can portmanteau nonlinearity tests serve as general mis specification tests a number of recent papers have employed the bds test as a general test for mis specification for linear and nonlinear models we show that for a particular class of conditionally heteroscedastic models the bds test is unable to detect a common mis specification our results also demonstrate that specific rather than portmanteau diagnostics are required to detect neglected asymmetry in volatility however for both classes of tests reasonable power is only obtained using very large sample sizes

hot stuff index insurance for indian pepper growers summary we simulate the impact of a joint price and yield index insurance on the basis of a small representative panel data set of indian smallholder pepper growers affordable and feasible index insurance reduces crop revenue risk to around 68 of its original level while a reduction to 50 of this level can be achieved with ideal insurance basis risk is large for only a small fraction of farm households depending on risk aversion 5 30 of farm households is willing to pay for index insurance increasing to 12 50 with a 50 premium reduction opportunity costs of consumption smoothing in the form of lower productivity levels suggest potential welfare gains of specialization with insurance

credit market constraints consumption smoothing and the accumulation of durable production assets in low income countries investments in bullocks in india in this paper we formulate and estimate a finite horizon structural dynamic model of agricultural investment behavior that incorporates the major features of low income agricultural environments income uncertainty constraints on borrowing and rental markets and the use of investment assets to generate income and smooth consumption the model is fit to longitudinal indian household data on farm profits bullock stocks and pump sets the estimated structural parameters are used to assess the effects on the life cycle accumulation of bullocks agricultural profits and welfare associated with complete markets and bullock liquidity and with second best policies that provide assured sources of income to farmers and weather insurance

unobservable shocks as carriers of contagion we propose an identified structural garch model to disentangle the dynamics of financial market crises we distinguish between the hypersensitivity of a domestic market in crisis to news from foreign non crisis markets and the contagion imported to a tranquil domestic market from foreign crises the model also enables us to connect unobserved structural shocks with their source markets using variance decompositions and to compare the size and dynamics of impulses during crises periods with tranquil period impulses to illustrate we apply the method to data from the 1997 1998 asian financial crisis which consists of a complicated set of interacting crises we find significant hypersensitivity and contagion between these markets but also show that links may strengthen or weaken impulse response functions for an equally weighted equity portfolio show the increasing dominance of korean and hong kong shocks during the crises and covariance responses demonstrate multiple layers of contagion effects

compound risk aversion ambiguity and the willingness to pay for microinsurance abstract index insurance in which payments are based on an index correlated with but not identical to individual losses has been faced with an unexpectedly low uptake despite its promise as a tool for poverty alleviation this paper offers new insights into the behavioral impediments to the uptake of index insurance we start from the observation that an index insurance contract appears to the farmer as a compound lottery with uncertainty about individual production outcomes as well as about the validity of the index as a reflection of individual losses adopting the smooth model of ambiguity aversion to this insurance problem we show that in theory this compound lottery structure per se will dampen the demand for index insurance using framed field experiments with cotton farmers in southern mali we elicited the coefficients of risk aversion and compound risk aversion the experimental results find that almost 60 of farmers are compound risk averse and that the distribution of compound risk aversion is such that it would nearly cut in half the potential demand for the standard index insurance contracts our results highlight the importance of designing contracts with minimal basis risk under compound risk aversion such a reduction in basis risk would not only enhance the value and productivity impacts of index insurance but would also assure that the contracts are purchased and have their anticipated impacts

do informal risk sharing networks crowd out public voluntary health insurance evidence from vietnam many governments in low income countries have promoted voluntary health insurance schemes in recent years with the principal aim of improving access to services amongst those working in the informal economy few attempts to understand demand for such schemes exist particularly in light of the importance of informal social security arrangements for many households a model of demand for health insurance is developed reflecting this context and estimated using data from vietnam the results show that informal financial networks may crowd out government promoted health insurance implications for theory and policy are discussed

poverty comparisons over time and across countries in africa abstract we use demographic and health surveys dhs to compare poverty at two or more points in time within and between african countries our welfare measure is an index resulting from a factor analysis of various household characteristics durables and household heads education an advantage of this measure is that for intertemporal and intraregional comparisons we need not rely on suspect price deflators and currency conversion factors the wide availability and similarity of questionnaires of the dhs facilitate comparisons over both time and countries our results generally show declines in poverty during the previous decade largely due to improvements in rural areas

time irreversibility and egarch effects in us stock index returns in this paper we suggest using a modified version of the time reversibility tr test of chen chou and kuan 2000 as a complementary diagnostic test for time series models the modified cck test is easy to compute and requires weaker moment conditions than existing tests our simulations demonstrate that this test is powerful against asymmetry in volatility but the bds test is not in the empirical study of us stock index returns we first find that these returns are all time irreversible applying the garch and egarch models to these returns we also find that the q and bds tests always accept the null hypothesis and cannot distinguish between these models by contrast the modified cck test accepts only the egarch model with an order that can accommodate the underlying asymmetry in volatility our results suggest that the detected time irreversibility in these return series may be attributed to volatility asymmetry and that such asymmetry may be captured using a proper egarch model copyright 2002 john wiley sons ltd

poverty traps and index based risk transfer products summary a growing literature suggests that in low income countries households with few assets can be trapped in chronic poverty this article reviews relevant threads of the poverty traps literature to motivate a description of the opportunities presented by innovative index based risk transfer products these products can be used to address some insurance and credit market failures that contribute to the persistence of poverty among households in low income countries applications are considered at the micro meso and macro levels 2008 elsevier ltd all rights reserved

ambiguity aversion and comparative ignorance decisions under uncertainty depend not only on the degree of uncertainty but also on its source as illustrated by ellsberg s observation of ambiguity aversion in this article we propose the comparative ignorance hypothesis according to which ambiguity aversion is produced by a comparison with less ambiguous events or with more knowledgeable individuals this hypothesis is supported in a series of studies showing that ambiguity aversion present in a comparative context in which a person evaluates both clear and vague prospects seems to disappear in a noncomparative context in which a person evaluates only one of these prospects in isolation

the roles of risk and ambiguity in technology adoption we study the impacts of risk and ambiguity aversion on the adoption of new technologies specifically genetically modified gm corn and soy seeds we conduct experiments measuring risk and ambiguity aversion with midwestern grain farmers risk aversion has only a small impact on the timing of adoption of gm soy while ambiguity aversion has a large impact speeding up farmer adoption of gm corn we hypothesize that this unusual finding is due to the fact that gm corn often contains an insect resistance trait which reduces the ambiguity of pest damages for adopters gm soy never contains this insect resistance trait this highlights the importance of distinguishing between risk and ambiguity when studying the effects of aversion to uncertainty on adoption of new technologies

persistent poverty and informal credit abstract this paper explores the consequences of nonlinear wealth dynamics for the formation of bilateral credit arrangements to help manage idiosyncratic risk using original data on expected wealth dynamics social networks and informal loans among southern ethiopian pastoralist households we find that the threshold at which expected wealth dynamics bifurcate serves as a focal point at which lending is concentrated informal lending responds to recipients losses but only so long as the recipients are not too poor our results suggest that when shocks can have long term effects loans are best understood as providing a safety net rather than a scale neutral insurance mechanism furthermore the persistently poor are excluded from social networks that are necessary to obtain loans given in response to shocks

the economics of poverty traps and persistent poverty an asset based approach abstract longitudinal data on household living standards open the way to a deeper analysis of the nature and extent of poverty while a number of studies have exploited this type of data to distinguish transitory from more chronic forms of income or expenditure poverty this paper develops an asset based approach to poverty analysis that makes it possible to distinguish deep rooted persistent structural poverty from poverty that passes naturally with time due to systemic growth processes drawing on the economic theory of poverty traps and bifurcated accumulation strategies this paper briefly discusses some feasible estimation strategies for empirically identifying poverty traps and long term persistent structural poverty as well as relevant extensions of the popular foster greer thorbecke class of poverty measures the paper closes with reflections on how asset based poverty can be used to underwrite the design of persistent poverty reduction strategies

adoption of agricultural innovations in developing countries a survey this paper reviews various studies which have provided a description and possible explanation to patterns of innovation adoption in the agricultural sector the survey points out that the tendency of many studies to consider innovation adoption in dichotomous terms adoption nonadoption may not be appropriate in many cases where the actual decisions are defined over a more continuous range more attention needs to be given to the socio cultural and institutional environment in area studies so that their interrelation with economic factors affecting adoption can be inferred the presence of several interrelated innovations is another aspect that needs to be considered more carefully in future research since a number of simultaneous decisions may be involved furthermore the possibility of regular sequential patterns in adopting components of a new technological package should be specifically addressed in future studies finally the impact of differential adoption rates on land holding distribution merits attention in future research

risk and insurance in a rural credit market an empirical investigation in northern nigeria credit contracts play a direct role in pooling risk between households in northern nigeria repayments owed by borrowers depend on realizations of random shocks by both borrowers and lenders the paper develops two models of state contingent loans the first is a competitive equilibrium in perfectly enforceable contracts the second permits imperfect information and equilibrium default estimates of both models indicate that quantitatively important state contingent payments are embedded in these loan transactions but that a fully efficient risk pooling equilibrium is not achieved the research is based on a year long survey in zaria nigeria conducted by the author

can insurance payouts prevent a poverty trap evidence from randomised experiments in northern kenya index based insurance can have welfare enhancing effects through two pathways by inducing policyholders to change their investment and risk management decisions or by mitigating weather related sh

measuring the response of macroeconomic uncertainty to shocks recent research documents the importance of uncertainty in determining macroeconomic outcomes but little is known about the transmission of uncertainty across such outcomes this paper examines the response of uncertainty about inflation and output growth to shocks documenting statistically significant size and sign bias and spillover effects uncertainty about inflation is a determinant of output uncertainty whereas higher growth volatility tends to raise inflation volatility both inflation and growth volatility respond asymmetrically to positive and negative shocks negative growth and inflation shocks lead to higher and more persistent uncertainty than shocks of equal magnitude but opposite sign

community based risk management arrangements a review summary risk and its consequences pose a formidable threat to poverty reduction efforts this article reviews a plethora of community based risk management arrangements across the developing world these types of arrangements are garnering greater interest in light of the growing recognition of the relative prominence of household or individual specific idiosyncratic risk as well as the increasing shift towards community based development funding the article discusses potential advantages such as targeting cost and informational and disadvantages such as exclusion and inability to manage correlated risk of these arrangements and their implications for the design of community based social protection programs and policies

politics institutions and welfare spending in industrialized democracies 1960 82 electoral turnout as well as left and center governments increase welfare effort that the welfare efforts of governments led by particular types of parties show significant differences and vary notably with the strength of oppositional and junior coalitional parties and that relatively neocorporatist centralized and traditionalistic polities are high on welfare effort overall our findings suggest that contrary to many claims both partisan and nonpartisan facets of democratic politics and political institutions shape contemporary social welfare effort

risk and ambiguity aversion behavior in index based insurance uptake decisions experimental evidence from ethiopia abstract index based insurance ibi is an innovative pro poor climate risk management strategy that suffers from low uptake evidence on the role of behavioral impediments in adoption of ibi is scant we conducted lab in the field experiments with 1139 smallholders out of whom 596 have adopted ibi in ethiopia to elicit their risk and ambiguity aversion behavior and examine whether risk and or ambiguity aversion can explain actual ibi uptake decisions our study suggests that an increase in risk aversion increases uptake but an increase in ambiguity aversion lowers uptake of ibi we also find evidence that an increase in risk aversion speeds up the uptake of ibi while an increase in ambiguity aversion delays the adoption of ibi

what makes people think like economists evidence on economic cognition from the survey of americans and economists on the economy abstract the positive economic beliefs of economists and the general public systematically differ what factors make noneconomists think more like economists using the survey of americans and economists on the economy this paper shows people think more like economists 1 if they are well educated 2 if they are male 3 if their real income rose over the last 5 years 4 if they expect their real income to rise over the next 5 years or 5 if they have a high degree of job security however neither high income nor ideological conservatism have this effect my findings for education gender and income have close parallels in political science on tests of objective political knowledge the better educated and males score higher controlling for numerous other variables and the independent effect of income is minor

output growth and its volatility the gold standard through the great moderation this study examines the relationship between u s output growth and its volatility over the period 1876 i to 2012 ii we adjust the data for outliers and structural breaks we employ generalized autoregressive conditional heteroskedasticity garch and exponential garch egarch specifications normality and homoskedasticity appear only in the garch or egarch model that corrects for the outliers when including the break in the mean equation high volatility persistence remains after also accommodating the breaks in the variance equation the integrated garch effect proves spurious either for the symmetric or the asymmetric model finally our empirical results suggest that the finding of higher output growth volatility stimulating output growth and higher output growth reducing its volatility obtained from the symmetric garch in mean garch m model also proves spurious as a result of the emergence of an asymmetric effect our more appropriately specified asymmetric egarch m model suggests positive volatility in mean and level effects in the long period real gross national product series

pathways of representation a causal analysis of public opinion policy linkages theory altemative theories of the linkage process between mass policy preferences and public policies are tested empirically hypotheses opinion policy linkage may arise because mass preferences drive the policy process elite preferences drive the process or because of a shared preferences reciprocal influence process policy linkage may also be facilitated by higher voter mobilization and party competition methods a multiple equation model of the opinion policy process in the united states is tested with two stage least squares regression results the state policy process is best explained by an opinion sharing reciprocal influence model shared partisanship party competition and voter mobilization enhance the linkage process in theoretically anticipated ways

pricing in microinsurance markets summary microinsurance markets have exhibited strong growth rates in recent years great parts of the industry are however challenged by fundamental issues of providing insurance products one of the most significant of which is pricing risk in this paper we provide a nontechnical analysis of insurance pricing problems and a review of the set of opportunities that can address some of the specific pricing constraints in microinsurance markets a key contribution of this paper is the investigation of conventional techniques as potential solutions for improving the pricing of insurance risk in microinsurance markets

modeling heteroscedasticity in daily foreign exchange rates this article estimates autoregressive conditionally heteroscedastic arch and generalized arch garch models for five foreign currencies using 10 years of daily data a variety of arch and garch specifications a number of nonnormal error densities and a comprehensive set of diagnostic checks it finds that arch and garch models can usually remove all heteroscedasticity in price changes in all five currencies goodness of fit diagnostics indicate that exponential garch with certain nonnormal distributions fits the canadian dollar extremely well and the swiss franc and the deutsche mark reasonably well only one nonnormal distribution fits the japanese yen reasonably well none fit the british pound

electoral competition in the american states electoral competition is a concept that has played a central role in much of the state politics literature one commonly used indicator of competition in the states is the ranney index we offer an alternative indicator of competition one based on district level outcomes of state legislative elections after evaluating both indicators in terms of validity and reliability the analysis suggests that the district level indicator is both empirically and intuitively superior as a measure of electoral competition the implications of this finding are discussed

american federalism welfare policy and residential choices the relationship between welfare benefit levels and the residential choices of the poor raises two issues for federalism in the united states do state benefit levels affect the residential choices of the poor do residential choices of the poor affect the level at which a state sets its benefit levels empirical studies have seldom studied the interconnection between these two issues this research estimates simultaneously the mutual effects of welfare benefits and poverty rates while controlling for other economic and political variables when benefit levels become high the size of the poverty population increases conversely when poverty rates become high benefit levels are cut the findings are consistent with the claim that state determined benefit levels distort policy and residential choices

risk aversion experimental evidence from south african fishing communities we estimate the risk attitudes of a large sample of individuals from various fishing communities along the west coast of south africa female fishers and rights holders are found to be more risk averse than their male counterparts while rights holders are found to be less risk averse relative to subjects without fishing rights risk attitudes are found to be correlated with compliance with fisheries regulations in particular a greater degree of risk aversion translates into a reduction in compliance furthermore in the case of gender female fishers and rights holders are more likely to comply with fisheries regulations

experimental evidence on the drivers of index based livestock insurance demand in southern ethiopia while index based microinsurance has attracted considerable attention uptake rates have been weak in many low income countries we explore the purchase patterns of index based livestock insurance in southern ethiopia focusing on the role of accurate product comprehension and price we find that randomly distributed learning kits improve subjects knowledge of the products however we do not find strong evidence that the improved knowledge per se causes greater insurance uptake we also find that reduced price due to randomly distributed discount coupons has an immediate positive impact on uptake without dampening subsequent period demand due to reference dependence associated with price anchoring effects

implications of nonlinear dynamics for financial risk management this paper demonstrates that when log price changes are not iid their conditional density may be more accurate than their unconditional density for describing short term behavior using the bds test of independence and identical distribution daily log price changes in four currency futures contracts are found to be not iid while there appear to be no predictable conditional mean changes conditional variances are predictable and can be described by an autoregressive volatility model that seems to capture all the departures from independence and identical distribution based on this model daily log price changes are decomposed into a predictable part which is described parametrically by the autoregressive volatility model and an unpredictable part which can be modeled by an empirical density either parametrically or nonparametrically this two step seminonparametric method yields a conditional density for daily log price changes which has a number of uses in financial risk management

does exchange rate risk affect exports asymmetrically asian evidence abstract this paper tests the hypothesis of asymmetric effects of exchange rate risk with a dynamic conditional correlation bivariate garch 1 1 m model the asymmetry means that exchange rate risk volatility affects exports differently during appreciations and depreciations which may reflect exporter s asymmetric risk perception and hedging behavior using bilateral exports from eight asian countries to the us the real exchange rate risk significantly affects exports for all countries negative or positive in periods of depreciation or appreciation thus policy makers can consider the stability of the exchange rate in addition to its depreciation as a method of controlling export growth

short run subsidies and long run adoption of new health products evidence from a field experiment short run subsidies for health products are common in poor countries how do they affect long run adoption a common fear among development practitioners is that one off subsidies may negatively affect long run adoption through reference dependence people might anchor around the subsidized price and be unwilling to pay more for the product later but for experience goods one off subsidies could also boost long run adoption through learning this paper uses data from a two stage randomized pricing experiment in kenya to estimate the relative importance of these effects for a new improved antimalarial bed net reduced form estimates show that a one time subsidy has a positive impact on willingness to pay a year later inherit to separately identify the learning and anchoring effects we estimate a parsimonious experience good model estimation results show a large positive learning effect but no anchoring we black then discuss the types of products and the contexts inherit for which these results may apply

the basis risk of catastrophic loss index securities abstract using a windstorm simulation model developed by applied insurance research we analyze the effectiveness of catastrophic loss index options in hedging hurricane losses for florida insurers the results suggest that insurers in the two largest size quartiles can hedge losses almost as effectively using contracts based on four intrastate indices as they can using contracts that settle on their own losses many insurers in the third largest size quartile also can hedge effectively using the intrastate indices but most insurers in the smallest quartile would encounter significant basis risk hedging using a statewide loss index is effective only for the largest insurers

how might climate change influence farmers demand for index based insurance the low observed uptake of non subsidised index based insurance policies in developing countries has been puzzling researchers for about a decade this paper analyses the role of drought frequency in farmers demand for index based insurance in developing countries while it is typically assumed that an increase in exposure to risk would result in higher demand for index insurance this paper finds the opposite an increase in drought frequency may result in lower demand for index insurance under fairly standard conditions in an expected utility model we show that the demand for insurance is an inverted u function of drought frequency we further show that downside basis risk decreases insurance demand under frequent drought conditions it implies that insurance against similar but more frequent events cannot meet large demand from farmers to check the empirical relevance of these effects we conduct an insurance field experiment in burkina faso with 205 farmers we analyse insurance demand for different drought frequencies different levels of basis risks and different loading factors through incentivised lottery choices this analysis confirms that for higher drought frequencies insurance demand is lower insurance demand also decreases with basis risk and the loading factor

nonlinear dynamics in real time equity market indices evidence from the united kingdom this paper tests for the presence of nonlinear dependence and chaos in real time returns on the u k ftse 100 index using a six month sample of about 60 000 observations since there is clear evidence of nonlinearity the authors follow other researchers in this field by applying the same tests to the residuals from a garch process fitted to the data in order to find out whether or not the nonlinearity can be explained by this type of model in the event their results suggest that garch can explain some but not all of the observed nonlinear dependence copyright 1995 by royal economic society