently received dynamic econometric practice ignored this principle the practice of dynamic econometrics should be changed so that it is consistent with the principle that people s rules of choice are influenced by their constraints this is a substantial undertaking and involves major adjustments in the ways that we formulate estimate and simulate econometric models

the effective tax rate and the pretax rate of return abstract this paper presents new estimates of the taxes paid on nonfinancial corporate capital on the pretax rate of return to capital and on the effective tax rate the basic time series show that both the pretax rate of return and the effective tax rate have varied substantially in the past quarter century an explicit analysis indicates that after adjusting for different aspects of the business cycle pretax profitability was between one and 1 5 percentage points lower in the 1970s than in the 1960s the rate of profitability in the 1960s was also about one half of a percentage point greater than the profitability in the 7 years of the 1950s after the korean war changes in productivity growth in inflation in relative unit labor costs and in other variables are all associated with changes in profitability none of these variables however can explain the differences in profitability between the 1950s 1960s and 1970s looking at broad decade averages the effective tax rate and the pretax rate of return move in opposite directions lower pretax profits occuring when the tax rate is high there thus appears to have been no tendency for pretax profits to vary in a way that offsets differences in effective tax rates

capital allocation how the us compares with other major industrialized nations data for the seven major industrialized nations spanning two decades provide evidence that capital formation as a percentage of gross domestic product differs significantly among the major industrialized nations comparatively the us ranks among the leaders in residential structures and among the lowest in commercial structures however us private sector allocation of capital to machinery and equipment appears to be in line with other major trading nations the rate of capital cost recovery appears to affect the amount of capital allocated to commercial structures but not to residential structures or machinery and equipment likewise changes in the capital cost recovery provisions under the economic recovery tax act of 1981 seem to have led to an increase in capital allocated to commercial structures and to a marginal increase in capital allocated to machinery and equipment

chaos in oil prices evidence from futures markets abstract we test for the presence of low dimensional chaotic structure in crude oil heating oil and unleaded gasoline futures prices from the early 1980s evidence on chaos will have important implications for regulators and short term trading strategies while we find strong evidence of non linear dependencies the evidence is not consistent with chaos our test results indicate that arch type processes with controls for seasonal variation in prices generally explain the non linearities in the data we also demonstrate that employing seasonally adjusted price series contributes to obtaining robust results via the existing tests for chaotic structure maximum likelihood methodologies that are robust to the non linear dynamics lend support for samuelson s hypothesis on contract maturity effects in futures price changes however the tests for chaos are not found to be sensitive to the maturity effects in the futures contracts the results are robust to controls for the oil shocks of 1986 and 1991

the realization effect risk taking after realized versus paper losses abstract understanding how prior outcomes affect risk attitudes is critical for the study of choice under uncertainty a large literature documents the significant influence of prior losses on risk attitudes the findings appear contradictory some studies find greater risk taking after a loss whereas others show the opposite that people take on less risk i reconcile these seemingly inconsistent findings by distinguishing between realized versus paper losses using new and existing data i replicate prior findings and demonstrate that following a realized loss individuals avoid risk if the same loss is not realized a paper loss individuals take on greater risk jel d11 d14 d81 g11

how to effectively stabilize china s commodity price fluctuations abstract the bulk commodities are basic goods and their price fluctuations are directly related to the stability of a country s macro economy investigating the main driving forces of the commodity price fluctuations is the key to stabilizing the macro economy ignoring the objective facts that there are a large number of nonlinear relationships between economic variables most of the existing scholars use the linear models to commodity price fluctuations to compensate for the shortcomings of existing research this paper uses the nonparametric additive regression model with data driven features to investigate the main driving forces of china s commodity price fluctuations the results show that exchange rate has an early promotion late inhibition inverse u shaped nonlinear effect on commodity price fluctuations because the renminbi appreciates in the early stages but depreciates in the later stages the nonlinear impact of the real economy also appears an inverted u shaped pattern due to the changes in growth mode of the real economy similarly international oil price produces an inverted u shaped nonlinear effect owing to the rise in international oil prices in the early stages and the decline in the later stages however the money supply has an early inhibition late promotion positive u shaped nonlinear effect on commodity prices therefore government departments should formulate targeted policies over time to effectively stabilize china s commodity prices

do equity markets respond to earnings paths we present our investigation of whether the u s equity market responds to the path of earnings information an earnings path consisted of two consecutive quarters of earnings announcements adjusted for expectations and seasonality by using analysts consensus forecasts after controlling for the information content over the period we found that security returns for the two quarter period are affected by the earnings path the path dependent security returns are more evident for smaller firms and the path dependence persists after controlling for firm size and investor anticipation of future earnings surprises

taxes inflation and the durability of capital the choice of capital durability is affected by the rate of inflation because nominal depreciation deductions are based on historical cost rather than replacement cost this paper analyzes a model with competitive firms and demonstrates that an increase in the rate of inflation will lead to an increase in the durability of capital if the ratio of the nominal discount rate to the rate of depreciation exceeds a critical value however if this ratio is less than the crucial value this effect is reversed the effect of costs of adjustments on the crucial value is analyzed

costly search and mutual fund flows this paper studies the flows of funds into and out of equity mutual funds consumers base their fund purchase decisions on prior performance information but do so asymmetrically investing disproportionately more in funds that performed very well the prior period search costs seem to be an important determinant of fund flows high performance appears to be most salient for funds that exert higher marketing effort as measured by higher fees flows are directly related to the size of the fund s complex as well as the current media attention received by the fund which lower consumers search costs

a reappraisal of the chaotic paradigm for energy commodity prices abstract energy commodity prices have been examined over the last 20 years to detect the presence of chaos as an alternative to stochastic models with contrasting results in this paper we wish to reassess the chaotic paradigm in the light of two new pieces of information with respect to the literature the appearance of noise aware estimation methods for the correlation entropy and the availability of longer time series our analysis shows that the literature has heavily underestimated the presence of noise and that chaotic characteristics coexist with stochastic ones in the time series of prices through the recurrence quantification analysis we have also observed the presence of intermittency where periods of regular behaviour are replaced by periods of chaotic behaviour which could explain the emergence of bubbles

energy sector pricing on the role of neglected nonlinearity modern economies have been subjected to a number of shocks during the past several years such as the burst of the internet bubble terrorist attacks corporate scandals the war in iraq the uncertainty about energy prices and the recent subprime mortgage crisis in particular during the last few years the energy shock has caused concerns for potential stagflation for both the united states and numerous other countries we perform numerous univariate tests for non linearity and chaotic structure using price data from the energy sector to resolve whether the sector s fundamentals or exogenous shocks drive these prices

all s well that ends well on the importance of how returns are achieved we demonstrate that investor satisfaction and investment behavior are influenced substantially by the price path by which the final investor return is achieved in a series of experiments we analyze various different price paths investors are most satisfied if their assets first fall in value and then recover and they are least satisfied with the opposite pattern independent of whether the final return is positive or negative price paths systematically influence risk preferences return beliefs and ultimately trading decisions our results enable a much more holistic perspective on a wide range of topics in finance such as the disposition effect risk taking behavior after previous gains and losses and behavioral asset pricing

evidence for countercyclical risk aversion an experiment with financial professionals countercyclical risk aversion can explain major puzzles such as the high volatility of asset prices evidence for its existence is however scarce because of the host of factors that simultaneously change during financial cycles we circumvent these problems by priming financial professionals with either a boom or a bust scenario subjects primed with a financial bust were substantially more fearful and risk averse than those primed with a boom suggesting that fear may play an important role in countercyclical risk aversion the mechanism described here is relevant for theory and may explain self reinforcing processes that amplify market dynamics jel e32 e44 g01 g11 g12

why does the law of one price fail an experiment on index mutual funds we conduct an experiment to evaluate why individuals invest in high fee index funds in our experiments subjects allocate 10 000 across four s p 500 index funds and are rewarded for their portfolio s subsequent return subjects overwhelmingly fail to minimize fees we can reject the hypothesis that subjects buy high fee index funds because of bundled non portfolio services search costs for fees matter but even when we eliminate these costs fees are not minimized instead subjects place high weight on annualized returns since inception fees paid decrease with financial literacy interestingly subjects who choose high fee funds sense they are making a mistake

capital gains overhang with a dynamic reference point financial models incorporating a reference point such as the capital gains overhang cgo model typically assume it is fixed at the purchase price combining experimental and market data this pa

the ineffectiveness of effective tax rates on business investment a critique of feldstein s fisher schultz lecture abstract in his fisher schultz lecture martin feldstein 1982 examined the effects of non neutral tax rules on business investment by estimating three econometric models and he concluded that the rising rate of inflation has because of the structure of existing u s tax rules substantially discouraged investment in the past 15 years in a detailed examination of feldstein s effective tax rate model and a less extensive review of his other formulations neoclassical and return over cost we advance a number of important and independent criticisms and find that these three models fail to support feldstein s conclusion that taxes have exerted a significantly depressing effect on net investment during the recent inflation episode

tax incentives for business investment a primer for policy makers in developing countries abstract the use of tax incentives is widespread even though the available empirical evidence on the cost effectiveness of such incentives in stimulating investment is highly inconclusive this paper is primarily intended as a primer on the use of tax incentives for policy makers especially those in developing countries it discusses the objectives cost effectiveness and transparency of implementing tax incentives assesses the comparative merits of alternative forms of such incentives and provides a review of the empirical literature its main conclusions are that the justification for the use of tax incentives should be limited to the rectification of market failures and that the preferred form of tax incentives are those that provide for faster recovery of investment costs

hot hands in mutual funds short run persistence of relative performance 1974 1988 the relative performance of no load growth oriented mutual funds persists in the near term with the strongest evidence for a one year evaluation horizon portfolios of recent poor performers do significantly worse than standard benchmarks those of recent top performers do better though not significantly so the difference in risk adjusted performance between the top and bottom octile portfolios is six to eight percent per year these results are not attributable to known anomalies or survivorship bias investigations with a different previously used data set and with some post 1988 data confirm the finding of persistence

determinants of investor expectations and satisfaction a study with financial professionals abstract we investigate determinants of price expectations and satisfaction levels of financial professionals and students in experiments with 150 professionals and 576 students we systematically vary price paths according to the final return positive or negative and the way in which the final return is achieved upswing followed by downswing or vice versa professionals show the most optimistic price expectations and are most satisfied if assets fall in price first and then recover in addition professionals price expectations are highest after positive returns among students qualitatively similar patterns emerge but professionals price expectations are less prone to framing effects

what makes an investment risky an analysis of price path characteristics abstract we examine the influence of financial asset historical price path characteristics on investors risk perception return beliefs and investment propensity to that end we run a series of survey experiments in which we present various price patterns to individuals with vested interest in financial matters our findings reveal that price paths with identical daily and monthly returns and consequently identical return standard deviation can lead to substantially different risk perception by investors indicating that historical volatility is insufficient to explain risk perception salient features such as highs lows and crashes are the most influential drivers of perceived risk in price paths return forecasts are primarily driven by past overall returns and the most recent price developments perceived risk and return beliefs strongly predict investment propensity

how price path characteristics shape investment behavior abstract price paths are often the only graphical representation of financial products investors receive before making an investment decision we argue that price paths serve as graphical frames that influence the perceived attractiveness of an asset by highlighting specific asset characteristics in a controlled lab experiment we find that price paths have an impact on investment decisions in a regression we test a simple model relating the perception of price path shapes to several heuristics these heuristics are focusing on more recent outcomes deriving implicit reference prices from focal prices focusing on losses and estimating risk from the amplitude of the path we conclude that investment decisions are systematically biased due to the shape of an asset s price path

the disposition effect in securities trading an experimental analysis the disposition effect is the tendency to sell assets that have gained value winners and keep assets that have lost value losers disposition effects can be explained by the two features of prospect theory the idea that people value gains and losses relative to a reference point the initial purchase price of shares and the tendency to seek risk when faced with possible losses and avoid risk when a certain gain is possible our experiments were designed to see if subjects would exhibit disposition effects subjects bought and sold shares in six risky assets asset prices fluctuated in each period contrary to bayesian optimization subjects did tend to sell winners and keep losers when the shares were automatically sold after each period the disposition effect was greatly reduced

tax policy and investment in major u s macroeconomic econometric models abstract in an analysis of six major u s quarterly models the predicted results of tax incentives for investment are found to vary widely differences are traced to critical specifications in investment equations when appropriately revised investment equations are reestimated the role of tax parameters is much reduced particularly among the high outliers and the variance among the models is narrowed decidedly full model simulations of revised equations suggest that current and proposed incentives such as the investment tax credit and accelerated depreciation are not cost effective increases in investment approximate only half of static tax losses and budget deficits widen

how does household portfolio diversification vary with financial literacy and financial advice household investment mistakes are an important concern for researchers and policymakers alike portfolio underdiversification ranks among those mistakes that are potentially most costly however its roots and empirical importance are poorly understood i estimate quantitatively meaningful diversification statistics and investigate their relationship with key variables nearly all households that score high on financial literacy or rely on professionals or private contacts for advice achieve reasonable investment outcomes compared to these groups households with below median financial literacy that trust their own decision making capabilities lose an expected 50 bps on average all group differences stem from the top of the loss distribution