how does background risk affect portfolio choice an analysis based on uncertain mean variance model with background risk abstract this paper explores how background risk affects individual investment decisions under the framework of uncertainty theory we propose an uncertain mean variance model with background risk and give its optimal solution when the returns of stocks and background asset obey normal uncertainty distributions on this basis we study the characteristic of the mean variance efficient frontier of the stock portfolio in the presence of background risk furthermore we compare the proposed model with the uncertain mean variance model without background risk and discuss the efficiency difference between the two models and further give the condition where the two models select the same stocks based on the comparison we analyze how background risk affects individual portfolio choice finally we give some numerical examples as illustrations

proper risk aversion on introduit et on etudie une condition comportementale significative sur les fonctions d utilite pour les richesses qui signifie qu une loterie indesirable ne peut jamais etre rendue desirable par la presence d une loterie indesirable independante

standard risk aversion this paper introduces the concept of standard risk aversion a von neumann morgenstern utility function has standard risk aversion if any risk makes a small reduction in wealth more painful in the sense of an increased reduction in expected utility also makes any undesirable independent risk more painful it is shown that given monotonicity and concavity the combination of decreasing absolute risk aversion and decreasing absolute prudence is necessary and sufficient for standard risk aversion standard risk aversion is shown to imply not only pratt and zeckhauser s proper risk aversion individually undesirable independent risks always being jointly undesirable but also that being forced to face an undesirable risk reduces the optimal investment in a risky security with and independent return similar results are established for the effect of broad class of increases in one risk on the desirability of or optimal investment in a second independent risk

employer stock and 401 k plans the sharp decline in the stock prices of several firms at which employees held a large fraction of their 401 k plan assets in company stock including enron global crossing lucent and polaroid has sparked a public policy debate about investment options in 401 k plans at many large firms particularly those with retirement saving plans that combine elements of an employee stock ownership plan esop with a traditional 401 k a substantial fraction of defined contribution retirement plan assets are held in company stock such undiversified holdings are a source of concern because they raise the volatility of the retirement wealth for employees and expose some workers to the prospect of very small retirement values holding an undiversified position in employer stock may be particularly costly because of the potential correlation between company stock returns and the value of the worker s human capital which may depend on the company s prospects this paper reviews the extent of undiversified company stock investments in 401 k plans evaluates the cost of such investments from an employee s perspective and discusses a range of policy actions that could address the excessive concentration of retirement plan assets

strategic responses to automobile emissions control a game theoretic analysis abstract this paper examines the dynamics of standard setting regulation under technological uncertainty and asymmetric information about technological capability a two period model which allows fully strategic action is developed and applied to the regulation of automobile emissions a situation in which standards have been used to force innovation it is found that the initial level of r d activity caused by regulation increases with the intrinsic technical capability of industry this result done not depend on marginal productivities of research that favor high capability types and implies that a poor capability industry will not attempt to compensate for its inability to innovate with increased research activity it is also found that the regulator s ability to induce investment is greater when r d is likely to be unsuccessful

investor sentiment and the financial crisis a sentiment based portfolio theory perspective the article proposes a portfolio model subjected to a constraint that captures the investor s goal with maximum estimation of expected return that is affected by investor sentiment and we give a solution of the portfolio model by exploring the geometric features furthermore we discuss the relationship between investor sentiment and the financial crisis by analysing the optimal allocation the results show that when investor sentiment is low enough the investor should reject the investment this condition leads the depression financial market to prevail then the financial crisis erupts when investor sentiment is modest the financial crisis is difficult to erupt unless the decline of investor sentiment is quick and deep but there is a special status that the financial crisis is caused by other factors rather than by investor sentiment and only improving investor sentiment cannot move away from the financial crisis

a further look at household portfolio choice and health status abstract this paper investigates the effect of changes in health status on household financial wealth and financial portfolio choice it is shown that the impact of health events on household financial and non financial wealth is asymmetric a diagnosis of a new disease leads to a larger decrease in financial wealth than in non financial wealth moreover we find that the puzzle pertaining to the relationship between health status and portfolio choice discussed in the extant literature generally disappears after controlling for differences in the amount of financial assets held by healthy and sick people the results suggest that the effect of changes in health status on household financial portfolios is indirect a health shock significantly reduces household total financial wealth in turn leading households to restructure the composition of their financial assets

environmental quality competition and eco labeling abstract a three stage game of investment environmental quality provision and price competition is developed to study the impact of green technology investment eco labeling in a duopoly model of vertical product differentiation the firms incentives to invest in green technologies depend on their relative cost structure when firms are identical with respect to fixed costs both firms will always invest but if one firm is more efficient in investing then the other firm may or may not invest depending on the level of unit cost of investment quality competition will be tighter when the low quality firm is more efficient and looser when the high quality firm is more efficient in investing socially optimal investment for both firms is always positive but lower than in the duopoly solution in the absence of environmental externalities the quality dispersion chosen by profit maximizing firms may be too high or too low while environmental externalities increase the possibility low quality dispersion that is too low within the market solution finally and importantly ecolabeling can be used as a means of reducing excessive investment and increasing environmental quality that is too low

regulatory attitudes and environmental innovation in a model combining internal and external r d the extent to which environmental regulatory institutions are either green or brown impacts not just the intensity of regulation at any moment but also the incentives for the development of new pollution control technologies we set up a strategic model of r d in which a polluter can deploy technologies developed in house or license technologies developed by specialist outsiders an eco industry polluters exert r d effort and may even develop redundant technologies to improve the terms on which they procure technology from outside we find that while regulatory bias has an ambiguous impact on the best available technology strategic delegation to systematically biased regulators can improve social welfare

asymmetric extreme tails and prospective utility of momentum returns abstract we use extreme value theory to analyse the tails of a momentum strategy s return distribution the asymmetry between the fat left tail and thin right tail strongly reduces a momentum strategy s prospective utility levels

the determinants of household risky asset holdings australian evidence on background risk and other factors we study the portfolio allocation decisions of australian households using the relatively new household income and labour dynamics in australia hilda survey we focus on household allocations to risky financial assets our empirical analysis considers a range of hypothesised determinants of these allocations we find background risk factors posed by labor income uncertainty and health risk are important credit constraints and observed risk preferences play the expected role a positive age gradient is identified for risky asset holdings and home ownership is associated with greater risky asset holdings a unifying theme for many of our empirical findings is the important role played by financial awareness and knowledge in determining risky asset holdings many non stockholding households appear to lack the experience and financial literacy that might enable them to benefit from direct investment in stocks

tax competition when governments lack commitment excess capacity as a countervailing threat consider a multinational firm that can produce for the world market from two countries in each country the firm has to make a costly ex ante investment in capacity after which each government chooses a tax rate and then the firm determines output levels if there were only one country there would be the standard timeinconsistency problem the government would set a confiscatory tax ex post the firm would realize this ex ante and no investment would be made the interesting point of this paper is that the situation is very different when there are two countries the firm invests in both countries so as to gain leverage ex post if the firm holds more capacity than is needed to meet world demand then this induces tax competition for capacity utilization among governments ex post because the firm can threaten to serve the market at least partially from a plant in a different country competition leads to low enough tax rates to justify the initial investment in excess capacity when capacity costs are sufficiently low when capacity costs are too high the firm will not invest at all as the standard timeinconsistency problem suggests thus the paper generates and combines tax competition and lack of government commitment within a single framework the above logic provides also a novel argument for becoming a multinational firm there is some evidence in support of the strategic use of excess capacity for example general motors gm announced it will build almost identical plants in several risky countries which allows gm to shift production easily at the same time the newly established capacity will probably exceed gm s sales another application is the problem of how multinationals export oil from the caspian sea the caspian sea is surrounded by politically unstable countries multinationals started to build and lobby for multiple pipelines through several countries in order to keep transit fees low these and other applications are discussed in more detail in section v the paper sheds new light on the relationship between multinational firms and host governments on the one hand a multinational firm can be viewed as the powerful agent in the relationship because the firm decides in which country to invest eager governments often offer substantial tax benefits in order to attract investment this view is underlying the literature on tax competition see for example john d wilson 1986 dan a black and william h hoyt 1989 ian king et al 1993 on the other hand and in a separate literature multinational firms are portrayed as the potential victims of host governments who may renege on tax promises after the firm has made a sunk investment and has become partially immobile see for example eric w bond and larry samuelson 1989 chris doyle and sweder van wijnbergen 1994 jonathan thomas and tim worrall 1994 hence the host government is the powerful agent and this may lead to underinvestment if anticipated by the firm 2 while both views capture elements of truth it is unsatisfactory that our understanding of the relationship seems to department of economics university of colorado boulder co 80309 e mail janeba colorado edu this research was undertaken while i was at indiana university in bloomington i am grateful to mike baye susanne janeba dave schmidt greg shaffer jay wilson and two anonymous referees as well as participants at the stanford institute for theoretical economics 1998 and workshop participants at the universities of bonn colorado indiana michigan munich pennsylvania state and toronto for very helpful comments the usual disclaimer applies l in a different context patrick j kehoe 1989 considers also tax competition after a private sector decision is made in his model however atomistic individuals decide on savings and cannot influence the degree of tax competition 2 it should be noted that in the second literature strand tax holidays are sometimes derived endogenously in an infinite horizon game tax holidays help overcome lack of commitment see for instance doyle and van wijnbergen 1994

portfolio selection with mental accounts and delegation das et al 2010 develop an elegant framework where an investor selects portfolios within mental accounts but ends up holding an aggregate portfolio on the mean variance frontier this investor directly allocates the wealth in each account among available assets in practice however investors often delegate the task of allocating wealth among assets to portfolio managers who seek to beat certain benchmarks accordingly we extend their framework to the case where the investor allocates the wealth in each account among portfolio managers our contribution is threefold first we provide an analytical characterization of the existence and composition of the optimal portfolios within accounts and the aggregate portfolio second we present conditions under which such portfolios are not on the mean variance frontier and conditions under which they are third we show that the aforementioned analytical characterization is also applicable within the framework of das et al and thus improves upon their numerical approach

portfolio optimization with mental accounts we integrate appealing features of markowitz s mean variance portfolio theory mvt 4 and shefrin and statman s behavioral portfolio theory bpt into a new mental accounting 5 ma framework features of the ma framework include an ma structure of portfolios 6 a definition of risk as the probability of failing to reach the threshold level in each mental 7 account and attitudes toward risk that vary by account we demonstrate a mathematical 8 equivalence between mvt ma and risk management using value at risk var the ag9

pollution taxes when firms choose technologies we consider the properties of a pollution tax when the regulated firm has a discrete choice of technologies with which to reduce pollution the firm s technology choice makes possible two sequences of play the traditional one in which the regulator moves first committing to a tax rate before the firm adopts a technology and an alternative one in which the firm moves first by adopting a technology we find that a range of pollution levels including possibly the first best one are unattainable when the regulator moves first the regulator may be better able to achieve the first best outcome when the firm moves first

a comparison of var and cvar constraints on portfolio selection with the mean variance model in this paper we analyze the portfolio selection implications arising from imposing a value at risk var constraint on the mean variance model and compare them with those arising from the imposition of a conditional value at risk cvar constraint we show that for a given confidence level a cvar constraint is tighter than a var constraint if the cvar and var bounds coincide consequently a cvar constraint is more effective than a var constraint as a tool to control slightly risk averse agents but in the absence of a risk free security has a perverse effect in that it is more likely to force highly risk averse agents to select portfolios with larger standard deviations however when the cvar bound is appropriately larger than the var bound or when a risk free security is present a cvar constraint dominates a var constraint as a risk management tool

an analysis of portfolio selection with background risk abstract this paper investigates the impact of background risk on an investor s portfolio choice in a mean variance framework and analyzes the properties of efficient portfolios as well as the investor s hedging behaviour in the presence of background risk our model implies that the efficient portfolio with background risk can be separated into two independent components the traditional mean variance efficient portfolio and a self financing component constructed to hedge against background risk our analysis also shows that the presence of background risk shifts the efficient frontier of financial assets to the right with no changes in its shape moreover both the composition of the hedge portfolio and the location of the efficient frontier are greatly affected by a number of background risk factors including the proportion of background assets in total wealth and the correlation between background risk and financial risk

pollution permits and environmental innovation abstract this paper starts with a warning about the negative impact of plain pollution allowance markets on environmental pollution innovation stand alone spot markets enable the government to expropriate an innovation by offering a competing technology pollution permits that puts an arbitrary downward pressure on the licensing price advance allowances reduce expropriation but still create suboptimal incentives for innovation they have the further drawback that permits are inefficiently used when the innovation occurs options to pollute at a given striking price fare better than allowances because they create private incentives to phase out pollution in the case of innovation we characterize the social optimum and show that it can be implemented by issuing options to pollute inter alia finally the paper compares ex ante and ex post government procurement surprisingly ex post licensing by the innovator to the government may yield a higher licensing fee than an ex ante contract

portfolio choice in the presence of background risk in this paper we focus on how the presence of background risks from sources such as labour and entrepreneurial income influences portfolio allocations this interaction is explored in a theoretical model that is calibrated using cross sectional data from a variety of sources the model is shown to be consistent with some but not all aspects of cross sectional observations of portfolio holdings the paper also provides a survey of the extensive theoretical and empirical literature on portfolio choice

representative consumer s risk aversion and efficient risk sharing rules abstract we study the representative consumer s risk attitude and efficient risk sharing rules in a single period single good economy in which consumers have homogeneous probabilistic beliefs but heterogeneous risk attitudes we prove that if all consumers have convex absolute risk tolerance so must the representative consumer we also identify a relationship between the curvature of an individual consumer s individual risk sharing rule and his absolute cautiousness the first derivative of absolute risk tolerance furthermore we discuss some consequences of these results and refinements of these results for the class of hara utility functions

who buys and who sells options the role of options in an economy with background risk abstract in this paper we derive an equilibrium in which some investors buy call put options on the market portfolio while others sell them since investors are assumed to have similar risk averse preferences the demand for these contracts is not explained by differences in the shape of utility functions rather it is the degree to which agents face other non hedgeable background risks that determines their risk taking behavior in the model we show that investors with low or no background risk have a concave sharing rule i e they sell options on the market portfolio whereas investors with high background risk have a convex sharing rule and buy these options journal of economic literature classification numbers d52 d81 g11 g13

a prospect theoretical interpretation of momentum returns abstract the puzzling evidence of seemingly high momentum returns is related to an understanding of risk as a simple covariance however by applying a prospect theoretical assessment of us stock momentum returns we provide a possible direction for explaining the puzzle

convex and decreasing absolute risk aversion is proper proper risk aversion a pivotal concept in the study of behavioral conditions on utility functions states that an undesirable risk can never be made desirable by the presence of an independent risk it is well known that standard risk aversion is sufficient for this concept we show in this short article that convex and decreasing absolute risk aversion is an alternative sufficient condition

beyond expected utility subjective risk aversion and optimal portfolio choice under convex shortfall risk measures abstract we conduct a decision theoretic analysis of convex shortfall risk measures regarding their flexibility to represent subjective risk aversion and discuss the implications for the choice of optimal portfolios as convex shortfall risk measures are closely related to the expected utility functional we draw upon the expected utility framework as our benchmark first we show that unlike expected utility convex shortfall risk measures do always represent constant absolute risk aversion this constitutes a significant limitation when changing initial wealth of e g investors is relevant interestingly though it is exactly this limitation that provides additional degrees of freedom in representing subjective risk aversion beyond expected utility when initial wealth is fixed as e g in returned based portfolio selection models in the tradition of markowitz 1952 second we apply convex shortfall risk measures to the standard portfolio problem between a riskless and a risky asset we provide a procedure that allows inferring the optimal portfolios under convex shortfall risk measures from certain optimal expected utility portfolios the procedure incorporates the additional degrees of freedom in modeling subjective risk aversion and thus allows more flexible and realistic portfolios compared to expected utility third we address the optimal portfolio choice between a riskless and a risky asset in the presence of an additional background risk again we prove a correspondence result between optimal portfolios under convex shortfall risk measures and expected utility and obtain more flexible and realistic portfolios compared to expected utility we also compare the optimal risky investments without and with background risk and provide a necessary and sufficient condition for a reduction of the risky investment

expected shortfall spectral risk measures and the aggravating effect of background risk or risk vulnerability and the problem of subadditivity abstract we analyze spectral risk measures srms including its most popular representative expected shortfall es with respect to gollier and pratt 1996 s concept of risk vulnerability we find that srms and risk vulnerability are mutually exclusive owing to the property of subadditivity while subadditivity is commonly regarded as the axiomatic cornerstone of srms risk vulnerability by contrast prevails if and only if superadditivity holds the lack of risk vulnerability yields questionable predictions in portfolio problems srm decision makers who split their wealth between a risk free and a risky asset do constantly opt for an increase in the risky investment when their deterministic background wealth is complemented by some additional background risk the more general setting where background wealth is already random and then becomes more risky is not as clear cut any srm decision maker may both increase or decrease the risky investment depending on the concrete instance of the portfolio problem however when random background wealth and the risky asset are jointly normally distributed srm decision makers will again unambiguously increase their risky investment we further conduct a data analysis and discuss possible implications of the findings for regulatory risk management

commitment versus discretion in climate and energy policy to decarbonize the power sector policy makers need to commit to long term credible rules for climate and energy policy otherwise risk of opportunistic policy making will impair investments into low carbon technologies however the future benefits and costs of decarbonization are subject to substantial uncertainties thus there may also be societal gains from allowing policy makers the discretion to adjust the policies as new information becomes available we examine how this trade off between policy commitment either unconditional or state contingent and discretion affects the optimal intertemporal design of market based instruments in the power sector using a dynamic partial equilibrium model we show that commitment to a state contingent level of ambition for the market based instrument leads to higher welfare than both unconditional commitment and discretion with benefit uncertainty the choice between the practically more feasible approaches of unconditional commitment and discretion is analytically ambiguous a basic numerical illustration suggests that policy discretion may outperform unconditional commitment in terms of welfare however this result is reversed when only a limited fraction of benefit uncertainty resolves in reasonable time when future policy makers have own agendas or when investors are risk averse with cost uncertainty policy discretion is welfare superior if the government can commit to a technology deployment target

permanent versus interim regulations a game theoretic analysis abstract when a regulator anticipates learning about the benefits or costs of regulations over time questions can be raised about the appropriate regulatory policy this paper compares permanent and interim regulations in a setting with initially uncertain pollution damages a fixed capital input and costly enforcement the analysis shows that neither policy is first best conditions under which one policy dominates the other are identified with the help of a simulation the results indicate that permanent regulations may be preferable to interim regulations even when there is substantial uncertainty about damages

naive diversification strategies in defined contribution saving plans there is a worldwide trend toward defined contribution saving plans and growing interest in privatized social security plans in both environments individuals are given some responsibility to make their own asset allocation decisions raising concerns about how well they do at this task this paper investigates one aspect of the task namely diversification it is shown that some investors follow the 1 n strategy they divide their contributions evenly across the funds offered in the plan consistent with this naive notion of diversification it is found that the proportion invested in stocks depends strongly on the proportion of stock funds in the plan

behavioral portfolio theory we develop a positive behavioral portfolio theory bpt and explore its implications for portfolio construction and security design the optimal portfolios of bpt investors resemble combinations of bonds and lottery tickets consistent with friedman and savage s 1948 observation we compare the bpt efficient frontier with the mean variance efficient frontier and show that in general the two frontiers do not coincide optimal bpt portfolios are also different from optimal capm portfolios in particular the capm twofund separation does not hold in bpt we present bpt in a single mental account version bpt sa and a multiple mental account version bpt ma bpt sa investors integrate their portfolios into a single mental account while bpt ma investors segregate their port folios into several mental accounts bpt ma portfolios resemble layered pyramids where layers are associated with aspirations we explore a two layer portfolio where the low aspiration layer is designed to avoid poverty while the high aspiration layer is designed for a shot at riches

preservation of more risk averse under expectations abstract the preservation of risk aversion properties of utility functions under expectation operations is of interest in the study of derived utility functions in sequential decision problems and in problems with multiple contemporaneous sources of uncertainty the purpose of this note is to present sufficient conditions for the pratt relation more risk averse to be preserved under expectations

extreme us stock market fluctuations in the wake of 9 11 we apply extreme value analysis to us sectoral stock indices in order to assess whether tail risk measures like value at risk and extremal linkages were significantly altered by 9 11 we test whether semi parametric quantile estimates of downside risk and upward potential have increased after 9 11 the same methodology allows one to estimate probabilities of joint booms and busts for pairs of sectoral indices or for a sectoral index and a market portfolio the latter probabilities measure the sectoral response to macro shocks during periods of financial stress so called tail s taking 9 11 as the sample midpoint we find that tail s often increase in a statistically and economically significant way this might be due to perceived risk of new terrorist attacks copyright 2008 john wiley sons ltd

investment behavior under knightian uncertainty an evolutionary approach abstract the as if view of economic rationality defends the profit maximization hypothesis by pointing out that only those firms who act as if they maximize profits can survive in the long run recently the problem of arriving at a logically consistent definition of rational behavior in games has shown that one must sometimes study explicitly the evolutionary processes that form the basis of this view the purpose of this paper is to investigate the usefulness of genetic programming as a tool for generating hypotheses about rational behavior in situations where explicit maximization is not well defined we use an investment decision problem with knightian uncertainty as a borderline test case and show that when the artificial agents receive the same information about the unknown probability distributions they develop behavior rules as if they were expected utility maximizers with bayesian learning rules

incentives for technological development bat is bad this paper examines the effect of environmental regulation on a firm s incentives to invest in developing cheaper clean up technologies in a model where consumers are willing to pay for environmentally clean technologies it focuses on two types of policies a bat based policy and a commitment policy in the former policy the standard is based on the best available technology bat where the regulator re optimizes environmental regulation in response to new technologies however under a commitment policy the regulator announces a regulation and sticks to it irrespective of the firm s adopted technology the paper finds that cleaner technologies are not adopted if the regulator announces a bat based policy a commitment policy not only leads to positive investment in research and development but is also welfare improving

homeownership and investment in risky assets abstract this paper uses the 1989 survey of consumer finances to show that committed expenditures related to homeownership cause agents to hold their financial assets in a safe form this work follows theoretical results by fratantoni 5 which show that the mortgage commitment leads to reduced risky asset holding and empirical results by guisoet al 7 which show that agents with uncertain labor income hold fewer risky assets i find that doubling the median homeowner s mortgage payment income ratio leads to a 15 decrease in the risky share

portfolio selection with mental accounts and background risk abstract das et al 2010 develop a model where an investor divides his or her wealth among mental accounts with motives such as retirement and bequest nevertheless the investor ends up selecting portfolios within mental accounts and an aggregate portfolio that lie on the mean variance frontier importantly they assume that the investor only faces portfolio risk in practice however many individuals also face background risk accordingly our paper expands upon theirs by considering the case where the investor faces background risk our contribution is threefold first we provide an analytical characterization of the existence and composition of the optimal portfolios within accounts and the aggregate portfolio second we show that these portfolios lie away from the mean variance frontier under fairly general conditions third we find that the composition and location of such portfolios can differ notably from those of portfolios on the mean variance frontier

portfolio selection through maslow s need hierarchy theory inspired by maslow s need hierarchy theory we construct a new portfolio selection framework using the bi level optimization technique in which the lower level need relates to safety low risk whi

mental accounting in portfolio choice evidence from a flypaper effect this paper documents a lack of coordination between the asset allocations of different financial accounts in a household portfolio our findings are predicted by the theory of mental accounting richard h thaler 1985 1990 1999 agents sometimes make decisions about individual accounts in their portfolio without considering their other accounts the setting for our analysis is a large u s firm when an employee at this firm makes a 401 k contribution the company makes a matching contribution proportional to the employee s contribution up to a match threshold in march 2003 the firm changed its 401 k matching rules creating a natural experiment both before and after the rule change the initial allocation of participants own contribution flows was determined by the participants 1 the change in march 2003 was to the policy determining the initial asset allocation of the employer match contributions in the first regime before march 2003 the firm directed matching contribution flows entirely into employer stock this was not a binding restriction as participants could freely reallocate their match balances after matching contributions were made although in practice participants rarely did so in march 2003 the company changed its match policy requiring new enrollees to actively choose the asset allocation for both their own and match contribution flows the change between these regimes was economically neutral any allocation of balances in one regime could be replicated in the other nevertheless allocations to employer stock differed vastly across the two regimes employees who enrolled in february 2003 just before the regime change allocated 23 of their own contribution flows to employer stock since all of their match contributions were directed into employer stock this resulted in a 56 total 401 k allocation to employer stock combining the own contribution and match contribution accounts few of these february enrollees made subsequent trades to reduce their employer stock balances in either account employees who enrolled in march 2003 right after the change allocated 23 of their total own plus match contribution flows to employer stock notice that own contribution allocations to employer stock in the first regime precisely match the combined allocation of own and match contributions in the second regime 23 in both cases even though combined allocations differ greatly across the regimes these results imply that each dollar of employer stock contributed to enrollees through the match in the first regime increased the employees total holdings of employer stock by a full dollar rather than being offset by reduced employer stock holdings elsewhere or being sold off directly in other words money sticks where it hits a phrase attributed to arthur okun generating an asset allocation flypaper effect that is akin to the flypaper effects of public finance corporate finance and intra household consumption 2 after considering several explanations for the asset allocation flypaper effect we conclude that it is due in part to mental accounting our results can be explained by the following simple model in the first regime new enrollees actively allocated only their own contribution flows effectively ignoring the fact that their matching contributions were entirely directed into employer stock in the second regime the match allocation became salient because new enrollees were required to choose both their match and own contribution allocations during the enrollment process this caused enrollees to consider their entire 401 k portfolio instead of just their own contribution accounts as a result the fraction of total contributions allocated to employer stock under the second regime equaled the fraction of own contribution flows allocated to employer stock under the first regime the average participant allocated roughly one quarter of assets to employer stock in whatever accounts were salient whether the set of salient accounts was narrow regime one or broad regime two the dependence of portfolio outcomes on account salience is inconsistent with investors having a clear target asset allocation for their entire portfolio which they efficiently implement through their investment choices in accordance with much prior research we also find that investors are quite passive rarely reallocating their portfolios 3 however our central finding concerns asset allocation decisions made at enrollment a point when people have overcome their passivity and are taking action investor passivity thus cannot account for the unresponsiveness of own contribution allocations to the match allocation at enrollment under the first regime although passivity helps explain why these initial decisions are rarely reversed subsequently

international portfolio selection with exchange rate risk a behavioural portfolio theory perspective abstract this paper analyzes international portfolio selection with exchange rate risk based on behavioural portfolio theory bpt we characterize the conditions under which the bpt problem with a single foreign market has an optimal solution and show that the optimal portfolio contains the traditional mean variance efficient portfolio without consideration of exchange rate risk and an uncorrelated component constructed to hedge against exchange rate risk we illustrate that the optimal portfolio must be mean variance efficient with exchange rate risk while the same is not true from the perspective of local investors unless certain conditions are satisfied we further establish that international portfolio selection in the bpt with multiple foreign markets consists of two sequential decisions investors first select the optimal bpt portfolio in each market overlooking covariances among markets and then allocate funds across markets according to a specific rule to achieve mean variance efficiency or to minimize the loss in efficiency

why do so few hold stocks the authors investigate why 75 percent of u s households do not hold stocks despite the equity premium and predictions of expected utility models the question is relevant for privatization asset pricing and tax progressivity issues they show that risk aversion per se heterogeneity of beliefs habit persistence time nonseparability and quantity constraints on borrowing do not account for the phenomenon a wedge between borrowing and lending rates and minimum investment requirements are plausible but empirically weak factors more promising explanations are inertia and departures from expected utility maximization there is also qualified support for nondiversifiable income risk as a contributing factor copyright 1995 by royal economic society

background risk and university endowment funds abstract this paper tests the effect of background risk on university endowment portfolios where background risk is defined as the volatility of universities nonfinancial income the results show that higher background risk is associated with lower portfolio standard deviations universities with higher background risk invest significantly more in fixed income and less in alternative assets a 1 standard deviation increase in background risk increases the allocation to fixed income by approximately 15 relative to the mean there is also evidence that wealthier highly selective universities hold riskier portfolios

owner occupied housing and investment in stocks an empirical test abstract this paper analyzes the empirical link between housing investment and stockholding by testing implications of the model of flavin and yamashita american economic review 92 2002 345 362 their model illustrates how the house to net worth ratio influences a homeowner s portfolio composition regression estimates suggest that there is a strong relationship between housing investment and stockholding and the house to net worth ratio could explain certain heterogeneity in stockholding households with a high house to net worth ratio hold a lower proportion in stocks the results support the hypothesis that overinvestment in housing affects financial portfolio of homeowners

dynamic incentives by environmental policy instruments a survey abstract in this paper i survey and discuss recent developments on the incentives provided by environmental policy instruments for both adoption and development of advanced abatement technology a main conclusion to be drawn from the literature is that under competitive conditions market based instruments usually perform better than command and control moreover taxes may provide stronger long term incentives than tradable permits if the regulator is myopic if the government can anticipate new technology or is able to react on it optimally regulatory policies by virtue of administered prices taxes and policies by setting quantities issuing tradable permits are almost equivalent the literature also shows that under competitive conditions there is no difference between auctioning permits and grandfathering moreover timing and commitment of environmental policy is not crucial for adoption under competitive conditions commitment has positive incentive effects however if an r d sector has market power in the presence of market imperfections the ranking of the different policy instruments is ambiguous

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

effects of background risks on cautiousness with an application to a portfolio choice problem we provide necessary and sufficient conditions on an individual s expected utility function under which any zero mean idiosyncratic risk increases cautiousness the derivative of the reciprocal of the absolute risk aversion which is the key determinant for this individual s demand for options and portfolio insurance