variance risk premium dynamics the role of jumps using high frequency stock market data and synthetic variance swap rates this paper identifles and investigates the temporal variation in the market variance risk premium the variance risk is manifest in two salient features of flnancial returns stochastic volatility and jumps the pricing of these two separate components is analyzed in a general semiparametric framework the key empirical results imply that investors fears of future jumps are especially sensitive to recent jump activity and that their willingness to pay for protection against jumps increase signiflcantly immediately after the occurrence of jumps this in turn suggests that time varying risk aversion as previously documented in the literature is primarily driven by large or extreme market moves the dynamics of risk neutral jump intensity extracted from deep out of the money put options conflrms these flndings jel c51 c52 g12 g13

resolving differences in willingness to pay and willingness to accept reply gwendolyn c morrison 1997 raises a logical point regarding our experimental test of the divergence between willingness to pay wtp and willingness to accept wta measures of economic value shogren et al 1994 she argues that our design does not provide a true test of the existence of a fundamental endowment effect since we did not control for the potential of a pivoting indifference map daniel kahneman et al 1990 she concludes that even though our ev idence shows that the mean wtp and wta bids for market goods with close substitutes e g candy bars and coffee mugs converge after market experience the endowment effect might still be alive and well albeit at statisti cally insignificant levels

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

bridging the gap between laboratory experiments and naturally occurring markets an inferred valuation method abstract several recent studies have found important differences between behavior in the laboratory and the field we explore two possible causes for the divergence social concerns and unfamiliarity with the traded good consistent with our conceptual model we find that people overstated their preferences for relatively familiar goods with normative attributes and understated their preferences for a relatively unfamiliar good with low normative motivations in the laboratory as compared to the field we also find that for goods with a normative dimension a new method we refer to as inferred valuation has the potential to narrow the lab field gap in some cases willingness to pay obtained from a conventional valuation elicitation method is more than twice the value from the new inferred valuation approach

the disparity between willingness to accept and willingness to pay measures of value psychologists have long argued that people are much more averse to a loss than attracted to an equivalent gain this behavior termed loss aversion has been formalized by kahneman and tversky 1979 in their reformulation of expected utility theory prospect theory in prospect theory the utility function is replaced by a value function that evaluates changes in income from the current level increases in income are weighted by a relatively small marginal utility decreases in income are weighted by a much larger marginal utility in effect the value function implies that a kink in the relationship between utility and income occurs at the initial income or reference point and that the slope of the utility function for losses in income is steeper than it is for gains in a recent paper knetsch and sinden 1984 report a series of experiments that demonstrate the existence of a large disparity between willingness to accept wta and willingness to pay wtp measures of value they argue that the psychological theory of loss aversion explains this difference economic theory would suggest that individuals who exhibit a large disparity between wta and wtp are perhaps underperceiving the value of gains or overperceiving the value of losses are behaving in an irrational manner and will consequently achieve a lower level of well being than if they behaved in a true utility maximizing manner this would in contrast to loss aversion usually imply near equal values for wta and wtp see willig 1976 further documentation of a larger than expected disparity between wta and wtp has been obtained in surveys asking for the value of a variety of public goods for example cummings brookshire and schulze 1986 document six

let me dream on anticipatory emotions and preference for timing in lotteries we analyze one of the explanations why people participate in lotteries our hypothesis stipulates that part of the value that a unit of money buys in lotteries is consumed before the actual resolution in the form of emotions such as hope in other words a person holding a lottery ticket may prefer a delayed resolution of risk due to positive anticipatory emotions this conjecture is tested in an experiment with real lottery tickets we show that our theoretical considerations may contribute to explaining empirical puzzles associated with lottery participation timing of resolution and the spreading of lots over drawings more specifically we find that a substantial minority of participants prefer delayed resolution that anticipated thrill is the main variable explaining this choice and that emotions actually experienced during the waiting period are indeed predominantly positive and correlated with predictions finally we find that a great majority prefers to spread chances that is to obtain one ticket for each of two drawings rather than two for the same drawing

contests with multiple rounds this paper studies contests where players have the flexibility to add to their previous efforts after observing their rivals most recent effort in an intermediate stage it is found that 1 contrary to previous findings the stackelberg outcome where the underdog leads and the favorite follows cannot be an equilibrium 2 there are multiple subgame perfect equilibria all occurring on the underdog s usual one shot reaction function in between and including the one shot cournot nash and stackelberg outcome with the favorite leading 3 the total equilibrium effort is typically greater than or equal to what a one shot cournot nash play would predict and 4 in settings where players can choose whether or not to disclose their early actions to the rival both the favorite and the underdog disclose in equilibrium applications in sports lobbying and r d races are discussed

the volatility risk premium embedded in currency options this study employs a non parametric approach to investigate the volatility risk premium in the over the counter currency option market using a large database of daily delta neutral straddle quotes in four major currencies the british pound the euro the japanese yen and the swiss franc we find that volatility risk is priced in all four currencies across different option maturities we find that the volatility risk premium is negative with the premium decreasing in maturity finally we also find evidence that jump risk may be priced in the currency option market

dynamic optimal portfolio choice in a jump diffusion model with investment constraints we consider the dynamic portfolio choice problem in a jump diffusion model where an investor may face constraints on her portfolio weights for instance no short selling constraints it is a daunting task to use standard numerical methods to solve a constrained portfolio choice problem especially when there is a large number of state variables by suitably embedding the constrained problem in an appropriate family of unconstrained ones we provide some equivalent optimality conditions for the indirect value function and optimal portfolio weights these results simplify and help to solve the constrained optimal portfolio choice problem in jump diffusion models finally we apply our theoretical results to several examples to examine the impact of no short selling and or no borrowing constraints on the performance of optimal portfolio strategies

decomposition of optimal portfolio weight in a jump diffusion model and its applications this article solves the portfolio choice problem in a multi asset jump diffusion model we decompose the optimal portfolio weight into components that correspond to a collection of fictitious economies one of which is a standard diffusion economy and the others of which are pure jump economies we derive a semi closed form solution for the optimal portfolio weight and investigate its properties with or without ambiguity aversion we find that an investor may not reduce her investment in risky assets when facing more frequent jumps as suggested by a single asset jump diffusion model moreover an investor who is extremely cautious about her estimates of higher moments of asset returns may still hold risky assets contrary to the prediction of a pure diffusion model with ambiguity aversion to the first moment

racing with uncertainty and strategic interaction between competitors as the race unfolds most of the existing literature examines one or other of these features but not the two combined our aim is to see how the efforts of competitors in a race vary with the intensity of rivalry between them in our principal model whch is of a one dimensional race it is shown that the leader in the race makes greater efforts than the follower and efforts increase as the gap between competitors decreases under certain conditions the same results hold in our second related model which is of a two dimensional race

do tournaments have incentive effects much attention has been devoted to studying models of tournaments or situations in which an individual s payment depends only on his or her output or rank relative to that of other competitors academic interest derives from the fact that under certain sets of assumptions tournaments have desirable normative properties because of the incentive structures they provide our paper uses nonexperimental data to test whether tournaments actually elicit effort responses we focus on professional golf tournaments because information on the incentive structure prize distribution and measures of individual output players scores are both available we find strong support for the proposition that the level and structure of prizes in pga tournaments influence players performance

economic contests comparative reward schemes contests are situations in which an individual s reward depends on his performance relative to others students are graded on a curve the candidate with the most votes gets the political office the underling who performs best is promoted to the executive position contests are useful in dealing with indivisible rewards reducing monitoring costs and minimizing risks from common uncertainties they are employed to sort potential participants and once they have entered to induce appropriate effort from them with monitoring precision and prize spreads as potential choice variables optimal contest structures are derived for fair and unfair contests among equal and unequal participants the converse problems of climbing low ability individuals enter the contest designed for high ability candidates and slumming are shown to be manageable

willingness to pay and the cost of commitment an empirical specification and test in a static setting willingness to pay for an environmental improvement is equal to compensating variation in a dynamic setting however willingness to pay may also contain a commitment cost in this paper we incorporate the dynamic nature of the value formation process into a stated preference study designed to test whether there is an important dynamic component commitment cost in stated preference values the results clearly indicate that stated preference values can contain commitment costs and that these can be quite large respondents offered the opportunity to delay their purchasing decisions until more information became available were willing to pay significantly less for improved water quality than those facing a now or never decision these results have important consequences for the design and interpretation of stated preference data

testing commitment cost theory in choice experiments in choice experiments it is commonly assumed that individuals make choices in static and certainty decision making conditions real world choices however are usually made in a dynamic setting committing a purchase decision under conditions of uncertainty might have a commitment cost cc in this study we test cc theory using a nonhypothetical choice experiment specifically we test whether choice behavior and willingness to pay estimates differ when individuals have the option to gain present or delayed information or reverse the transaction our results suggest that the construction of a dynamic decision context can be relevant in the design of choice experiments

rational risk valuation given sequential reduction opportunities abstract we design experimental auctions with sequential risk reduction opportunities between private and collective self protection or self insurance we reject two hypotheses of rational risk valuation individuals do not prefer self protection to self insurance and the sequencing of private and collective mechanisms matters

an experimental test of the commitment cost theory are used in making public policy recommendations carrying out cost benefit analysis and formulating marketing and pricing strategies unlike traded goods individuals are not likely familiar with valuing and pricing nonmarket goods as such a key characteristic among almost all nonmarket goods is uncertainty regarding value that individuals have uncertainty regarding the value they have for nonmarket goods is supported by a number of recent empirical findings e g johannesson et al loomis and ekstrand van kooten krcmar and bulte among other things uncertainty may be a result of unfamiliarity with the good in question for example a poll of scottish individuals found that over 70 were unfamiliar with

5 information impact and allocation rules in auctions with affiliated private values a laboratory study in affiliated private value auctions each bidder has perfect information regarding his her own value for the object at auction but higher values of the item for one bidder make higher values for other bidders more likely we report on a series of experiments examining three key implications of these auctions i in a first price auction public information about rivals values increases expected revenue ii an english auction increases expected revenue compared to a first price auction and iii a second price auction is isomorphic to an english auction in examining these issues we compare predictions of some ad hoc bidding models with nash equilibrium predictions in the first price auction experiments nash equilibrium bidding theory organizes the data better than either of two ad hoc bidding models public information about others valuations does increase average revenue but the increase in revenue is smaller and less reliable than predicted under risk neutral nash equilibrium bidding lower average revenue might be attributed to risk aversion while the high variability is attributed to a sizable frequency of individual bidding errors relative to the theory bidding theory precisely organizes english auction outcomes after a brief initial learning period the dominant strategy equilibrium does not organize second price auctions nearly as well as market prices persistently exceed predicted prices the difference between english and second price outcomes is attributed to effects of different information flows inherent in the structure of the two institutions on eliminating bidding errors revenue impacts of these two institutions relative to a first price auction are examined in light of observed bidding patterns

is the experimental auction a dynamic market experimental auctions are generally thought of as static markets this paper presents the results of an experimental auction designed to test whether participants perceptions regarding the relative difficulty of delaying or reversing a transaction outside the experimental market systematically affect their willingness to pay bids the results show that auction participants perceptions significantly impact their bids in a manner that is consistent with real option theory these results suggest that economists must be careful to consider the existence of outside markets when designing experimental auctions

the hayek hypothesis in experimental auctions institutional effects and market power the hayek hypothesis in experimental auctions institutional effects and market power we report twelve market experiments utilizing a seller market power supply and demand structure where two of five sellers can unilaterally increase their profit by withholding supply the data indicate that both the double auction and posted offer institutions result in traders extracting the bulk of the potential gains from exchange in the market however prices generally occur above the competitive equilibrium prediction market power in the form of strategic supply withholding does not appear to be responsible for the supra competitive prices i introduction one important result arising from experimental market research is that the information flows and contracting rules which define the institutional structure of a market can exert a pronounced influence on market performance such institutional features may be more important than some traditional structural characteristics in determining whether market outcomes will correspond to the predictions of the competitive model in particular a large and growing body of experimental data suggests that markets can generate efficient outcomes even when there are a relatively small number of buyers and sellers with incomplete information on the underlying structure of the market based on evidence from a wide variety of experimental double auction markets vernon smith 1982 167 has expressed this more formally as the hayek hypothesis markets economize on information in the sense that strict privacy together with the public messages of the market are sufficient to produce efficient ce competitive equilibrium outcomes in this statement however the notion of an efficient ce outcome could be interpreted as 1 a simple efficiency claim that all exchange surplus will be extracted or 2 a price claim that all exchange surplus will be extracted via trades at the competitive equilibrium price a recent study by holt langan and villamil 1986 hereafter hlv examines the validity of the hayek hypothesis using the double auction institution and a market structure designed to provide a rather difficult test for the competitive model hlv s market power design provides a subset of sellers with an incentive to unilaterally generate a price increase via the strategic withholding of supply the resulting price deviation from the competitive equilibrium is substantial but results in a relatively small loss of market efficiency thus the price interpretation of the hayek hypothesis is violated in this design if holders of market power recognize their position and successfully affect prices to their advantage the efficiency interpretation however will still hold approximately even with the successful exercise of market power in fact the price interpretation of the hayek hypothesis tends to break down in hlv s markets but the efficiency interpretation tends to hold hlv report deviations from the competitive equilibrium price consistent with the exercise of market power in three of five seller market power experiments they also conjecture that deviations from the competitive equilibrium may increase as participants become more experienced with the trading institution this paper reports the results of twelve experiments that build on hlv s research our experiments compare market performance in hlv s seller market power smp design using both the double auction and posted offer trading institutions our purpose in conducting these experiments is twofold first we are interested in examining the effects of changes in trading institutions on deviations from the competitive equilibrium price in the smp design second to the extent that competitive equilibrium price deviations are observed we are interested in assessing whether the exercise of market power in the form of strategic withholding is the source of these deviations

willingness to pay compensating variation and the cost of commitment hicksian welfare theory is static in nature but many decisions are made in a dynamic environment we present a dynamic model of an agent s decision to purchase or sell a good under the realistic conditions of uncertainty irreversibility and learning over time her willingness to pay wtp contains both the intrinsic value of the good as in hicksian theory plus a commitment cost associated with delaying to obtain more information the hicksian equivalence between wtp willingness to accept wta and compensating and equivalent variations no longer holds the wtp and wta divergence may arise and observed wtp values are not always appropriate for welfare analysis jel d60 d83

estimating the public value of conflicting information the case of genetically modified foods environmental groups have be food products other than those that norcome the chief antagonists toward agricultural bio mally carry allergens see friends of the technology innovations they demonstrate and dis earth 2001 greenpeace international 2001 seminate private information with the objective of through press releases web sites and pro changing the behavior of consumers and productests environmental ers we use experimental auctions with adult u s groups have been succonsumers and show that this information reduces cessful at publicizing their negative views significantly the demand for genetically modified on gm foods and affecting consumers and gm food products and that it has significant producer s behavior 2 public good value an average of 3 cents per prod environmental groups share the costs uct purchased or roughly 2 billion annually we of producing negative gm information 3 also show that the dissemination of independent third party information about agricultural biotech their members benefit collectively from nology dissipatesmost of the public good value of reductions in demand for gm products negative gm product information

experimental auction procedure impact on valuation of quality differentiated goods despite increased use of experimental auctions a myriad of different procedures are being employed without formal consideration of how the procedures might affect results this study investigates the effect of several procedural issues on valuation estimates from experimental auctions results indicate the second price auction generates higher valuations than english becker degroot marschak bdm and random nth price auctions especially in latter bidding rounds and that random nth price auction yields lower valuations than english and bdm auctions we find that endowing subjects with a good prior to eliciting bids can have an impact on valuations but the effect varies across auction mechanism

the optimal allocation of prizes in contests we study a contest with multiple not necessarily equal prizes contestants have private information about an ability parameter that affects their costs of bidding the contestant with the highest bid wins the first prize the contestant with the second highest bid wins the second prize and so on until all the prizes are allocated all contestants incur their respective costs of bidding the contest s designer maximizes the expected sum of bids our main results are 1 we display bidding equlibria for any number of contestants having linear convex or concave cost functions and for any distribution of abilities 2 if the cost functions are linear or concave then no matter what the distribution of abilities is it is optimal for the designer to allocate the entire prize sum to a single first prize 3 we give a necessary and sufficient conditions ensuring that several prizes are optimal if contestants have a convex cost function

the provision of incentives in firms i ncentives are the essence of economics despite many wide ranging claims about their supposed importance there has been little empirical assessment of incentive provision for workers the purpose of this paper is to critically overview existing work on the provision of incentives since the interests of workers and their employers are not always aligned a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm s interest this literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers these include piece rates options discretionary bonuses promotions profit sharing efficiency wages deferred compensation and so on my objective here is to evaluate this literature in the light of a growing empirical literature on compensation where possible i will address the literature from two perspectives first an underlying assumption of this literature is that individuals respond to contracts that reward performance accordingly i consider whether agents behave in this way and whether these responses are always in the firm s interest second i address whether firms write contracts with these responses in mind in other words do contracts look like the predictions of the theory incentives are provided to workers

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

the economic value to smokers of graphic warning labels on cigarettes evidence from combining market and experimental auction data abstract many countries now require prominent pictorial health warning labels hwls on the front and back of cigarette packages in the us pictorial hwls have been adopted but tobacco industry litigation has delayed their implementation this intervention could have value to smokers if it increases their information and changes their smoking behavior in this paper we estimate the value of two different health warning labels for cigarette packages relative to the current us labeling policy our methodology does not depend on the personal values of policy makers or other individuals as the value of information estimates we derive are based solely on smokers own consumption choices not any public health or other effects we introduce an approach to valuing information with a surplus measure that couples willingness to pay from non hypothetical experimental auctions with time series revealed preference demand estimates we find that a pictorial hwl has a large value to smokers and a higher value than a label that only contains text insofar as changing purchase behavior

a new explanation for the wtp wta disparity abstract we propose a new explanation for the wtp wta disparity in experiments and surveys uncertainty irreversibility and limited learning opportunities can generate commitment costs driving a wedge between wtp and wta we present experimental evidence that supports our hypothesis

laboratory testbeds and non market valuation the case of bidding behavior in a second price auction with an outside option researchers now use the lab to examine the behavioral underpinnings of valuation before the field application which some argue has less experimental control but lab valuation work raises its own set of concerns when it uses private goods to explore non market valuation behavior because private goods have substitutes often unaccounted for in the lab therefore the lab as a tool to testbed field valuation work may be limited herein we design an induced valuation experiment to explore bidding behavior in a second price auction with an outside option that is a perfect substitute for the auction commodity theory predicts that rational bidders will consider the prices of outside options when formulating bidding strategies and will reduce their bids whenever their resale value exceeds the price of the outside option our results suggest that bidders account for outside options when formulating bids with behavior following comparative static predictions in addition we provide evidence concerning hypothetical versus actual behavior with induced values the data suggesting a hypothetical bias in the level of bids but not in bid shaving

suspense dynamic incentives in sports contests in a dynamic model of sports competition if spectators care only about contestants efforts incentive schemes depending linearly on the final score difference dominate rank order schemes based only on who wins if spectators also care about suspense defined as valuing more contestants efforts when the game is closer rank order schemes can dominate linear score difference schemes and this will be the case when the demand for suspense is sufficiently high under additional assumptions we show that the optimal rank order scheme dominates a broad class of incentive schemes sport contestants can earn substantial financial prizes total prize money at wimble don topped 10 million for the first time in 2005 the professional golf association has distributed approximately 250 million in prize money across 48 events in the pga tour even in less professional sports prize money plays an important role nearly 21 million in prize money was awarded in international track and field competitions in 2004 interestingly prize money is typically allocated on the basis of who wins and who loses more informative measures of performance such as score differences rarely matter even though they are readily available when there are several contestants in a sporting event rewards depend on who wins the most games round robin tourna ment or on the sequence of games won elimination tournament total scores and other performance measures matter only in terms of determining who the winner is not how much the winner gets although for superstar athletes prize money pales in comparison with income from sponsorship deals only about 6 million of tiger woods income of close to 90 million in 2004 was prize money sponsorship money can depend on factors such as charisma and star power other than athletic perform ance so prize money is still the main provider of incentives for efforts in a given sports event likewise in recent years contracts for players in some team sports are loaded with incentive clauses that often take on a strong piece rate flavour e g salaries for batters depending on the batting average in baseball but financial incentives for team efforts remain largely independent of relative performance measures such as score differences why do win lose rank order incentives dominate in the design of financial incentives in sports especially in individual sports the literature on optimal design of rank order tournaments that began with lazear and rosen 1981 explains how tournaments provide incentives for efforts however the literature has not shed much light on when rank order incentive schemes are preferred to schemes based on other relative performance measures particularly when the agents are risk neutral prendergast 1999 pp 36 7 reviews several reasons for using tournaments but it remains unclear why prizes in sporting events depend only on rank order of scores and not on scores themselves holmstrom 1982 casts doubt this article was originally titled suspense it was first presented at the memorial conference for sherwin

optimal portfolios when variances and covariances can jump abstract we analyze the optimal portfolio choice in a multi asset wishart model in which return variances and correlations are stochastic and subject to jump risk the optimal portfolio is characterized by the positions in stock diffusion risk variance covariance diffusion risk and jump risk we find that including jumps in the second moments changes the optimal positions and particularly variance covariance hedging demands significantly erroneously omitting these jumps gives rise to substantial model risk furthermore variance covariance jump risk can have a significant impact on potential utility gains when the market is completed by adding derivatives as a robustness check we compare our results to those obtained for other parametrizations of wishart models from the literature as well as to various single asset models

asset allocation how much does model choice matter abstract this paper analyzes the optimal portfolio decision of a crra investor in models with stochastic volatility and stochastic jumps the investor follows a buy and hold strategy in the stock the money market account and one additional derivative we show that both the type of the model and the structure of the risk premia have a significant impact on the optimal portfolio on the utility gain from having access to derivatives and on whether the investor prefers to trade otm or atm options we also show that model mis specification results in significant utility losses omitting jumps in volatility can be devastating in particular if the investor chooses the seemingly optimal otm put options a misestimation of the structure of the risk premia has a less devastating effect but can still lead to a loss of around 4 in the annual certainty equivalent return

willingness to pay and willingness to accept how much can they differ comment i agree with the point made by edoh y amiran and daniel a hagen 2003 that there can be a substantial or even infinite divergence between the wta and wtp for a public good even where there is a nonzero elasticity of substitution between market goods and the public good provided that the indifference curves are asymptotically bounded with respect to market goods in the manner they describe this is an important point they are also correct to point out that the elasticity of substitution is a local concept whereas their asymptotic boundedness condition applies also for discrete changes my 1991 paper used a local analysis because it was following the structure of the analysis in robert d willig 1976 and alan randall and john r stoll 1980 i wanted to show that while randall and stoll appeared to extend willig s local result on wta versus wtp from price changes to changes in the quantity of a public good the relevant elasticity was in fact different and involved the substitution elasticity as well as the income elasticity i view these points by amiran and hagen as not two separate results but essentially the same result their asymptotic boundedness condition generalizes my zero elasticity of substitution condition to discrete changes the asymptotic boundedness condition can be expressed as follows assuming a bivariate utility function u x q and given a reference point x q associated with a reference utility level u u x q there exists some q q such that for all q q there exists no x such that u x q u in other words no amount of x can substitute for the reduction in public good from q to q q in the case of a zero elasticity of substitution q q but as amiran and hagen show in their theorem 1 this is unnecessarily restrictive when dealing with a discrete reduction in q furthermore their theorem 2 can be viewed as a special case of their theorem 1 in which q 0 which makes q an essential commodity it is well known in consumer theory that the wta to avoid the loss of an essential market good is infinite their theorem 2 extends this result to the case of an essential nonmarket good but as their theorem 1 shows essentialness is not necessary for an infinite wta the boundedness condition is the key and this implies a fundamental lack of substitutability between money market goods and the public good

information and the divergence between willingness to accept and willingness to pay abstract there is considerable empirical and experimental evidence that there is a divergence between willingness to accept compensation to give up a good and willingness to pay to obtain a good this divergence persists even when the good in question is small relative to income a result in apparent conflict with standard economic theory this paper develops a theoretical bidding model with costly information acquisition to explain this divergence the model generates a gap between offers to sell and bids to buy consistent with the experimental results we argue that the model does a better job of explaining empirical and experimental data than either of the two commonly invoked theoretical explanations the endowment effect and the substitution effect

cojumps and asset allocation in international equity markets abstract this paper examines the patterns of intraday cojumps between international equity markets as well as their impact on international asset holdings and portfolio diversification benefits using intraday index based data for exchange traded funds as proxies for international equity markets we document evidence of significant cojumps with the intensity increasing during the global financial crisis of 2008 2009 the application of the hawkes process also shows that jumps propagate from the us and other developed markets to emerging markets correlated jumps are found to reduce diversification benefits and foreign asset holdings in minimum risk portfolios whereas idiosyncratic jumps increase the diversification benefits of international equity portfolios in contrast the impact of higher order moments induced by idiosyncratic and systematic jumps on the optimal composition of international portfolios is not significant

consumer s surplus without apology the purpose of this paper is to settle the controversy surrounding consumer s surplus and by so doing to validate its use as a tool of welfare economics i will show that observed consumer s surplus can be rigorously utilized to estimate the unobservable compensating and equivalent variations the correct theoretical measures of the welfare impact of changes in prices and income on an individual i derive precise upper and lower bounds on the percentage errors of approximating the compensating and equivalent variations with consumer s surplus these bounds can be explicitly calculated from observable demand data and it is clear that in most applications the error of approximation will be very small in fact the error will often be overshadowed by the errors involved in estimating the demand curve the results in no way depend upon arguments about the constancy of the marginal utility of income consequently this paper supplies specific empirical criteria which can replace the apologetic caveats frequently employed by those who presently apply consumer s surplus moreover the results imply that consumer s surplus is usually a very good approximation to the appropriate welfare measures to preview below i establish the validity of these rules of thumb for a

is food and drug administration policy governing artisan cheese consistent with consumers preferences abstract united states government policy prohibits the sale of cheese made from unpasteurized milk aged less than 60 days despite contested science behind the policy we use experimental auctions for artisan cheese to estimate the value of pasteurization and age as food safety attributes which is the rationale for the policy we also look at consumers perception of the tradeoff between safety and quality a survey was conducted with participants at farmers markets including experimental auctions and sensory analysis of pasteurized and unpasteurized cheese and questions concerning attitudes about food safety there is no evidence of positive demand for pasteurization and there is no evidence of a tradeoff between safety and quality on average artisan cheese consumers make purchasing decisions based on taste not their attitude toward food safety the results of this study raise questions about the possible extension of a minimum aging period for cheese made from unpasteurized milk

correlation risk and optimal portfolio choice we develop a new framework for multivariate intertemporal portfolio choice that allows us to derive optimal portfolio implications for economies in which the de gree of correlation across industries countries or asset classes is stochastic optimal portfolios include distinct hedging components against both stochastic volatility and correlation risk we find that the hedging demand is typically larger than in univari ate models and it includes an economically significant covariance hedging compo nent which tends to increase with the persistence of variance covariance shocks the strength of leverage effects the dimension of the investment opportunity set and the presence of portfolio constraints this paper develops a new multivariate modeling framework for intertempo ral portfolio choice under a stochastic variance covariance matrix we consider an incomplete market economy in which stochastic volatilities and stochastic correlations follow a multivariate diffusion process in this setting volatili ties and correlations are conditionally correlated with returns and optimal portfolio strategies include distinct hedging components against volatility and correlation risk we solve the optimal portfolio problem and provide simple closed form solutions that allow us to study the volatility and covariance hedg ing demands in realistic asset allocation settings we document the importance of modeling the multivariate nature of second moments especially in the con text of optimal asset allocation and find that the optimal hedging demand can be significantly different from the one implied by more common models with constant correlations or single factor stochastic volatility an important thread within the asset pricing literature has documented the characteristics of the time variation in the covariance matrix of asset

optimal portfolios when volatility can jump abstract we consider an asset allocation problem in a continuous time model with stochastic volatility and jumps in both the asset price and its volatility first we derive the optimal portfolio for an investor with constant relative risk aversion the demand for jump risk includes a hedging component which is not present in models without volatility jumps we further show that the introduction of derivative contracts can have substantial economic value we also analyze the distribution of terminal wealth for an investor who uses the wrong model either by ignoring volatility jumps or by falsely including such jumps or who is subject to estimation risk whenever a model different from the true one is used the terminal wealth distribution exhibits fatter tails and in some cases significant default risk

demand for farm animal welfare and producer implications results from a field experiment in michigan abstract this study utilizes a becker degroot marschak bdm mechanism to assess michigan consumer demand for animal welfare practices results are examined in the context of changing farm production costs and producer marketing margins we find that while consumers are willing to pay significant premiums for animal welfare standards failing to account for the costs associated with producing the entire animal under the new system could lead to suboptimal policy that negatively affects producer welfare our results suggest that consumer premiums for animal welfare are product specific and that wtp estimates should not be generalized to the entire animal we discuss policy implications of our findings and highlight the importance of considering producer costs when evaluating consumer demand for farm animal welfare practices

information in the term structure of yield curve volatility using a novel no arbitrage model and extensive second moment data we decompose conditional volatility of u s treasury yields into volatilities of short rate expectations and term premia short rate expectations become more volatile than premia before recessions and during asset market distress correlation between shocks to premia and shocks to short rate expectations is close to zero on average and varies with the monetary policy stance while treasuries are nearly unexposed to variance shocks investors pay a premium for hedging variance risk with derivatives we illustrate the dynamics of the yield volatility components during and after the financial crisis

keep on smiling the pricing of quanto options when all covariances are stochastic the paper introduces a model for the joint dynamics of asset prices which can capture both a stochastic correlation between stock returns as well as between stock returns and volatilities stochastic leverage by relying on two factors for stochastic volatility the model allows for stochastic leverage and is thus able to explain time varying slopes of the smiles the use of wishart processes for the covariance matrix of returns enables the model to also capture stochastic correlations between the assets our model offers an integrated pricing approach for both quanto and plain vanilla options on the stock as well as the foreign exchange rate we derive semi closed form solutions for option prices and analyze the impact of state variables quanto options offer a significant exposure to the stochastic covariance between stock prices and exchange rates in contrast to standard models the smile of stock options the smile of currency options and the price differences between quanto options and plain vanilla options can change independently of each other

using laboratory experimental auctions in marketing research a case study of new packaging for fresh beef this paper illustrates the use of laboratory experimental auctions in a pretest market research program for new products we review the experimental auctions literature discuss the range of auction mechanisms available and present the advantages and disadvantages of using a particular mechanism for a laboratory pretest market we then present a step by step example of how a theoretically incentive compatible auction mechanism fifth price sealed bid was used in a laboratory pretest market for vacuum packaged beef based on the illustration we discuss the potential for using laboratory experimental auctions in pretest market research we present the limitations that may be encountered in such applications and outline research aimed at improving the behavioral properties of the technique

preference learning in consecutive experimental auctions this paper explores the origins of the strikingly high price premia paid for new food products in lab valuation exercises our experimental design distinguishes between two explanations of this phenomenon novelty of the experimental experience versus the novelty of the good i e preference learning bids reflect a person s desire to learn how an unfamiliar good fits into their preference set subjects bid in four consecutive experimental auctions for three goods that vary in familiarity candy bars mangos and irradiated meat our results suggest that preference learning is the main source of the high premia and that novelty of the experimental experience does not in itself artificially inflate valuations copyright 2000 oxford university press

aggregation and linearity in the provision of intertemporal incentives we consider the problem of providing incentives over time for an agent with constant absolute risk aversion the optimal compensation scheme is found to be a linear function of a vector of n accounts which count the number of times that each of the n kinds of observable events occurs the number n is independent of the number of time periods so the accounts may entail substantial aggregation in a continuous time version of the problem the agent controls the drift rate of a vector of accounts that is subject to frequent small random fluctuations the solution is as if the problem were the static one in which the agent controls only the mean of a multivariate normal distribution and the principal is constrained to use a linear compensation rule if the principal can observe only coarser linear aggregates such as revenues costs or profits the optimal compensation scheme is then a linear function of those aggregates the combination of exponential utility normal distributions and linear compensation schemes makes computations and comparative statics easy to do as we illustrate we interpret our linearity results as deriving in part from the richness of the agent s strategy space which makes it possible for the agent to undermine and exploit complicated nonlinear functions of the accounting aggregates

earning the right premium on the right factor in portfolio planning abstract the optimal portfolio as well as the utility from trading stocks and derivatives depends on the risk factors and on their market prices of risk we analyze this dependence for a crra investor in models with stochastic volatility jumps in the stock price and jumps in volatility we find that the compartment of the total variance into diffusion risk and jump risk has a small impact on the utility in an incomplete market only in contrast the decomposition of the equity risk premium into a diffusion component and a jump risk component and the compartment of the latter into its various elements has a huge impact on the utility in a complete market the more extreme the market prices of risk i e the more they deviate from their equilibrium values the larger the utility of the investor additionally we show that the structure of the optimal exposures to jump risk crucially depends on which elements of jump risk are priced

price and volatility co jumps abstract the nature of the dependence between discontinuities in prices and contemporaneous discontinuities in volatility co jumps has been reported by many as being elusive in terms of sign magnitude and statistical significance using a novel identification strategy in continuous time relying on trade level information for spot variance estimation as well as infinitesimal cross moments we document that a sizeable proportion of discontinuous changes in prices are associated with strongly anti correlated contemporaneous discontinuous changes in volatility assuming a possibly nonmonotonic pricing kernel we illustrate the equilibrium implications of price and volatility co jumps for return and variance risk premia

multivariate fx models with jumps triangles quantos and implied correlation we propose an integrated model of the joint dynamics of fx rates and asset prices for the pricing of fx derivatives including quanto products the model is based on a multivariate construction for levy processes which proves to be analytically tractable the approach allows for simultaneous calibration to market volatility surfaces of currency triangles and also gives access to market consistent information on dependence between the relevant variables a successful joint calibration to real market data is presented for the particular case of the variance gamma process

optimal portfolio allocation with volatility and co jump risk that markowitz would like abstract we study a continuous time optimal portfolio allocation problem with volatility and co jump risk allowing prices variances and covariances to jump simultaneously differently from the traditional approach we deviate from affine models by specifying a flexible wishart jump diffusion for the co precision the inverse of the covariance matrix the optimal portfolio weights that solve the dynamic programming problem are genuinely dynamic and proportional to the instantaneous co precision reconciling optimal dynamic allocation with the static markowitz type economic intuition an application to the optimal allocation problem across hedge fund investment styles illustrates the importance of having jumps in volatility associated with jumps in price