a method for solving general equilibrium models with incomplete markets and many financial assets abstract this paper presents a numerical method for solving stochastic general equilibrium models with dynamic portfolio choice the method can be applied to models with heterogeneous agents time varying investment opportunity sets and incomplete asset markets we illustrate the method using a two country model with production we check the accuracy of our method by comparing the numerical solution to a complete markets version of the model against its known analytic properties we then apply the method to an incomplete markets version where no analytic solution is available in all versions the standard accuracy tests confirm the effectiveness of our method

walrasian equilibrium with gross substitutes in this paper we study the problem of efficient production and allocation of indivisible objects among a set of consumers we assume that the agents preferences depend on the bundle of objects and the quantity of money they consume furthermore we assume that preferences are quasilinear in money and that agents have a large endowment of money with indivisibilities it is well known that many familiar properties of the utility functions fail to ensure existence in their striking analysis of the matching problem kelso and crawford 5 introduce the gross substitutes gs condition which ensures the non emptiness of the core we propose two new conditions and show that with quasilinearity they are equivalent article id jeth 1999 2531 available online at http www idealibrary com on

optimal liberalization of financial markets abstract as financial markets become completely liberalized countries gain from improved risk sharing but less wealthy countries can no longer profit from borrowing abroad at the lower rate and reinvesting at home at the higher rate with decreasing rather than constant returns to capital the gain from risk sharing is more likely to dominate the loss of the difference between the borrowing rate abroad and the decreasing reinvestment rate at home complete liberalization is likely to be optimal for less wealthy countries unless their labor endowment is large their productivity is large or holdings by foreigners are small as in china

how not to sell nuclear weapons we consider situations where a sale affects the ensuing interaction between potential buyers these situations are modeled by assuming that an agent who does not acquire the object for sale incurs an identity dependent externality we construct a revenue maximizing auction for the seller we observe that 1 outside options and participation constraints are endogenous 2 the seller extracts surplus also from agents who do not obtain the auctioned object 3 the seller is better off by not selling at all while obtaining some payments if externalities are much larger than valuations

bundling equilibrium in combinatorial auctions this paper analyzes ex post equilibria in the vcg combinatorial auctions if is a family of bundles of goods the organizer may restrict the bundles on which the participants submit bids and the bundles allocated to them to be in t he vcg combinatorial auctions obtained in this way are known to be truth telling mechanisms in contrast this paper deals with non restricted vcg auctions in which the buyers choose strategies that involve bidding only on bundles in and these strategies form an equilibrium we fully characterize those that induce an equilibrium in every vcg auction and we refer to the associated equilibrium as a bundling equilibrium the main motivation for studying all these equilibria and not just the domination equilibrium is that they afford a reduction of the communication complexity we analyze the tradeoff between communication complexity and economic efficiency of bundling equilibrium

transaction costs and international portfolio diversification abstract this paper employs an intertemporal portfolio choice model that incorporates proportional transaction costs to examine two features of portfolio allocation the domestic bias of equity holdings and the relationship between domestic and international turnover rates the model implies that the rate of portfolio diversification decreases as the magnitude of the transaction costs increases as costs increase active portfolio reallocation decreases and is replaced by passive portfolio reallocation which is costless and is accomplished through the realization of capital gains the international turnover rate is greater than the domestic turnover rate because the average holdings of the international asset are small not because the volume of trading is large

nonlinear adjustment to purchasing power parity in the post bretton woods era abstract this paper models the dynamics of adjustment to long run purchasing power parity ppp over the post bretton woods period in a nonlinear framework consistent with the presence of frictions in international trade we estimate exponential smooth transition autoregressive estar models of deviations from ppp which are obtained using the johansen cointegration method for both consumer price index cpi and wholesale price index wpi based measures and a broad set of us trading partners in several cases we find clear evidence of a mean reverting dynamic process for sizable deviations from ppp with the equilibrium tendency varying nonlinearly with the magnitude of disequilibrium analysis of impulse response functions also supports a nonlinear dynamic structure but convergence to long run ppp in the post bretton woods era is very slow

international portfolio nondiversification and exchange rate variability abstract incomplete international portfolio diversification is implied by an equilibrium models of exchange rates with nontraded goods the model can also explain the greater correlation between consumption and income within a country than between consumption across countries nontraded goods make more stringent the elasticity conditions required to explain exchange rate variability resulting from current productivity disturbances though not from disturbances to fiscal policies or the prospective return to investment the model is also consistent with international real interest rate differentials changes over time in the current account and relative wealth across nations and observed time series properties of exchange rates

the process followed by ppp data on the properties of linearity tests recent research has reported the lack of correct size in stationarity test for ppp deviations within a linear framework however theoretically well motivated nonlinear models such as the estar appear to parsimoniously fit the ppp data and provide an explanation for the ppp puzzle employing monte carlo experiments we analyze the size and power of the nonlinear tests against a variety of nonstationary hypotheses we also fit the estar model to data from high inflation economies our results provide further support for estar specification

all equilibria of the multi unit vickrey auction abstract this paper completely characterizes the set of equilibria of the vickrey auction for multiple identical units when buyers have non increasing marginal valuations and there are at least three potential buyers there are two types of equilibria in the first class of equilibria there are positive bids below the maximum valuation in this class above a threshold value all bidders bid truthfully on all units one of the bidders bids at the threshold for any unit for which his valuation is below the threshold the other bidders bid zero in this range in the second class of equilibria there are as many bids at or above the maximum valuation as there are units the allocation of these bids is arbitrary across bidders all the remaining bids equal zero with any positive reserve price equilibrium becomes unique bidders bid truthfully on all units for which their valuation exceeds the reserve price

night lights in economics sources and uses1 night lights as detected by satellites are increasingly used by economists typically as a proxy for economic activity the growing popularity of these data reflects either the absence or the presumed inaccuracy of more conventional economic statistics like national or regional gdp further growth in use of night lights is likely as they have been included in the aiddata geo query tool for providing sub national data and in geographic data that the demographic and health survey links to anonymised survey enumeration areas yet this ease of obtaining night lights data may lead to inappropriate use if users fail to recognize that most of the satellites providing these data were not designed to assist economists and have features that may threaten validity of analyses based on these data especially for temporal comparisons and for small and rural areas in this paper we review sources of satellite data on night lights discuss issues with these data and survey some of their uses in economics

an intertemporal model of international capital market segmentation this paper develops an intertemporal model of international capital market segmentation within the model under various forms of segmentation integration the equilibrium asset prices and allocations the risk free interest rate and the intertemporal consumption behavior and welfares of two countries are derived and compared it is shown that the equilibrium interest rate is increased on integration and that integrating markets may be significantly welfare decreasing for one of the countries conditions that may lead to a decrease in welfare are investigated the conclusions as to the effects of segmentation on asset prices in the mean variance model of the existing finance segmentation literature are also shown to break down in an intertemporal model

exchange rate volatility and international trade a general equilibrium analysis abstract we analyze the relation between exchange rate volatility and the volume of international trade in a general equilibrium stochastic endowment economy with imperfect international commodity markets and treating both variables as endogenous even in the simplest model the sign of the relation depends on the source for the change in volatility for instance more volatility of the endowments and higher costs to international trade both boost exchange risk and lower welfare but the first increases the expected volume of trade while the second decreases trade note that even the inter equilibria relation between trade and welfare is ambiguous

why real interest rates cost of capital and price earnings ratios vary across countries abstract this paper examines how productivity changes affect real rates of return and price earnings ratios in a small open economy the model provides conditions under which increased productivity in a country s traded goods sector causes prices of non traded goods to increase relative to the price of traded goods under these conditions real rates of interest decline and the production of certain non traded durable goods such as capital equipment and housing immediately increase this overconstruction has two effects first the increase in capital relative to labor in these sectors increases the marginal product of labor and hence immediately causes an increase in wages and the prices of non traded goods second an oversupply of capital goods and housing depresses their rental rates in the current period thereby increasing their price to rental ratios or equivalently their price earnings ratios

purchasing power parity over two centuries trends and nonlinearity in two recent contributions lothian and taylor and cuddington and liang produced empirical evidence that annual data for the dollar sterling real exchange rate spanning two centuries exhibited a non linear deterministic trend this trend could be proxying harrod balassa samuelson effects lothian and taylor showed that a linear stationary autoregressive mode which embodied a cubic trend implied much faster mean reversion of the real exchange rate to shocks than a model that excluded the trend this article shows that both non linearity and a deterministic trend can be allowed for in a theoretically appealing manner and that the fitted models provide a parsimonious explanation of both the dollar sterling and franc sterling real exchange rates over the two centuries of data generalized impulse response function analysis of the models demonstrates that the speed of adjustment to shocks can be even faster when trends are considered

international good market segmentation and financial innovation abstract while international capital flows are now well liberalized markets for goods remain segmented to investigate how financial innovation may relieve the effects of this segmentation on risk sharing we examine a series of two country economies with internationally segmented good markets distinguished by the available financial securities sufficient conditions for efficiency include complete international financial markets together with liberalized international financial flows under these conditions heterogeneous agents from the same country may use securities as a substitute for the international shipment of goods this allows them to partially circumvent the segmentation allowing for efficient risk sharing

a learning approach to auctions we analyze a repeated first price auction in which the types of the players are determined before the first round it is proved that if every player is using either a belief based learning scheme with bounded recall or a generalized fictitious play learning scheme then for sufficiently large time the players bids are in equilibrium in the one shot auction in which the types are commonly known

do trade costs in goods market lead to home bias in equities abstract two of the main puzzles in international economics are the consumption and the portfolio home biases we solve for international equity portfolios in a two country two good stochastic equilibrium model with trade costs in goods markets we show that introducing trade costs as suggested by obstfeld and rogoff obstfeld m rogoff k 2000a the six major puzzles in international macroeconomics is there a common cause nber macroeconomics annual 15 is not sufficient to explain these two puzzles simultaneously on the contrary we find that trade costs create a foreign bias in portfolios for reasonable parameter values this result is robust to the addition of non tradable goods for standard calibrations of the preferences

on the effects of barriers to international investment a simple model is presented in which it is costly for domestic investors to hold foreign assets the implications of the model for the composition of optimal portfolios at home and abroad are derived it is shown that all foreign assets with a beta larger than some beta plot on either one of two security market lines some foreign assets with a beta smaller than are not held by domestic investors even if their expected return is increased slightly while it is obviously not true that asset markets are completely segmented between countries there is evidence of barriers to international investment although reality seems to lie in that grey area between complete segmentation and no segmentation at all most international asset pricing models are concerned with the extreme case of no barriers to international investment no effort seems to have been made to study the effect on portfolio choice of such barriers which make it costly to hold foreign securities as opposed to domestic securities but which do not in general render international diversification so onerous that investors avoid foreign securities completely casual empiricism suggests that models without barriers to international investment should be suspect those models cannot explain why it appears that in every country investors on average hold more domestic securities than would be required if they held the world market portfolio 2 this paper constructs a model of international asset pricing in which there is a cost associated with holding either long or short risky foreign securities for the sake of simplicity in most of the paper we assume that while domestic investors face barriers to international investment foreign investors face no such barriers it turns out that nothing significant is lost with such an assumption the main conclusions of this paper for the case in which foreign investors face no barriers to international investment are 1 in the presence of barriers to international investment some risky foreign

characterization of ex post equilibrium in the vcg combinatorial auctions we prove that when the number of potential buyers is at least three every ex post equilibrium in the vickrey clarke groves combinatorial auction mechanisms is a bundling equilibrium and is symmetric this complements a theorem proved by holzman kfir dahav monderer and tennenholtz 2003 according to which the symmetric bundling equilibria are precisely those defined by a quasi field

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

home bias and high turnover dynamic portfolio choice with incomplete markets why do investors trade a lot in foreign assets and hold so little of them in their portfolios this paper shows that both observations can arise naturally in the presence of nondiversifiable nontraded consumption risk when each country specializes in production preferences exhibit consumption home bias and asset markets are incomplete using a general equilibrium two country two sector tradable and nontradable model of the world economy with production i show that low diversification occurs because variations in relative prices i increase the riskiness of foreign assets and ii facilitate risk sharing across countries large and volatile capital flows are necessary to take advantage of international risk premia differentials that occur in response to productivity changes in the nontradable sector i characterize the optimal portfolio holdings the evolution of the investment opportunity set the risk premium and the dynamics of capital flows using a new methodology for solving dynamic general equilibrium models with incomplete markets and portfolio choice

disaggregated economic impact analysis incorporating ecological and social trade offs and techno institutional context a case from the western ghats of india economic valuation of ecosystem benefits and their aggregation in a benefit cost analysis bca framework is the norm in mainstream environmental economics but valuation and bca have also attracted criticisms internal criticisms point to the absence of alternative scenarios in valuation overlooking of ecological trade offs and dis services and inattention to context others criticize aggregation across diverse stakeholders and the problem of non monetizable benefits and dismiss bca as fatally flawed they suggest approaches such as deliberative decision making and multi criteria analysis we propose a middle path that uses the strengths of economic analysis for decision support while avoiding the pitfalls we disaggregate economic impacts by stakeholder groups link ecosystem changes to benefits as well as dis benefits and examine how socio technological context shapes the magnitude of economic impact we illustrate this approach by studying the impact of creating the biligiri rangaswamy temple wildlife sanctuary in the western ghats forests of southern india our analysis shows that while some stakeholders are net beneficiaries others are net losers changes in forest rights irrigation technologies and ecosystem dynamics influence the magnitude of benefits and sometimes convert gainers into losers such disaggregated analysis can provide useful information for deliberative decision making and important academic insights on how economic value is generated

international portfolios capital accumulation and foreign assets dynamics despite the liberalization of capital ows among oecd countries equity home bias remains sizable we depart from the two familiar explanations of equity home bias transaction costs that impede international diversi cation and terms of trade responses to supply shocks that provide risk sharing so that there is little incentive to hold diversi ed portfolios we show that the interaction of the following ingredients generates a realistic equity home bias capital accumulation shocks to the e ciency of physical investment as well as international trade in stocks and bonds in our model domestic stocks are used to hedge uctuations in local wage income terms of trade risk is hedged using bonds denominated in local goods and in foreign goods in contrast to related models the low level of international diversi cation does not depend on strongly countercyclical terms of trade the model also reproduces the cyclical dynamics of foreign asset positions and of international capital ows

equity and bond flows to latin america and asia the role of global and country factors abstract this paper investigates the factors motivating the large capital flows to a number of developing countries in recent years we use monthly us capital flows to nine latin american and nine asian countries to analyze the behavior of bond and equity flows employing a panel data approach we find that although global factors the drop in us interest rates and the slowdown in us industrial production are important in explaining capital inflows country specific developments are at least as important especially for asia we also find that equity flows are more sensitive than bond flows to global factors but that bond flows are generally more sensitive to a country s credit rating and secondary market debt price

a dynamic equilibrium model of imperfectly integrated financial markets abstract this paper analyzes the determination of global equity portfolios and stock returns in the context of imperfectly integrated stock markets we consider a continuous time two country endowment economy where the level of financial integration is captured by a proportional tax on foreign dividends despite the investor heterogeneity induced by this tax we obtain approximate closed form expressions for asset prices and characterize equity holdings and the joint process followed by country level stock returns in equilibrium our model is consistent with a broad range of empirical findings on international financial integration when the endogenous cross country return correlation is high small frictions in equity markets can generate a substantial home bias in portfolios in the baseline version of our model the cross country return correlation is driven by the fundamental correlation and portfolio rebalancing in a two good extension of the model the adjustment of relative good prices can generate a high stock return correlation even for a low level of fundamental correlation magnifying the impact of the financial friction on portfolios we assess the quantitative performance of the model in a calibration exercise using data from g7 countries

adjustment costs and international trade dynamics abstract this paper develops a model of trader behavior that is characterized by quadratic adjustment costs imperfect competition and rational expectations the model is fitted to data on aggregate trade flows between the united states and three of its largest trading partners tests against alternative specifications confirm the importance of imperfect competition and adjustment costs the hypothesis of rational expectations cannot be rejected the estimated price elasticities of trade flows are generally in the range reported by previous researchers but the activity elasticities are significantly higher

home bias in open economy financial macroeconomics standard theory would predict that investors hold a well diversified portfolio of equities across the world but despite the process of financial globalization investors still hold a disproportionate share of local equities in their portfolio the equity home bias french and poterba 1991 we review the various explanations of this puzzling phenomenon in the context of recent developments in macroeconomic modelling that have allowed to incorporate sophisticated international portfolio choices in standard two country general equilibrium models we refer to this literature as open economy financial macroeconomics we focus on three broad classes of explanations i hedging motives in frictionless financial markets real exchange rate and non tradable income risk ii asset trade costs in international financial markets such as transaction costs differences in tax treatments between national and foreign assets iii informational frictions and behavioural biases these recent developments raise the need for new portfolio facts beyond the equity home bias and we will present some new evidence on cross border asset holdings across different types of assets equities bonds and bank lending we also present some new micro data on institutional holdings of equity at the fund level these data should inform macroeconomic modelling of the open economy and a growing literature of models of delegated investment

estimating worldwide life satisfaction abstract whilst studies of life satisfaction are becoming more common place their global coverage is far from complete this paper develops a new database of life satisfaction scores for 178 countries bringing together subjective well being data from four surveys and using stepwise regression to estimate scores for nations where no subjective data are available in doing so we explore various factors that predict between nation variation in subjective life satisfaction building on vemuri and costanza s vemuri a w costanza r 2006 the role of human social built and natural capital in explaining life satisfaction at the country level toward a national well being index nwi ecological economics 58 119 133 four capitals model the main regression model explains 76 of variation in existing subjective scores importantly this includes poorer nations that had proven problematic in vemuri and costanza s vemuri a w costanza r 2006 the role of human social built and natural capital in explaining life satisfaction at the country level toward a national well being index nwi ecological economics 58 119 133 study natural human and socio political capitals are all found to be strong predictors of life satisfaction built capital operationalised as gdp did not enter our regression model being overshadowed by the human capital and socio political capital factors that it inter correlates with the final database presents a stop gap resource that until robust surveys are carried out worldwide allows comparisons of subjective life satisfaction between nations to be made with reasonable confidence

an examination of uncovered interest rate parity in segmented international commodity markets we examine the effect of segmented commodity markets on the relation between forward and future spot exchange rates in a dynamic economy we calculate the slope coefficient in our theoretical economy from regressing exchange rate changes on forward premia with reasonable parameter values the slope coefficient is less than unity however even for extreme parameters the slope is not less than zero as found in the data a negative slope coefficient in a nominal version of the model requires the covariance between monetary shocks and relative output shocks to be significantly negative in contrast to the covariance in the data one of the most studied relations in international finance is that between forward exchange rates and future spot rates empirical tests typically find that when one regresses changes in spot rates on forward premia the slope coefficient is less than one and often negative this result is called the forward bias anomaly and implies that the returns from investing in forward exchange contracts are predictable our objective is to examine the effect of segmentation of international commodity markets on the relation between the forward premium and the change in the spot rate segmentation of commodity markets is modeled by introducing a cost for transferring goods across countries giving rise to deviations from purchasing power parity ppp in this article we first derive the theoretical implications of the effect of segmentation on the forward bias in a dynamic general equilibrium model and then analyze a calibrated version of the model our analysis serves as a useful benchmark to study how much of the predictable deviations from uncovered interest parity uip can be explained by endogenous deviations from ppp

exchange rate uncertainty forward contracts and international portfolio selection in this paper ex ante efficient portfolio selection strategies are developed to realize potential gains from international diversification under flexible exchange rates it is shown that exchange rate uncertainty is a largely nondiversiflable factor adversely affecting the performance of international portfolios therefore it is essential to effectively control exchange rate volatility for that purpose two methods of exchange risk reduction are simultaneously employed multicurrency diversification and hedging via forward exchange contracts the empirical findings show that international portfolio selection strategies designed to control both estimation and exchange risks almost consistently outperform the u s domestic portfolio in out of sample periods since grubel 11 applied modern portfolio theory mpt to international investment various authors such as levy and sarnat 17 solnik 20 and lessard 16 have examined the gains from international diversification of investment portfolios for the purpose of establishing the gains from international diversification these studies constructed international portfolios using historical risk and return data from a period of fixed or relatively stable exchange rates and showed that internationally diversified portfolios dominated purely domestic portfolios in terms of mean variance efficiency from the standpoint of today s investors however the previous studies fail to offer operational guidance for international diversification for two important reasons first it is now questionable whether the past findings are still relevant under the current flexible exchange rate regime second by being ex post in nature the past studies ignored the issue of estimation risk or parameter uncertainty and therefore may have overstated the realizable portion of the potential gains from international diversification fluctuating exchange rates are likely to mitigate the potential gains from international diversification by making investment in foreign securities more risky as will be shown later a fluctuating exchange rate contributes to the risk of foreign investment not only through its own variance but also through its positive covariances with the local stock market returns during our sample period of 1980 through 1985 for example exchange rate volatility is found to account for about fifty percent of the volatility of dollar returns from investment in the stock markets of such major countries as germany japan and the u k furthermore the exchange rate changes vis a vis the u s dollar are found to be

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

does non traded input necessarily deepen the international non diversification puzzle i the one good case abstract this paper shows that with non traded inputs and only one good the optimal portfolio should contain a larger share of foreign assets than domestic it deepens the international non diversification puzzle

an exact solution to a dynamic portfolio choice problem under transactions costs the presence of any friction in financial markets qualitatively changes the nature of the optimization problem faced by an investor it requires one to either act or do nothing an issue which of course does not arise in frictionless situations the investor considered here accumulates wealth without consuming until some terminal point in time when he consumes all his objective is to maximize the expected utility derived from that terminal consumption we postpone the terminal point far into the future to obtain a stationary portfolio rule the portfolio policy is in the form of two control barriers between which portfolio proportions are allowed to fluctuate we show how to calculate them

international stock market equilibrium with heterogenous tastes this paper considers a dynamic real exchange model of international trade in commodities and equities given generalized cobb douglas intraperiod tastes that differ across countries we find a closed form solution with properties that are noteworthy not because they reverse our presumptions but because they exceed them a consumption based model of international equity investment might be expected to have the following properties i the optimal portfolios should reflect the international pattern of commodity expenditure ii a country s portfolio should be biased toward equities in commodities that attract a large share of its expenditure iii a country would short some equities given an appropriate structure of equity returns iv short sales of equities would allow the international economy to move toward the situation that would prevail if risk markets were complete in our model solution these properties take strong forms

an intertemporal general equilibrium asset pricing model the case of diffusion information this paper provides sufficient conditions for the equilibrium price system and a vector of exogenously specified state variable processes to form a diffusion process in a pure exchange economy the conditions involve smoothness of agents utility functions and certain nice properties of the aggregate endowment process and the dividend processes of traded assets in place of the dynamic programming a martingale representation technique is utilized to characterize equilibrium portfolio policies this technique is useful even when there does not exist a finite dimensional markov structure in the economy and thus the markovian stochastic dynamic programming is not applicable a gents are shown to hold certain hedging mutual funds and the riskless asset in contrast to earlier results the market portfolio does not have a special role in hedging since the markets are dynamically complete when there exists a finite dimensional markov system in the economy the dimension of the hedging demand identified through the markovian dynamic programming may be much larger than that identified by the martingale method copyright 1987 by the econometric society

coastal disasters from the perspective of ecological economics natural hazards are recurrent events that frequently result in high death tolls and large economic losses because of their large impact they have concerned the international community for a long time in spite of the efforts the impact of natural hazards has increased oftentimes the role of natural ecosystems and the ecosystem services they provide to human societies are not considered in risk reduction programs how relevant are ecosystems what are the consequences of the depletion of natural ecosystems and the loss of ecosystem services provided by them would the alternative vision of ecological economics in which development and economy are seen as the whole the ecosystem daly h e and farley j 2004 ecological economics principles and applications island press washington dc 454 pp be helpful in reducing disaster risk in this paper we are set to test whether a holistic approach from the perspective of ecological economics is helpful to clarify and reduce the impact of natural hazards we focused on hurricanes because they are the most frequently reported events of all natural disasters hewitt k 1997 regions of risk longman edinburgh gate 389 pp we analyze the relationship between the components of human built social and natural capitals with the damage caused by hurricanes in terms of mortality rate we then generate a conceptual model to help envision the complexity of the system a stepwise back and forth steps linear regression analysis revealed that mortality rate was significantly and positively affected by hurricane frequency p 0 01 while area covered by semi altered ecosystems a mosaic of natural and human altered ecosystems p 0 01 and gdp p 0 05 negatively affected mortality rate r2 0 81 the proportion of natural altered ecosystems yielding the best protection results needs to be determined yet natural capital alone does not decrease number of deaths rather its complex interactions with the other capitals and the many feedback loops that are involved need to be considered to achieve effective disaster risk reduction no single capital is enough to reduce the impact and intensity of natural hazard a balance between human built social and natural capitals and an increasing awareness of the consequences of different development decisions will help human societies to live with rather than cope with coastal hazards

sustainability of nations by indices comparative study between environmental sustainability index ecological footprint and the emergy performance indices abstract the present work makes a comparison between the two most used environmental sustainability indices of nations ecological footprint and environmental sustainability index with two emergy ratios renewability and emergy sustainability index all of them are gaining space within the scientific community and government officials despite the efforts for obtaining an index that adequately represents the sustainability of a region according to the result of this research nowadays there is not yet a completely satisfactory index we consider that all of them need to be improved but the results point out the possibility of obtaining one better index of sustainability through the junction of ecological footprint with renewability emergy index

risk sharing and counter cyclical variation in market correlations abstract i present a consumption based dynamic asset pricing model in which international market correlations vary counter cyclically over time the driving force in the model is the time varying effective risk aversion induced by external habit formation market returns are driven by fundamental outputs and discount rates when risk aversion is high the effect of discount rates on market returns rises with the market price of risk to the extent that countries share risk the cross country correlation of discount rates exceeds the cross country correlation of fundamental outputs in bad times market correlations rise as returns are mostly driven by discount rates thus consistent with the empirical evidence periods of high risk aversion are associated with high market correlations and high market volatility after calibration my model is consistent with the observed variation in market correlations as well as other features of asset prices including the equity premium and market volatility

aid and growth at the regional level this paper brings the aid effectiveness debate to the sub national level we hypothesize the non robust results regarding the effects of aid on development in the previous literature to arise due to the effects of aid being insufficiently large to measurably affect aggregate outcomes using geo coded data for world bank aid to a maximum of 2 221 first level administrative regions adm1 and 54 167 second level administrative regions adm2 in 130 countries over the 2000 2011 period we test whether aid affects development measured as nighttime light growth our preferred identification strategy exploits variation arising from interacting a variable that indicates whether or not a country has passed the threshold for receiving ida s concessional aid with a recipient region s probability to receive aid in a sample of 478 adm1 regions and almost 8 400 adm2 regions from 21 countries controlling for the levels of the interacted variables the interaction provides a powerful and excludable instrument overall we find significant correlations between aid and growth in adm2 regions but no causal effects acknowledgements this paper is part of a research project on macroeconomic policy in low income countries supported by the u k department for international development dfid the views expressed in this paper are those of the authors and do not necessarily represent those of the imf imf policy or dfid we thank andrea presbitero seminar participants at the development research group meeting at the university of goettingen the conference on financing for development geneva 2015 and the centre for the studies of african economies conference oxford 2015 for helpful comments and jamie parsons for proofreading

smooth transition models and arbitrage consistency slow adjustment of real exchange rate towards equilibrium in linear models has long puzzled researchers stimulating the adoption of nonlinear models the exponential smooth transition model has been particularly successful providing faster adjustment speeds this paper discusses some of its theoretical limitations for example that expectations are adaptive we propose a new nonlinear model conceptually superior to the estar model since it is consistent with rational expectations one of its advantages is that it can be solved and estimated by nonlinear least squares using monthly post 1973 real exchange rate data we show that the model implies even faster speeds of adjustment

market frictions and real exchange rates abstract one explanation for the failure of purchasing power parity ppp is that market frictions impede trade allowing departures from ppp to grow quite large without precipitating goods arbitrage if this explanation is correct then other things equal large deviations from ppp should be less persistent than small differences this paper examines this prediction over the modern floating rate era the outcome is surprising between most countries large deviations from ppp appear to be at least as persistent as small deviations and perhaps even more so the exceptions are for some intra ec real exchange rates the implication is that market frictions alone do not explain the chimerical nature of ppp

the role of human social built and natural capital in explaining life satisfaction at the country level toward a national well being index nwi this paper investigates the contributions to life satisfaction of four basic types of capital human social built and natural life satisfaction data were available for respondents from fifty seven countries from the world values survey over the decade of the 1990s data on proxies for human social built and natural capital were available for 171 countries using data from the 1998 united nations human development report united nations development programme 1998 human development report 1998 oxford university press new york freedom house 1999 freedom house 1999 news of the century press freedom 1999 freedom house http freedomhouse org pfs99 pfs99 pdf september 30 2003 and sutton and costanza 2002 sutton p costanza r 2002 global estimates of market and non market values derived from nighttime satellite imagery land cover and ecosystem service valuation ecol econ 41 509 527 regression models show that both the un human development index hdi which includes proxies for both built and human capital and an index of the value of ecosystem services per km 2 as a proxy for natural capital are important factors in explaining life satisfaction at the country level and together can explain 72 of the variation in life satisfaction we did not find a proxy for social capital that was a significant predictor in the regression models this was due to the inadequacy of available proxy variables for social capital at the national scale and intercorrelation with other variables we discuss data limitations and a range of other problems with the existing limited data along with methods to overcome some of these limitations to improve future analyses we propose a national well being index nwi based on our findings and describe a path to improve it over time d 2005 elsevier b v all rights reserved

mediators in position auctions abstract a mediator is a reliable entity which plays on behalf of the players who give her the right to play the mediator acts in a pre specified way based on messages received from the players however a mediator cannot enforce behavior that is players can play in the game directly without the mediator s help a mediator generates a new game for the players the mediated game the outcome in the original game of an equilibrium in the mediated game is called a mediated equilibrium monderer and tennenholtz introduced a theory of mediators for games with complete information we extend the theory of mediators to games with incomplete information and apply the new theory to position auctions a central topic in electronic commerce we provide a minimal set of conditions on position auctions which is sufficient to guarantee that the vcg outcome function is a mediated equilibrium in these auctions

the demand for foreign bonds this paper derives the demand for foreign bonds in a simple general equilibrium model in which the exchange rate is perfectly correlated with the terms of trade a necessary condition for the demand for foreign bonds to be an increasing function of the domestic currency value of imports is derived earlier work shows that the demand for foreign bonds is an increasing function of imports if the domestic investor s degree of relative risk tolerance is smaller than one the present paper shows that the demand for foreign bonds can be a decreasing function of imports if the degree of relative risk tolerance is smaller than one when the consumption expenditure elasticity of imports exceeds one

international portfolio diversification with estimation risk international portfolio diversification has long been advocated as a way of enhancing average returns while reducing portfolio risk for the investor who considers diversifying into foreign securities this proposition however relies on the assumption that the required inputs to the classical mean variance analysis are known with certainty typically expected returns variances and covariances are simply replaced by their ex post sample values and the optimal portfolio is derived without mentioning the uncertainty inherent in these parameter values but the rational investor should take this uncertainty into account when forming expectations and probably will consider estimators that are less subject to estimation error than the classical sample mean this paper investigates alternative estimators of expected returns and their implications for the alleged gains from diversification an important observation is the crucial influence that errors in estimating expected returns have on portfolio analysis a closer examiprevious studies of international portfolio diversification have relied on ex post meanvariance analysis without considering the problem of estimation risk typically past averages are substituted for expected returns and no allowance is made for the uncertainty inherent in these parameter values first i demonstrate the shortcomings of such an approach and second i investigate another method of estimating expected returns initially proposed by stein by shrinking the sample averages toward a common mean i find that the out of sample performance of the optimal portfolio is substantially increased one of the implications of this method is that the classical conclusions vastly overestimate the possible gains in average returns instead benefits from diversification are more likely to accrue from a reduction in risk this paper draws on part of my dissertation at the university of chicago i am grateful to arnold zellner michael mussa george constantinides and especially john bilson for useful discussions and comments numerous improvements were also suggested by the referee this research received the generous financial support of the college interuniversitaire d etudes doctorales dans les sciences du management

shedding light on the shadow economy a nighttime light approach abstractmeasuring the shadow economy is inherently difficult but critical for understanding economic development using census data on formal and informal sectors in cambodia we document that 96 6 per cent of non farm establishments do not formally register with the government and their sales accounted for 76 6 per cent of total sales in 2011 estimating their past sales from changes in nighttime light for 1993 2010 we find that both formal and informal firms increased their estimated sales the share of informal sales increased from 68 8 per cent in 1993 to 76 6 per cent in 2011 suggesting that the informal sector increased quantitatively in both absolute and relative terms over time

computing optimal multi currency mean variance portfolios abstract the paper provides an exact and computable solution to the general quadratic mean variance problem with exchange rate and return uncertainties multiple currencies are considered with multiple investments in each currency the classical mean variance formulation is augmented with currency risk the overall risk is hence the multiplicative effect of return risks within a currency and the currency risk currency risk may be interpreted in terms of though not restricted to past forecast errors we provide a framework within a general structure for return and exchange rate forecasts and risks we show that the quadratic mean variance structure is maintained and provide solutions to computational questions in the evaluation of the optimal portfolio by extending conventional analysis we arrive at a surprisingly simple solution which may be a useful addition to the arsenal of finance techniques

the international diversification puzzle is not as bad as you think the international diversification puzzle is the fact that country portfolios are on average biased toward domestic assets while one good international macro models with nondiversifiable labor income risk predict the opposite pattern of diversification this paper embeds a portfolio choice decision in a two good international business cycle model and provides a closed form solution for equilibrium country portfolios equilibrium portfolios are biased toward domestic assets because endogenous international relative price fluctuations make domestic assets a good hedge against labor income risk evidence from developed economies in recent years is qualitatively and quantitatively consistent with the mechanisms highlighted by the theory

a general equilibrium model of international portfolio choice we investigate in a two country general equilibrium model whether a bias in consumption towards domestic goods will necessarily lead to a preference for domestic securities we develop a model where investors are constrained to consume only from their domestic capital stock and where it is costly to transfer capital across countries in this model investors less risk averse than an investor with log utility bias their portfolios towards domestic assets investors more risk averse than log however prefer foreign assets thus this model suggests that it is unlikely that the portfolios observed empirically can be explained by the high proportion of domestic goods in total consumption we investigate in a two country general equilbrium model whether a bias in consumption toward domestic goods will necessarily lead to a preference for domestic assets in an investor s optimal portfolio we constrain investors to consume only from their domestic capital stock and introduce a proportional cost for transferring goods from one country this cost gives rise to endogenous deviations from the law of one price lop thus the home and foreign investors do not hold identical portfolios we show that an investor s optimal portfolio is biased towards domestic equity only if she is less risk averse than an investor with log utility investors with relative risk aversion greater than one exhibit a preference for the foreign asset this is because the exchange rate derived endogenously is negatively correlated with the return on the foreign asset and therefore the translated return on the foreign stock is less risky than that on the domestic stock thus the results of this model suggest that it is unlikely that the preference for domestic assets that is observed empirically can be explained by the high proportion of domestic goods in total consumption there exists a considerable body of literature documenting the gains from international diversification grubel 1968 was the first to propose that international diversification allows investors to attain lower return variances than those achievable by diversifying domestically this proposition relies on the correlation between stock indices across countries being significantly less

home asset preference and productivity shocks abstract this paper presents sufficient conditions for the domestic investor consumer to hold in equilibrium a disproportionate share of domestic assets the analysis is carried out in a general equilibrium framework of products and assets markets when the source of the uncertainty is productivity shocks in the nontraded goods industries in the asset markets we allow trade in instruments with a payoff which is not necessarily positively correlated with the price of the consumption good as the instruments considered in the existing literature consequently in our analysis in contrast to the existing literature hedging against price uncertainty is neither necessary nor sufficient for home asset preference

do we really care about biodiversity this paper addresses from an economic perspective the issue of global biodiversity conservation it challenges the perception that the world really cares a great deal about biodiversity and is prepared to pay the full cost of maintaining this stock of natural capital despite the existence of a plethora of international agreements there still seems to be a global deficit of care surrounding efforts to combat challenges such as those posed by global warming and biodiversity conservation more light can be thrown on the degree of care by measuring both the actual expenditures and the stated willingness to pay for biodiversity conservation however actual expenditures are much lower than willingness to pay estimates recorded in the published literature using the criteria that the right amount of conservation effort is one where the marginal economic benefits from conservation just equal the marginal costs of conservation the paper explores the biodiversity conservation conundrum and concluded that on the available evidence the world does not care too much about this natural capital stock and bequests to future generations

economic shocks and civil conflict at the regional level we study the effects of economic shocks on civil conflict at the subnational level using a panel dataset of 5689 administrative regions from 53 african countries with yearly observations from 1992 to 2010 we find that economic shocks measured by nighttime light intensity and instrumented by lagged rainfall levels and droughts increase the probability of civil conflict

global estimates of market and non market values derived from nighttime satellite imagery land cover and ecosystem service valuation we estimated global marketed and non marketed economic value from two classified satellite images with global coverage at 1 km2 resolution gdp a measure of marketed economic output is correlated with the amount of light energy le emitted by that nation as measured by nighttime satellite images le emitted is more spatially explicit than whole country gdp may for some nations or regions be a more accurate indicator of economic activity than gdp itself can be directly observed and can be easily updated on an annual basis as far as we know this is the first global map of estimated economic activity produced at this high spatial resolution 1 km2 ecosystem services product esp is an important type of non marketed value esp at 1 km2 resolution was estimated using the igbp land cover dataset and unit ecosystem service values estimated by costanza et al valuing ecosystem services with efficiency fairness and sustainability as goals nature s services island press washington dc pp 49 70 the sum of these two gdp esp sep is a measure of the subtotal ecological economic product marketed plus a significant portion of the non marketed the ratio esp sep 100 esp is a measure of proportion of the sep from ecosystem services both sep and esp were calculated and mapped for each 1 km2 pixel on the earth s surface and aggregated by country results show the detailed spatial patterns of gdp esp and sep also available at http www du edu psutton esiindexisee ecoleconesi htm globally while gdp is concentrated in the northern industrialized countries esp is concentrated in tropical regions and in wetlands and other coastal systems esp ranges from 1 for belgium and luxembourg to 3 for the netherlands 18 for india 22 for the united states 49 for costa rica 57 for chile 73 for brazil and 92 for russia while gdp per capita has the usual northern industrialized countries at the top of the list sep per capita shows a quite different picture with a mixture of countries with either high gdp capita high esp capita or a combination near the top of the list finally we compare our results with two other indices 1 the 2001 environmental sustainability index esi derived as an initiative of the global leaders of tomorrow environment task force world economic forum and 2 ecological footprints of nations how much nature do they use how much nature do they have developed by mathis wackernagel and others while both of these indices purport to measure sustainability the esi is actually mainly a measure of economic activity and is correlated with gdp while the eco footprint index is a measure of environmental impact the related eco deficit national ecological capacity minus national footprint correlates well with esp

why empirical international portfolio models fail evidence that model misspecification creates home asset bias abstract international portfolio models consistently predict that investors should put much more of their wealth into foreign assets than they actually do a result known as home asset bias we use actual international portfolio data to show how model misspecification contributes to this bias we find that three widely used simplifying assumptions produce optimal portfolio weights that are significantly different from the weights produced by an unsimplified model in particular imposing the invalid assumption that ppp holds exaggerates the degree of home asset bias these findings suggest that researchers should pay greater attention to empirical model specification in the future