the home bias of the poor foreign asset portfolios across the wealth distribution abstract this paper documents how the share of foreign stocks in us household portfolios rises with the ratio of financial wealth to non financial income this is both because wealthier households are more likely to participate in foreign asset markets and because portfolio shares of participants increase with financial wealth but decrease with non financial income a simple standard two country general equilibrium model shows that hedging of terms of trade movements and non financial income risk produces non trivial heterogeneity in portfolios across the wealth and income distribution within countries that is qualitatively in line with this evidence

capital flow controls international asset pricing and investors welfare a multi country framework this paper investigates the impact of capital flow restrictions on the pricing of securities on the optimal portfolio composition for investors of different nationalities and on their welfare under capital flow controls the equilibrium price of a security is determined jointly by its international and national risk premiums and investors acquire nationality specific portfolios along with a market wide proxy for the world market portfolio removal of investment barriers generally leads to an increase in the aggregate market value of the affected securities and all investors favor a move toward market integration introduction of different types of index funds in the world market generally increases world market integration and investor welfare in recent years the international capital markets have undergone numerous important changes that have increased the international linkage of national markets these changes include the creation of national index funds e g mexico korea taiwan india france and scandinavia and selective liberalization e g brazil india korea sweden and japan despite their potential impact on the national economies and global finance it is not clear what consequences these integrating changes entail for example is welfare increased by allowing cross border investment that is restricted to purchasing the entire national portfolio of which the national index fund is a class unfortunately with the exception of subrahmanyam 1975a who studies the pricing and welfare effects of fully integrating heretofore completely segmented markets other international asset pricing models that incorporate capital flow restrictions for instance black 1974 stulz 1981b lessard et al 1983 errunza and losq 1985 cooper and kaplanis 1986 and eun and janakiramanan 1986 analyze the pricing but not the welfare effects of investment barriers to analyze systematically the welfare implications of various structural changes in the current market environment this paper follows the lead of subrahmanyam and recasts the analysis in two important respects

why does the cyclical behavior of real wages change over time the cyclical behavior of real wages has evolved from mildly countercyclical during the interwar period to modestly procyclical in the postwar era this paper presents a general equilibrium business cycle model that helps explain the evolution in the model changes in the real wage cyclicality arise from interactions between nominal wage and price rigidities and an evolving input output structure

intertemporal substitution of effort some empirical evidence the labour economics literature refers often to effort but there is little empirical evidence as to how productivity and effort respond to wage rate variations an unusual natural experiment in which wage rates suffered an exogenous change of two weeks duration gives some insight into the magnitude of this effect for a group of workers in victorian county durham the effort response measured as the impact of a temporary wage rate change on output per shift dominates the response of attendance comparison of the estimates presented here with those in treble journal of economic history 61 414 38 2001 suggests that the effects are short lived

input demand elasticities for heterogeneous labor firm level estimates and an investigation into the effects of aggregation labor economists have paid increasing attention to the estimation of demand elasticities for heterogeneous labor the majority of these studies investigate the effect on wage rates resulting from exogenous changes in factor quantities i e the measurement of elasticities of complementarity examples of these studies abound borjas for example investigates the impact of differences in labor market representation on the earnings of racial groups 8 in another paper borjas defines immigrants as a separate labor group and is able to determine the impact of immigration on the wages earned by natives 9 berger defines labor inputs along education and gender lines thereby allowing for the investigation of changes in the age education composition of the work force on wage rates 5 and grant and hamermesh study the effect of increasing female labor force participation on the wages earned by youth and adults 17 less attention has been paid to the study of the responsiveness of employment to exogenous changes in wage rates i e the measurement of elasticities of substitution less attention has been focused on this issue because the data requirements are more stringent since in order to presume that wage rates are exogenously determined the unit of observation must be small ideally establishmentor firm level data would be used the relative inaccessibility of these type of data has led researchers to use more aggregated figures such as smsa level or industry level data to address microissues as long as wage rates are determined exogenously the unit of observation chosen is appropriate there are real concerns however about the adequacy of more aggregated units to describe the behavior of firms 2 this study addresses the issue of whether micro level data are in fact needed to accurately measure elasticities of substitution among labor groups a firm level data set that includes input

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

trying to explain home bias in equities and consumption investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest a phenomenon called equity home bias in the absence of this bias investors would optimally diversify domestic output risk using foreign equities therefore consumption growth rates would tend to co move across countries even when output growth rates do not empirically however consumption growth rates tend to have a lower correlation across countries than do output growth rates a phenomenon i call consumption home bias in this paper i discuss these two biases and their potential relationship as suggested by the literature

an empirical analysis of the daily labor supply of stadium venors this paper analyzes the daily labor supply behavior of food and beverage vendors at a single stadium over an entire baseball season this labor market is attractive for the study of labor supply both because ofvendors unilateraly decide whether to participate on each game date and because canges in product demand conditions across days are large and highly predictable generating exogenous game to game variation in the vendor wage i exploit the observable shift in product demand conditions across games to esumate the labor supply participation elasticity of stadium vendors estimates that recognize that demand conditions and vendor labor supply decisions simultancously determine the venofdor wage always find substantial labor supply elasticities typically in the 55 65 range in contract estimates that ignore the endoreneity of the ties these results highlight the imporatance of using demand shift markets

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

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

new evidence on labor supply employment versus hours elasticities by sex and marital status using the tri annual micro panel data of the survey of income and program participation we estimate fixed effects labor supply models separating the extensive and intensive margins the employment elasticity is 0 6 for single men versus 1 1 for married men the employment elasticity is 2 4 for single women versus 1 8 for married women the compensated hours worked elasticity is 0 4 for employed single and married men and 0 7 for employed single and married women the implied aggregate employment elasticity of 1 5 and hours per employee elasticity of 0 5 indicate employment fluctuations account for three fourths of wage induced variation in labor hours

international portfolio nondiversification and exchange rate variability abstract incomplete international portfolio diversification is implied by an equilibrium models of exchange rates with nontraded goods the model can also explain the greater correlation between consumption and income within a country than between consumption across countries nontraded goods make more stringent the elasticity conditions required to explain exchange rate variability resulting from current productivity disturbances though not from disturbances to fiscal policies or the prospective return to investment the model is also consistent with international real interest rate differentials changes over time in the current account and relative wealth across nations and observed time series properties of exchange rates

why do stocks and consumption imply such different gains from international risk sharing abstract estimates of the gains to international risk sharing based upon stock returns tend to find dramatically higher gains than do estimates from consumption based models in this paper i examine the reasons for these differences using a common theoretical framework for both approaches i find that the differences are largely due to the much higher variability of stock returns and its implied intertemporal substitution in marginal utility also contrary to conventional wisdom the differences in gains from the two approaches do not arise from treating stock returns as exogenous rather than endogenous

home bias in equity portfolios inflation hedging and international capital market equilibrium we test whether the home bias in equity portfolios is caused by investors trying to hedge inflation risk the empirical evidence is consistent with this motive only if investors have very high levels of risk tolerance and equity returns are negatively correlated with domestic inflation we then develop a model of international portfolio choice and equity market equilibrium that integrates inflation risk and deadweight costs using this model we estimate the levels of costs required to generate the observed home bias in portfolios consistent with different levels of risk aversion for a level of risk aversion consistent with standard estimates of the domestic equity market risk premium these costs are about a few percent per annum greater than observable costs such as withholding taxes thus the home bias cannot be explained by either inflation hedging or direct observable costs of international investment unless investors have very low levels of risk aversion article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

comparing new keynesian models of the business cycle a bayesian approach abstract the baseline new keynesian model cannot replicate the observed persistence in inflation output and real wages for sensible parameter values as a result several extensions have been suggested to improve its fit to the data we use a bayesian approach to estimate and compare the baseline sticky price model of calvo s 1983 staggered prices in a utility maximizing framework journal of monetary economics 12 383 398 and three extensions our empirical results are as follows first we find that adding price indexation improves the fit of calvo s 1983 staggered prices in a utility maximizing framework journal of monetary economics 12 383 398 model second models with both staggered price and wage setting dominate models with only price rigidities third introducing wage indexation does not significantly improve the fit fourth all model estimates suggest a high degree of price stickiness fifth the estimates of labor supply elasticity are higher in models with both staggered price and wage contracts finally the estimated inflation parameters of the taylor rule are stable across models

the reality of stock market jumps diversification abstract we propose a non parametric procedure for estimating systemic co jumps and independent idiosyncratic jumps for 35 stock markets and study news associated with these jumps as reported in factiva and bloomberg from 1988 to 2014 our results suggest that it is important to distinguish between systemic co jumps and idiosyncratic jumps we find both types of jumps have important implications for home bias investors while idiosyncratic jumps have economically significant impact on portfolio weights for emerging markets our news analysis suggests systemic jumps are typically caused by currency crises sectoral failure liquidity issues and deteriorating economic climate while idiosyncratic jumps are usually caused by political unrest currency instability and large firm effects on small economies in fact many of the idiosyncratic jumps share the same origin although different stock markets experienced the impact differently at different times

do trade costs in goods market lead to home bias in equities abstract two of the main puzzles in international economics are the consumption and the portfolio home biases we solve for international equity portfolios in a two country two good stochastic equilibrium model with trade costs in goods markets we show that introducing trade costs as suggested by obstfeld and rogoff obstfeld m rogoff k 2000a the six major puzzles in international macroeconomics is there a common cause nber macroeconomics annual 15 is not sufficient to explain these two puzzles simultaneously on the contrary we find that trade costs create a foreign bias in portfolios for reasonable parameter values this result is robust to the addition of non tradable goods for standard calibrations of the preferences

estimation of short run and long run elasticities of energy demand from panel data using shrinkage estimators this article discusses the problem of obtaining short run and long run elasticities of energy demand for each of 49 states in the united states using data for 21 years estimation using the time series data by each state gave several wrong signs for the coefficients estimation using pooled data was not valid because the hypothesis of homogeneity of the coefficients was rejected shrinkage estimators gave more reasonable results the article presents in a unified framework the classical empirical bayes and bayes approaches for deriving these estimators

on the effects of barriers to international investment a simple model is presented in which it is costly for domestic investors to hold foreign assets the implications of the model for the composition of optimal portfolios at home and abroad are derived it is shown that all foreign assets with a beta larger than some beta plot on either one of two security market lines some foreign assets with a beta smaller than are not held by domestic investors even if their expected return is increased slightly while it is obviously not true that asset markets are completely segmented between countries there is evidence of barriers to international investment although reality seems to lie in that grey area between complete segmentation and no segmentation at all most international asset pricing models are concerned with the extreme case of no barriers to international investment no effort seems to have been made to study the effect on portfolio choice of such barriers which make it costly to hold foreign securities as opposed to domestic securities but which do not in general render international diversification so onerous that investors avoid foreign securities completely casual empiricism suggests that models without barriers to international investment should be suspect those models cannot explain why it appears that in every country investors on average hold more domestic securities than would be required if they held the world market portfolio 2 this paper constructs a model of international asset pricing in which there is a cost associated with holding either long or short risky foreign securities for the sake of simplicity in most of the paper we assume that while domestic investors face barriers to international investment foreign investors face no such barriers it turns out that nothing significant is lost with such an assumption the main conclusions of this paper for the case in which foreign investors face no barriers to international investment are 1 in the presence of barriers to international investment some risky foreign

the determinants of cross border equity flows abstract we explore a new panel data set on bilateral gross cross border equity flows between 14 countries 1989 1996 we show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions gross transaction flows depend on market size in source and destination country as well as trading costs in which both information and the transaction technology play a role distance proxies some information costs and other variables explicitly represent information transmission an information asymmetry between domestic and foreign investors and the efficiency of transactions the geography of information is the main determinant of the pattern of international transactions while there is weak support in our data for the diversification motive once we control for the informational friction we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings

indeterminacy aggregate demand and the real business cycle abstract we show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual fluctuations that standard rbc models predict fairly well but also aspects of actual fluctuations that standard rbc models cannot explain such as the hump shaped trend reverting impulse responses to transitory shocks found in us output cogley and nason am econom rev 85 1995 492 the large forecastable movements and comovements of output consumption and hours rotemberg and woodford am econom rev 86 1996 71 and the fact that consumption appears to lead output and investment over the business cycle indeterminacy arises in our model due to capacity utilization and mild increasing returns to scale

segmentation and time of day patterns in foreign exchange markets abstract this paper sheds light on a puzzling pattern in spot foreign exchange markets domestic currencies appreciate depreciate systematically during foreign domestic working hours this phenomenon spans many years and several exchange rates and overrides calendar effects we argue that it is mainly due to liquidity and inventory patterns that emerge from the combination of two factors domestic agents tend to be net buyers of foreign currency and to trade mostly in their country s working hours the prevalence of domestic foreign traders demanding the counterpart currency during domestic foreign working hours implies sell price buy price pressure on the domestic currency during domestic foreign working hours

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

capacity utilization under increasing returns to scale abstract this paper overcomes an important objection against the empirical relevance of the benhabib farmer model as a potential account of actual business cycle fluctuations this is attributable to an elasticity effect and a returns to scale effect of capacity utilization these effects are closely related to the empirical puzzles that capital appears to play an insignificant role in explaining cyclical movements in output and that the estimated labor elasticity appears to be larger than labor s share due to these effects multiple equilibria and persistent fluctuations can easily occur in a growth model for externalities mild enough so that the aggregate labor demand curve is downward sloping analyses show that the propagation mechanism generated by capacity utilization under mild increasing returns is capable of explaining the periodic patterns of u s business cycles documented by watson journal of economic literature classification numbers e32 e22 c52

is local bias a cross border phenomenon evidence from individual investors international asset allocation abstract extant literature consistently documents that investors tilt their domestic equity portfolios towards regionally close stocks local bias we hypothesize that individual investors local bias is not limited to the domestic sphere but instead also determines their international investment decisions our results confirm the presence of a cross border local bias specifically we show i that the stockholdings of individual investors living within regional proximity to a foreign country display a significantly lower foreign investment bias towards investment opportunities in that country and ii that this drop in foreign investment bias levels is disproportionately driven by investments in regionally close neighbor country companies the impact of cross border local bias on investors bilateral foreign equity investments is economically significant and holds even after controlling for previously identified explanations of international asset allocation

foreign direct investment the human dimension this paper argues that fdi is plagued by information asymmetries and moral hazard problems which can be ameliorated by face to face interaction an equilibrium model of fdi indicates that better ability to discriminate among alternative projects in a foreign country through personal contact will increase foreign investment into that country and spur more investment back from that country we examine the relationship between fdi and three proxies for personal interaction distance language and travel we find strong evidence supporting the importance of the human dimension in fdi particularly that associated with travel the direction of influence appears to be of travel on fdi rather than fdi on travel

model misspecification and underdiversification in this paper we study intertemporal portfolio choice when an investor accounts explicitly for model misspecification we develop a framework that allows for ambiguity about not just the joint distribution of returns for all stocks in the portfolio but also for different levels of ambiguity for the marginal distribution of returns for any subset of these stocks we find that when the overall ambiguity about the joint distribution of returns is high then small differences in ambiguity for the marginal return distribution will result in a portfolio that is significantly underdiversified relative to the standard mean variance portfolio

indeterminacy and increasing returns abstract we investigate properties of the one sector growth model with increasing returns under two organizational structures capable of reconciling the existence of aggregate increasing returns with competitive behavior by firms the first involves input externalities the second involves monopolistic competition we show for parameters in close accord with recent literature on real business cycles that the model displays an indeterminate steady state that can be exploited to generate a model of business fluctuations driven by self fulfilling beliefs in our first class of models growth is generated by exogenous increases in factor productivity in the second class the marginal product of capital is large enough for endogenous growth journal of economic literature classification numbers e00 e3 o40

business cycles and the relationship between concentration and price cost margins using a newly constructed panel data base we examine changes in price cost margins in 284 manufacturing industries between 1958 and 1981 a key finding is a dramatic narrowing of the spread between the margins of concentrated and unconcentrated industries over this period we provide evidence that this narrowing is a result of the greater sensitivity of price cost margins in more concentrated industries to demand fluctuations this finding is robust to the inclusion of other industry variables and to measures of import competition the results indicate that cross sectional estimates of the concentration margins relationship are likely to be both biased and misleading

nontraded goods nontraded factors and international non diversification abstract can the presence of nontraded consumption goods or nontraded factors of production explain the high degree of home bias displayed by investor portfolios we find that the answer is no so long as individuals have access to free international trade in financial assets in particular it is never optimal to exhibit home bias with respect to domestic traded good equities by contrast holdings of nontraded good equities in an optimal portfolio will depend sensitively on the elasticity of substitution between traded and nontraded goods

sticky wages and sectoral labor comovement abstract a defining feature of business cycles is the comovement of inputs at the sectoral level with aggregate activity standard models cannot account for this phenomenon this paper develops and estimates a two sector dynamic general equilibrium model that can account for this key regularity my model incorporates three shocks to the economy monetary policy shocks neutral technology shocks and embodied technology shocks in the capital producing sector the estimated model is able to account for the response of the u s economy to all three shocks using this model i argue that the key friction underlying sectoral comovement is rigidity in nominal wages

prices output and hours an empirical analysis based on a sticky price model abstract i show that a simple sticky price model based on rotemberg 1982 is consistent with a variety of facts concerning the correlation of prices hours and output it is consistent with the negative correlation between forecastable movements in prices and output as well as the smaller negative correlation between forecastable movements in prices and hours it is also consistent with the positive correlations of unexpected movements in prices output and hours these patterns are harder to reconcile with the flexible price version of the model in particular they require that money respond differently to forecastable and to unforecastable real shocks

welfare gains from international risksharing abstract this paper uses consumption data to compute yet unexploited welfare gains that can be achieved through risksharing among twenty oecd countries there is both aggregate national consumption risk and nondiversifiable individual specific risk countries engage in an optimal risksharing arrangement to pool risk associated with the aggregate consumption endowment streams welfare gains are associated with reduced consumption variability and with the international pricing of the consumption streams of individual countries the paper considers the standard vnm time additive preferences as well as nonexpected utility and habit formation preferences large unexploited gains are found under all sets of preferences leading to an international risksharing puzzle

confidence in the familiar an international perspective one striking feature of intemrnational portfolio investment is the extent to which equity portfolios are concentrated in the domestic equity market of the investor the home bias puzzle i examine the role of investors perception of foreign investment risk on their portfolio choices the expected retumrns and risk of foreign investment are specified through an asset pricing model with the home portfolio being the benchmark asset pastor s 2000 domestic capm the model serves as a reference point around which investors can center their prior beliefs i focus on investors prior beliefs that are consistent with the literature on confidence in the familiar foreign equities in terms of both expected returns and risk being viewed less favorably than domestic equities these prior beliefs are then combined with the data on g7 equities and the revised beliefs are used to obtain the global optimal asset allocation to hold predominantly domestic equities each g7 investor has to believe that the risk of foreign investment is several times higher than the actual risk the home bias is more of a puzzle for a u s investor during the 1970s specifying investors prior beliefs around the world capm does not help resolve the puzzle

shocks structures or monetary policies the euro area and us after 2001 abstract the us federal reserve cut interest rates more vigorously in the recent recession than the european central bank did by comparison with the fed the ecb followed a more measured course of action we use an estimated dynamic general equilibrium model with financial frictions to show that comparisons based on such simple metrics as the variance of policy rates are misleading we find that because there is greater inertia in the ecb s policy rule the ecb s policy actions actually had a greater stabilizing effect than did those of the fed as a consequence a potentially severe recession turned out to be only a slowdown and inflation never departed from levels consistent with the ecb s quantitative definition of price stability other factors that account for the different economic outcomes in the euro area and us include differences in shocks and differences in the degree of wage and price flexibility

the alaskan labor market during the pipeline era built between 1974 and 1977 the trans alaska pipeline was the largest privately financed construction project in world history the alaskan labor market during the pipeline era provides an ideal opportunity to view labor market responses to a large anticipated and temporary shock to labor demand the paper presents several theoretical models of market responses to temporary demand shocks and then assesses the ability of each model to explain the alaskan data among the findings are that alaskan wages were very flexible labor supply was quite elastic on both the intensive hours per worker and extensive number of workers margins and even a major short run demand shock need not have a long run impact

what can explain the apparent lack of international consumption risk sharing recent research in international business cycles finds that international consumption comovements do not match the risk sharing predictions of standard complete markets models in this paper i ask whether two different types of explanations can help explain this result 1 nonseparabilities between tradables and nontradable leisure or goods and 2 the effects of capital market restrictions on consumption risk sharing i find that risk sharing cannot be resolved by either explanation alone however when i allow for both nonseparabilities and certain market restrictions risk sharing among unrestricted countries cannot be rejected this evidence suggests that a combination of these two effects may be necessary to explain consumption risk sharing across countries

evaluating risky consumption paths the role of intertemporal substitutability abstract in dynamic stochastic welfare comparisons a failure clearly to distinguish between risk aversion and intertemporal substitutability can result in misleading assessments of the impact of risk aversion on the welfare costs of consumption risk changes the problem arises in any setting in which uncertainty is propagated over time notably but not exclusively in economies with stochastic consumption trends regardless of the preference setup adopted an increase in risk aversion amplifies the per period costs of risks the weights consumers use to cumulate the per period costs of risks with persistent effects should however depend on intertemporal substitutability as well as on risk aversion under time separable expected utility preferences an increase in the period utility function s curvature therefore alters the welfare effect of risk for reasons that are in part unrelated to risk aversion to illustrate these points i reconsider lucas s estimate of the cost of consumption instability for the postwar united states

the ability of global stock exchange mechanisms to mitigate home bias evidence from euronext this paper examines the effects on equity home bias of two mechanisms adopted by euronext when it was formed by the merger of four european countries stock exchanges in 2002 the two structural mechanisms are the integration of trading platforms across the four predecessor exchanges and the creation of named segments of the integrated exchange on which firms could voluntarily list by precommitting to enhanced disclosure and transparency employing a difference in differences research design using other european union companies as a control group we document that the integration of the euronext market was associated with a reduction in home bias for firms listed on the named segments of the euronext exchange but not for the nonsegment euronext firms our results suggest that the reduction in transaction costs from the integration of the trading platforms did not make the nonsegment euronext firms more attractive to the specific investors for whom the transaction costs were reduced on the other hand the decrease in information costs due to the precommitments to enhanced transparency made the segment firms more attractive to all categories of foreign investors consistent with the information costs hypothesis this paper was accepted by mary barth accounting

are correlations of stock returns justified by subsequent changes in national outputs abstract in an integrated world capital market the same pricing kernel is applicable to all securities we apply this idea to the stock returns of different countries we investigate the underlying determinants of cross country stock return correlations first we determine for a given measured degree of commonality of country outputs what should be the degree of correlation of national stock returns we propose a framework that contains a statistical model for output and an intertemporal financial market model for stock returns we then attempt to match the correlations generated by the model with measured correlations our results show that under the hypothesis of market segmentation the model correlations are much smaller than observed correlations however assuming world markets are integrated our model correlations can be matched with observed correlations

the impact of affirmative action on labor demand a test of some implications of the le chatelier principle this paper presents an alternative approach to measuring the impact of affirmative action on firms affirmative action is modeled as a series of hiring quotas if the quotas are binding then a firm subject to affirmative action will operate with greater costs of production have less elastic demand for inputs and be less able to substitute between most inputs the results are consistent with the hypothesis that affirmative action regulations significantly constrain firms behavior own wage elasticities are less elastic and most inputs are less substitutable for constrained firms further affirmative action raises costs by 6 5 percent for firms subject to the program copyright 1992 by mit press

asset pricing puzzles and incomplete markets the representative agent theory of asset pricing is modified to incorporate heterogeneous agents and incomplete markets the model features two types of agents who differ up to a nontradable idiosyncratic component in their endowment processes numerical solutions indicate that individuals are able to diversify a substantial portion of their idiosyncratic income risk through riskless borrowing and lending alone restrictions on the variability of intertemporal marginal rates of substitution hansen and jagannathan 1991 are used to argue that incomplete markets as modeled here cannot account for the properties of asset returns that are anomalous from the perspective of representative agent theory a large literature in financial economics has investigated the extent to which variants of the lucas 1978 general equilibrium theory of asset pricing can account for the joint behavior of aggregate u s consumption and asset returns by and large this literature has concluded that a theory based upon frictionless arrow debreu markets and or a representative agent makes strongly counterfactual predictions regarding even the simple unconditional properties of this relationship mehra and prescott 1985 for instance show that the theory drastically underpredicts the average excess rate of return on u s stocks the so called equity premium puzzle weil 1989 points out as did mehra and prescott that the magnitude of the average risk free rate is far below that predicted by the theory this has been dubbed the risk free rate puzzle numerous authors including grossman melino and shiller 1987 and backus gregory and zin 1989 show that the theory cannot account for term premia inherent in the yield curve hodrick 1987 surveys a large literature which documents the theory s shortcomings in accounting for excess expected returns in foreign exchange markets the notion that the representative agent model cannot account for excess returns across a wide array of asset markets can be made more precise by using tools developed by hansen and jagannathan 1991 and shiller 1982

intertemporal substitution in labor supply evidence from micro data the sensitivity of the supply of labor to intertemporal variation in the wage is an important issue in macroeconomics the analysis of social security and pensions and the study of life cycle patterns of work this paper explores two approaches to the measurement of intertemporal substitution that have appeared in the literature the first approach is to use consumption to control for wealth and unobserved expectations about future wages in the labor supply equation the second approach is to estimate a first difference equation for hours in which labor supply from the previous period serves as a control for wealth and wage expectations the results indicate that intertemporal substitution elasticity for married men is positive but small

international investment restrictions and closed end country fund prices some closed end country funds trade at large premiums relative to their net asset values this paper examines whether international investment restrictions raise country fund price net asset value ratios by segmenting international capital markets we test whether a relation exists between announcements of changes in investment restrictions and changes in these ratios using weekly data from may 1981 to january 1989 the results provide evidence that some foreign markets are at least partially segmented from the u s capital market

increasing returns and unsynchronized wage adjustment in sunspot models of the business cycle a challenge to models of equilibrium indeterminacy based on increasing returns is that required increasing returns for generating indeterminacy can be implausibly large and rise quickly with the relative risk aversion in labor we show that unsynchronized wage adjustment via a relative wage effect can both lower the required degree of increasing returns for indeterminacy to a plausible level and make it invariant to the relative risk aversion in labor consequently indeterminacy and sunspot driven fluctuations can emerge for plausible increasing returns regardless of the relative risk aversion in labor our model generates reasonable dynamics in terms of matching the business cycle and sunspot shocks become more important with labor market friction

the 1000 gtc coal question are cases of vastly expanded future coal combustion still plausible abstract decades ago prospects seemed strong for significantly expanded global coal consumption studies of energy futures depicted the full geologic extent of coal as a virtually unlimited backstop energy supply drawing justification from legacy ratios of reserves to production r p on the order of several centuries annual consumption and market prices for hard coal have doubled since 1990 providing an opportunity to recalibrate the next century s reference case with an empirically constrained outlook for this important industrial fuel source over the last two decades improving knowledge of world coal deposits refined estimates of their recoverable portion reducing assessed reserves by two thirds coal supply costs during this period increased much faster than anticipated by models which mapped total geologic occurrences with long and flat supply curves consequently underlying assumptions no longer hold for many multi decade global energy reference cases depicting a rapid expansion of coal production the conceptual framework for these scenarios needs revision energy system outlooks underlying pathways of future greenhouse gas ghg emissions provide a case study since the climate change research community commonly uses business as usual scenarios with a strong carbon signal from coal combustion many times higher than current reserve estimates in this paper we explain why vast expansion in 21st century coal consumption should not be used to describe any plausible reference case of the global energy future illustrating coal as a practically unlimited backstop supply is inconsistent with the current state of coal markets technology and reserve estimates future coal production faces many uncertainties but the key uncertainty for long term scenarios is the recoverable portion of reserves not how many total geologic resources will eventually become reserves

the need for improved financial reporting of a developing country energy utility abstract some consideration has been given to regulatory and institutional reforms to facilitate sustainable development in electricity usage in papua new guinea but little attention has been paid to bringing about full compliance of financial reporting expectations of the country s main energy utility examining documentary evidence of the audit reports of the auditor general s office of papua new guinea this study considers the financial reporting compliance of png power for the period 2007 2013 and the means by which compliant reporting may be improved the results of the study reveal that the financial statements of png power are late and receive disclaimers of opinion from the auditor general s office which suggest that png power s stakeholders are not receiving accurate and reliable financial information to make informed decisions about sustainable development of electricity usage and planning in papua new guinea the study reveals that it would take little resources to improve png power s reporting which in turn could enhance national energy policy decision making and energy utility accountability

loss aversion asymmetric market comovements and the home bias abstract loss aversion has been used to explain why a high equity premium might be consistent with plausible levels of risk aversion the intuition is that the first order different utility impact of wealth gains and losses leads loss averse investors to behave similarly to investors with high risk aversion but if so should those agents not perceive larger gains from international diversification than standard expected utility investors with plausible levels of risk aversion they might not because comovements in international stock markets are asymmetric correlations are higher in market downturns than in upturns this asymmetry dampens the gains from diversification relatively more for loss averse investors we analyze the portfolio problem of such an investor who has to choose between home and foreign equities in the presence of asymmetric comovement in returns perhaps surprisingly in the context of the home bias puzzle we find that loss averse investors behave similarly to those with standard expected utility preferences and plausible levels of risk aversion we argue that preference specifications that appear to perform well with respect to the equity premium puzzle should be subjected to this test

the sampling error in estimates of mean variance efficient portfolio weights this paper presents an exact finite sample statistical procedure for testing hypotheses about the weights of mean variance efficient portfolios the estimation and inference procedures on efficient portfolio weights are performed in the same way as for the coefficients in an ols regression ols t and f statistics can be used for tests on efficient weights and when returns are multivariate normal these statistics have exact t and f distributions in a finite sample using 20 years of data on 11 country stock indexes we find that the sampling error in estimates of the weights of a global efficient portfolio is large

exchange rate volatility and deviations from unbiasedness in a cash in advance model abstract this paper examines time series properties of exchange rate changes the forward premium and the forward bias in the context of a variant of svensson s cash in advance model the model is solved and simulated using realistic forcing processes whose law of motion is estimated from u s japan data and then approximated by a markov chain although method of moments estimation shows that the over identifying restrictions implied by the model are not rejected it fails dramatically in producing a sufficiently variable risk premium on forward market speculation this result is robust to various pertubations to the model s parameters forcing processes and preference structure the model also fails to match exchange rate and forward premium volatility simultaneously

the seasonal cycle and the business cycle almost all recent research on macroeconomic fluctuations has worked with seasonally adjusted or annual data this paper takes a different approach by treating seasonal fluctuations as worthy of study in their own right our results show that seasonal fluctuations are an important source of variation in all macroeconomic quantity variables but are small or entirely absent in both real and nominal price variables the timing of the seasonal fluctuations consists of increases in the second and fourth quarters a large decrease in the first quarter and a mild decrease in the third quarter the paper demonstrates that with respect to each of several major stylized facts about business cycles the seasonal cycle displays the same characteristics as the business cycle in some cases even more dramatically than the business cycle that is we find that at seasonal frequencies as well as at business cycle frequencies output movements across broadly defined sectors move together the timing of production and the

why did the equity home bias fall during the financial panic of 2008 investors tend to put most of their wealth in local stocks theories of portfolio choice and uncertainty aversion jointly predict that this home bias should increase during a financial crisis yet using a sample of 45 countries i document that the equity home bias fell during the financial panic of 2008 exploiting bilateral stock holdings i find that investors actively increased their home bias but large valuation changes subsumed these trades across countries the change in home bias is consistent with partial portfolio rebalancing and increased information asymmetries during the crisis

unemployment as excess supply of labor implications for wage and price inflation abstract the introduction of both market clearing wages and nominal rigidities on wage setting can be used to rationalize unemployment as excess supply of labor in the new keynesian model as a result wage inflation dynamics are forward looking and depend negatively on the rate of unemployment moreover both price inflation and wage inflation evolve as indicated by equations equivalent to those obtained in erceg et al 2000 though with different slope coefficients in an equal volatility comparison the model with unemployment conveys less price stickiness and more wage stickiness

intertemporal substitution and constraints on labor supply evidence from panel data intertemporal substitution and constraints on labor supply evidence from panel data i introduction through much of the 1970s and 1980s macroeconomic stabilization analysis has been dominated by equilibrium models in which fluctuations in employment result from intertemporal substitution workers voluntarily vary their labor supply over time in response to movements in wages and interest rates a number of recent empirical tests of intertemporal substitution models for example altonji 1982 mankiw et al 1985 ham 1986 strongly reject the intertemporal substitution approach these results have led some economists to reject equilibrium macro models in favor of keynesian models in which workers face quantity constraints on labor supply in keynesian models employment fluctuations result from changes in the severity of constraints that is changes in involuntary unemployment rather than intertemporal substitution on the other hand many economists remain unconvinced by recent rejections of intertemporal substitution models because the results are consistent with many possible explanations for tractability empirical studies always impose restrictive assumptions such as separability of utility over time and between goods or such as the existence of a representative consumer data also suffer from numerous problems such as aggregation bias measurement error and the use of average rather than marginal wage rates consequently even the authors of the studies seem hesitant to draw firm conclusions they often simply conclude that workers behavior is explained either by quantity constraints or by a more complicated intertemporal substitution model than the one they have tested 1 this paper attempts to determine which of these explanations is correct are changes in employment a sophisticated form of intertemporal substitution or are they involuntary the crucial data come from questions in the panel study of income dynamics about whether workers experience unemployment or are unable to work as many hours as they want following ham 1982 1986 this information is used to classify workers as quantity constrained in their labor supply or unconstrained i then test a simple intertemporal substitution model for each group of workers if the tests suffer from overly restrictive utility functions or data problems then the model should be rejected for both samples on the other hand if some workers truly face quantity constraints then the model should perform better for the sample of unconstrained workers 2 the tests yield two main results first the model indeed performs worse for the constrained workers for this group the data reject the model s overidentifying restrictions and the parameter estimates contradict the model in contrast the results for the unconstrained workers are weakly consistent with the model as keynesian theories suggest quantity constraints alter workers behavior second the estimates of the intertemporal labor supply elasticity for prime age men are close to zero even for unconstrained workers even if workers are free to vary their hours they apparently choose to respond little to movements in wages the paper addresses two other issues first do constraints on borrowing influence labor supply in the intertemporal substitution model workers borrow and lend to smooth consumption while varying hours of work as this suggests the model performs best for workers who not only face no labor supply constraints but who also own substantial assets and thus are unlikely to face liquidity constraints finally the paper proposes a new approach to identifying intertemporal labor supply equations previous micro studies do not adequately address the problem that wages are correlated with unobservable characteristics that affect tastes for work i propose two identifying restrictions 1 changes in tastes are uncorrelated with levels of time in variant variables and 2 changes in tastes have no aggregate component

does home bias affect firm value evidence from holdings of mutual funds worldwide this study finds strong evidence that home bias affects firm valuation at both country and firm levels at the country level increasing the bias of domestic investors toward home equity lowers the market valuation of home equity at the firm level firm value increases as the compositions of local equities held by domestic and foreign investors tend toward the firms global market capitalization weights but decreases as their weights deviate from global weights overall the evidence is consistent with the optimal global risk sharing hypothesis that the greater risk sharing between domestic and foreign investors in international capital markets reduces the cost of capital and hence enhances market valuation

international portfolio diversification with estimation risk international portfolio diversification has long been advocated as a way of enhancing average returns while reducing portfolio risk for the investor who considers diversifying into foreign securities this proposition however relies on the assumption that the required inputs to the classical mean variance analysis are known with certainty typically expected returns variances and covariances are simply replaced by their ex post sample values and the optimal portfolio is derived without mentioning the uncertainty inherent in these parameter values but the rational investor should take this uncertainty into account when forming expectations and probably will consider estimators that are less subject to estimation error than the classical sample mean this paper investigates alternative estimators of expected returns and their implications for the alleged gains from diversification an important observation is the crucial influence that errors in estimating expected returns have on portfolio analysis a closer examiprevious studies of international portfolio diversification have relied on ex post meanvariance analysis without considering the problem of estimation risk typically past averages are substituted for expected returns and no allowance is made for the uncertainty inherent in these parameter values first i demonstrate the shortcomings of such an approach and second i investigate another method of estimating expected returns initially proposed by stein by shrinking the sample averages toward a common mean i find that the out of sample performance of the optimal portfolio is substantially increased one of the implications of this method is that the classical conclusions vastly overestimate the possible gains in average returns instead benefits from diversification are more likely to accrue from a reduction in risk this paper draws on part of my dissertation at the university of chicago i am grateful to arnold zellner michael mussa george constantinides and especially john bilson for useful discussions and comments numerous improvements were also suggested by the referee this research received the generous financial support of the college interuniversitaire d etudes doctorales dans les sciences du management

gains from international diversification 1968 85 returns on portfolios of stocks and bonds this paper applies the multi period investment model to a universe of international securities on the basis of the simple probability assessment approach our principal findings are 1 the gains from including non u s asset categories in the universe were remarkably large in some cases statistically significant especially for the highly risk averse strategies 2 the gains from removing the no leverage constraint were more substantial than they were in the absence of non u s securities and 3 there is strong evidence of market segmentation in that the optimal levels of investment in u s securities were mostly zero in the presence of the non u s asset categories

staggered price setting staggered wage setting and business cycle persistence abstract staggered price setting and staggered wage setting are commonly viewed as similar mechanisms in generating persistent real effects of monetary shocks in this paper we distinguish the two mechanisms in a dynamic stochastic general equilibrium framework we show that although the dynamic price setting and wage setting equations are alike a key parameter governing persistence is linked to the underlying preferences and technologies in different ways with reasonable parameter values the staggered price mechanism by itself is incapable of while the staggered wage mechanism plays an important role in generating persistence

firm specific capital nominal rigidities and the taylor principle in the presence of firm specific capital the taylor principle can generate multiple equilibria sveen and weinke new perspectives on capital sticky prices and the taylor principle j econ theory 123 2005 21 39 obtain that result in the context of a calvo style sticky price model one potential criticism is that the price stickiness which is needed for our theoretical result to be relevant from a practical point of view is somewhat to the high part of available empirical estimates in the present paper we show that if nominal wages are not fully flexible which is an uncontroversial empirical fact then the taylor principle fails already for some minor degree of price stickiness we use our model to explain the consequences of both nominal rigidities for the desirability of alternative interest rate rules

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

homework in labor economics household production and intertemporal substitution abstract we argue that estimates of intertemporal substitution elasticities obtained from standard life cycle models are subject to a downward bias because they neglect changes in work done at home over the life cycle we extend the standard life cycle model to include home production and estimate it using data from three time use surveys we find that the downward bias is large

direct foreign ownership institutional investors and firm characteristics in this paper we characterize foreign ownership using a dataset of ownership and attributes of swedish rms the analysis reveals that foreigners show a preference for large rms rms paying low dividends and rms with large cash positions on their balance sheets when we further analyze the preference for large rms we nd that market liquidity and presence in international markets measured through export sales or listings on other exchanges seem to characterize foreign holdings better than rm size alone foreigners also tend to underweight rms with a dominant owner importantly we demonstrate that most of the features associated with foreign ownership are driven by the fact that foreign investors typically are mutual funds or other institutional investors hence we identify an institutional investor bias rather than a foreign investor bias finally using ownership data on a country level we conclude that the results are particularly strong among u s investors who comprise the largest institutions among foreign investors 2001 elsevier science s a all rights reserved jel classixcation g1 g15

testing symmetry and proportionality in ppp a panel data approach purchasing power parity ppp is a proposition equating the nominal exchange rate to the ratio of the domestic to foreign price levels this article employs bayesian panel data methods to test for ppp in particular the implied symmetry and proportionality conditions using a dataset of all the organization for economic cooperation and development member countries in the post bretton woods era i do not find support for symmetry and proportionality in ppp over time and across countries

reserve reporting in the united states coal industry united states energy policymaking can be better supported with accurate and consistent data on coal reserves both in the public and private sectors in particular reserve data for coal and other energy resources should be directly comparable so that decision makers can easily understand the relationship among available resources long term policy and investment choices regarding energy security the environment and resource allocation depend on accurate information but existing and easily available data on the magnitude of geologically environmentally economically socially and legally accessible coal reserves are of insufficient quality to guide such decisions even still these data are often presented for use in policy and energy analysis currently coal reserves are overstated relative to competitor energy resource reserves in part because coal reporting standards have historically been more liberal and vague than standards for resources like natural gas overstating the marketable coal resource could lead to inefficient allocation of limited capital investment that can be difficult to reverse us government bodies like the energy information administration united states geological survey securities and exchange commission and bureau of land management can help correct deficiencies by clarifying standards and collecting data that are relevant for decision makers such as energy based reserve information