quality disclosure under consumer loss aversion consumers experience a sense of loss when a product s quality does not match their expectations to alleviate consumer loss aversion cla firms can disclose information to reduce consumers uncer

competition under consumer loss aversion we address the effect of expectation based consumer loss aversion on firm strategy in imperfect competition consumers are fully informed about match value and price at the moment of purchase however some consumers are initially uninformed about their tastes and form a reference point consisting of an expected match value and price distribution whereas others are perfectly informed all the time we show that if firms have symmetric costs a larger share of informed consumers leads to a more competitive outcome the reverse holds if cost asymmetry in duopoly is sufficiently large

is tiger woods loss averse persistent bias in the face of experience competition and high stakes although experimental studies have documented systematic decision errors many leading scholars believe that experience competition and large stakes will reliably extinguish biases we test for the presence of a fundamental bias loss aversion in a high stakes context professional golfers performance on the pga tour golf provides a natural setting to test for loss aversion because golfers are rewarded for the total number of strokes they take during a tournament yet each individual hole has a salient reference point par we analyze over 2 5 million putts using precise laser measurements and find evidence that even the best golfers including tiger woods show evidence of loss aversion jel d03 d81 l83

the behavior of foreign exchange rates the analysis of the distribution of foreign exchange rate changes provides a description of the behavior of foreign exchange rates and its determining underlying process the application of empirical methodologies or further theoretical developments is limited by the nature of this distribution in this paper the empirical analysis of major currencies during the flexible exchange rate period suggests that there is no unique distribution representing the behavior of the foreign exchange rate this however is determined both by foreign exchange management policies and the fundamental economic forces

market trading structures and asset pricing evidence from the treasury bill markets earlier studies report signfficant price disparities betweenfutures andforward or spot markets examining the treasury bill markets this article demonstrates that differences in market trading structures explain these disparities treasury billfutures rates contain significantly lower liquidity and default premia than do syntheticforward rates this reflects the functioning of a futures clearing association and differences between an open outcry auction futures market and an over the counter dealer spot market the same factors that make futures contracts nonredundant securities also explain the existence in equilibrium of price disparities

optimal currency risk hedging abstract this paper investigates the optimal hedging strategy of a domestic expected utility maximizer endowed with a temporarily non traded position in a foreign investment the domestic and foreign yield curves the exchange rate between the two involved currencies and the foreign investment value are stochastic and obey fairly general diffusion processes we compare the hedger s optimal strategies using either exchange rate forward contracts or futures contracts for both strategies the optimal number of contracts held can be broken down into several components having clear economic interpretations however while futures contracts are known in such a context to be more difficult to price than their forward counterparts the optimal strategy using them is simpler this is due to the fact that when forward contracts are used incurred profits or losses that accrue to the investor s wealth at each instant are locked in in the forward position up to the contract maturity thus discounting these gains or losses back at the current date brings about an interest rate risk therefore the investor s hedging strategy itself generates an additional risk which in turn induces the need for additional hedging the magnitude of the difference between the two hedge ratios may be significant under a set of plausible assumptions since in general financial markets are not complete the additional interest rate risk cannot be perfectly hedged hence the marking to market mechanism that characterizes futures contracts and allows for the complete elimination of this risk is valuable for risk averse agents

inventories stock outs and production smoothing if stock outs are ignored and if demand shocks are additive then optimal behaviour requires that the marginal cost of production mc be equated with the expected marginal revenue of increasing expected sales by one unit emr however with more general demand shocks and still ignoring stock outs the excess of mc over emr has the same sign as the covariance of the slope of the demand curve and the marginal valuation of inventory the equality of emr and mc is also broken by taking account of stock outs even if demand shocks are additive if there is a production lag then taking account of stock outs implies that optimal behaviour will be characterized by production smoothing even if the cost of production is linear two alternative definitions of production smoothing are presented and optimal behaviour in the presence of stock outs displays each type of smoothing it is a well known proposition that a firm producing a storable good under conditions of increasing marginal cost will tend to smooth the time profile of its production relative to the time profile of its sales the incentive to smooth production arises from the fact that the cost function is a convex function of the level of production for a given average level of production average costs can be reduced by reducing the variation in production of course if the cost function is linear in the level of production then this incentive to smooth production disappears however we will demonstrate in this paper that if the possibility of stock outs is explicitly incorporated into the firm s dynamic optimization problem i e if we impose a non negativity constraint on inventories and if there is a lag in production then optimal behaviour can be characterized by production smoothing even if the cost function is linear

forward and futures pricing of treasury bills the paper discusses the recent literature on interest rate futures contracts applying both traditional futures and term structure theories it is argued that an important characteristic of futures contracts has been ignored in most of the futures literature by constructing a riskless arbitrage between implicit forward contracts and futures contracts it is demonstrated that even in an efficient market the futures and forward prices will be different the difference results because the marking to the market that is required on a futures contract implies that the course of interest rates is important to the pricing of interest rate futures contracts

competition and price variation when consumers are loss averse we modify the salop 1979 model of price competition with differentiated products by assuming that consumers are loss averse relative to a reference point given by their recent expectations about the purchase consumers sensitivity to losses in money increases the price responsiveness of demand and hence the intensity of competition at higher relative to lower market prices reducing or eliminating price variation both within and between products when firms face common stochastic costs in any symmetric equilibrium the markup is strictly decreasing in cost even when firms face different cost distributions we identify conditions under which a focal price equilibrium where firms always charge the same focal price exists and conditions under which any equilibrium is focal

the distribution of foreign exchange price changes trading day effects and risk measurement this study investigates the nature of price changes in a variety of major and minor foreign exchange markets the results suggest that the log of price changes over one trading day intervals seems to follow a non normal stable distribution function different measures of location and to lesser extent scale are present for different days of the week dollar denominated price changes are high on mondays and wednesdays and low on thursdays and fridays for all currencies the wednesday thursday result is consistent with the settlement procedures used in foreign exchange transactions in the dollar the friday monday result is consistent with an increase in demand for the dollar prior to the weekend this study offers some previously unavailable results on the nature of price changes in a certain set of speculative markets in particular this is a study of the distributional characteristics of daily and weekly price changes for a number of major and minor foreign exchange markets the results document the existence of non normal stable distributions for price changes in foreign exchange markets these price change distributions differ by day of the week in ways that are only partly attributable to the institutional structure of the market the results of the study are interpreted within the context of understanding how foreign exchange markets operate and within the context of prior studies of stock market data concerned with summarizing the probability distribution of price changes for different intervals including days of the week since bachelier s 1 original treatise that contained the proposition that speculative market prices follow a process that could be described by a normal distribution there have been numerous alternative attempts to describe the stochastic processes which characterize speculative market prices these studies have not resulted in any generalized description of the probability distribution of price changes in such markets indeed the evidence suggests substantial differences in the process among various types of financial instruments the failure to achieve consensus can be traced to the lack of robustness in the statistical procedures employed to estimate processes and to differences in the underlying institutional or economic arrangements which are unique to that market the possibility of differences in the information set used to assess value or differences in technology for transmitting information makes it important to secure additional

money and the business cycle with one period nominal contracts a modified version of the nominal contract developed by j a gray 1976 and s fischer 1977 is introduced in a general equilibrium model with money which has been used in the real business cycle literature money is introduced in the model through cash in advance constraint two kinds of contracts are examined namely a nominal wage contract and a nominal price contract the nominal wage contract improves the fit of the model in many respects the nominal price contract increases the output volatility enormously but it has some unrealistic features

uncertainty in sales and inventory behaviour in the u s trade sectors this paper investigates uncertainty in sales and inventory behavior for the u s wholesale and retail trade sectors first using a vector error correction model with garch m the authors find that the uncertainty measured by forecast error variance in sales does not affect inventory behavior in both trade sectors second using forecast error variance decomposition and estimated permanent components they observe that the uncertainty may be attributed more to demand shocks than to cost shocks

preference free optimal hedging using futures abstract this paper provides an alternative formulation and proof of the conditions under which optimal hedge ratios are independent of risk preference and points out that the conditions are satisfied by a wide class of models of spot and futures returns

a note on the econometric use of constant dollar inventory series abstract one dollar of finished goods inventories does not represent the same amount of physical goods as one dollar of sales when department of commerce constant dollar series are used this can cause seriously biased regression estimates

production sales and the change in inventories an identity that doesn t add up we examine two measures of monthly manufacturing production the first is the index of industrial production the second is constructed from the accounting identity that output equals sales plus the change in inventories we show that the means variances and serial correlation coefficients of the log growth rates differ substantially between the two series and the cross correlations are in most cases less than 0 4 a model of classical measurement error indicates that in 15 of 20 two digit industries measurement error accounts for over 35 of the variation in the monthly growth rates of seasonally adjusted industrial production

accounting for output fluctuations in manufacturing there is a substantial body of evidence to the effect that output is more volatile than sales among manufacturing industries numerous explanations have been advanced to account for this excess output volatility some examples are pro cyclical inventory movements induced by a stockout avoidance motive cost and technology shocks and decreasing marginal costs this article assesses the contribution of these different motives to output volatility for six different manufacturing industries linear quadratic models are estimated for each of the industries and then dynamic simulations are employed to determine the volatility of output when one or more of the factors are removed from the model technology shocks provide the most significant contribution to output volatility the stockout avoidance motive is also important cost shocks provide a very small contribution and marginal production costs are increasing at the margin and thus stabilize output it is also shown that output volatility declines when curre

multi dimensional reference dependent preferences in sealed bid auctions how most laboratory experiments differ from the field abstract we study bidding behavior in first and second price sealed bid auctions with loss averse agents our model predicts overbidding in first price induced value auctions consistent with evidence from most laboratory experiments substantially different bidding behavior could result in commodity auctions where money and auction item are consumed along different dimensions of the consumption space differences also result in second price auctions our study thereby indicates that transferring qualitative behavioral findings from induced value laboratory experiments to the field may be problematic if subjects are loss averse

are exchange rate changes normally distributed abstract although assumed to be normal daily returns in reality are leptokurtic monthly returns however are shown to be more normally distributed evidence was found of dependence on consecutive daily price changes which may be an explanation for the leptokurtosis

competitive persuasive advertising under consumer loss aversion abstract i present a model to describe the effects of persuasive advertising targeted at consumers with expectation based reference dependent preferences persuasive advertising is competitive and increases the salience of advertised products while decreasing the salience of competing products consumers gain loss utility associated with the expectation to buy the most salient product is inflated while gain loss utility associated with the expectation to buy the least salient product is deflated i show that under moderate levels of loss aversion and product differentiation persuasive advertising has strictly anti competitive effects whenever consumers are aware of prices but uncertain about their individual match value from a purchase

reference dependent risk attitudes we use koszegi and rabin s 2006 model of reference dependent utility and an extension of it that applies to decisions with delayed consequences to study preferences over monetary risk because our theory equates the reference point with recent probabilistic beliefs about outcomes it predicts specific ways in which the environment influences attitudes toward modest scale risk it replicates classical prospect theory including the prediction of distaste for insuring losses when exposure to risk is a surprise but implies first order risk aversion when a risk and the possibility of insuring it are anticipated a prior expectation to take on risk decreases aversion to both the anticipated and additional risk for large scale risk the model allows for standard consumption utility to dominate reference dependent gain loss utility generating nearly identical risk aversion across situations

expectations as endowments evidence on reference dependent preferences from exchange and valuation experiments while evidence suggests that people evaluate outcomes with respect to reference points little is known about what determines them we conduct two experiments that show that reference points are determined at least in part by expectations in an exchange experiment we endow subjects with an item and randomize the probability they will be allowed to trade subjects that are less likely to be able to trade are more likely to choose to keep their item in a valuation experiment we randomly assign subjects a high or low probability of obtaining an item and elicit their willingness to accept for it the high probability treatment increases valuation of the item by 20 30 copyright 2011 oxford university press

is the endowment effect an expectations effect a hallmark result within behavioral economics is that individuals choices are affected by current endowments a recent theory due to k szegi and rabin 2006 quarterly journal of economics 121 1133 1165 explains such endowment effect with a model of expectations based reference dependent preferences departing from past work we conduct complementary experiments to disentangle expectations verified probabilistic beliefs held by subjects from other features of endowment such as assignment to a good hence allowing us to compare the effect of expectations with that of other variations while mere assignment can affect choices we do not find a large role in the effect for k szegi rabin expectations

are preliminary announcements of the money stock rational forecasts abstract we develop a theoretical framework of analyzing preliminary announcements of economic data and then apply this framework to the money stock we find that preliminary announcements of the money stock are best characterized as measured with classical errors in variables that is the revision is not correlated with the true value of the series the revision is however forecastable using information available at the time of the preliminary announcement our ability to forecast the revision implies that preliminary announcements are not rational estimates of the true money stock

the sub gaussian distribution of currency futures stable paretian or nonstationary this study conducts an empirical test to examine wh ether the observed non normal distribution of currency futures price changes isgenerated by the relationship between maturity and variability in general the author finds that the relationship between maturity and vari ability is not suff icient to explain the observed non normality although some amount of non statio narity is present in the scale and in the characteristic exponent the non norma l stable paretian distribution adequately describes futures price changes for mo st currencies and most contracts during the period covered in thisstudy copyright 1987 by mit press

expectations and factor demand this paper develops and estimates a model of interrelated factor demand with rational expectations in the presence of internal adjustment costs invariant technological parameters are distinguished from the firm s adjustment parameters which change when the exogenous processes faced by the firm change the capital demand equation is derived by solving the euler equations which stem from minimization of the present value of costs future exogenous variables are supplied from solutions of arima equations the model is tested on postwar quarterly data for u s manufacturing a regime change in the process for energy prices is simulated as is a temporary suspension of the investment tax credit

is advertising a signal of product quality evidence from the compact disc player market 1983 1992 abstract we study panel data on advertising and pricing in the compact disc player market during 1983 1992 controlling for product features firm heterogeneity and aggregate effects i advertising increases after the player is introduced but at a decreasing rate and ii price falls from the outset and at an accelerating pace these patterns are inconsistent with both the perfect learning in papers by kihlstrom and riordan j polit econ 92 1984 427 and milgrom and roberts j polit econ 94 1986 796 and the imperfect learning in horstmann and macdonald j econ manag strat 3 1994 561 versions of paper by nelson j polit econ 82 1974 729 model of advertising extensions having persistent consumer uncertainty and learning can explain these profiles

a continuous time equilibrium model of forward prices and futures prices in a multigood economy abstract this paper is a theoretical investigation of equilibrium forward and futures prices we construct a rational expectations model in continuous time of a multigood identical consumer economy with constant stochastic returns to scale production using this model we find three main results first we find formulas for equilibrium forward futures discount bond commodity bond and commodity option prices second we show that a futures price is actually a forward price for the delivery of a random number of units of a good the random number is the return earned from continuous reinvestment in instantaneously riskless bonds until maturity of the futures contract third we find and interpret conditions under which normal backwardation or contango is found in forward or futures prices these conditions reflect the usefulness of forward and futures contracts as consumption hedges

the production and inventory behavior of the american automobile industry understanding inventory movements is central to an understanding of business cycles this paper presents an empirical study of the behavior of inventories in the automobile industry it finds that inventory behavior is well explained by the assumption of intertemporal optimization with rational expectations the underlying cost structure appears to have substantial costs of changing production as well as substantial costs of being away from target inventory thelatter being a function of current sales given this cost structure whether inventory behavior is stabilizing or destabilizing depends on the characteristics of the demand process in the automobile industry inventory behavior is destabilizing the variance of production is larger than the variance of sales

joint production quasi fixed factors of production and investment in finished goods inventories inventory investment has long been an important area of inquiry for empirical work in macroeconomics this is due in large measure to the fact that inventory investment is a major source of fluctuations in aggregate output empirical work on inventories however has been dominated by the use of simple univariate flexible accelerators 1 the major objective of this paper is to propose and test a multivariate flexible accelerator model for inventory investment the model is tested with data on finished goods inventories from the manufacturing sector of the u s economy there are two reasons for undertaking such a task first at a theoretical level a univariate flexible accelerator model asserts that investment in say finished goods inventories is proportional to the gap between the desired and actual stocks of finished goods such a model presumes that decisions by firms on finished goods inventories are made independently of decisions on other stocks but theory suggests that when firms make simultaneous decisions on a variety of stocks which includes not only finished goods but also goods in process inventories the size of the work force etc decisions on finished goods will interact with decisions on

the resurgence of inventory research what have we learned abstract recent empirical and theoretical research on business inventories is surveyed and critically evaluated while most inventory research has had macroeconomic motivations we focus on its microtheoretic basis and on potential conflicts between theory and evidence the paper asks two principal questions first how can inventories which are allegedly used by firms to stabilize production nonetheless be a destabilizing factor at the macroeconomic level second why if firms are following the production smoothing model is production more variable than sales in many industries we suggest that the so called s s model may help answer both questions

the production impact of cash for clunkers implications for stabilization policy during july and august of 2009 americans purchased nearly 700 000 new automobiles or light trucks under the government s cash for clunkers program officially the car allowance rebate system or cars under the terms of the purchase qualified buyers traded in their old vehicles to receive a rebate on the price of a new vehicle the amount of the rebate either 3 500 or 4 500 depended on both the model that was traded in and the model that was acquired the direct cost to taxpayers of subsidizing these purchases was roughly 2 8 billion the program had two primary goals to reduce energy consumption and pollution by inducing consumers to replace their old gas guzzlers with newer fuel efficient models and to serve as a stimulus for the troubled automobile industry and the u s economy as a whole in this article we take a close look at the second objective exploring how the cars program affected sales and more important production in the automobile industry 1 drawing on our findings we then propose an answer to the more difficult question of the program s impact on u s gross domestic product gdp 2 in line with other recent studies our analysis shows that the cars program had only a transitory cumulative effect on sales we estimate an initial impact of about 450 000 additional automobile sales but these were essentially shifted from the periods before and especially after the program we calculate that by january 2010 the cumulative effect of the cars program on auto sales was essentially zero 3 more important for our purposes however is the program s effect on automobile production while most studies of cars have focused on sales we argue that the program s success as a stimulus to the economy hinges on its impact on production production increases are more likely to translate into higher gdp and employment gdp being fundamentally a measure of production sales clearly rose at the outset but given that the industry can simply let inventory stocks absorb the increase in sales higher sales alone do not imply higher gdp or employment 4 overall we find that the program had a very modest and short lived effect on production production was about 200 000 units higher during the program in comparison to the 450 000 increase in sales sales from september 2009 to january 2010 were correspondingly lower than they would have been in the absence of cars which allowed producers to have lower production while still replenishing their inventory stocks thus on a quarterly basis we estimate that the cars program shifted production by around 100 000 units from 2009q4 and 2010q1 to 2009q3 these calculations suggest that the program had a negligible direct effect on gdp shifting less than roughly 2 billion or less than one tenth of 1 of gdp into 2009q3 from the subsequent two quarters this contrasts starkly with a study released by the department of transportation dot in the immediate aftermath of the program which concluded that cars had given a substantial boost to both gdp and employment in the final section of the article we discuss why our conclusions differ from those of the dot study our findings raise broader questions beyond just this particular program about the efficacy of efforts to stimulate short term spending it is clearly a mistake to gauge their impact by just looking at the spending they induce without looking at the supply side it is reasonable to expect that producers will use other margins than production and employment to respond to temporary movements in sales so the only question is quantitative how large is the gap between the sales and production impact we find it to be large in the case of cash for clunkers in what follows we will lay out the economics behind our analysis by examining how rebates and other transitory price changes affect consumer purchases and manufacturers inventory decisions

rational expectations and the smoothing properties of inventories of finished goods abstract this paper formulates and estimates a dynamic rational expectations equilibrium model of inventories of finished goods and employment of labor the view that the primary role of inventories of finished goods is to act as a buffer stock in the face of fluctuating demand is examined both the model and estimation results indicate that this is the case because of differences in the costs involved for firms in changing their inventory stocks and labor force in addition to providing some new evidence on the behavior of inventories of finished goods and employment the paper illustrates a technology for maximum likelihood estimation of structural parameters under the hypothesis of rational expectations

forward contracts and futures contracts abstract this paper provides a detailed discussion of the similarities and differences between forward contracts and futures contracts under frictionless markets and continuous trading simple arbitrage arguments are invoked to value forward contracts to relate forward prices and spot prices and to relate forward prices and futures prices we also argue that forward prices need not equal futures prices unless default free interest rates are deterministic

how not to pay for advice a framework for consumer financial protection abstract this paper investigates the determinants of the compensation structure for brokers who advise customers regarding the suitability of financial products our model explains why brokers are commonly compensated indirectly through contingent commissions paid by product providers even though this compensation structure could lead to biased advice when customers are wary of the adviser s incentives contingent commissions can be an effective incentive tool to induce the adviser to learn which specialized product is most suitable for the specific needs of customers if instead customers naively believe they receive unbiased advice high product prices and correspondingly high commissions become a tool of exploitation policy intervention that mandates disclosure of commissions can protect naive consumers and increase welfare however prohibiting or capping commissions could have the unintended consequence of stifling the adviser s incentive to acquire information more vigorous competition benefits consumers and reduces exploitation but firms have limited incentives to educate naive customers

inventories and sticky prices note in a recent contribution to this review alan blinder provides an interesting analysis of the relationship between optimal inventory decisions and the process of price adjustment arguing that inventory permits separation of production and sale decisions and allows the firm greater flexibility in responding to anticipated demand disturbances blinder shows that the responsiveness of relative prices depends critically upon the cost of storage and the temporal structure of the demand shocks few economists would fault the intuitive substance of blinder s basic proposition and the proposition is justified with characteristic precision the analysis however is considerably less general than blinder maintains the formal argument of his paper relies upon a simple model of a monopolist capable of backlogging orders and storing unsold goods as the model is constructed order backlogs assume a role of fundamental importance in any stationary equilibrium this feature of the model vitiates blinder s extension of his result to situations in which order backlogs are prohibited the basic monopoly model developed in sections i and ii of blinder s paper places no restriction upon the sign of inventory negative inventory is interpreted as net unfilled orders while no distinction is drawn between reductions in gross inventory and additions to the order backlog as a result the cost of holding inventory is symmetric around an arbitrary minimum point the only role of inventory is to permit the time paths of production and sales to differ gross inventory allows production to antedate sales while order backlogs generate revenue before production costs are borne under these circumstances if future costs and revenues are discounted it is natural to expect any stationary equilibrium level of net inventory to be negative this can be shown to be true of blinder s model it is useful to distinguish in general between the nonstochastic stationary level of inventory n and the stochastic stationary level n the former is realized when the current expected demand disturbance eo is zero and production equals sales the latter which differs from customary usage represents the level of inventory expected to prevail when adjustment to the current nonzero expected demand disturbance is complete if the demand disturbance is not a random walk so that p 1 in blinder s 5 the two equilibria coincide relatively little attention is devoted to either stationary solution because blinder s main interest is in the optimal current solution level n1 the stochastic stationary level is crucially important however since it represents the goal toward which the current choice must provide an optimal first step to verify that both nand n are negative whenever production is strictly positive note that blinder s necessary condition 7 with the coefficient cl set equal to zero together with the definition of xa as the deviation of the shadow value of inventory q from its nonstochastic stationary value q implies

new york city cab drivers labor supply revisited reference dependent preferences with rational expectations targets for hours and income this paper reconsiders whether cabdrivers labor supply decisions reflect reference dependent preferences following botond koszegi and matthew rabin 2006 we construct a model with targets for hours as well as income both determined by rational expectations estimating using henry s farber s 2005 2008 data we show that the reference dependent model can reconcile his 2005 finding that drivers stopping probabilities are significantly related to hours but not income with the negative wage elasticity of hours found by colin camerer et al 1997 and farber 2005 2008 the model yields sensible estimates that avoid farber s 2008 criticism that drivers income targets are too unstable to allow a useful reference dependent model of labor supply

inventories inflation dynamics and the new keynesian phillips curve abstract we introduce inventories into an otherwise standard new keynesian model and study the implications for inflation dynamics inventory holdings are motivated as a means to generate sales for demand constrained firms we derive various representations of the new keynesian phillips curve with inventories and show that one of these specifications is observationally equivalent to the standard model with respect to the behavior of inflation when the model s cross equation restrictions are imposed however the driving variable in the new keynesian phillips curve real marginal cost is unobservable and has to be proxied by for instance real unit labor cost an alternative approach is to impute marginal cost by using the model s optimality conditions we show that the stock sales ratio is linked to marginal cost we also estimate these various specifications of the new keynesian phillips curve using gmm we find that the predictive power of the inventory specification at best approaches that of the standard model but does not improve upon it

a comparison of foreign exchange forward and futures prices abstract in theory futures resettlement should create systematic pricing differences between futures and forward contracts however previous empirical studies do not demonstrate such differences in the foreign exchange markets on the other hand inferences from these studies are suspect since they do not directly implement theortical measures of resettlement effects and are unadjusted for sub gaussian data properties in this paper these limitations are addressed through the use of the multivariate autoregressive moving average model our findings provide evidence of systematic pricing influences arising from futures resettlement

inventories and the volatility of production a stylized fact associated with inventory behavior is that the variance of production exceeds the variance of sales this paper presents a model of production decisions with demand uncertainty that incorporates no nnegativity constraints on inventories even with no productivity shocks optimal behavior by the firm is consistent with this stylized fact either if demand exhibits positive serial correlation or if the firm can backlog excess demand the reason is that a demand shock affects both the actual inventory level given unchanged production and the desired level production must replenish the stock and adjust to the new desired level copyright 1987 by american economic association

uncertain demand consumer loss aversion and flat rate tariffs we consider a model of firm pricing and consumer choice where consumers are loss averse and uncertain about their future demand possibly consumers in our model prefer a flat rate to a measured tariff even though this choice does not minimize their expected billing amount a behavior in line with ample empirical evidence we solve for the profit maximizing two part tariff which is a flat rate if a marginal costs are not too high b loss aversion is intense and c there are strong variations in demand moreover we analyze the optimal nonlinear tariff this tariff has a large flat part when a flat rate is optimal among the class of two part tariffs

forward foreign exchange rates expected spot rates and premia a signal extraction approach in this paper we implement a methodology to identify and measure premia in the pricing of forward foreign exchange that involves application of signal extraction techniques from the engineering literature diagnostic tests indicate that these methods are quite successful in capturing the essence of the time series properties of premium terms the estimated premium models indicate that premia show a certain degree of persistence over time and that more than half the variance in the forecast error that results from the use of current forward rates as predictors of future spot rates is accounted for by variation in premium terms the methodology can be applied straightforwardly to the measurement of unobservables in other financial markets there exists a growing body of empirical research on premia in the pricing of forward foreign exchange conditional on the hypothesis that the foreign exchange market is efficient or rational the existence of time varying premia has been documented in the literature by fama 6 hansen and hodrick 10 11 hodrick and srivastava 15 16 hsieh 171 and korajczyk 20 frankel 9 fails to identify such premia and domowitz and hakkio 51 obtain different results for different currencies

coordinating lead times and safety stocks under autocorrelated demand we consider a supply chain in which orders and lead times are linked endogenously as opposed to assuming lead times are exogenous this assumption is relevant when a retailer s orders are produced by a supplier with finite capacity and replenished when the order is completed the retailer faces demands that are correlated over time either positively or negatively which may for example be induced by a pricing or promotion policy the auto correlation in demand affects the order stream placed by the retailer onto the supplier and this in turn influences the resulting lead times seen by the retailer since these lead times also determine the retailer s orders and its safety stocks which the retailer must set to cover lead time demand there is a mutual dependency between orders and lead times the inclusion of endogenous lead times and autocorrelated demand represents a better fit with real life situations however it poses some additional methodological issues compared to assuming exogenous lead times or stationary demand processes that are independent over time by means of a markov chain analysis and matrix analytic methods we develop a procedure to determine the distribution of lead times and inventories that takes into account the correlation between orders and lead times our analysis shows that negative autocorrelation in demand although more erratic improves both lead time and inventory performance relative to iid demand positive correlation makes matters worse than iid demand due to the endogeneity of lead times these effects are much more pronounced and substantial error may be incurred if this endogeneity is ignored

binary payment schemes moral hazard and loss aversion we modify the principal agent model with moral hazard by assuming that the agent is expectation based loss averse according to k o szegi and rabin 2006 2007 the optimal contract is a binary payment scheme even for a rich performance measure where standard preferences predict a fully contingent contract the logic is that due to the stochastic reference point increasing the number of different wages reduces the agent s expected utility without providing strong additional incentives moreover for diminutive occurrence probabilities for all signals the agent is rewarded with the fixed bonus if his performance exceeds a certain threshold

de targeting advertising an assortment of products to loss averse consumers we consider product markets in which consumers are interested only in a specific product category and initially do not know which product category matches their tastes using sophisticated tracking technologies an intermediary can make inferences about a consumer s preferred product category and offer advertising firms the possibility to target their ads to match the consumer s taste such targeting reduces overall advertising costs and as a direct effect increases industry profits however as we show in this paper when consumers form reference prices and are loss averse more precise targeting may intensify competition between firms as a result firms may earn higher profits from de targeted advertising i e when the intermediary deliberately informs about some products and their price quotes from outside a consumer s preferred product category

the relative valuation of american currency spot and futures options theory and empirical tests this study empirically tests contingent claims pricing models for american currency spot and futures options numerical analysis indicates that the difference in the model prices of spot and futures put call options with the same exercise price and maturity is for a premium discount currency positive and an increasing function of a the absolute dif ference in the prices of the underlying spot and futures contracts and b the maturity of the options tests on british pound deutsche mark and swiss franc options indicate many violations ofthe ordinal pricing relationships noted above additional tests indicate that option prices are inconsistent with functional relationship b above most of the ob served violations are sufficiently large to provide arbitrage profits net of transaction costs assuming interest rates are constant and the interest rate parity theorem holds continu ously alternatively both the violations and the inconsistent functional relationship may be due to violation of the assumption of constant interest rates

measuring tail thickness to estimate the stable index α a critique a generalized pareto or simple pareto tail index estimate above 2 has frequently been cited as evidence against infinite variance stable distributions it is demonstrated that this inference is invalid tail index estimates greater than 2 are to be expected for stable distributions with as low as 1 65 the nonregular distribution of the likelihood ratio statistic for a null of normality and an alternative of symmetric stability is tabulated by monte carlo methods and appropriately adjusted for sampling error in repeated tests real stock returns yield a stable of 1 845 and reject iid normality at the 996 level

expectation based loss aversion and strategic interaction abstract by extending the equilibrium concepts of k szegi and rabin 2006 k szegi and rabin 2007 this paper analyzes the strategic interaction of expectation based loss averse players for loss averse players with choice acclimating expectations the utility from playing a mixed strategy is not linear but convex in the probabilities they assign to their pure strategies as a consequence they are generally unwilling to randomize and an equilibrium may fail to exist for players with choice unacclimating expectations by contrast randomizing over their pure strategies may indeed constitute a credible best response and an equilibrium always exists building upon these insights we delineate how expectation based loss averse players differ in their strategic behavior from their counterparts with standard expected utility preferences derive novel strategic effects discuss equilibrium selection and derive equilibrium play for some simple games

the stylized facts about the behavior of manufacturers inventories and backorders over the business cycle 1959 1980 recent theoretical work has highlighted the role of inventories in propagating business cycles this paper attempts to provide an empirical foundation for current and future research on the role inventories play in business cycles the evidence presented here indicates that inventories and backorders are major variables in predicting output fluctuations further the evidence is that disaggregating inventories by stage of fabrication is important in predicting output in concert with previous findings our results suggest that disaggregated inventories ought to be a component of models of the business cycle

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

international evidence on the persistence of economic fluctuations abstract this paper presents new evidence on the persistence of fluctuations in real gnp we estimate two measures of persistence nonparametrically using post war quarterly data from canada france germany italy japan the united kingdom and the united states we compare these estimates with monte carlo results from various ar 2 processes for six out of seven countries the point estimates indicate that a 1 shock to output should change the long run unvariate forecast of output by well over 1 low order arma models yield similar conclusions finally we examine the persistence in relative outputs of different countries

reference points and effort provision a key open question for theories of reference dependent preferences is what determines the reference point one candidate is expectations what people expect could affect how they feel about what actually occurs in a real effort experiment we manipulate the rational expectations of subjects and check whether this manipulation influences their effort provision we find that effort provision is significantly different between treatments in the way predicted by models of expectation based reference dependent preferences if expectations are high subjects work longer and earn more money than if expectations are low

an empirical investigation of dynamic ordering policies adaptive base stock policy is a well known tool for managing inventories in nonstationary demand environments this paper presents empirical tests of this policy using aggregate firm level data first we extend a single item adaptive base stock policy in previous literature to a multi item case second we transform the policy derived for the multi item case to a regression model that relates firm level inventory purchases to firm level sales and changes in sales forecasts we focus on two research questions can the adaptive base stock policy explain cross sectional ordering behaviors under sales growth to the extent that the adaptive base stock policy fails to explain ordering behaviors under sales growth are there frictions that explain such a finding our empirical results demonstrate disparities in ordering behaviors between firms experiencing high and moderate sales growth contrary to theoretical prediction this implies that inventory purchases are a function of not only current sales and changes in sales forecast but also past sales growth as potential explanations for this departure from theoretical prediction we show that both future demand dynamics and inventory holding risks depend on past sales growth in addition we find that firms inventory holding risks may also be affected by purchasing constraints imposed by supply chain contracts our results provide managerial implications for practitioners and inform future theoretical research this paper was accepted by martin lariviere operations management

can the production smoothing model of inventory behavior be saved the production smoothing model of inventory behavior has a long and venerable history and theoretical foundations that seem very strong yet certain overwhelming facts seem not only to defy explanation within the production smoothing framework but actually to argue that the basic idea of production smoothing is all wrong most prominent among these is the fact that the variance of detrended production exceeds the variance of detrended sales this paper first documents the stylized facts then it derives the production smoothing model rigorously and explains how the model can be amended to make it consistent with the facts finally it reviews the theoretical and empirical evidence and tries to draw some tentative conclusions

forward and futures prices evidence from the foreign exchange markets empirical studies of the treasury bill markets have revealed substantial differences between the futures price and the implied forward price these differences have been attributed to taxes transaction costs and the settling up procedure employed in the futures market this paper examines the forward and futures prices in foreign exchange in an attempt to distinguish between the competing explanations empirical studies of the treasury bill market have revealed differences between the futures price or rate and the implicit forward price derived from the term structure of interest rates 1 these differences have generally been attributed to market imperfections such as taxes and transaction costs see for example arak 1 capozza and cornell 2 and rendelman and carabini 6 recently however cox ingersoll and ross 3 henceforth cir derived a model in which forward and futures prices need not be equal even in perfect markets without taxes as long as interest rates are stochastic the significance of the cir effect may be hard to investigate using only data from the bill market because of the potentially complicating effects of taxes and transaction costs unique to this market by using data from the foreign exchange market we are able to eliminate the tax effect and reduce the impact of transaction costs the question we address is whether the discrepancies observed in the treasury bill market are also observed in the foreign exchange market if they are then we have evidence that the differences are due to a combination of the cir effect and the transaction costs common to both markets if they are not then either the magnitude of the cir effect is much less in the foreign exchange market or the treasury bill results are due to the unique tax treatment and transaction costs of that market this paper is organized as follows in section i the trading mechanics of the forward and futures markets in foreign exchange are discussed section ii reviews the explanations for the discrepancies between the forward and futures prices for treasury bills the institutional differences between the foreign exchange and bill markets are also summarized to show which of these explanations cannot apply to the foreign exchange market in section iii the data are decribed and the empirical results are presented the conclusions are summarized in the final section

a new meta analysis on the wtp wta disparity abstract this study reports a new meta analysis of papers that elicit willingness to pay wtp and willingness to accept compensation wta measures of value for the same good we investigate the effects of type of good and several survey design features on the wtp wta disparity measured as the logarithm of the ratio of mean wta to mean wtp confirming horowitz and mcconnell s 2002 pioneering meta analysis we find the disparity is smaller for ordinary private goods than for public and non market goods that it is not solely an artifact of using hypothetical transactions or other weak experimental or survey methods and that it is smaller for studies using student subjects in addition we find that the disparity is smaller when subjects have experience valuing the good in real markets or through repeated experimental trials in contrast to horowitz and mcconnell we find the disparity is significantly smaller in studies using incentive compatible elicitation mechanisms the disparity is smaller in more recent studies an effect that is attributable only in part to changes in study characteristics

common stochastic trends in a system of exchange rates univariate tests reveal strong evidence for the presence of a unit root in the univariate time series representation for seven daily spot and forward exchange rate series furthermore all seven spot and forward rates appear to be cointegrated that is the forward premiums are stationary and one common unit root or stochastic trend is detectable in the multivariate time series models for the seven spot and forward rates respectively this is consistent with the hypothesis that the seven exchange rates possess one longrun relationship and that the disequilibrium error around that relationship partly accounts for subsequent movements in the exchange rates a general consensus has emerged in recent years that many macroeconomic time series such as gnp consumption expenditures disposable income etc can be characterized by a stochastic trend model in particular nelson and plosser 22 described this property as one of being difference stationary so that the first difference of a time series is stationary an alternative trend stationary model where a stationary component is added to a deterministic trend term has generally been found to be less appropriate 1 similarly it has long been recognized that many financial time series such as foreign exchange rates are nonstationary e g in meese and singleton 21 the issue of nonstationary is not merely a statistical curiosity but has several important implications for the modeling of exchange rates for instance many models of exchange rate determination under rational expectations require stationarity assumptions when solving out the expected future values of the fundamentals further there has been some controversy over the appropriate transformations to use when conducting tests of whether the forward rate is an unbiased and efficient predictor of the future spot exchange rate 2 some authors e g frenkel 11 12 have conducted tests in levels while geweke and feige 14