intervention policy of the boj a unified approach intervening in the fx market implies a complex decision process for central banks monetary authorities have to decide whether to intervene or not and if so when and how since the successive steps of this procedure are likely to be highly interdependent we adopt a nested logit approach to capture their relationships and to characterize the prominent features of the various steps of the intervention decision process our estimations based on japanese data from 1991 to 2004 indicate that the bank of japan i mainly reacted to deviations of the exchange rate with respect to fundamentals and ii tended to favour secrecy when its credibility was low we also provide new insights on the so called secrecy puzzle by modeling explicitly the risk for a secret intervention to be detected our results have important implications in terms of exchange rate policy such as the emergence of a trade off between intervention size communication policy and secrecy our results tend to provide some explanation for the observed persistence of ineffective intervention policy during some sub periods c 2008 elsevier b v all rights reserved

optimal consumption and investment with transaction costs and multiple risky assets we consider the optimal intertemporal consumption and investment policy of a constant absolute risk aversion cara investor who faces fixed and proportional transaction costs when trading multiple risky assets we show that when asset returns are uncorrelated the optimal investment policy is to keep the dollar amount invested in each risky asset between two constant levels and upon reaching either of these thresholds to trade to the corresponding optimal targets an extensive analysis suggests that transaction cost is an important factor in affecting trading volume and that it can significantly diminish the importance of stock return predictability as reported in the literature this paper studies the optimal intertemporal consumption and investment policy of an investor with a constant absolute risk aversion cara preference and an infinite horizon the investor can trade in one risk free asset and n 1 risky assets in contrast to the standard setting the investor faces both fixed and proportional transaction costs in trading any of these risky assets in the absence of transaction costs and when risky asset prices follow geometric brownian motions the optimal investment policy is to keep a constant dollar amount in each risky asset as shown by merton 1971 this trading strategy requires continuous trading in all the risky assets in addition the optimal consumption is affine in the total wealth in the presence of transaction costs however trading continuously in a risky asset would incur infinite transaction costs therefore risky assets are traded only infrequently in this case the literature on optimal consumption and investment with multiple risky assets subject to transaction costs is limited leland 2000 examines a multiasset investment fund that is subject to transaction costs and capital gains taxes under the assumption that the fund has an exogenous target for each risky asset he develops a relatively simple numerical procedure to compute the no transaction region akian menaldi and sulem 1996 consider an optimal consumption and investment problem with proportional transaction costs for

risk sensitive dividend problems abstract we consider a discrete time version of the popular optimal dividend payout problem in risk theory the novel aspect of our approach is that we allow for a risk averse insurer i e instead of maximising the expected discounted dividends until ruin we maximise the expected utility of discounted dividends until ruin this task has been proposed as an open problem in gerber and shiu 2004 the model in a continuous time brownian motion setting with the exponential utility function has been analysed in grandits et al 2007 nevertheless a complete solution has not been provided in this work instead we solve the problem in discrete time setup for the exponential and the power utility functions and give the structure of optimal history dependent dividend policies we make use of certain ideas studied earlier in bauerle and rieder 2011 where markov decision processes with general utility functions were treated our analysis however includes new aspects since the reward functions in this case are not bounded

beliefs equilibria in an overlapping generations model we consider a standard two generations version of the overlapping generations model agents predict inflation rates on the basis of a perceived law of motion which is estimated by running a linear regression on past inflation rates we introduce the notion of beliefs equilibrium at such an equilibrium i the perceived law of motion is such that it fits the time series of inflation rates best and ii this time series of actual inflation rates is generated when agents use that perceived law of motion we show that beliefs might converge although inflation rates keep on fluctuating these fluctuations are consistent with the limit belief

restricted perception equilibria and rational expectation equilibrium abstract this paper studies a cobweb economy in which agents make decisions using a misspecified model of their stochastic environment specifically the agents model of the price process is restricted to be a moving average of order q ma q minimizing the mean square of their forecast error we prove existence and uniqueness of this ma q optimal equilibrium and we show that as q goes to infinity the ma q optimal equilibrium converges in mean square towards the rational expectations equilibrium the speed of convergence is dictated by the persistence of the underlying exogenous process lastly we show that when all other agents use the correctly specified model the misspecified ma q model can provide accurate forecasts this suggests that if agents have to pay for their forecasting model and if the correctly specified model is more costly a situation in which all agents use the correctly specified model might not be an equilibrium

complementarities multiplicity and supply information if traders can obtain private information about the payoff and the supply of a stock then there can exist i complementarity in information acquisition and ii multiple equilibria in the financial and information markets the additional dimension of supply information increases coordination possibilities in the financial market leading to multiple equilibria the existence of two information sources can lead to information acquisition being complementary the multiplicity of equilibria is suggestive of excess volatility and crashes the different financial market equilibria imply differing patterns of cost of capital and volume of trade 2009 by the european economic association

potential disasters can turn the tragedy into success this paper presents a novel experimental design that allows testing how users of a common pool resource respond to an endogenously driven drastic drop in the supply of the resource we show that user groups will manage a resource more efficiently when confronted with such a non concave resource growth function compared to groups facing a logistic growth function even among cooperative groups there is a significant behavioral difference although theory predicts there should not be we argue that effectiveness of communication is endogenous to the problem the threat of reaching a critical tipping point beyond which the growth rate will drop drastically triggers more effective communication within the group enabling stronger commitment for cooperation and more knowledge sharing which together explains the results we argue that the insights generated by this study can be seen as one of many but nevertheless important contributions towards an increased understanding of the interactions between human behavior and the environment in common pool resource systems

target zones and exchange rate dynamics this paper develops a simple model of exchange rate behavior under a target zone regime it shows that the expectation that monetary policy will be adjusted to limit exchange rate variation affects exchange rate behavior even when the exchange rate lies inside the zone and is thus not being defended actively somewhat surprisingly the analysis of target zones turns out to have a strong formal similarity to problems in option pricing and investment under uncertainty

target zones and exchange rates an empirical investigation this paper develops an empirical model of exchange rates in a target zone the distribution of exchange rate changes is conditioned on a latent jump variable where the probability and size of a jump vary over time as a function of financial and macroeconomic variables when there is no jump the target zone is credible and exchange rate changes are constrained to remain within the target zone band the paper revisits the empirical evidence from the european monetary system regarding the conditional distribution of exchange rate changes the credibility of the system and the size of the foreign exchange risk premia in contrast to some previous findings we conclude that the french franc deutschmark rate exhibits considerable nonlinearities realignments are somewhat predictable and the credibility of the system did not increase substantially after 1987 moreover our model implies that the foreign exchange risk premium becomes large during speculative crises

should central bankers talk to the foreign exchange markets in this paper we study the role of official statements and speeches given by central bank authorities in charge of foreign exchange policy we investigate the impact of statements that comment on and confirm such interventions on the day of the intervention on the two major foreign exchange markets over an extended period 1989 2003 we also study the impact in terms of policy effectiveness of central bank communication before the actual operations our results suggest that appropriate speeches clarifying the current intervention policy can have marginally virtuous effects both in terms of exchange rate level and exchange rate volatility this leads us to conclude that in general actual interventions on the market should still be employed provided that official statements are used to clarify the nature and purpose of these interventions c 2008 elsevier ltd all rights reserved

exogenous degradation in the commons field experimental evidence abstract this article presents the results from framed field economic experiments in rural colombia that aim to explore the behavioral responses of resource users to exogenous changes in the availability of a common pool resource in the first 10 rounds of the experiment all subjects played at a baseline with the same initial resource availability in the subsequent rounds the experimenters exogenously changed the resource size including mild and strong reductions in the resource size and rebounds to original size results show that subjects react to strong reductions in resource availability by increasing appropriation from the resource this behavior holds for intense and persistent as well as for progressive reductions in resource availability in addition subjects that experience a reduction in the resource availability followed by a rebound to the initial resource size appropriate more than those subjects who did not experience any change in the resource availability

adaptive expectations and the variance hypothesis abstract it is shown that lucas variance hypothesis on output inflation tradeoff is consistent even with adaptive price expectations hence empirical evidence of the model need not support the rational expectations natural rate hypothesis

does mean variance portfoliomanagement deserve expected utility s approximative affirmation abstract this article is a comment on the paper by harry markowitz on mean variance approximations to expected utility european journal of operational research 234 2014 436 355 this comment is followed by the reply of harry markowitz

sample autocorrelation learning in a capital market model adaptive agent models are supposed to result in the same limit behavior as models with perfectly rational agents in this article we show that this claim cannot by accepted in general even in a simple capital market model where the agents apply sample autocorrelation learning to perform their forecasts by applying this learning algorithm the agents use sample means the sample autocorrelation coefficient and the sample variances of prices to predict the future prices and to determine the demand for the risky asset therefore even if the agents are not perfectly rational we require that the agents forecasts are consistent with the underlying information in this article a sufficient condition for convergence is derived analytically and checked by means of simulations the price sequence as well as the sequence of parameters estimated by means of sample autocorrelation learning converge if the initial value of the price sequence is sufficiently close to the steady state equilibrium and a random variable derived from the dividend process is not too volatile to skip the price trajectory out of the attracting region therefore the market price can even diverge and the region of convergence could become very small depending on the underlying parameters thus divergence of the price sequences is not a pathological example since it possibly occurs over a wide range of parameters therefore the often claimed coincidence of adaptive agents models and ration agent models cannot be observed even in a simple capital market model author s abstract

introduction to the stability of rational expectations equilibrium abstract this paper surveys the literature which examines the stability of the expectations that agents are assumed to have in a rational expectations equilibrium ree this issue is more complex than the usual statistical estimation problem because the relationship between observable variables and payoff relevant variables is endogenous one approach taken in the literature yields convergence to a ree but requires agents to have extensive knowledge about the structure and dynamics of the model that prevails while they learn a second approach does not assume that agents have correctly specified likelihood functions and finds that ree may not be stable

rational expectations equilibrium an alternative approach we study a dynamic market process in which traders condition their beliefs about payoff relevant parameters on past endogenously generated market data and current exogenous data we say that a market process is informative if the beliefs of traders who receive only endogenously generated market data converge almost surely to the true parameter value our main result is that under standard regularity hypotheses the generic market process is informative we define an equilibrium as the limit points of the market process journal of economic literature classification numbers 02 1 026 c 1984 academic press inc

optimal dynamic reinsurance policies under a generalized denneberg s absolute deviation principle abstract this paper studies the optimal dynamic reinsurance policy for an insurance company whose surplus is modeled by the diffusion approximation of the classical cramer lundberg model we assume the reinsurance premium is calculated according to a proposed mean cvar premium principle which generalizes denneberg s absolute deviation principle and expected value principle moreover we require that both ceded loss and retention functions are non decreasing to rule out moral hazard under the objective of minimizing the ruin probability we obtain the optimal reinsurance policy explicitly and we denote the resulting treaty as the dual excess of loss reinsurance this form of the optimal treaty is new to the literature and lends support to the fact that reinsurance contracts in practice often involve layers it also demonstrates that reinsurance treaties such as the proportional and the standard excess of loss which are typically found to be optimal in the dynamic reinsurance model need not be optimal when we consider a more general optimization model we also consider other generalizations including i allowing the insurer to manage its business through both reinsurance and investment and ii n piecewise mean cvar premium principle in the former case we not only show that the dual excess of loss reinsurance policy remains optimal but also demonstrate that investing in stock can further enhance insurer s financial stability with lower ruin probability for the latter case we establish that the optimal reinsurance treaty can have at most n layers which is also more consistent with practice

classical and restricted impulse control for the exchange rate under a stochastic trend model abstract building on cadenillas and zapatero 2000 and bertola et al 2016 we consider the problem faced by a central bank to optimally control the exchange rate whereby the control is composed of a direct impulse control intervention and an indirect continuously acting intervention given by the control of the domestic interest rate similarly to cadenillas and zapatero 2000 and bertola et al 2016 we formulate the problem as a mixed classical impulse control problem and the approach is based on a quasi variational inequality by considering a specific class of the optimal value functions and controls as in bertola et al 2016 but differently from cadenillas and zapatero 2000 we consider a finite horizon that makes the problem time inhomogeneous and we do not have to impose a smooth fit condition so that a fully analytical solution is possible with respect to bertola et al 2016 we generalize the problem by letting more realistically the drift in the dynamics of the exchange rate to be time varying or even unobservable so that it has to be filter estimated from observable data numerical illustrations are presented as well

optimal target zones how an exchange rate mechanism can improve upon discretion abstract using krugman s 1991 target zone model we find an explicit subgame perfect solution for a central bank wishing to stabilise the exchange rate given proportional costs of intervention we demonstrate however that precommitment to narrower bands would yield a welfare gain which provides a theoretical rationale for an exchange rate mechanism erm numerical simulations suggest that the optimal currency band with precommitment via an erm is only half as wide as that under discretion and that the welfare benefits are sufficient to sustain the system

environmental versus human induced scarcity in the commons do they trigger the same response we study appropriation strategies in common pool resources where extinction is a credible threat here we present an experimental study of the appropriation of common pool resources in a dynamic setting where resource availability depends on the initial environmental characteristics of the common resource and on human induced resource depletion due to users appropriation patterns our results show that initial resource scarcity limits appropriation by inducing an initial caution among users that persists throughout of the game additionally we find that subjects restrain their appropriation strategies when scarcity increases however this concern for resource scarcity is not enough to prevent resource depletion agents do not counteract the previous rounds appropriation strategies but follow the appropriation trend high appropriation levels are followed by higher appropriation strategies thus promoting the well known tragedy of the commons often concern for resource preservation is not great enough to limit appropriation

rational thinking under costly information macroeconomic implications abstract the notion of optimized rational behavior in the formation of expectations is used in this note to study the dynamics of a simple macroeconomic model in a setting where departures from stability are not possible under perfect foresight the selection of an optimal degree of rationality may lead to the generation of long term endogenous fluctuations

behavioral learning equilibria we propose behavioral learning equilibria where boundedly rational agents learn to use a simple univariate linear forecasting rule with correctly specified unconditional mean and first order autocorrelation in the long run agents learn the best univariate linear forecasting rule without fully recognizing the more complex structure of the economy an important feature of behavioral learning equilibria is simplicity and parsimony which makes coordination of individual expectations on such an aggregate outcome more likely in a first application an asset pricing model driven by ar 1 ar 1 dividends a unique behavioral learning equilibrium exists characterized by high persistence and excess volatility and it is stable under learning in a second application the new keynesian phillips curve multiple equilibria coexist learning exhibits path dependence and inflation may switch between low and high persistence regimes

the effectiveness of central bank intervention in the ems the post 1993 experience abstract we analyze the effectiveness of intervention in the european monetary system by using data on the dem intervention activity of six european central banks covering the period from august 1993 to april 1998 to allow for regime specific intervention effects we estimate markov switching autoregressive conditional heteroscedasticity models we find that interventions have only limited effects on the conditional means and variances

can agents learn their way out of chaos abstract in an olg model with adaptive learning forecast errors of the agents are analyzed in regions where the resulting dynamical system behaves chaoticly agents think they are living in stochastic world it is shown that they cannot reject the hypothesis that mean and autocorrelation coefficients of their forecast errors are 0 thus they have no incentive to switch to another learning rule predictions cannot be unmasked as being wrong because of the limited statistical tools the agents possess bounded rationality these phenomena occur in the olg model even with a cobb douglas utility function

market for information experimental evidence predictions of the noisy rational expectations equilibrium ree model are found to be relatively accurate for both asset and information markets in the laboratory when information about an asset s uncertain dividend is sold to a fixed number of highest bidders prices allocations efficiency and distribution of profit predictions of the full revelation ree model in the asset market dominate the predictions of the walrasian model demand for information shifts to the left and its price declines close to zero when the price of information is fixed at a relatively high level the number of informed agents and the informativeness of the asset market tends to adjust to permit the informed agents to recover their investment in information

ordinary least squares learning and nonlinearities in macroeconomics the paper reviews the literature on adaptive learning in macroeconomic settings where the formation of expectations is particularly relevant special attention will be given to simple two period overlapping generations models with a unique fixed point perfect foresight equilibrium in this kind of scenario eventual long term periodic and a periodic cycles are exclusively the result of the process of learning the outcome that high rates of money growth have a potentially destabilizing effect generating periodic fluctuations and chaos is emphasized the persistence of systematic forecast errors in a scenario where agents are supposed to act rationally is relevant in this context and it will be thoroughly discussed resorting to the notions of self fulfilling mistakes consistent expectations equilibria and beliefs equilibria

applying simulation optimization to the asset allocation of a property casualty insurer abstract proper asset allocations are vital for property casualty insurers to be competitive and solvent theories of finance offer little practical guidance in constructing such asset allocations however this research integrates simulation models with a newly developed evolutionary algorithm for the multi period asset allocation problem of a property casualty insurer we first construct a simulation model to simulate operations of a property casualty insurer then we develop multi phase evolution strategies mpes to be used with the simulation model to search for promising asset allocations for the insurer a thorough experiment is conducted to evaluate the performance of our simulation optimization approach computational results show that mpes is an effective search algorithm it dominates the grid search method by a significant margin the re allocation strategy resulting from mpes outperforms re balancing strategies significantly this research further demonstrates that the simulation optimization approach can be used to study economic issues related to multi period asset allocation problems in practical settings

consistent expectations equilibria and learning in a stock market abstract in this article we investigate the question whether the highly demanding informative requirements of rational expectations models are necessary to derive equilibria within capital market models in this analysis agents are only provided with publicly available information such as prices and dividends nevertheless we require that agents should behave like econometricians additionally we skip the assumption of rational expectations models that agents know the implied actual law of motion of the system by these assumptions the stock market can be considered as a hommes sorger consistent expectations model we show the existence of consistent expectations equilibria with myopic agents and independent identically distributed dividends the only cee is the rational expectations equilibrium in the simulation part we demonstrate how the steady state cee can be derived by means of sample autocorrelation learning thus we are able to derive a stock market equilibrium with less demanding requirements where this equilibrium is equal to the rational expectations equilibrium

learning from prices and the dispersion in beliefs i study whether investors use an asset s price to update their beliefs about its payos i show that in a dynamic economy the relationship between the dispersion in investor beliefs and returnvolume characteristics can be used to empirically answer this question when investors have rational expectations re and condition on the price i show that belief dispersion is positively related to expected returns return volatility and correlation between volume and absolute returns but negatively related to return autocorrelation when investors do not use the price as in a dierence of opinions do model these relationships are reversed i test these predictions using the crosssection of returns volume and analyst forecast dispersion over dierent horizons the results are consistent with the re model at quarterly and longer horizons but reject both models at the monthly horizon i show that a hybrid model with some do investors and some re investors can match the short horizon evidence the empirical results are consistent with the idea that while some investors do not use the price in the short run they increase their conditioning on the price over time

bayesian economist bayesian agents i an alternative approach to optimal learning we generalize the results on bayesian learning based on the martingale convergence theorem to the sequential framework we show that the variability in the sequential framework is sufficient under mild conditions to circumvent the incomplete learning results that characterize the optimal learning literature we then give an alternative approach whereby the economist is bayesian with a prior on the space of agent priors we illustrate the usefulness of our approach by applying it to two popular economic examples a monopolist who does not know the demand curve he faces and the stochastic single sector growth model with an unknown production function

learning rational expectations classical conditions ensure uniqueness and global stability this paper explores the possibilities for global stability of rational expectations under boundedly rational learning the authors focus on a specific asymmetric example of l blume and d easley s 1982 environment based on r radner 1979 their main results point out an intriguing relationship between stability in learning and classical conditions for uniqueness and stability of walrasian equilibrium in particular the authors find that gross substitutability suitably extended to incorporate the informational role of prices is sufficient to ensure global stability of revealing rational expectations equilibrium under learning their analysis is significantly aided by a technique developed here which allows convenient graphical treatment of the issues surrounding rational expectations copyright 1990 by the london school of economics and political science

optimal central bank intervention in the foreign exchange market abstract we consider a currency with exchange rate dynamics modeled as a geometric brownian motion the objective of the central bank is to keep this exchange rate as close as possible to a given target so there is a running cost associated to the difference between the exchange rate and the target additionally there are also fixed and proportional costs associated with each intervention the objective of this paper is to find the optimal level of intervention and the optimal sizes of the interventions so as to minimize the total cost we solve this problem by applying the theory of stochastic impulse controls journal of economic literature classification numbers c61 d81 f31 g15

complicated endogenous business cycles under gross substitutability abstract in this paper we investigate the global behaviour of the output equilibrium time paths in a two dimensional overlapping generations model with productive investment and capital accumulation where agents behave rationally and markets are competitive we show that equilibrium time paths can converge to complicated chaotic attractors as well as periodic attractors when the substitution effect dominates the income effect everywhere the occurrence of complicated equilibrium paths is guaranteed by homoclinic intersections of the stable and unstable manifolds of the autarkic steady state journal of economic literature classificiation number e32

the coexistence of stable equilibria under least squares learning abstract in this paper we consider firms that learn about market conditions by estimating the demand function using past market data we show that learning may lead to suboptimal outcomes even when the estimated demand function perfectly fits the observations used in the regression and firms thus perceive to have learned the demand function correctly we consider the salop model with three firms and two types of consumers that differ in their sensitivity to product differences firms do not know the demand structure and they apply least squares learning to learn the demand function in each period firms estimate a linear perceived demand function and they play the perceived best response to the previous period price of the other firms this learning rule can lead to three different outcomes a self sustaining equilibrium the nash equilibrium or an asymmetric learning equilibrium in this last equilibrium one firm underestimates the demand for low prices and it attracts consumers with high sensitivity only this type of equilibrium has not been found in the literature on least squares learning before both the nash equilibrium and the asymmetric learning equilibrium are locally stable therefore the model has coexisting stable equilibria

negative externalities in cropping decisions private versus common land this paper analyzes to what extent the entitlement of property rights affects cropping decisions when these decisions generate negative externalities to that end we implement an experimental study where agents make cropping decisions in two different treatments private and common land the results show that there are no statistically significant differences between the two treatments in the contribution to the negative externality thus revealing that the entitlement of property rights does not affect cropping decision in this context furthermore our findings indicate that the implication of the agents in activities generating negative externalities tends to increase over time thus amplifying its adverse consequences

optimal dividend and capital injection problem in the dual model with proportional and fixed transaction costs in this paper we consider the dividend payments and capital injections control problem in a dual risk model such a model might be appropriate for a company that specializes in inventions and discoveries which pays costs continuously and has occasional profits the objective is to maximize the expected present value of the dividends minus the discounted costs of capital injections this paper can be considered as an extension of yao et al 2010 we include fixed transaction costs incurred by capital injections in this paper this leads to an impulse control problem using the techniques of quasi variational inequalities qvi this optimal control problem is solved numerical solutions are provided to illustrate the idea and methodologies and some interesting economic insights are included

genetic algorithm learning and the cobweb model this paper presents the cobweb model in which competitive firms in a market for a single good use a genetic algorithm to update their decision rules about next period production and sales the results of simulations show that the genetic algorithm converges to the rational expectations equilibrium for a wider range of parameter values than other algorithms frequently studied within the context of the cobweb model price and quantity patterns generated by the genetic algorithm are also compared to the data of experimental cobweb economies it is shown that the algorithm can capture several features of the experimental behavior of human subjects better than three other learning algorithms that are considered

government debt control optimal currency portfolio and payments motivated by empirical facts we develop a theoretical model for optimal currency government debt portfolio and debt payments which allows both government debt aversion and jumps in the exchange rates we obtain first a realistic stochastic differential equation for public debt and then solve explicitly the optimal currency debt problem we show that higher debt aversion and jumps in the exchange rates lead to a lower proportion of optimal debt in foreign currencies furthermore we show that for a government with extreme debt aversion it is optimal not to issue debt in foreign currencies to the best of our knowledge this is the first theoretical model that provides a rigorous explanation of why developing countries have reduced consistently their proportion of foreign debt in their debt portfolios

living in an imaginary world that looks real abstract in the paper we show using standard approaches general equilibrium modeling and the assumption of complete rationality that the macroeconomic environment is endogenous and is indeterminate specifically it is argued without resorting to sunspot type arguments that microeconomic fundamentals do not suffice to characterize the economy at the macro level in particular we show how perceptions of rational agents of the workings of the economy a shape the environment b affect the environment sufficiently to ensure that rational economic agents find the observed environment consistent with their beliefs even though it is not as a by product we illustrate that endogenous macro uncertainty can arise as an outcome if rational economic agents whose expectations are anchored on endogenous variables expect them to arise finally we show that systematic errors can persist indefinitely under rationality

risk and value based management for non life insurers under solvency constraints abstract the aim of this paper is to study optimal risk and value based management decisions regarding a non life insurer s investment strategy by maximizing shareholder value based on preference functions while simultaneously controlling for the ruin probability we thereby extend previous work by deriving analytical solutions and by explicitly accounting for the policyholders willingness to pay depending on their risk sensitivity based on the insurer s reported solvency status which will be of great relevance under solvency ii we further investigate the impact of the risk free interest rate non linear dependencies between assets and liabilities distributional assumptions as well as reinsurance one main finding is that the consideration of default risk driven premiums is vital for optimal management decisions since e g the target ruin probability implying a higher shareholder value differs for various risk sensitivities of the policyholders furthermore in the present setting proportional reinsurance increases shareholder value only for non risk sensitive policyholders

the linkage between speculative attack and target zone models of exchange rates in this paper we generalize the target zone exchange rate as model formalized by krugman 1988b to include finite sized interventions in defense of the zone the main contributions of these pages consist of linking the recent developments in the theory of target zones to the mirror image theory of speculative attacks on asset price fixing regimes and in using aspects of that linkage to give an intuitive interpretation to the smooth pasting condition usually invoked as a terminal condition this abstract was borrowed from another version of this item

on the dual risk model with parisian implementation delays in dividend payments abstract in this paper we study the dual compound poisson risk process which is suitable for a business that pays expenses at a constant rate over time and earns random amount of income at random times in contrast to the usual dividend barrier strategy e g avanzi gerber and shiu 2007 in which any overshoot over a pre specified barrier is paid immediately to the company s shareholders as a dividend it is assumed that dividend is payable only when the process has stayed above the barrier continuously for a certain amount of time d known as the parisian implementation delay in dassios and wu 2009 under such a modification the laplace transform of the time of ruin and the expected discounted dividends paid until ruin are derived motivated by the erlangization technique e g asmussen avram and usabel 2002 of approximating a fixed time using an erlang distribution we also analyze the case where the delay d is replaced by an erlang random variable numerical illustrations are given to study the effect of parisian implementation delays on ruin related quantities and to demonstrate the good performance of erlangization interestingly unlike the traditional barrier strategy it is found that the optimal dividend barrier maximizing the expected discounted dividends does depend on the initial surplus level

the impact of fx central bank intervention in a noise trading framework abstract in this paper we analyse the effectiveness of the direct central bank interventions using a new effectiveness criterion to this aim we investigate the effects of central bank interventions cbi in a noise trading model with chartists and fundamentalists we first estimate a model in which chartists extrapolate past returns and fundamentalists forecast a mean reverting dynamics of the exchange rate towards a fundamental value then we investigate the role of central bank interventions for explaining the switching properties between the two types of agents we find evidence that in the medium run interventions increase the proportion of fundamentalists and therefore exert some stabilizing influence on the exchange rate

target zones and realignments recent contributions emphasize that the presence of exchange rate target zones has important effects on the within band behavior of exchange rates when agents are forward looking the authors find that the implications of available models are inconsistent with european exchange rate data and they suggest that the frequent realignments occurring in the period they consider may be responsible for this they construct a model in which the likelihood of a realignment in the near future increases as the exchange rate approaches the limits of its fluctuation band and show that its implications are broadly consistent with the evidence copyright 1992 by american economic association

on consumer preferences and the willingness to pay for term life insurance abstract we run a choice based conjoint cbc analysis for term life insurance on a sample of 2017 german consumers using data from web based experiments individual level part worth profiles are estimated by means of a hierarchical bayes model drawing on the elicited preference structures we then compute relative attribute importances and different willingness to pay measures in addition we present comprehensive simulation results for a realistic competitive setting that allows us to assess product switching as well as market expansion effects on average brand critical illness cover and underwriting procedure turn out to be the most important nonprice product attributes hence if a policy comprises their favored specifications customers accept substantial markups in the monthly premium furthermore preferences vary considerably across the sample while some individuals are prepared to pay relatively high monthly premiums a large fraction exhibits no willingness to pay for term life insurance at all presumably due to the absence of a need for mortality risk coverage we also illustrate that utility driven product optimization is well suited to gain market shares avoid competitive price pressure and access additional profit potential finally based on estimated demand sensitivities and a set of cost assumptions it is shown that insurers require an in depth understanding of preferences to identify the profit maximizing price

equilibrium asset prices and exchange rates abstract in a two country two good world we construct an intertemporal international general equilibrium for two logarithmic representative agents financial markets are fully integrated and independently incomplete the equilibrium expected rate of change of the exchange rate increases with the differential of interest rates and the volatility of the domestic equity markets and decreases with the covariance between domestic and foreign equity markets the equilibrium volatility of the exchange rate is the sum of the volatilities due to idiosyncratic factors in the financial markets and a term that represents the difference of weights in the common international factor

tests of rational expectations in a stark setting the authors test the hypothesis that subjects forecasts in a stark experimental setting are not predictably different than the actual process generating the data the particular process that they use is a random walk forty subjects predict realizations of random walks chosen to be consistent with the actual process generating the data the authors find that they cannot predict subjects deviations from rational expectations of the process actually generating the data for about half of the subjects the authors cannot predict the forecast errors of about 90 percent of the subjects with information actually available to them coauthors are arlington w williams raymond c battalio and timothy i mason copyright 1993 by royal economic society

oral interventions versus actual interventions in fx markets an event study approach the article assesses whether exchange rate communication or oral intervention has been an effective policy tool for monetary authorities to influence exchange rates it employs an event study methodology that identifies intervention clusters or events for the euro dollar and the dollar yen exchange rates the article finds that both oral intervention events and actual intervention events have been highly successful over the short to medium run the article shows that the success of intervention events is related to market conditions and to the coordination among policy makers it also finds that the success of communication and actual interventions is largely unrelated to monetary policy thus suggesting that interventions primarily function through a coordination channel

existence and stability of rational expectation equilibria in a simple overlapping generation model abstract we consider a simple overlapping generation model with outside money and one consumption good for a big class of preference relations it is shown that globally no self fulfilling expectation exists except the trivial one if the information set contains only past and present prices even locally positive results can be obtained for homothetic preferences only to get asymptotic stability this class must be restricted again the elasticity of substitution must be very small the implications of this are very negative a learning process can never reach rationality

the market for preferences learning processes are widely held to be the mechanism by which boundedly rational agents adapt to environmental changes we argue that this same outcome might also be achieved by a different mechanism namely specialisation and the division of knowledge which we here extend to the consumer side of the economy we distinguish between high level preferences and low level preferences as nested systems of rules used to solve particular choice problems we argue that agents while sovereign in high level preferences may often find it expedient to acquire in a pseudo market the low level preferences in order to make good choices when purchasing complex commodities about which they have little or no experience a market for preferences arises when environmental complexity overwhelms learning possibilities and leads agents to make use of other people s specialised knowledge and decision rules

adaptive behavior and economic theory the relationship between psychological and economic views of behavior once a subject of heavy dispute is now understood in a very similar way by practitioners of both these disciplines and of our sister social sciences in general terms we view or model an individual as a collection of decision rules rules that dictate the action to be taken in given situations and a set of preferences used to evaluate the outcomes arising from particular situation action combinations these decision rules are continuously under review and revision new decision rules are tried and tested against experience and rules that produce desirable outcomes supplant those that do not i use the term adaptive to refer to this trial anderror process through which our modes of behavior are determined if one is interested in modeling particular decisions in any very explicit way it is obviously necessary to think about rather narrow aspects of an individual s entire set of decision rules his or her personality experimental psychology has traditionally focused on the adaptive process by which decision rules are replaced by others in this tradition the influence of the subject s or as an economist says the agent s preferences this essay uses a series of examples to illustrate the use of rationality and adaptation in economic theory it is argued that these hypotheses are complementary and that stability theories based on adaptive behavior may help to narrow the class of empirically interesting equilibria in certain economic models an experiment is proposed to test this idea

portfolio selection in stochastic markets with hara utility functions in this paper we consider the optimal portfolio selection problem where the investor maximizes the expected utility of the terminal wealth the utility function belongs to the hara family which includes exponential logarithmic and power utility functions the main feature of the model is that returns of the risky assets and the utility function all depend on an external process that represents the stochastic market the states of the market describe the prevailing economic financial social political and other conditions that affect the deterministic and probabilistic parameters of the model we suppose that the random changes in the market states are depicted by a markov chain dynamic programming is used to obtain an explicit characterization of the optimal policy in particular it is shown that optimal portfolios satisfy the separation property and the composition of the risky portfolio does not depend on the wealth of the investor we also provide an explicit construction of the optimal wealth process and use it to determine various quantities of interest the return risk frontiers of the terminal wealth are shown to have linear forms special cases are discussed together with numerical illustrations

a family production overlapping generations economy abstract this paper provides a theoretical analysis of an overlapping generations economy in which production decisions and input output allocations are all carried out at the family level i consider a single class of output allocation schemes and various degrees of knowledge about the production technology under complete knowledge i show that a family organizational structure in which everyone receives his marginal contribution to output invests less in physical capital than under a perfectly competitive equilibrium environment under incomplete knowledge i analyze and compare how beliefs about the input output relationship affect the physical capital accumulation dynamics and the long run standards of living

forecasting dynamics and convergence to market fundamentals evidence from experimental asset markets abstract subjects trade shares of a fictitious asset in a computerized double auction market and submit one period ahead forecasts of the mean contract price on average the predictions of the rational expectations hypothesis are not supported and forecasts tend to be both biased and inconsistent with the specification of the process which would generate prices in a rational expectations equilibrium nevertheless an empirical analysis of agents forecasting dynamics indicates that learning does occur and that agents forecasts evolve in a direction consistent with a rational expectations equilibrium

cobweb dynamics under bounded rationality this paper discusses recent work on expectation formation in the familiar cobweb hog cycle model a convenient feature of the model is the fact that it has a unique rational expectations equilibrium ree attention will be focused on whether this unique ree can be learned under bounded rationality with agents using simple habitual rule of thumb forecasting rules or whether other approximate rational expectations equilibria can arise where forecasts are although not perfect approximately correct in particular the possibility of chaotic equilibria under bounded rationality will be discussed both the homogeneous agent case and the heterogeneous case with evolutionary competition between different forecasting rules will be discussed recent experimental work on expectations formation in the cobweb economy suggests excess volatility and endogenous possibly chaotic price fluctuations driven by the interaction of competing boundedly rational agents

learning rational expectations the finite state case this paper is devoted to the question of whether traders can learn rational expectations from repeated observations of market data in a stationary environment with finitely many exogenous states of the world the learning problem is placed in the context of an iterative adjustment process which achieves equilibrium if traders have rational expectations the main result is that even if traders begin with no knowledge of their environment there exists an estimation procedure which converges to rational expectations when the environment satisfies a certain regularity condition the regularity condition is shown to be generic

fed intervention dollar appreciation and systematic risk abstract in a four factor asset pricing model estimated on daily data fed intervention significantly affects betas of surprises in the market return expected inflation rate yield curve and corporate bond risk premium fed foreign currency sales cause economically and statistically significant increases in the systematic risk premium in appreciation and thus in the dollar s expected appreciation rate the direction the fed desires and consistent with the signaling but not the portfolio balance channel intervention s effects on actual appreciation are less reliable they depend on unpredictable risk factor realizations even successful intervention to strengthen the dollar may be costly by increasing the dollar s systematic risk intervention reduces the attractiveness of u s relative to foreign investments further uncertainty about future fed interventions may induce resource misallocation ceteris paribus investors find it harder to estimate risk adjusted discount rates and forecast the home currency value of cash flows

financial education and behavioral finance new insights into the role of information in financial decisions recent empirical evidence based on surveys and experimental activities within the fields of behavioral finance and financial education has offered economists new empirically based insights into how individuals use information in making financial decisions specifically the importance of information in financial decisions may be reduced or eliminated by psychological aspects of the individual such as a state of overconfidence that is individual or shared with a group or by the individual s limited ability to process complex and abundant information this paper aims to complement this emerging body of literature by studying how individuals perceive and process information when making financial decisions we review these contributions and suggest a number of broad guidelines that can provide a framework for future discussion of this topic within financial decision theory

on the consistency of backward looking expectations the case of the cobweb in dynamic models of economic fluctuations backward looking expectations with systematic forecasting errors are inconsistent with rational behaviour in non linear dynamic models exhibiting seemingly unpredictable chaotic fluctuations however simple habitual rule of thumb backward looking expectation rules may yield non zero but nevertheless non systematic forecasting errors in a chaotic model expectational forecasting errors may have zero autocorrelations at all lags even for rational agents patterns in these forecasting errors may be very difficult to detect especially in the presence of small noise backward looking expectations are then not necessarily inconsistent with rational behaviour we investigate whether simple expectation schemes such as naive or adaptive expectations can be consistent with rational behaviour in the simplest of all non linear dynamic economic models the non linear cobweb model

mitigating the tragedy of the commons through cooperation an experimental evaluation abstract in a commons each firm s costs rise with industry output this externality can be mitigated if firms jointly restrict harvests but higher prices result repeated interaction usually facilitates cooperation that lowers harvest rates increased cooperation suggests there should be more firms in the socially optimal market structure using experimental markets with two to five firms we observe the influence of industry size on harvest rates cooperation increases the socially optimal number of firms in markets when there are static externalities but not for dynamic externalities finally even when the initial stock is low there is little tendency toward resource extinction

flexibility premium of emissions permits abstract investments in abatement technology are often characterised by irreversibility and significant implementation lags whereas emissions permits can be traded at any time as such abatement and emissions permit trading systems are hardly perfect substitutes we formally study the flexibility of emissions permits and propose a unified framework to rationalise the impact of both investment divestment lags and irreversibility in relation to the price of emissions permits using option pricing concepts we reformulate the technology adoption problem in terms of the technology s characteristics irreversibility and implementation lags and offer a conceptual quantification of the flexibility premium of emissions permits

comparing regulations to protect the commons an experimental investigation in a laboratory experiment we test three regulations imposed on a common pool resource game with heterogeneous users an access fee and subsidy scheme transferable quotas and non transferable quotas we calibrate the game so that all regulations improve users profits compared to free access extraction we compare the regulations according to five criteria resource preservation individual profits profit difference pareto improvement from free access and sorting of the most efficient users one of the main findings is that even though it performs better in sorting out the most efficient subjects the fee and subsidy scheme is not more profitable than tradable quotas

chaotic learning equilibria chaotic temporary equilibrium trajectories under least squares learning are shown to exist in a standard version of the overlapping generations model theses trajectories show forecast errors that never vanish thus we do not find convergence to an equilibrium in which agents have perfect foresight complex trajectories can even be found in the case of savings functions which are monotonically decreasing in the expected gross rate of inflation in this case no cyclical or chaotic trajectories with perfect foresight exist thus learning alone is a source of chaotic dynamic journal of economic literature classification numbers d83 d84

a structural threshold model of the exchange rate under optimal intervention abstract by considering a social trade off between targeting the exchange rate and minimizing intervention costs nonlinear exchange rate dynamics can be captured by a structural threshold model this article provides a theory based empirical exchange rate model and shows how to put the model into an empirical investigation to estimate the structural threshold model we propose a two step procedure which separately estimates the permanent and temporary fundamentals of the foreign exchange market a demonstration of our approach is applied to 1981q3 2008q3 taiwan s foreign exchange market with a brief review of its monetary policies and central bank given prior estimation results are consistent with theoretical predictions and many intervention operations of taiwan s central bank are successfully identified

intertemporal allocation in the corn and soybean markets with rational expectations this paper addresses the intertemporal allocation of supplies and the simultaneous determination of spot and futures prices in the u s corn and soybeans markets these markets were selected for study because of their importance in the u s grain trade and in u s futures markets on the chicago board of trade in 1981 these two grains accounted for 81 26 of all trading in grain futures simultaneous equations models of commodity futures markets have received some attention in the literature stein 1961 1964 developed a two equation simultaneous model comprising functional relationships for discretionary hedging and speculation in commodity markets more recently dewbre estimated a two equation model of spot and futures price determination in commodity markets with rational expectations our study however constitutes the first application of a simultaneous equations model to a comparative study of u s commodity markets with separate functional relationships for long and short hedgers long and short speculators in futures and consumers and holders of unhedged inventories this model is based on peston and yamey although that model did not account explicitly for the activities of long hedgers and short speculators the next section discusses the specification of the equations and the third section outlines the data and estimation method employed the results and validation of the model are discussed in the fourth section the conclusions are stated in the last section while cash and futures prices are endogenous variables in this model the variances of these prices are not treated as endogenous moreover the model is estimated separately for the corn and soybeans markets rather than as a joint model for corn and soybeans products both these matters may be worthwhile extensions of the approach employed here although they go beyond what is attempted in this paper

optimal control of a mean reverting inventory motivated by empirical observations we assume that the inventory level of a company follows a mean reverting process the objective of the management is to keep this inventory level as close as possible to a given target there is a running cost associated with the difference between the actual inventory level and the target if inventory deviates too much from the target management may perform an intervention in the form of either a purchase or a sale of an amount of the goods there are fixed and proportional costs associated with each intervention the objective of this paper is to find the optimal inventory levels at which interventions should be performed as well as the magnitudes of the interventions to minimize the total cost we solve this problem by applying the theory of stochastic impulse control our analysis yields the optimal policy which at times exhibits a behavior that is not intuitive

the term structure of interest rate differentials in a target zone theory and swedish data abstract the term structure of interest rate differentials is derived in a model of a small open economy with a target zone exchange rate regime for given time to maturity the interest rate differential is decreasing in the exchange rate and for given exchange rate the interest rate differential s absolute value and its instantaneous variability are both decreasing in the time to maturity devaluation realignment risks are incorporated and imply upward shifts of the interest rate differentials several implications of the theory are found to be broadly consistent with data on swedish exchange rates and interest differentials for the period 1986 1989

imperfect foresight and chaos an example of a self fulfilling mistake abstract we consider an overlapping generations economy with a single production sector and a government first we assume that the households have imperfect foresight in the sense that they cannot distinguish between the trajectories of a deterministic chaotic system and a stochastic process it is shown that mistaking a deterministic chaotic system for a stochastic one is a self fulfilling mistake because the possibility of making this mistake arises only when it is made the unique perfect foresight equilibrium is proved to exhibit simple dynamics for most parameter values finally we show that when agents apply simple econometric models to build their expectations the resulting dynamics resemble the chaotic dynamics of the imperfect foresight equilibrium under certain parameter constellations while they are close to the simple dynamics of the perfect foresight equilibrium for other parameter values

the welfare implications of foreign exchange intervention abstract this paper examines the welfare implications of foreign exchange intervention in a two country two currency general equilibrium model with limited participation in financial markets and cash in advance constraints on transactions both sterilized and nonsterilized intervention operations have significant impacts on the allocation of liquidity in international financial markets and therefore affect real economic activities the welfare effects of shocks to monetary policy sterilized and nonsterilized foreign exchange interventions are examined and compared the design of welfare maximizing intervention policy rules is also discussed