on the inverse of the covariance matrix in portfolio analysis the goal of this paper is the derivation and application of a direct characterization of the inverse of the covariance matrix central to portfolio analysis such a characterization in terms of a few primitive constructs provides the basis for new and illuminating expressions for key concepts as the optimal holding of a given risky asset and the slope of the risk return efficiency frontier faced by the individual investor the building blocks of the inverse turn out to be the regression coefficients and residual variance obtained by regressing the asset s excess return on the set of excess returns for all other risky assets copyright the american finance association 1998

banking bubbles and financial crises this paper develops a tractable macroeconomic model with a banking sector in which banks face endogenous borrowing constraints there is no uncertainty about economic fundamentals banking bubbles can emerge through a positive feedback loop mechanism changes in household confidence can cause the bubbles to burst resulting in a financial crisis credit policy can mitigate economic downturns the welfare gain is larger when the government interventions are more front loaded given that the government injects the same amount of liquidity in terms of present value bank capital requirements can prevent the formation of banking bubbles by limiting leverage but if too restrictive will lead to less lending and hence lower production

dynamic asset allocation with event risk major events often trigger abrupt changes in stock prices and volatility we study the implications of jumps in prices and volatility on investment strategies using the event risk framework of duffie pan and singleton 2000 we provide analytical solutions to the optimal portfolio problem event risk dramatically affects the optimal strategy an investor facing event risk is less willing to take leveraged or short positions the investor acts as if some portion of his wealth may become illiquid and the optimal strategy blends both dynamic and buy and hold strategies jumps in prices and volatility both have important effects

a reinterpretation of the optimal demand for risky assets in fund separation theorems in a continuous time portfolio selection model with n risky assets and k state variables driving their risk and return parameters we derive simple expressions for the allocation to each asset in the k 1 risky funds of the k 2 fund separation theorem we show that the allocation to any given risky asset in each fund can be written in terms of the parameters of a regression of the excess returns of this asset on those of the n 1 remaining assets we also use these parameters to provide quantitative measures of the increase in sharpe ratio of the speculative demand or in the maximum correlation of each hedging demand with respect to the corresponding risk factor associated with the introduction of a new asset in the investment universe finally we show that in a multiperiod setting an asset is spanned by others if and only if it improves neither the maximum sharpe ratio of the speculative demand nor the maximum correlations of the hedging demands with the risk factors this paper was accepted

international asset pricing and portfolio diversification with time varying risk we test the conditional capital asset pricing model capm for the world s eight largest equity markets using a parsimonious generalized autoregressive conditional heteroskedasticity garch parameterization our methodology can be applied simultaneously to many assets and at the same time accommodate general dynamics of the conditional moments the evidence supports most of the pricing restrictions of the model but some of the variation in risk adjusted excess returns remains predictable during periods of high interest rates our estimates indicate that although severe market declines are contagious the expected gains from international diversification for a u s investor average 2 11 percent per year and have not significantly declined over the last two decades

no bubble condition model free tests in housing markets we test for the existence of housing bubbles associated with a failure of the transversality condition that requires the present value of payments occurring infinitely far in the future to be zero the most prominent such bubble is the classic rational bubble we study housing markets in the united kingdom and singapore where residential property ownership takes the form of either leaseholds or freeholds leaseholds are finite maturity pre paid and tradeable ownership contracts with maturities often exceeding 700 years freeholds are infinite maturity ownership contracts the price difference between leaseholds with extremely long maturities and freeholds reflects the present value of a claim to the freehold after leasehold expiry and is thus a direct empirical measure of the transversality condition we estimate this price difference and find no evidence of failures of the transversality condition in housing markets in the u k and singapore even during periods when a sizable bubble was regularly thought to be present

stationary sunspot equilibria in a finance constrained economy abstract stationary sunspot equilibria are shown to exist in a production economy with infinite lived agents when it is not possible to borrow against future wage income equilibrium fluctuations exhibit persistence over time scales of the same order of magnitude as observed business cycles an active fiscal policy that stabilizes aggregate money expenditures can prevent such fluctuations

stable near rational sunspot equilibria abstract we introduce a new class of solutions to nonlinear forward looking models called near rational sunspot equilibria nrse nrse are natural nonlinear extensions of the usual sunspot equilibria associated with the linearized version of the economy and are near rational in that agents use the optimal linear forecasting model when forming expectations generic results for existence and stability under learning are established nrse in indeterminate nonlinear models are found to be stable under learning provided that the corresponding linearized model s minimal state variable solution is e stable nrse are readily computable and our results make it possible to use the standard linear tools to search for stable nrse we illustrate our results using a canonical nonlinear new keynesian model

are speculative bubbles welfare improving a note on wang and wen 2012 abstract wang and wen 2012 show in a dsge model that the existence of speculative bubbles are welfare improving in their steady state analysis of the benchmark model the authors claim the existence of a unique steady state in the bubble equilibrium with a higher capital stock and hence higher output compared to the fundamental equilibrium this is due to higher investment efficiency because firms can use bubble assets as a store of value when they are hit by an adverse investment shock in this note we demonstrate that this claim is at odds with our finding of the existence of an additional less favorable steady state in the bubble equilibrium in the new steady state allocations are very similar to the steady state without bubbles which implies a deterioration of investment efficiency if the economy is in the new less favorable bubble steady state

the effects of monetary policy on stock market bubbles at zero lower bound revisiting the evidence abstract we revisit the results in gali and gambetta 2015 by reestimating their time varying bayesian var model including the shadow rate of wu and xia 2016 we found some significant differences when looking at the results during and in the aftermath of the crisis with the shadow rate the impact of monetary policy shocks on asset prices becomes negative there is also a much lower positive impact of monetary policy shocks on bubbles when using the shadow rate the impact is lower by almost three percentage points

bubbles and self enforcing debt we characterize equilibria with endogenous debt constraints for a general equilibrium economy with limited commitment in which the only consequence of default is losing the ability to borrow in future periods first we show that equilibrium debt limits must satisfy a simple condition that allows agents to exactly roll over existing debt period by period second we provide an equivalence result whereby the resulting set of equilibrium allocations with self enforcing private debt is equivalent to the allocations that are sustained with unbacked public debt or rational bubbles in contrast to the classic result by bulow and rogoff 1989a positive levels of debt are sustainable in our environment because the interest rate is sufficiently low to provide repayment incentives

who should buy long term bonds according to conventional wisdom long term bonds are appropriate for conservative long term investors this paper develops a model of optimal consumption and portfolio choice for infinite lived investors with recursive utility who face stochastic interest rates solves the model using an approximate analytical method and evaluates conventional wisdom as risk aversion increases the myopic component of risky asset demand disappears but the intertemporal hedging component does not conservative investors hold assets to hedge the risk that real interest rates will decline long term inflation indexed bonds are most suitable for this purpose but nominal bonds may also be used if inflation risk is low

asset bubbles and bailouts as long as bubble size is relatively small bubbles increase production level but once the size becomes too large then bubbles reduce it given this non monotonic relationship this paper investigates the relationship between bubbles and government bailouts it shows that bailouts for bursting bubbles may positively influence ex ante production efficiency and relax the existence condition of stochastic bubbles the level of bailouts has a non monotonic relationship with production efficiency and a partial bailout policy achieves production efficiency moreover it examines the welfare effects of bailout policies rigorously and shows that even non risky bubbles may be undesirable for taxpayers

the market s response to the 1974 lifo adoptions in this paper i report the results of a study of stock price reactions to lifo adoptions in 1974 and 1975 these two years were characterized by high levels of inflation and wide swings in stock prices and more than 400 firms on the new york and american stock exchanges switched to lifo previous studies see below provide conflicting results of the market s reaction to lifo adoptions these studies exhibit certain research design and small sample limitations which prevent one from resolving the issue of how the market reacts to lifo switches using a better matched pair design and a larger sample i conclude that lifo adopters suffered negative abnormal return performance during the period surrounding their annual earnings announcements while several possible explanations for this result are discussed additional research is needed to provide further insight into the nature of the market reaction to lifo adoption

collateral requirements and asset prices many assets derive their value not only from future cash flows but also from their ability to serve as collateral in this article we investigate this collateral premium and its impact on asset returns in an infinite horizon general equilibrium model with heterogeneous agents we document that borrowing against collateral substantially increases the return volatility of long lived assets moreover otherwise identical assets with different degrees of collateralizability exhibit substantially different return dynamics because their prices contain a sizable collateral premium that varies over time this premium can be positive even for assets that never pay dividends

non standard monetary policy asset prices and macroprudential policy in a monetary union abstract this paper evaluates the interaction of non standard monetary measures and macroprudential policy in a monetary union by developing a two region model of the euro area ea and simulating the eurosystem s asset purchase programme app in each region some households are subject to a borrowing constraint and the local real estate is used as collateral our results are as follows first in one region a large loan to value ltv ratio can amplify the positive effect of the union wide app on domestic households borrowing second during the app implementation overly optimistic i e non fundamental expectations about local real estate prices would further augment households borrowing in that region third region specific macroprudential measures that stabilize private debt can counteract the effects of the optimistic expectations and favor a macroeconomic expansion driven only by fundamentals i e the app without the need to scale back the latter fourth both the app and the region specific macroprudential policy bring about a welfare improvement

asset prices debt constraints and inefficiency abstract we consider possibly non stationary economies with endogenous solvency constraints under uncertainty over an infinite horizon as in alvarez and jermann 2000 5 a sort of cass criterion cass 1972 10 completely characterizes constrained inefficiency under the hypothesis of uniform gains from risk sharing which is always satisfied in stationary economies when the autarchy is constrained inefficient uniform gains from risk sharing also guarantee a finite value of the intertemporal aggregate endowment at a constrained optimum hence no equilibrium exhibits a null interest rate in the long run finally constrained inefficiency occurs if and only if there exists a feasible redistribution producing a welfare improvement at all contingencies

economic growth with bubbles this paper presents a stylized model of economic growth with bubbles this model views asset price bubbles as a market generated device to moderate the effects of frictions in financial markets improving the allocation of investments and raising the capital stock and welfare the model illustrates various channels through which asset price bubbles affect the incentives for innovation and economic reforms and therefore the rate of economic growth the model also offers a new perspective on the effects of financial development on asset price bubbles and economic growth

bubbles and constraints on debt accumulation it is commonly thought tirole econometrica 50 1982 1163 1182 that bubbles cannot occur in deterministic sequential market economies with a finite number of infinitely lived agents this paper shows that the constraint on debt accumulation which make possible the existence of equilibrium can cause bubbles if agents face a wealth constraint bubbles can exist if and only if the assest is in zero net supply if agents face exogenous short sales constraints bubbles can exists if and only if some agent s endowment grows at a rate larger than the rate of return and the short sales constraint binds that agent infinitely often

systemic risk and international portfolio choice returns on international equities are characterized by jumps moreover these jumps tend to occur at the same time across countries leading to systemic risk we capture these stylized facts using a multivariate system ofjump diffusion processes where the arrival of jumps is simultaneous across assets we then determine an investor s optimal portfolio for this model of returns systemic risk has two effects one it reduces the gains from diversification and two it penalizes investors for holding levered positions we find that the loss resulting from diminished diversification is small while that from holding very highly levered positions is large returns on international equities are characterized by jumps 1 moreover these jumps tend to occur at the same time across countries implying that conditional correlations between international equity returns tend to be higher in periods of high market volatility or following large downside moves 2 our objective in

should central banks respond to movements in asset prices in recent decades asset booms and busts have been important factors in macroeconomic fluctuations in both industrial and developing countries in light of this experience how if at all should central bankers respond to asset price volatility we have addressed this issue in previous work bernanke and gertler 1999 the context of our earlier study was the relatively new but increasingly popular monetary policy framework known as inflation targeting see e g bernanke and frederic mishkin 1997 in an inflation targeting framework publicly announced medium term inflation targets provide a nominal anchor for monetary policy while allowing the central bank some flexibility to help stabilize the real economy in the short run the inflation targeting approach gives a specific answer to the question of how central bankers should respond to asset prices changes in asset prices should affect monetary policy only to the extent that they affect the central bank s forecast of inflation to a first approximation once the predictive content of asset prices for inflation has been accounted for there should be no additional response of monetary policy to assetprice fluctuations in use now for about a decade inflationtargeting has generally performed well in practice however so far this approach has not often been stress tested by large swings in asset prices our earlier research employed simulations of a small calibrated macroeconomic model to examine how an inflation targeting policy defined as one in which the central bank s instrument interest rate responds primarily to changes in expected inflation might fare in the face of a boom and bust cycle in asset prices we found that an aggressive inflationtargeting policy rule in our simulations one in which the coefficient relating the instrument interest rate to expected inflation is 2 0 substantially stabilizes both output and inflation in scenarios in which a bubble in stock prices develops and then collapses as well as in scenarios in which technology shocks drive stock prices intuitively inflation targeting central banks automatically accommodate productivity gains that lift stock prices while offsetting purely speculative increases or decreases in stock values whose primary effects are through aggregate demand conditional on a strong policy response to expected inflation we found little if any additional gains from allowing an independent response of central bank policy to the level of asset prices in our view there are good reasons outside of our formal model to worry about attempts by central banks to influence asset prices including the fact that as history has shown the effects of such attempts on market psychology are dangerously unpredictable hence we concluded that inflationtargeting central banks need not respond to asset prices except insofar as they affect the inflation forecast in the spirit of recent work on robust control the exercises in our earlier paper analyzed the performance of policy rules in worst case discussants robert shiller yale university glenn rudebusch federal reserve bank of san francisco kenneth rogoff harvard university

leaning against the credit cycle how should a central bank act to stabilize the ratio of debt over gross domestic product gdp we show how the persistent nature of household debt shapes the answer to this question in environments where households repay mortgages gradually surprise interest hikes only weakly influence household debt and tend to increase debt to gdp in the short run while reducing it in the medium run interest rate rules with a positive weight on debt to gdp cause indeterminacy compared to inflation targeting debt to gdp stabilization calls for a more expansionary policy when debt to gdp is high so as to deflate the debt burden through inflation and output growth

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

on fragility of bubbles in equilibrium asset pricing models of lucas type abstract in this paper we study the existence of bubbles for pricing equilibria in a pure exchange economy a la lucas with infinitely lived homogeneous agents the model is analyzed under fairly general assumptions no restrictions either on the stochastic process governing dividends distribution or on the utilities possibly unbounded are required we prove that the pricing equilibrium is unique as long as the agents exhibit uniformly bounded relative risk aversion a generic uniqueness result is also given regardless of agent s preferences a few pathological examples of economies exhibiting pricing equilibria with bubble components are constructed finally a possible relationship between our approach and the theory developed by santos and woodford on ambiguous bubbles is investigated the whole discussion sheds more insight on the common belief that bubbles are a marginal phenomenon in such models journal of economic literature classification numbers c61 c62 d51 g12

monetary and macroprudential policy coordination among multiple equilibria abstract the notion of a tradeoff between output and financial stabilization is based on monetary macroprudential models with unique equilibria using a game theory setup this paper shows that multiple equilibria lead to qualitatively different results monetary and macroprudential authorities have tools that impose externalities on each other s objectives one of the tools macroprudential is coarse while the other monetary policy is unconstrained we find that this asymmetry always leads to multiple equilibria and show that under economically relevant conditions the authorities prefer different equilibria giving the unconstrained authority a weight on helping the constrained authority leaning against the wind now has unexpected effects the relation between this weight and the difficulty of coordinating is hump shaped and therefore a small degree of leaning worsens outcomes on both authorities objectives

asset bubbles and credit constraints we provide a theory of rational stock price bubbles in production economies with infinitely lived agents firms meet stochastic investment opportunities and face endogenous credit constraints they are not fully committed to repaying debt credit constraints are derived from incentive constraints in optimal contracts which ensure default never occurs in equilibrium stock price bubbles can emerge through a positive feedback loop mechanism and cannot be ruled out by transversality conditions these bubbles command a liquidity premium and raise investment by raising the debt limit their collapse leads to a recession and a stock market crash

rational asset pricing bubbles this paper provides a fairly systematic study of general economic conditions under which rational asset pricing bubbles may arise in an intertemporal competitive equilibrium framework our main results are concerned with nonexistence of asset pricing bubbles in those economies these results imply that the conditions under which bubbles are possible including some well known examples of monetary equilibria are relatively fragile this paper is concerned with the conditions under which asset prices in an intertemporal competitive equilibrium are equal to the present value of the streams of future dividends to which each asset represents a claim according to a central result of the theory of finance this is very generally true in the case of economies with trading at only a finite sequence of dates as long as there are no restrictions upon transactions other than that associated with possible incom pleteness of the set of securities that are traded the result is sometimes called the fundamental theorem of asset pricing here we consider the extent to which such a result continues to be valid in the case of trading over an infinite horizon it has often been observed in the econometric literature on asset pricing bubbles that it is possible in principle for the price of a perpetuity and the dividends on that security to satisfy at all times a present value relation for one period holding returns while the security s price nonetheless does not equal the present value of the stream of dividends expected over the infinite future in such a case the price of the perpetuity is said to involve a bubble component 2 joint stochastic processes for which this component is nonzero are sometimes argued to characterize existing assets for a recent example see froot and obstfeld 1991 but such an inference depends upon aspects of the stochastic

the time varying effect of monetary policy on stock returns we find that a surprise increase on the federal funds rate has five times stronger and statistically significant effects on stock returns during 2000 2007 versus statistically insignificant effects during 1989 2000 these differences are not apparent in the bond markets

asset price bubbles and technological innovation we introduce borrowing constraints into a two sector schumpeterian growth model and examine the impact of asset price bubbles on innovation in this environment rational bubbles arise when the intermediate good producing r d sector is faced with adverse productivity shocks importantly these bubbles help alleviate credit constraints and facilitate innovation in the stagnant economy on the policy front we make a case for debt financed credit to the r d sector further we establish that a constant credit growth rule akin to the friedman rule outperforms the often prescribed counter cyclical lean against the wind credit policy jel e32 e44 o40

monetary policy and rational asset price bubbles i examine the impact of alternative monetary policy rules on a rational asset price bubble through the lens of an olg model with nominal rigidities a systematic increase in interest rates in response to a growing bubble is shown to enhance the uctuations in the latter

currency hedging for international portfolios this paper examines the benefits from currency hedging both for speculative and risk minimization motives in international bond and equity portfolios the riskreturn performances of globally diversified portfolios are compared with and without forward contracts over the period 1974 to 1990 inclusion of forward contracts results in statistically significant improvements in the performance of unconditional portfolios containing bonds conditional strategies are also implemented both in sample and out of sample and are shown to both significantly improve the risk return tradeoff of global portfolios and to outperform unconditional hedging strategies whether international portfolios should be hedged against currency risks is the subject of an active debate the theoretical side of the debate has been closely associated with two strands in the academic literature international asset pricing and optimal hedging in the futures markets in the international asset pricing model iapm of solnik 1974 optimal portfolios contain positions in forward contracts or equivalently foreign currency denominated bills these positions which can differ from the positions in foreign stocks have since been termed hedges black 1990 shows that under additional assumptions the hedge ratios should be identical for all investors regardless of their nationality universality and that investors should never fully hedge their foreign currency exposures similarly theoretical models from the futures literature produce demands for hedging instruments that contain both speculative and hedging components the empirical issue unanswered so far is whether adding forward contracts to international portfolios significantly improves the risk return profile of global investments empirical research has barely begun to respond to the challenges of theoretical models there exists little empirical evidence on either the relevance of black s universal hedge ratios or the optimality of hedge ratios less than one instead researchers have concentrated on the benefits of fully hedging exchange risk for example eun and resnick 1988 indicate that stock portfolios perform better when fully hedged but offer no statistical tests

do contractionary monetary policy shocks expand shadow banking summary using var models for the usa we find that a contractionary monetary policy shock has a persistent negative impact on the level of commercial bank assets but increases the assets of shadow banks and securitization activity to explain this waterbed effect we propose a standard new keynesian model featuring both commercial and shadow banks and we show that the model comes close to explaining the empirical results our findings cast doubt on the idea that monetary policy can usefully get in all the cracks of the financial sector in a uniform way

intangible capital relative asset shortages and bubbles abstract purely technological factors can be a fundamental force behind the emergence of asset price bubbles in developed economies we analyze an economy in which the production technology utilizes both physical and intangible capital where the latter cannot be used as collateral for borrowing technological change in the form of increased importance of intangible capital in production sharpens the borrowing constraints of entrepreneurs leading to a scarcity of high yield assets relative to low yield ones this can create the conditions for asset bubbles additionally due to the financial frictions standard dynamic efficiency tests are not valid and bubbles are not pareto improving

on the interplay between speculative bubbles and productive investment the aim of this paper is to study the interplay between long term productive investments and more short term and liquid speculative ones a three period lived overlapping generations model allows us to make this distinction agents have a portfolio decision when young they can invest in human capital that is a productive long term investment that provides a return during the following two periods when young or in the middle age they can invest in a bubble young individuals can also borrow on a credit market to finance the productive investment however the amount borrowed is limited by a credit constraint we show that the existence of a stationary bubble raises productive investment and production when the bubleless economy is credit constrained and dynamically efficient indeed young agents sell short the bubble to increase productive investments whereas traders at middle age transfer wealth to old age the bubble allows to relax the credit constraint we outline that a permanent technological shock inducing either a larger return of capital in the short term or a similar increase in the return of capital in both periods raises productive capital production and the bubble size we use our framework to discuss the effect on the occurrence of bubbles of financial regulation and fiscal policy

more than a feeling confidence uncertainty and macroeconomic fluctuations economists observers and policy makers often emphasize the role of sentiment as a potential driver of the business cycle in this paper we provide three contributions to this debate first we give an overview of the recent literature on the nexus between sentiment considering both confidence and uncertainty and economic activity second we review existing empirical measures of sentiment in particular consumer confidence stock market volatility smv and economic policy uncertainty epu on monthly data for 27 countries 1985 2016 third we identify some new stylized facts based on international evidence while different measures are surprisingly lowly correlated on average in each country they are typically highly positively correlated across countries suggesting the existence of a global factor or sizeable international spillovers of sentiment consumer confidence has the closest co movement with economic and financial variables and most of the correlations are contemporaneous or forward looking consistent with the view that economic sentiment is indeed a driver of activity

assessing the effects of unconventional monetary policy and low interest rates on pension fund risk incentives this study quantifies the effects of persistently low interest rates near to the zero lower bound and unconventional monetary policy on pension fund risk incentives in the united states using two structural vector autoregressive var models and a counterfactual scenario analysis the results show that monetary policy shocks as identified by changes in treasury yields following changes in the central bank s target interest rates lead to a substantial increase in pension funds allocation to equity assets notably the shift from bonds to equity securities is greater during the period where the us federal reserve launched unconventional monetary policy measures additional findings show a positive correlation between pension fund risk taking low interest rates and the decline in treasury yields across both well funded and underfunded public pension plans which is thus consistent with a structural risk shifting incentive

savings asset scarcity and monetary policy abstract this paper analyzes optimal monetary policy regarding asset markets in a model where money and savings are essential and asset markets matter the model is able to explain why different regimes for the correlation of real interest rates and stock price dividend ratios exist and offers two explanations why the correlation vanished after 2007 a decrease in inflation or changes in the supply of risky and safe assets the results on optimal policy show that away from the friedman rule fiscal policy can improve welfare by increasing the amount of outstanding government debt if the fiscal authority is not willing or able to increase debt the monetary authority can improve welfare of current generations by reacting procyclically to asset return shocks

the ex ante information content of accounting information systems this study examines the effect of the particular set of accounting methods used by a firm its information system on the ex ante information content of its earnings announcements the results suggest that reported income figures produced from a system consisting of inventory depreciation and tax credit accounting methods which are consistent in their effects on net income are more informative than when those effects are inconsistent informativeness of an earnings announcement is estimated by the expected increased variability in share prices at the earnings announcement date using the option pricing methodology introduced by patell and wolfson 1979 1981 an accounting information system can be defined by the product of managers choices with respect to alternative methods of accounting for various items demski 1972 for example managements can choose between last in first out lifo and first in first out fifo for determining the cost of inventory between straight line sl and accelerated acc to account for depreciation and between deferral def and flowthrough ft to account for the investment tax credit the collective choice from alternative methods constitutes a firm s accounting information system e g lifo acc ft prior research has indicated that annual and interim accounting reports are informative there have also been attempts to assess the oklahoma state university i wish to acknowledge the support of professors t williams w frank r d nair j hickman and w taylor in the completion of the dissertation on which this article is based the comments of j boatsman n dopuch k schipper r leftwich the participants of the accounting workshop at oklahoma state university and anonymous referees are appreciated 1 beaver 1968 may 1971 and gonedes 1974 for example

asset bubbles endogenous growth and financial frictions this paper analyzes the effects of bubbles in an infinitely lived agent model of endogenous growth with financial frictions and heterogeneous agents we provide a complete characterization on the relationship between financial frictions and the existence of bubbles our model predicts that if the degree of pledgeability is sufficiently high or sufficiently low bubbles can not exist they can only arise at an intermediate degree this suggests that improving the financial market condition might enhance the possibility of bubbles we also examine whether bubbles are growth enhancing or growth impairing in the long run we show that when the degree of pledgeability is relatively low bubbles boost long run growth on the other hand when it is relatively high bubbles lower long run growth moreover we examine the effects of the burst of bubbles and show that the effects much depend on the degree of the pldgeability i e the quality of financial system

should central banks burst bubbles some microeconomic issues anti bubble policy is examined in a finite horizon greater fool bubble model with rational agents asymmetric information and short sales constraints this permits the use of standard tools of welfare economics to analyse bubble policies policy is modelled as deflating overpriced assets by revealing information about this overpricing if the central bank is following such a policy then the market interprets inaction as an implicit endorsement of asset prices which raises these prices also the central bank can deflate overpriced assets even if it has no informational advantage over any investors about this overpricing however unless it has such an informational advantage a bubble bursting rule may only make things worse

asset shortages liquidity and speculative bubbles abstract we study the effect of asset shortages on liquidity in economies with limited enforcement of debt contracts we establish that under a suitable assumption in terms of gains from trade liquidity does not dry up and trading volumes do not disappear as credit conditions worsen the equilibrium outcome becomes arbitrarily close to a purely speculative equilibrium and bubbles occur in the limit the result applies to incomplete markets and more generally to equilibria where collateral constraints interfere with the additivity of the payoff pricing functional

are sunspots learnable an experimental investigation in a simple macroeconomic model abstract we conduct experiments with human subjects in a model with a positive production externality in which productivity is a nondecreasing function of the average level of employment of other firms the model has three steady states and a sunspot equilibrium that fluctuates between the high and low steady states steady states are payoff ranked low values give lower profits than higher values we investigate whether subjects can learn a sunspot equilibrium we observe coordination on the extrinsic announcements in our experimental economies cases of apparent convergence to the low and high steady states are also observed

us monetary policy and the euro area abstract this study documents empirically that contractionary us monetary policy may generate short term expansionary spillover effects in individual euro area ea member countries economic activity increases mainly via the trade channel also domestic credit and stock markets expand highlighting the importance of the financial channel however the international repercussions are transitory and distributed unevenly within the ea the effect diminishes as ea interest rates increase with a few quarters delay while the effects are heterogenous and rather large before 1999 responses become more homogeneous and smaller in size after the implementation of the euro still country specific asymmetries remain

when can life cycle investors benefit from time varying bond risk premia we study the importance of time varying bond risk premia in a consumption and portfolio choice problem for a life cycle investor facing short sales and borrowing constraints tilts in the optimal asset allocation in response to changes in bond risk premia exhibit pronounced life cycle patterns we find that the investor is willing to pay an annual fee up to 1 to implement a strategy that optimally conditions on prevailing bond risk premia in addition to her age and wealth to solve our model we extend recently developed simulation based techniques to life cycle problems featuring multiple state variables and multiple risky assets

an income strategy approach to the positive theory of accounting standard setting choice abstract this paper is designed to provide additional evidence on the positive theory of accounting policy choice by combining individual accounting principles into firm income strategies these strategies were the dependent variable in a probit analysis where the independent variables were size management compensation industry concentration ratio systematic risk capital intensity and the total debt to total asset ratio the results indicate that four of these factors size management compensation concentration ratio and the total debt to total asset ratio have a significant association with the choice of a firm s income strategy this test provides strong evidence consistent with the positive theory of accounting standard setting choice we also present evidence that smaller firms and or firms in less concentrated industries do not appear to make accounting policy choice decisions that are consistent with this theory

herding behaviour and the declining value relevance of accounting information evidence from an emerging stock market abstractthis article sheds light on the underlying mechanisms behind the changes in the value relevance of accounting information in the karachi stock exchange kse during the 1999 2010 period we find that neither changes in earnings quality nor the earnings lack of timeliness hypothesis can explain the decline in the value relevance of accounting information in the kse based on the stylized facts associated with the growth of the kse and the broader economics literature we argue that the reduction in the explanatory power of accounting information vis a vis stock returns was caused by herding behaviour empirical estimates from state space model of herding behaviour confirm the existence of herding and we find that the value relevance of accounting information is significantly lower in periods characterized by herding behaviour this article is also amongst the first attempts to empirically demonstrate that an expansionary monetary policy and increases in foreign portfolio investment lead to increas

consumption and portfolio policies with incomplete markets and short sale constraints the infinite dimensional case abstract we employ a martingale approach to study a dynamic consumption portfolio problem in continuous time with incomplete markets and short sale constraints we introduce a notion of minimax local martingale and transform the dynamic problem into a static problem of maximizing expected utility over the consumption bundles that satisfy a single budget constraint formed using that measure we establish the existence of and characterize the minimax local measure provide sufficient conditions for the dynamic consumption portfolio problem to have a solution and relate the optimal policies to the solution of quasi linear partial differential equation

market structure and competitive equilibrium in dynamic economic models abstract recently theorists have analyzed economies which potentially contain both finite and infinite horizon overlapping generations using arrow debreu complete markets typically applied models assume recursive spot and contingent securities markets implying a different equilibrium concept indeed if infinite horizon agents are present recursive equilibria cannot exist without some side conditions on debt with the right side conditions we show that every recursive market equilibrium allocation is a complete market equilibrium allocation and vice versa this bridges a gap between theory and applications and extends existing equivalence results on market structure

bubbles and charges the definitions of fundamental value and speculative bubbles that are standard in macroeconomics and finance are given formal representations as the countably additive part and the purely finitely additive part a measure and a pure charge respectively of the supporting price system when the commodity space is lx examples illustrate that rational bubbles can occur in standard general equilibrium models with complete markets and a finite number of agents even in the absence of uncertainty consider an economy which includes securities or capital goods which are claims to cash flows over countably infinite time and also includes markets for all goods conduct the following thought experiment for each security add the present value of the first n elements of the cash flow and take the limit as n gets large this limit represents the fundamental value of the security the difference if any between the price of the security and its fundamental value is termed a speculative bubble this use of the terms fundamental and speculative bubble is we believe one of those that are generally accepted blanchard and fischer 1989 pp 218 221 for example used the terms precisely in this way yet confusion persists about what factors generate bubbles fads and irrationality have always figured prominently and the hypothesis that these factors are important has gained some empirical support from the literature on asset price volatility another bubbleproducing factor is the structure of information in the market in a partialequilibrium setting allen and gorton 1988 showed that rational bubbles can exist with a finite number of agents who have asymmetric information although fads and asymmetric information can undeniably produce bubbles here we focus exclusively on the phenomenon of speculative bubbles in general equilibrium models with optimizing agents rational expectations and symmetric information an important source of confusion we believe is that the term fundamental is used in connection with sunspot equilibria as well as bubble equilibria a sunspot equilibrium is one in which prices and allocations depend on irrelevant sunspots as well as exogenous variations in fundamentals preferences technology and endowments bubbles on this usage reflect the effect of extrinsic uncertainty on equilibrium prices and allocations this use of the term fundamental in connec

financial stability under model uncertainty abstract this paper studies how asset price model misspecification affects the conduct of monetary policy under commitment in a new keynesian model using robust control techniques we find that monetary policy reacts aggressively to both asset price and inflation shocks to guard herself against worst case outcome