swap rates and credit quality this article presents a model for valuing claims subject to default by both contracting parties such as swaps and forwards with counterparties of different default risk the promised cash flows of a swap are discounted by a switching discount rate that at any given state and time is equal to the discount rate of the counterparty for whom the swap is currently out of the money that is a liability the impact of credit risk asymmetry and of netting is presented through both theory and numerical examples which include interest rate and currency swaps this article presents a model for valuing claims subject to default by both contracting parties such as swaps and forwards this extends the valuation model for defaultable claims proposed by duffie and singleton 1994 to cases in which the two counterparties have asymmetric default risk the extension permits a reexamination of the impact of credit risk on swap rates while the valuation model applies to all forms of contingent claims in which both contracting parties are at risk to default such as forward contracts we focus on swaps for purposes of illustration for example consider a 5 year interest rate swap between a given party paying a floating rate such as the london inter bank offered rate libor and another counterparty paying a fixed rate replacing the given fixed rate counterparty with a lower quality counterparty whose bond yields are 100 basis points higher increases the swap rate by roughly 1 basis point using our model and typical parameters for libor rate processes this credit impact on swap rates is approximately linear within the range of normally encountered credit quality for a 5 year currency swap given a foreign exchange rate with 15 percent volatility our model shows the impact of credit risk asymmetry on the market swap rate to be roughly 10 fold greater than that for interest rate swaps that is approximately 10 basis points in swap rate per 100 basis points in bond yield credit spread the main goal of this article is to provide a simple and theoretically consistent model allowing such computations

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

currency carry trade regimes beyond the fama regression abstract we show that carry trade strategies resemble fx option strategies that sell out of the money puts on high interest rate currencies both strategies collect premiums to generate persistent excess returns that unwind sharply when volatility increases we also show that the widely documented negative slope coefficient in regressions of exchange rate depreciation on forward currency premiums is an artifact of the volatility regime in high volatility regimes the so called fama regression produces a positive coefficient greater than unity we finally document the existence of an intuitive co movement between currency risk premiums and yield curve risk factors

risk aversion in a dynamic asset allocation experiment we conduct a controlled laboratory experiment in the spirit of merton 1971 in which subjects dynamically choose their portfolio allocation between a risk free and risky asset using the optimal allocation of an investor with hyperbolic absolute risk aversion hara utility we fit the experimental choices to characterize the risk profile of our participants despite substantial heterogeneity decreasing absolute risk aversion and increasing relative risk aversion are the predominant types we also find some evidence of increased risk taking after a gain finally the session level risk attitudes show a different profile than the individual descriptions of risk attitudes

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

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

evolving market structure an ace model of price dispersion and loyalty we present an agent based computational economics ace model of the wholesale sh market in marseille two of the stylized facts of that market are high loyalty of buyers to sellers and persistent price dispersion although it is every day the same population of sellers and buyers that meets in the same market hall in our ace model sellers decide on quantities to supply prices to ask and how to treat loyal customers while buyers decide which sellers to visit and which prices to accept learning takes place through reinforcement the model explains both stylized facts price dispersion and high loyalty in a coevolutionary process buyers learn to become loyal as sellers learn to o er higher utility to loyal buyers while these sellers in turn learn to o er higher utility to loyal buyers as they happen to realize higher gross revenues from loyal buyers the model also explains the e ect of heterogeneity of the buyers we analyze how this leads to subtle di erences in the shopping patterns of the di erent types of buyers and how this is

leaders followers and equity risk premiums in booms and busts abstract we study an investment problem in which two asymmetric firms face competition and the regime characterizing the economic condition follows a markov switching process we derive the value functions and investment thresholds of the leader and follower the option value of regime uncertainty is found to be quite important for the investment decision of firms we also show the relationship between the equity risk premium and the economic cycle that has not been done in previous studies which proxy economic conditions by the level of demand or other state variables

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

disappointment in decision making under uncertainty decision analysis requires that two equally desirable consequences should have the same utility and vice versa most analyses of financial decision making presume that two consequences with the same dollar outcome will be equally preferred however winning the top prize of 10 000 in a lottery may leave one much happier than receiving 10 000 as the lowest prize in a lottery this paper explores the implications of disappointment a psychological reaction caused by comparing the actual outcome of a lottery to one s prior expectations for decision making under uncertainty explicit recognition that decision makers may be paying a premium to avoid potential disappointment provides an interpretation for some known behavioral paradoxes and suggests that decision makers may be sensitive to the manner in which a lottery is resolved the concept of disappointment is integrated into utility theory in a prescriptive model

market organisation and trading relationships in this paper we give a theoretical model of buyers behaviour on a market for a perishable good where no prices are posted we show that if buyers learn from their own previous experience there is a sharp division between those who learn to be loyal to certain sellers and those who continue to shop around this feature remains in more general models which are simulated and is consistent with empirical data from the marseille fish market

covered interest arbitrage and market turbulence the covered interest parity theorem states that the covered interest differential between two similar assets denominated in different currencies should be zero this paper utilizes high quality data recorded by the dealers at the bank of england to test covered interest parity during certain historical periods in which there is known to have been turbulence as well as during a relatively calm control period the data is high frequency and allowance is made for the bid offer spread brokerage costs and other considerations the results have three main implications firstly profitable arbitrage opportunities do occasionally occur and sometimes persist during turbulent periods secondly the degree of efficiency of the relevant markets appears to have increased over time thirdly there appears to be a maturity effect whereby the existence and size of profitable arbitrage opportunities appear to be positive functions of the length of maturity a rationalization of this phenomenon is offered in terms of the existence of credit limits copyright 1989 by royal economic society

the impact of rmb swap agreements on foreign exchange reserve demand this paper constructs panel data of 150 economies from 2001 to 2017 to study the impact of rmb renminbi swap agreements on foreign exchange reserve demand the empirical results show that the swa

a theory of disappointment aversion an axiomatic model of preferences over lotteries is developed it is shown that this model is consistent with the allais paradox includes expected utility theory as a special case and is only one parameter beta richer than the expected utility model allais paradox type behavior is identified with positive values of beta preferences with positive beta are said to be disappointment averse it is shown that risk aversion implies disappointment aversion and that the arrow pratt measures of risk aversion can be generalized in a straight forward manner to the current framework copyright 1991 by the econometric society

pay reference points and police performance several theories suggest that pay raises below a reference point will reduce job performance final offer arbitration for police unions provides a unique opportunity to examine these theories as the police officers either receive their requested wage or receive a lower one in the months after new jersey police officers lose in arbitration arrest rates and average sentence length decline and crime reports rise relative to when they win these declines in performance are larger when the awarded wage is further from the police union s demand the findings support the idea that considerations of fairness disappointment and more generally reference points affect workplace behavior

modeling loss aversion and reference dependence effects on brand choice based upon a recently developed multiattribute generalization of prospect theory s value function tversky and kahneman 1991 we argue that consumer choice is influenced by the position of brands relative to multiattribute reference points and that consumers weigh losses from a reference point more than equivalent sized gains loss aversion we sketch implications of this model for understanding brand choice we develop a multinomial logit formulation of a reference dependent choice model calibrating it using scanner data in addition to providing better fit in both estimation and forecast periods than a standard multinomial logit model the model s coefficients demonstrate significant loss aversion as hypothesized we also discuss the implications of a reference dependent view of consumer choice for modeling brand choice demonstrate that loss aversion can account for asymmetric responses to changes in product characteristics and examine other implications for competitive strategy

an endowment effect for risk experimental tests of stochastic reference points recent models of reference dependent preferences indicate that expectations may play a prominent role in the presence of behavioral anomalies a subset of such expectations based models predicts an endowment effect for risk that risk attitudes differ when reference points change from certain to stochastic in two purposefully simple risk preference experiments eliminating often discussed confounds i demonstrate both between and within subjects such an endowment effect for risk these results provide needed separation between expectations based reference dependent models allow for evaluation of recent theoretical extensions and may help to close a long standing debate in decision science on inconsistency between utility elicitation methodologies

exchange asymmetry in experimental settings abstract we review past trading experiments and present 11 new experiments designed to show how the trading rate responds to alterations of the experimental procedure in agreement with earlier studies results show that if the trade decision is converted to one resembling a choice between goods the exchange asymmetry disappears but otherwise the asymmetry is remarkably robust results also indicate that when trading is public herding can occur which may have caused some of the more extreme examples of the exchange asymmetry and that some of the lack of trade may result from preference indifference nevertheless some form of status quo bias which may consist of a combination of loss aversion gain attraction regret avoidance and dislike of trading and which may be enhanced by indifference between the goods offered probably remains as an important influence on the trading rate

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

can a stochastic cusp catastrophe model explain stock market crashes this paper is the first attempt to fit a stochastic cusp catastrophe model to stock market data we show that the cusp catastrophe model explains the crash of stock exchanges much better than other models using the data of u s stock markets we demonstrate that the crash of october 19 1987 may be better explained by cusp catastrophe theory which is not true for the crash of september 11 2001 with the help of sentiment measures such as the index put call options ratio and trading volume the former models the chartists the latter the fundamentalists we have found that the 1987 returns are bimodal and the cusp catastrophe model fits these data better than alternative models therefore we may say that the crash has been led by internal forces however the causes for the crash of 2001 are external which is also evident in much weaker presence of bifurcations in the data in this case alternative models explain the crash of stock exchanges better than the cusp catastrophe model

testing the effect of defaults on the thermostat settings of oecd employees default options have been shown to affect behaviour in a variety of economic choice tasks including health care and retirement savings less research has tested whether defaults affect behaviour in the domain of energy efficiency this study uses data from a randomized controlled experiment in which the default settings on office thermostats in an oecd office building were manipulated during the winter heating season and employees chosen thermostat setting observed over a 6 week period using difference in differences panel and censored regression models to control for maximum allowable thermostat settings we find that a 1 c decrease in the default caused a reduction in the chosen setting by 0 38 c on average sixty five percent of this effect could be attributed to office occupant behaviour p value 0 044 the difference in differences model shows that small decreases in the default 1 led to a greater reduction in chosen settings than large decreases 2 we also find that office occupants who are more apt to adjust their thermostats prior to the intervention were less susceptible to the default we find no evidence that offices with multiple occupants displayed different patterns in thermostat choices than single occupant offices we conclude that this kind of intervention can increase building level energy efficiency and discuss potential explanations and broader policy implications of our findings

the dynamics of financially constrained arbitrage we develop a model of financially constrained arbitrage and use it to study the dynamics of arbitrage capital liquidity and asset prices arbitrageurs exploit price discrepancies between assets traded in segmented markets and in doing so provide liquidity to investors a collateral constraint limits their positions as a function of capital we show that the dynamics of arbitrage activity are self correcting following a shock that depletes arbitrage capital profitability increases and this allows capital to be gradually replenished spreads increase more and recover faster for more volatile trades although arbitrageurs cut their positions in these trades the least when arbitrage capital is more mobile across markets liquidity in each market generally becomes less volatile but the reverse may hold for aggregate liquidity because of mobility induced contagion

communication by central bank committee members different strategies same effectiveness the paper assesses the communication strategies of the federal reserve the bank of england and the european central bank and their effectiveness we find that the effectiveness of communication is not independent from the decision making process the paper shows that the federal reserve has been pursuing a highly individualistic communication strategy amid a collegial approach to decision making while the bank of england is using a collegial communication strategy and highly individualistic decision making the european central bank ecb has chosen a collegial approach both in its communication and in its decision making assessing these strategies we find that predictability of policy decisions and the responsiveness of financial markets to communication are equally good for the federal reserve and the ecb this suggests that there may not be a single best approach to designing a central bank communication strategy

disappointment and dynamic consistency in choice under uncertainty the central proposition of disappointment theory is that an individual forms expectations about uncertain prospects and that if the actual consequence turns out to be worse than or better than that expectation the individual experiences a sensation of disappointment or elation generating a decrement or increment of utility which modifies the basic utility derived from the consequence by incorporating a simple disappointment elation function into a model of individual choice many observed violations of conventional expected utility axioms including violations of savage s sure thing principle and the isolation effect can be predicted and defended as rational and dynamically consistent behaviour

why common factors in international bond returns are not so common this paper analyzes the common factor structure of us german and japanese government bond returns unlike previous studies we formally take into account the presence of country specific factors when estimating common factors we show that the classical approach of running a principal component analysis on a multi country dataset of bond returns captures both local and common influences and therefore tends to pick too many factors we conclude that us bond returns share only one common factor with german and japanese bond returns this single common factor is associated most notably with changes in the level of domestic term structures we show that accounting for country specific factors improves the performance of domestic and international hedging strategies

discrete choice with social interactions this paper provides an analysis of aggregate behavioural outcomes when individual utility exhibits social interaction effects we study generalized logistic models of individual choice which incorporate terms reflecting the desire of individuals to conform to the behaviour of others in an environment of noncooperative decisionmaking laws of large numbers are generated in such environments multiplicity of equilibria in these models which are equivalent to the existence of multiple self consistent means for average choice behaviour will exist when the social interactions exceed a particular threshold local stability of these multiple equilibria is also studied the properties of the noncooperative economy are contrasted with the properties of an economy in which a social planner determines the set of individual choices finally a likelihood function based on the theoretical model is given and conditions for the econometric identifiability of the model are established

evolutionary origins of the endowment effect evidence from hunter gatherers the endowment effect the tendency to value possessions more than non possessions is a well known departure from rational choice and has been replicated in numerous settings we investigate the universality of the endowment effect its evolutionary signi cance and its dependence on environmental factors we experimentally test for the endowment effect in an isolated and evolutionarily relevant population of hunter gatherers the hadza bushmen of northern tanzania we nd that hadza living in isolated regions do not display the endowment effect while hadza living in a geographic region with increased exposure to modern society and markets do display the endowment effect jel c93 d12 o15 this paper uses a natural experiment in a hunter gatherer population to provide evidence on three questions the universality of a behavioral bias the endowment effect its dependence on cultural factors and its evolutionary signi cance systematic deviations from rational behavior have been extensively documented along with their importance for market outcomes yet evidence on the three questions above is sparse especially for biases in economic decisions first most experiments are conducted in industrialized societies and in particular on college campuses so biases could be the result of shared experiences as opposed to innate features of human behavior second cross cultural experiments typically compare very different groups making it hard to attribute differences in behavior to a speci c cultural factor due to omitted variable bias roth et al 1991 henrich et al 2001 2006 third while many contributions in economics have proposed evolutionary

market specific and currency specific risk during the global financial crisis evidence from the interbank markets in tokyo and london abstract this paper investigates how international money markets reflected credit and liquidity risk during the global financial crisis after matching the currency denomination we examine how the tokyo interbank offered rate tibor was synchronized with the london interbank offered rate libor we find remarkably asymmetric responses in market specific and currency specific risk during the crisis the regression results suggest that market specific credit risk increased the difference across markets whereas liquidity risk caused the difference across currency denominations they also support the view that liquidity shortage of the us dollar occurred in international money markets during the crisis coordinated central bank liquidity provisions were useful in reducing the liquidity shortage of the us dollar but their effectiveness was asymmetric across markets

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

when and how us dollar shortages evolved into the full crisis evidence from the cross currency swap market abstract this paper investigates when and how the us dollar shortages evolved into the full crisis in the cross currency swap market between major european currencies and the us dollar during the turmoil of 2007 2009 using the dynamic factor model with regime switching coefficients of each swap price with respect to the latent common factor the 1 year market entered the high crisis regime soon after the onset of the subprime problem in august 2007 the 10 year market entered that regime following the collapse of bear sterns in mid march 2008 financial credit spreads have significant predictive power for switches between high and low regimes

responding to a shadow banking crisis the lessons of 1763 in august 1763 northern europe experienced a financial crisis with numerous parallels to the 2008 lehman brothers episode the 1763 crisis was sparked by the failure of a major provider of acceptance loans a form of securitized credit resembling modern asset backed commercial paper the central bank at the hub of the crisis the bank of amsterdam responded by broadening the range of acceptable collateral for its repo transactions analysis of archival data shows that this emergency source of liquidity helped to contain the effects of the crisis by preventing the collapse of at least two other major securitizers while the underlying themes seem to have changed little in 250 years the modest scope of the 1763 liquidity intervention together with the lightly regulated nature of the eighteenth century financial landscape provide some informative contrasts with events of late 2008

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

exchange asymmetries incorrectly interpreted as evidence of endowment effect theory and prospect theory systematic asymmetries in exchange behavior have been widely interpreted as support for endowment effect theory an application of prospect theory positing that loss aversion and utility function kinks set by entitlements explain observed asymmetries we experimentally test an alternative explanation namely that asymmetries are explained by classical preference theories finding influence through the experimental procedures typically used contrary to the predictions of endowment effect theory we observe no asymmetries when we modify procedures to remove the influence of classical preference theories when we return to traditional type procedures however the asymmetries reappear the results support explanations based in classical preference theories and reject endowment effect theory

intertemporal incentives under loss aversion this paper studies the intertemporal allocation of incentives in a repeated moral hazard model with reference dependent preferences as in k oszegi and rabin 2009 besides consumption utility the agent experiences utility from the change in his beliefs about present and future eort and income when eort plans are rational the prospect of being disappointed by the outcome realization equals that of being pleasantly surprised and hence the loss averse agent is on net hurt by news in contrast to the prediction with classical preferences but consistent with real world contracts if consumption utility is not too concave and news about present income carries suciently larger weight in utility than news about future income a contract setting a current

dynamic interaction models of economic equilibrium abstract the paper develops a stochastic dynamic model of economic equilibrium with locally interacting agents the main focus of the study is on the modeling of market interactions those arising in connection with commodity exchange and regulated by price mechanisms the mathematical framework is a control theory for random vector fields on directed graphs the graphs involved serve to describe the spatio temporal structure of commodity flows in the system the main results are concerned with the existence uniqueness and stability of stochastic dynamic equilibria

the endowment effect and the reference state evidence and manipulations abstract recent reports suggest that the endowment effect may be due to conditions under which it is observed and explained by incentives long recognized in standard theory evidence from new experiments reported here provides empirical support for the role of the economic environment on people s perceived reference state and consequently on their valuations as suggested by koszegi and rabin koszegi b rabin m 2006 a model of reference dependent preferences quarterly journal of economics 121 1133 1165 and indicates that the disappearance of the valuation disparity is more likely due instead to conditions that weaken the perception of reference states further these conditions appear to be poor approximations of those that prevail in most cases for which valuations are normally made

dollar illiquidity and central bank swap arrangements during the global financial crisis abstract while the global financial crisis was centered in the united states it led to a surprising appreciation in the dollar suggesting global dollar illiquidity in response the federal reserve partnered with other central banks to inject dollars into the international financial system empirical studies of the success of these efforts have yielded mixed results in part because their timing is likely to be endogenous in this paper we examine the cross sectional impact of these interventions theory consistent with dollar appreciation in the crisis suggests that their impact should be greater for countries that have greater exposure to the united states through trade and financial channels less transparent holdings of dollar assets and greater illiquidity difficulties we examine these predictions for observed cross sectional changes in cds spreads using a new proxy for innovations in perceived changes in sovereign risk based upon google search data we find robust evidence that auctions of dollar assets by foreign central banks disproportionately benefited countries that were more exposed to the united states through either trade linkages or asset exposure we obtain weaker results for differences in asset transparency or illiquidity however several of the important announcements concerning the international swap programs disproportionately benefited countries exhibiting greater asset opaqueness

managing liquidity optimal degree of centralization abstract large banking groups face the question of how to optimally allocate and generate liquidity in a central liquidity hub or in many decentralized branches we translate this question into a facility location problem under uncertainty we show that volatility is the key driver behind de centralization we provide an analytical solution for the 2 branch model and show that a liquidity center can be interpreted as an option on immediate liquidity therefore its value can be interpreted as the price of information i e the price of knowing the exact demand furthermore we derive the threshold above which it is advantageous to open a liquidity center and show that it is a function of the volatility and the characteristic of the bank network finally we discuss the n branch model for real world banking groups 10 60 branches and show that it can be solved with high granularity 100 scenarios within less than 30 s

deal or no deal decision making under risk in a large payoff game show we examine the risky choices of contestants in the popular tv game show deal or no deal and related classroom experiments contrary to the traditional view of expected utility theory the choices can be explained in large part by previous outcomes experienced during the game risk aversion decreases after earlier expectations have been shattered by unfavorable outcomes or surpassed by favorable outcomes our results point to reference dependent choice theories such as prospect theory and suggest that path dependence is relevant even when the choice problems are simple and well defined and when large real monetary amounts are at stake

some stochastic processes of interdependent demand and technological diffusion of an innovation exhibiting externalities among adopters one frequently hears the opinion that as twentieth century society becomes more complex technological change assumes more significance and occurs at a more r apid pace investment in researclh and development results in a myriad of potential innovations yet as the frontiers of technology are plshed outward uncertainity about the usefulniess of innovations becomes an increasingly important factor in the decision whether or not to adopt the new innovation furthermore the decisions of individual economic agents tend to become increasingly interrelated many recent innovations are such that whether others adopt the device influences the benefits of adoption which accrue to a given consumer or firm such externalities may be positive for example consider a nation s decision to use the metric system the wearing of a style by a fashion leader a merchant s decision to accept a certain credit card or the purchase of a coinmunication device by someone with whom one desires to communicate or negative for instance imitation in the production of a faddish consumption item for which the potential market is limited or the pulrchase of a telephone by an obscene caller our goal is to analyze techn ological difflsioll with interdependencies when uncertainty and informational considerationis are an inherent part of the theoretical model the uncertainty may be of two types a technological ulncertainty the usefulness or quality of the innovation is at least partially unlknown and b adoption uncertainity incomplete or inaccurate knowledge about who is usinlg the innovation in our stochastic model adoptioni is reversible the decision to use the innovation is not permanent but rather agents may change their minds agents are not able to learn about the characteristics quality profitability usefulness etc of the innovation this assumption limits the applicability of

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

from turmoil to crisis dislocations in the fx swap market before and after the failure of lehman brothers abstract this paper investigates dislocations in the foreign exchange fx swap market between the us dollar and three major european currencies after the failure of lehman brothers in september 2008 deviations from covered interest parity cip were negatively associated with the creditworthiness of us financial institutions as well as that of european institutions consistent with the deepening of a dollar liquidity problem into a global phenomenon us dollar term funding auctions by the ecb snb and boe as well as the us federal reserve commitment to provide unlimited dollar swap lines are found to have ameliorated the fx swap market dislocations

a yen is not a yen tibor libor and the determinants of the japan premium pricing in the euroyen market is based on libor the london interbank offered rate set at 11 00am london time or tibor the tokyo interbank offered rate set at 11 00am tokyo time the changing tibor libor spread reflects the credit risk associated with japanese banks or the japan premium the spread is modeled as a function of determinants of bank default and firm value systematic variation in the spread can be explained by interest rate and stock price effects along with public information flows of good and bad news regarding japanese banking with a separate role for bank credit downgrades and upgrades

determinants of the japan premium actions speak louder than words abstract since august 1995 japanese banks have had to pay a premium on eurodollar and euroyen interbank loans relative to their u s and u k competitors this so called japan premium provides a market indicator of investor anxiety about the ability of japanese banks to repay loans we examine the determinants of the japan premium and find that government announcements not associated with concrete actions had little impact on the other hand announcements of concrete actions by the japanese government such as injections of funds into the banking system tended to have an effect on the size of the japan premium

monetary policy and covered interest parity in the post gfc period evidence from the australian dollar and the nz dollar abstract after the global financial crisis gfc most major currencies had higher interest rates than the us dollar on forward contract because of increased demand for the us dollar as international liquidity however unlike the other major currencies the australian dollar and the nz dollar had lower interest rates than the us dollar on forward contract in the post gfc period the purpose of this paper is to explore why this happened through estimating the covered interest parity cip condition in the analysis we focus on a unique feature of australia and new zealand where short term interest rates remained significantly positive even after the gfc the paper first constructs a theoretical model where increased liquidity risk causes deviations from the cip condition it then tests this theoretical implication by using daily data of six major currencies we find that both money market risk measures and policy rates had significant effects on the cip deviations the result implies that unique monetary policy feature in australia and new zealand made deviations from the cip condition distinct on the forward contract

labor supply of new york city cabdrivers one day at a time life cycle models of labor supply predict a positive relationship between hours supplied and transitory changes in wages because such changes have virtually no effect on life cycle wealth previous attempts to test this hypothesis empirically with time series data have not been supportive estimated elasticities are typically negative or nonsignificant such analyses however are vulnerable to measurement error and other estimation problems we use data on daily observations of wages and hours for new york city cab drivers to estimate the supply response to transitory fluctuations in wages cab drivers decide daily how many hours to supply and face wages that are positively correlated within days but largely uncorrelated between days using these data our central finding is that wage elasticities are persistently negative from 5 to 1 in three different samples even after correcting for measurement error using instrumental variables these negative wage elasticities challenge the notion that cab drivers trade off labor and leisure at different points in time and question the empirical adequacy of life cycle formulations of labor supply

central bank swap line effectiveness during the euro area sovereign debt crisis abstract the federal reserve re established a swap line with the european central bank in response to the international liquidity stresses created by the euro area sovereign debt crisis we examine the swap line s effectiveness in addressing these stresses in 2010 11 we find that announcements about the swap line had a significant effect in reducing euro dollar fx swap spreads during the 2010 11 crisis but that the swap line only had limited effectiveness in alleviating the stresses probably owing to some stigma being attached to its use

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

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

reference dependent consumption plans we develop a rational dynamic model in which people are loss averse over changes in beliefs about present and future consumption because changes in wealth are news about future consumption preferences over money are reference dependent if news resonates more when about imminent consump tion than when about future consumption a decision maker might to generate pleasant surprises overconsume early relative to the optimal committed plan increase immediate consumption following surprise wealth increases and delay decreasing consumption following surprise losses since higher wealth mitigates the effect of bad news people exhibit an unambiguous first order precautionary savings motive

producer decision making under uncertainty role of past experiences and question framing limited research examines the role of reference points or how uncertain outcomes are processed in producer decisions this study employs a survey containing a split sample choice experiment varying how uncertain outcomes are portrayed and assesses multiple candidate reference points results suggest that u s cattle producers use the best outcome experienced as reference points in their decisions and the method by which uncertain outcomes are presented impacts loss aversion marginal willingness to pay and market participation estimates this illustrates how research employing split samples multiple reference points and alternative methods of portraying uncertain outcomes may better identify producer decision making

your loss is my gain a recruitment experiment with framed incentives empirically labor contracts that financially penalize failure induce higher effort provision than economically identical contracts presented as paying a bonus for success an effect attributed to loss aversion this is puzzling as penalties are infrequently used in practice the most obvious explanation is selection loss averse agents are unwilling to accept such contracts i formalize this intuition then run an experiment to test it surprisingly i find that workers were 25 percent more likely to accept penalty contracts with no evidence of adverse or advantageous selection consistent with the existing literature penalty contracts also increased performance on the job by 0 2 standard deviations i outline extensions to the basic theory that are consistent with the main results but argue that more research is needed on the long term effects of penalty contracts if we want to understand why firms seem unwilling to use them

a model of mental accounting and reference price adaptation consumers possess a mental account that stores the worth of items purchased and yet to be consumed reference prices act as the book values of these items movements in the account the comparison between the reference price and the price paid at entry and the comparison between the benefit of consumption and the reference price at exit yield hedonic benefits the reference price is determined by a psychological process of adaptation to the price evoked by the trade the model is integrative in that it explains a wide array of observed anomalies such as sunk cost effects payment depreciation reluctance to trade preference for prepayment and the flat rate bias the model also generates new testable implications this paper was accepted by james smith decision analysis