a behavioral framework for time diversification the box of factors that we call risk is both too large and too small the box is large enough to include many sometimes conflicting measures of risk variance and semivariance probabilities of losses and their amounts but the box is too small to include factors that affect choices but fall outside the boundaries of risk frames and cognitive errors self control and regret we explore the role of these factors in time diversification the belief that time diversification reduces risk underlies the current drive to invest social security funds in stocks but is such investment prudent we discuss the role of advisors in providing prudent advice changes in the standards of prudence over time the use of time diversification in guiding investors to prudent portfolios and its use in the current debate on social security

risk sharing by households within and across regions and industries abstract cochrane 1991 journal of political economy 99 957 976 and mace 1991 journal of political economy 99 928 956 test if risk sharing across households is complete in the sense that household consumption moves one for one with aggregate consumption in their studies the source of income risk is idiosyncratic and agents can share risk across the entire economy using a sample of households from the panel study on income dynamics psid we explore whether households share the risk associated with their industries and regions across households in other regions and industries we find that a large fraction of risk faced by households is not shared across regions and industries

planning of renewables schemes deliberative and fair decision making on landscape issues instead of reproachful accusations of non cooperation abstract the main issues related to successful implementation policies concern the socio economic institutions that are conditional to planning in the energy policy domain but also in the domain of spatial planning successful investments and the siting of renewable power plants eventually determine the success rate of national efforts in establishing renewable capacity central planning usually has several objectives and these often have a detrimental effect on the goal of renewable energy application current problems related to implementation decisions concerning wind power schemes are an example to those who will be faced by other renewable power plants notably biomass regarding community acceptance of wind power schemes the visual evaluation of the impact of wind power on the values of the landscape is by far the most dominant factor in explaining opposition or support type of landscape fully overshadows other attitudinal attributes as well as other visual and scenic factors such as the design of wind turbines and wind farms and the number and the size of turbines planning regimes and decision making practices that really enhance the implementation processes of renewable energy require strong ecological modernization this means institutional changes that create involvement and trust of actors at the actual implementation level local opposition cannot be explained by the egotistical motives of local residents when the inclination to behave according to supposed backyard motives is investigated the scale to measure this phenomenon appears to indicate commitment to equity issues and fairness of decision making hence for wind power local involvement to represent the local values of site specific landscapes is crucial for other renewables the source specific features are different but conflicts can be expected as well because the fairness of implementation decisions will be equally significant

risk rationality and time diversification the validity of the concept of time diversification is the subject of long running debate supporters of the concept argue that risk decreases as investment horizon increases detractors suggest that the concept is false on the face of it we argue that time diversification is consistent both theoretically and empirically with current conceptions of risk and rationality and we also note the implications of changes in investment horizon for stock market behavior

on the risk of stocks in the long run a note in a recent article in this journal zvi bodie used a simplified black scholes model to prove that the cost of insuring a long term stock portfolio against earning less than the risk free rate increases over time bodie believes that this means the risk of investing in common stocks increases over time and that the conventional wisdom of the investment community concerning time diversification is a fallacy bodie s proof relies on a constant standard deviation for common stock over all holding periods this assumption however may not be appropriate for long term stock portfolios this article is not available online

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

factor and spread analysis of the convertible securities market factor decomposition demonstrates that during certain time periods the convertible market has offered excess returns over a well allocated bond equity portfolio moreover because the magnitude of these returns spans a wide range of values investors can use this valuation framework as a tool for estimating the relative attractiveness of convertibles compared with their underlying equity and fixed income components analysis of yield spreads demonstrates the changing nature of valuation levels embedded in convertible securities a factor analysis of a market weighted equity index underlying convertibles shows that their equity component is well diversified across two major dimensions value versus growth and large cap versus small cap

mean var portfolio optimization a nonparametric approach portfolio optimization involves the optimal assignment of limited capital to different available financial assets to achieve a reasonable trade off between profit and risk we consider an alternative markowitz s mean variance model in which the variance is replaced with an industry standard risk measure value at risk var in order to better assess market risk exposure associated with financial and commodity asset price fluctuations realistic portfolio optimization in the mean var framework is a challenging problem since optimizing var leads to a non convex np hard problem which is computationally intractable in this work an efficient learning guided hybrid multi objective evolutionary algorithm mode gl is proposed to solve mean var portfolio optimization problems with real world constraints such as cardinality quantity pre assignment round lot and class constraints a learning guided solution generation strategy is incorporated into the multi objective optimization process to promote efficient convergence by guiding the evolutionary search towards promising regions of the search space the proposed algorithm is compared against the non dominated sorting genetic algorithm nsga ii and the strength pareto evolutionary algorithm spea2 experimental results using historical daily financial market data from s p 100 and s p 500 indices are presented experimental results shows that mode gl outperforms two existing techniques for this important class of portfolio investment problems in terms of solution quality and computational time the results highlight that the proposed algorithm is able to solve the complex portfolio optimization without simplifications while obtaining good solutions in reasonable time and has significant potential for use in practice

monetary conditions and international investing we examine the relationship between monetary conditions and global stock returns previous studies established that u s stock returns during expansive u s monetary periods are significantly higher than returns during restrictive periods we found that this pattern prevails in non u s markets furthermore the pattern exists relative to both local and u s monetary conditions by examining several investment strategies we show that investors could have improved portfolio performance in the period studied by using both u s and local monetary conditions to guide their portfolio allocations using monetary conditions to determine portfolio composition would have been consistently beneficial throughout the past 30 years

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

interest rate rules for fixed exchange rate regimes abstract this paper shows that properly designed interest rate rules can be consistent with maintaining exchange rate stability it sheds light on the relation between interest rate rules exchange rate regimes and determinacy of the rational expectation equilibrium in a modern macroeconomic framework

patterns of acceptance and non acceptance within energy landscapes a case study on wind energy expansion in austria abstract wind energy is a key technology in the transition toward a low carbon society but acceptance is considered to be a constraining factor in achieving ambitious wind deployment targets based on an austrian case study this paper investigates eight decisive patterns of acceptance and non acceptance of wind energy we apply qualitative research methods such as interviews focus groups and worldcafe discussions with stakeholders on the national level and with citizens and local decision makers at potential wind power expansion sites the results show that local opposition to wind energy cannot be explained by single factors but is caused by a complex set of individual and collective preferences rooted in institutional and socio political arrangements the problem concerning these conflicting patterns is that they are trapped in often opposing or confronting policy core beliefs which are unlikely to change hence it is necessary to appeal to overarching targets like the claims of environmental justice to counterbalance the impacts of wind energy we conclude that there is a strong demand for fair decision making processes and an equal distribution of environmental and economic gains and losses this article is part of a virtual special issue entitled the collaborative making of energy landscapes

the role of the exchange rate in monetary policy rules for a country that chooses not to permanently fix its exchange rate through a currency board or a common currency or some kind of dollarization the only alternative monetary policy that can work well in the long run is one based on the trinity of i a flexible exchange rate ii an inflation target and iii a monetary policy rule while not often put into this threepart format the desirability of such a monetary policy in an open economy is in my view the clear implication of three corresponding strands of recent monetary research i research on fixed exchange rates regimes including the influential 1995 article the mirage of fixed exchange rates by maurice obstfeld and kenneth rogoff and the many analyses of the breakdown of fixed exchange rate regimes in the late 1990 s ii research on the practical success with inflation targeting by ben bernanke et al 1999 and iii research on the benefits of simple monetary policy rules see e g taylor 1999a this clear policy implication however does not end the debate about how exchange rates should be taken into account in formulating monetary policy even if one excludes capital controls and sterilized exchange market intervention from consideration because they are not effective or attractive ways to de link exchangerate movements from the domestic interest rate a crucial question remains how should the instruments of monetary policy the interest rate or a monetary aggregate react to the exchange rate should policymakers avoid any reaction and focus instead on domestic indicators such as inflation and real gdp or is the rule of thumb that a substantial appreciation of the real exchange rate furnishes a prima facie case for relaxing monetary policy as characterized by obstfeld and rogoff 1995 p 93 a better monetary policy rule or perhaps policymakers should heed the obstfeld rogoff warning that substantial departures from ppp purchasing power parity in the short run and even over decades make such a policy reaction to the exchange rate undesirable more generally if one accepts the trinity concept of monetary policy in an open economy then what is the role of the exchange rate in the monetarypolicy rule

community perspectives of wind energy in australia the application of a justice and community fairness framework to increase social acceptance decisions concerning the siting of infrastructure developments or the use of natural resources have the potential to damage a community s social well being if the outcomes are perceived to be unfair justice is accepted as central to the well functioning of society with fairness being an expectation in day to day interactions outcomes that are perceived to be unfair can result in protests damaged relationships and divided communities particularly when decisions are made which benefit some sections of the community at the perceived expense of others through empirical research using a wind farm pilot study community perceptions of a community consultation process are explored using procedural justice principles to evaluate fairness findings from the pilot study indicate that perceptions of fairness do influence how people perceive the legitimacy of the outcome and that a fairer process will increase acceptance of the outcome a key research finding was that different sections of a community are likely to be influenced by different aspects of justice namely by outcome fairness outcome favourability and process fairness based on this finding a community fairness framework was developed which has potential application in community consultation to increase social acceptance of the outcome

real wage rigidities and the new keynesian model most central banks perceive a trade off between stabilizing inflation and stabilizing the gap between output and desired output however the standard new keynesian framework implies no such trade off in that framework stabilizing inflation is equivalent to stabilizing the welfare relevant output gap in this paper we argue that this property of the new keynesian framework which we call the divine coincidence is due to a special feature of the model the absence of nontrivial real imperfections we focus on one such real imperfection namely real wage rigidities when the baseline new keynesian model is extended to allow for real wage rigidities the divine coincidence disappears and central banks indeed face a trade off between stabilizing inflation and stabilizing the welfare relevant output gap we show that not only does the extended model have more realistic normative implications but it also has appealing positive properties in particular it provides a natural interpretation for the dynamic inflation unemployment relation found in the data

wind power implementation the nature of public attitudes equity and fairness instead of backyard motives abstract public attitudes anywhere in europe show moderate to strong support for the implementation of renewable energy nevertheless planning wind power developments appears to be a complicated matter in most countries the problems that have to be dealt with during decision making processes on the siting of wind turbines are usually referred to as mere communication problems however public attitudes towards wind power are fundamentally different from attitudes towards wind farms this gap causes misunderstandings about the nature of public support for renewables in particular where planners easily assume support for renewables can be generated by information campaigns emphasising the environmental benefits whereas opposition to renewable energy schemes can be explained by a selfish not in my backyard attitude both explanations used by planners authorities and unfortunately by many scholars are falsified furthermore policies that still take this common knowledge for granted can have negative consequences for the implementation rates of renewables visual evaluation of the impact of wind power on landscape values is by far the dominant factor in explaining why some are opposed to wind power and others are supporting it moreover feelings about equity and fairness appear the determinants of backyard motives instead of selfishness

channels of interstate risk sharing united states 1963 1990 we develop a framework for quantifying the amount of risk sharing among states in the united states and construct data that allow us to decompose the cross sectional variance in gross state product into several components which we refer to as levels of smoothing we find that 39 percent of shocks to gross state product are smoothed by capital markets 13 percent are smoothed by the federal government and 23 percent are smoothed by credit markets the remaining 25 percent are not smoothed we also decompose the federal government smoothing into subcategories taxes transfers and grants to states

estimating new keynesian phillips curves a full information maximum likelihood approach abstract the new keynesian phillips curve has recently become an important ingredient in monetary policy models however using limited information methods the empirical support for the new keynesian phillips curve appear to be mixed this paper argues by means of monte carlo simulations with a simple new keynesian sticky price model that single equations methods e g gmm are likely to produce imprecise and biased estimates then it is argued that estimating the model with full information maximum likelihood fiml is a useful way of obtaining better estimates finally a version of the model used in the monte carlo simulations is estimated on u s data with fiml and although the pure forward looking new keynesian phillips curve is rejected a version with both forward and backward looking components provides a reasonable approximation of u s inflation dynamics

nimby or not exploring the relevance of location and the politics of voiced opinions in renewable energy siting controversies local protests against renewable energy facilities have added fuel to the debate about the so called nimby not in my back yard effect this paper identifies six variables that can hamper the comparison between different public perception studies and offers two broad conclusions on aggregate proximity does have strong influence on public attitudes to proposed projects but the nature strength and spatial scale of this effect may vary according to local context and value of the land residents of stigmatised places are more likely to welcome facilities that are relatively green while people who derive a more positive sense of identity from particular rural landscapes are likely to resist such potential developments especially if they also live there secondly the fear of being branded a nimby and the positive ethics associated with the notion of renewable are both likely to colour the responses of many interviewees these aspects need to be clarified and accounted for in analyses of elicited responses both quantitative and qualitative if we are to improve our understanding of the social construction of individual attitudes in siting conflicts

time diversification and estimation risk the recommendation that investors with long investment horizons tilt their portfolios toward stocks is commonplace we used a nonparametric bootstrap approach to investigate whether in a mean variance efficient portfolio the weights for u s stocks and u s t bills vary in a systematic manner with investment horizon this approach allowed us to analyze the impact of estimation risk on the optimal weights of stocks and fixed income securities the results show that an investor can gain from time diversification the weights for stocks in an efficient portfolio were significantly larger for long investment horizons than a one year horizon

the determinants of cross border equity flows abstract we explore a new panel data set on bilateral gross cross border equity flows between 14 countries 1989 1996 we show that a gravity model explains international transactions in financial assets at least as well as goods trade transactions gross transaction flows depend on market size in source and destination country as well as trading costs in which both information and the transaction technology play a role distance proxies some information costs and other variables explicitly represent information transmission an information asymmetry between domestic and foreign investors and the efficiency of transactions the geography of information is the main determinant of the pattern of international transactions while there is weak support in our data for the diversification motive once we control for the informational friction we broaden the scope of our results by presenting some evidence linking the results on equity transactions to equity holdings

optimal guaranteed return portfolios and the casino effect in this paper we address the problem of determining optimal portfolios that may include options in a framework of return maximization with risk constraints relative to a benchmark as well as in terms of absolute returns the model we propose allows for deterministic constraints as well as probabilistic constraints we derive properties of optimal and feasible portfolios and present a linear programming model to solve the problem the optimal portfolios have payoff functions that reflect a gambling policy we show that optimal solutions to a large class of portfolio models that maximize expected return subject to downside risk constraints are driven by this casino effect and present tractable conditions under which it occurs in our model we propose to control the casino effect by using chance constraints using results from financial theory we formulate an lp model that maximizes expected return subject to worst case return constraints and chance constraints on achieving prespecified levels of return the results are illustrated with real life data on the s p 500 index

asset pricing in a generalized mean lower partial moment framework theory and evidence a new asset pricing model that generalizes earlier results in the downside risk literature is developed and empirically tested using a multivariate approach by specifying risk as deviations below any arbitrary target rate of return the generalized mean lower partial moment mlpm model overcomes the limited appeal of earlier formulations and moreover a large class of extant pricing models using alternative risk measures variance semivariance semideviation probability of loss etc becomes special cases of the new framework empirical tests indicate that the new model cannot be rejected against an unspecified alternative for a large set of target rates of return the traditional capm on the other hand is rejected as a well specified alternative the mlpm target rates inferred from market data appear to be related to equity market mean returns rather than to the riskfree rate the target rate that is implicit in the capm and explicit in earlier downside risk formulations the attractiveness of downside risk measures for decision making purposes has been noted in the financial economic literature for over a quarter of a century 1 risk from this perspective is measured in terms of deviations below some exogenously prespecified target rate of return and a formal analysis of these risk measures for various utility functions has been presented by bawa 1975 in terms of the lower partial moment lpm of the asset distributions the appeal of these risk measures has been based in part on their consistency with the way individuals actually perceive risk notwithstanding its intuitive appeal this area of research has been virtually neglected in recent years we believe that this disaffection with downside risk models tends from two sources first earlier models of this genre exogenously specify the target rate to equal the risk free interest rate in the absence of a satisfactory theory for explaining how investors establish their target rates this assumption as argued herein has been motivated more by technical reasons than economic considerations second empirical tests

intranational business cycles in the united states abstract we established a comprehensive set of stylized facts for intranational business cycles across states and regions in the u s notable findings are that the cross correlations of our consumption measure is much less than that for output and the volatility of the real exchange rate between states is much less than that for output these findings are contrasted with the quantity and price anomalies found in international business cycle data additional results for labour and non labour earnings suggest that the observed amount of intratemporal risk sharing is quite limited as compared to that for intertemporal risk sharing

on the risk of stocks in the long run a resolution to the debate in response to the ongoing debate in this journal about whether the risk of investments in the stock market is increased or decreased by lengthening the investment period we show that bodie s attempt to identify market risk with the price of put options leads to a circular argument within the workings of arbitrage free option pricing models thus bodie failed to rebut the conventional view that longer investment horizons may be thought of as less risky bodie s put option prices are relevant however to determining market prices of stock investment insurance

intrinsic inflation persistence empirical evidence suggests that inflation determination is not purely forward looking but models of price setting have struggled to rationalize this finding without directly assuming backward looking pricing rules for firms this paper shows that intrinsic inflation persistence can be explained with no deviation from optimizing forward looking behaviour if prices that have remained fixed for longer are more likely to be changed than those set recently a relationship between the probability of price adjustment and the duration of a price spell is shown to imply a simple hybrid phillips curve including lagged and expected inflation which is estimated using macroeconomic data

the time diversification controversy some financial theorists reject the widely held practitioner belief in time diversification the theorists argue that given serially uncorrelated returns holding a risky asset over longer periods of time will not reduce its inherent riskiness the argument is supported by references to economic models of risk aversion such as mean variance optimization and expected utility theory mean variance optimizers however are not indifferent to investment horizon and investment horizon indifference is only a special case within expected utility theory furthermore to the extent that models reject the notion of time diversification they are inadequate because they are inconsistent with common sense measures of risk at very long horizons

social acceptance of renewable energy innovation an introduction to the concept this paper introduces the special issue on social acceptance of renewable energy innovation it is a collection of best papers presented at an international research conference held in tramelan switzerland in february 2006 while there are ambitious government targets to increase the share of renewable energy in many countries it is increasingly recognized that social acceptance may be a constraining factor in achieving this target this is particularly apparent in the case of wind energy which has become a subject of contested debates in several countries largely due to its visual impact on landscapes this paper introduces three dimensions of social acceptance namely socio political community and market acceptance factors influencing socio political and community acceptance are increasingly recognized as being important for understanding the apparent contradictions between general public support for renewable energy innovation and the difficult realization of specific projects the third dimension market acceptance has received less attention so far and provides opportunities for further research particularly from management scholars

misconceptions about optimal equity allocation and investment horizon our analysis and results offer some resolution to a debate that has continued for 30 years we demonstrate that in contrast to prior claims no conflict exists between the implications of economic models of choice under uncertainty and a rational investor preference for larger equity allocations at longer investment horizons using examples of expected utility of wealth and mean variance utility we show that the effect of a longer horizon on risky asset allocation is consistent with increasing or decreasing optimal equity allocations even under the assumption of constant relative risk aversion

fiscal flows in the united states and canada lessons for monetary union in europe regional flows of federal taxes and transfers within the united states and canada are used to analyze long term fiscal flows the redistributive element and short term responses to regional business cycles the stabilization element in the united states long run flows amount to 22 cents in the dollar while the stabilization effect is 31 cents in the dollar in canada the redistributive effect is larger 39 cents and the stabilization effect smaller 17 cents federal flows appears to depend on the institutional structure of the country concerned however in both countries the redistributive element is considerably larger than the amounts involved in the ec structural funds program as for stabilization national fiscal policies in the ec appear to have been as effective as federal governments in the united states and canada in cushioning shocks to incomes

an improved immunization strategy m absolute current immunization models have limited power in interest rate risk protection a new approach entitled m absolute is designed to provide powerful and practical single risk measure immunization in particular circumstances m absolute is similar to m square but is derived as a first order lower bound immunization risk model like duration m absolute can be implemented as a simple single risk measure immunization model m absolute of a bond is defined as the weighted average of the absolute distances of the bond s cash flows from a horizon point even though it is a single risk measure m absolute can act effectively to reduce the impacts of several types of interest rate risks rather than hedge against only a single type of term structure shift empirical tests show that m absolute reduces the interest rate risk inherent in the traditional duration model by more than half these results are independent of the particular time period chosen

borders and nominal exchange rates in risk sharing models of risk sharing predict that relative consumption growth rates are positively related to changes in real exchange rates we investigate this hypothesis using a new multicountry and multiregional data set within countries we find evidence for risk sharing episodes of high relative regional consumption growth are associated with regional real exchange rate depreciation across countries however the association is reversed relative consumption and real exchange rates are negatively correlated we define this reversal as a border effect we find the border effect and show that it accounts for over half of the deviations from full risk sharing since cross border real exchange rates involve different currencies it is natural to ask how much of the border effect is accounted for by movements in exchange rates our measures indicate that a large part of the border effect comes from nominal exchange rate fluctuations we develop a simple open economy model that is consistent with the importance of nominal exchange rate variability in accounting for deviations from cross country risk sharing

asset allocation in a downside risk framework 1991 asset allocation in a downside risk framework financial analysts journal vol 47 no 5 pp 28 40

understanding the backus smith puzzle it s the nominal exchange rate stupid backus kehoe and kydland bkk 1992 showed that if international capital markets are complete consumption growth correlations across countries should be higher than their corresponding output growth correlations in stark contrast to the theory however in actual data the consumption growth correlation is lower than the output growth correlation by assuming trade imperfections due to non traded goods backus and smith 1993 showed that there is an additional impediment that works to lower the consumption growth correlation while backus and smith s argument was successful in partially explaining the low growth correlation puzzle it contributed to generating another puzzle because the data forcefully showed that consumption growth is negatively correlated with the real exchange rate which is a violation of the theory in this paper by decomposing the real exchange rate growth of the oecd countries into the nominal exchange rate growth and the inflation differential we find that nominal exchange rate movements are the main source for the backus smith puzzle we find that the nominal exchange rate moves counter cyclically with consumption movements which is a violation of the risk sharing theory with non traded goods we also find that the violations are more pronounced when nominal exchange rate changes are larger in absolute value in contrast the negative of bilateral inflation differentials is positively correlated with bilateral consumption movements the latter finding is in accordance with the theory furthermore using intranational data for the united states where the nominal exchange rate is constant the backus smith puzzle disappears although complete risk sharing is rejected

five facts about prices a reevaluation of menu cost models are price decreases 3 the frequency of price increases covaries strongly with inflation whereas the frequency of price decreases and the size of price increases and price decreases do not 4 the frequency of price change is highly seasonal it is highest in the first quarter and then declines 5 we find no evidence of upwardsloping hazard functions of price changes for individual products we show that the first second and third facts are consistent with a benchmark menu cost model whereas the fourth and fifth facts are not

consumption and real exchange rates in dynamic economies with non traded goods abstract we examine the possibility that non traded goods may account for several striking features of international macroeconomic data large persistent deviations from purchasing power parity small correlations of aggregate consumption fluctuations across countries and substantial international real interest rate differentials a dynamic exchange economy is used to show that non traded goods in principle can account for each of these phenomena in the theory there is a close relation between fluctuations in consumption ratios and those in bilateral real exchange rates but we find little evidence for this relation in time series data for eight oecd countries

investments with downside insurance and the issue of time diversification of two insurance policies that guarantee the same minimum rate of return on a portfolio and differ only in their time horizons which is riskier this study shows that if the minimum rate is lower than the risk free rate and if the risk is measured by the cost of insurance then the degree of risk is not a monotonic function of the policy s time horizon for every positive level of concession rate defined as the risk free rate minus the insured rate the cost of such insurance peaks at a finite time horizon this peak cost horizon is typically between 5 and 15 years the higher the concession rate or the lower the volatility of the insured portfolio the shorter this peak cost time horizon is thus although a 5 year insurance policy can be much riskier than a 1 year policy it can also be riskier than a 30 year policy

regional non adjustment and fiscal policy asymmetric shocks regional non adjustment and fiscal policy how will countries handle idiosyncratic macroeconomic shocks under the single currency since the regional adjustment patterns currently prevailing within european currency unions are likely to prevail at the national level under the single currency looking at the ways in which european countries react to internally asymmetric shocks today provides a good preview for the answer to that question in this paper we compare the usa with germany italy and the uk and with canada which is closer to europe than the usa in its labour market and fiscal institutions europe s and to some extent canada s model of regional response differs from that of the usa changes in regional real exchange rates are small in all countries outside of the usa however there is more reliance on interregional transfer payments less on labour migration and the pace of regional adjustment appears to be slower if emu aims at the same degree of economic and social cohesion that its constituent nations enjoy today this suggests that its members may find it hard to resist the eventual extension of existing eu mechanisms of income redistribution a transfer union we propose an alternative strategy based on a relaxed stability pact further strictures against central eu borrowing labour market and fiscal reform and the issuance by individual member states of debt indexed to nominal gdp maurice obstfeld and giovanni peri

limited asset market participation and the consumption real exchange rate anomaly under efficient consumption risk sharing as assumed in standard international business cycle models a country s aggregate consumption rises relative to foreign consumption when the country s real exchange rate depreciates yet empirically relative consumption and the real exchange rate are essentially uncorrelated i show that this consumption real exchange rate anomaly can be explained by a simple model in which a subset of households trade in complete financial markets while the remaining households lead hand to mouth htm lives htm behavior also generates greater volatility of the real exchange rate and of net exports which likewise brings the model closer to the data

multi period stochastic optimization models for dynamic asset allocation abstract institutional investors manage their strategic asset mix over time to achieve favorable returns subject to various uncertainties policy and legal constraints and other requirements one may use a multi period portfolio optimization model in order to determine an optimal asset mix the concept of scenarios is typically employed for modeling random parameters in a multi period stochastic programming model and scenarios are constructed via a tree structure recently an alternative stochastic programming model with simulated paths was proposed by hibiki hibiki n 2001b a hybrid simulation tree multi period stochastic programming model for optimal asset allocation in takahashi h ed the japanese association of financial econometrics and engineering jafee journal 89 119 in japanese hibiki n 2003 a hybrid simulation tree stochastic optimization model for dynamic asset allocation in scherer b ed asset and liability management tools a handbook for best practice risk books pp 269 294 and it is called a hybrid model the advantage of the simulated path structure compared to the tree structure is to give a better accuracy to describe uncertainties of asset returns in this paper we compare the two types of multi period stochastic optimization models and clarify that the hybrid model can evaluate and control risk better than the scenario tree model using some numerical tests according to the numerical results an efficient frontier of the hybrid model with the fixed proportion strategy dominates that of the scenario tree model when we evaluate them on simulated paths moreover optimal solutions of the hybrid model are more appropriate than those of the scenario tree model

risk sharing within the united states what do financial markets and fiscal federalism accomplish we measure income uncertainty at the level of u s states and the extent to which it has been reduced through risksharing using a method recently developed by athanasoulis and van wincoop 2000 risk is measured as the standard deviation of state specific income growth uncertainty measured by using the error term of a regression of income growth on variables in the information set risk sharing is measured by the extent to which this standard deviation has been reduced through financial markets and federal fiscal policy the advantage of this measure over the existing risk sharing literature is that the interpretation does not depend on many auxiliary assumptions our findings on the extent of risk sharing are insensitive to the only assumption we need to make the variables that are in the information set we find that the standard deviation of state specific income growth uncertainty is reduced by less than half through financial markets and federal fiscal policy we show that the extent of risk sha

integrated portfolio management with options in this paper we examine the problem of managing portfolios consisting of both stocks and options for the simultaneous optimization of stock and option positions we base our analysis on the generally accepted mean variance framework first we analyze the effects of options on the mean variance efficient frontier if they are considered as separate investment alternatives due to the resulting asymmetric portfolio return distribution mean variance analysis will be not sufficient to identify optimal optioned portfolios additional investor preferences which are expressed in terms of shortfall constraints allow a more detailed portfolio specification under a mean variance and shortfall preference structure we then derive optioned portfolios with a maximum expected return to circumvent the technical optimization problems arising from stochastic constraints we use an approximation of the return distribution and develop economically meaningful conditions under which the complex optimization problem can be transformed into a linear problem being comparably easy to solve empirical results based on both empirical market data and monte carlo simulations illustrate the portfolio optimization procedure with options

asymmetric shocks among u s states abstract the paper applies a factor model to the study of risk sharing among u s states the factor model makes it possible to disentangle movements in output and consumption due to national regional or state specific business cycles from those due to measurement error the results of the paper suggest that some findings of the previous literature which indicate a substantial amount of inter state risk sharing may be due to the presence of measurement error in output when measurement error is properly taken into account the evidence points towards a lack of inter state smoothing

conflicts between decentralized renewable electricity production and landscape services a spatially explicit quantitative assessment for switzerland abstract the production of decentralized renewable electricity often collides with provisioning regulating and cultural services of the landscape in this paper we operationalize the landscape service approach and generate conflict maps between three renewable energies wind pv forest biomass and six competing landscape services nutrition and materials aesthetics physical and experiential interactions heritage and symbolic content water and liquid flows lifecycle maintenance habitat and gene pool protection media content analysis and expert interviews were used to ground truth the national conflict maps in several swiss regions and to understand to what degree the national conflict assessments match the regional and local perceptions of these conflicts in switzerland approximately 40 000 km 2 biomass from forests is by far the least conflicting renewable energy followed by pv on roofs for the latter 68 of the technically feasible energy potential can be generated with low conflicts and more is expected with new materials wind has a high conflict potential only 12 of the technically feasible energy potential is low conflict pv on open land marginal land and shrubland is at the moment not currently feasible in switzerland the accuracy of our conflict assessment is sufficiently high to estimate the proportion that socially sustainable energy could cover of the overall energy gap of 22 25 twh yr caused by the phase out of swiss nuclear plants by 2050 low conflict solar energy from rooftops could contribute approximately 30 of the required 22 25 twh yr intensified wood production and wind energy could add another 40 the gap of approximately 30 must come from undisputed energy sources such as biogas from recycled organic material from centralized renewable energies such as geothermal or large hydropower or from new or technologically improved renewable energies the presented decision support tools are a timely contribution to the designation of legally binding zones for renewable energy production

european inflation dynamics abstract we provide evidence on the fit of the new phillips curve npc for the euro area over the period 1970 1998 and use it as a tool to compare the characteristics of european inflation dynamics with those observed in the u s we also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs as well as that of its two main components namely labor productivity and real wages some of the findings can be summarized as follows a the npc fits euro area data very well possibly better than u s data b the degree of price stickiness implied by the estimates is substantial but in line with survey evidence and u s estimates c inflation dynamics in the euro area appear to have a stronger forward looking component i e less inertia than in the u s d labor market frictions as manifested in the behavior of the wage markup appear to have played a key role in shaping the behavior of marginal costs and consequently inflation in europe

consumption real exchange rates and the structure of international asset markets abstract international real business cycle irbc models that assume complete asset markets yield strong restrictions for consumption and bilateral real exchange rate series empirical tests with data for the us japan france uk italy canada and sweden suggest that neither the trend behavior nor high frequency movements of consumption and real exchange rates are well explained by irbc models with complete markets it appears however that high frequency fluctuations of consumption and real exchange rates are consistent with unrestricted international trade in risk free bonds

portfolio allocation and international risk sharing we show that recent explanations of the consumption real exchange rate anomaly that rely on goods and financial market frictions are not robust to introducing just one additional international asset when portfolios are selected optimally international trade in two nominal bonds implies a consumption real exchange rate correlation that is too high compared with the data even when there are many shocks monetary policy specification plays a potentially important role for the degree of risk sharing provided by nominal bonds both in the benchmark model with only tradable and non tradable sector supply shocks and also in the model that allows for news

the terms of trade the real exchange rate and economic fluctuations this paper examines the relationship between terms of trade and business cycles using a three sector intertemporal equilibrium model and a large multicountry database results show that terms of trade shocks account for nearly one half of actual gdp variability the model explains weak correlations between net exports and terms of trade the harberger laursen and metzler effect and produces large and weakly correlated deviations from purchasing power parity and real interest rate parity terms of trade shocks cause real appreciations and positive interest differentials although productivity shocks have opposite effects the puzzle that welfare gains of international asset trading are negligible is left unresolved copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

robust tracking error portfolio selection with worst case downside risk measures abstract this paper proposes downside risk measure models in portfolio selection that captures uncertainties both in distribution and in parameters the worst case distribution with given information on the mean value and the covariance matrix is used together with ellipsoidal and polytopic uncertainty sets to build up this type of downside risk model as an application of the models the tracking error portfolio selection problem is considered by lifting the vector variables to positive semidefinite matrix variables we obtain semidefinite programming formulations of the robust tracking portfolio models numerical results are presented in tracking sse50 of the shanghai stock exchange compared with the tracking error variance portfolio model and the equally weighted strategy the proposed models are more stable have better accumulated wealth and have much better sharpe ratio in the investment period for the majority of observed instances

on the risk of stocks in the long run a familiar proposition is that investing in common stocks is less risky the longer an investor plans to hold them if this proposition were true then the cost of insuring against earning less than the risk free rate of interest should decline as the investment horizon lengthens this paper shows that the opposite is true even if stock returns are mean reverting in the long run the case for young people investing more heavily than older people in stocks cannot therefore rest solely on the long run properties of stock returns for guarantors of money fixed annuities the proposition that stocks in their portfolios are a better hedge the longer the maturity of their obligations is unambiguously wrong

exchange rate determination under interest rate rules we propose a theory of exchange rate determination under interest rate rules in a two country model we first show that simple interest rate feedback rules can determine a unique and stable equilibrium without any explicit reaction to the nominal exchange rate we characterize how the behavior of the exchange rate and of the terms of trade depends in a critical way on the monetary regime chosen though not necessarily on monetary shocks we give a simple account of exchange rate volatility in terms of monetary policy rules we provide an explanation of the relation between nominal exchange rate volatility and macroeconomic variability in terms of the monetary regime adopted by monetary authorities

on the risk of stocks in the long run a comment diametrically opposite conclusions about stocks long term risk follow from bodie s methodology see financial analysts journal may june 1995 bodie s conclusion that stocks risk increases monotonically with the investment horizon is incorrect conventional wisdom about the long term risk of stocks has not been refuted

time diversification definitions and some closed form solutions abstract we establish general conditions under which younger investors should invest a larger proportion of their wealth in risky assets than older ones in the finite horizon dynamic setting we show that such phenomenon known as time diversification can occur in the presence of human wealth guaranteed consumption or mean reverting stock returns we formalize two alternative notions of time diversification commonly confounded in the literature analytic solutions are provided for both time series and cross sectional forms of time diversification to our best knowledge this paper is the first to solve in closed form the hedging demand for a cara investor with inter temporal consumption and a finite horizon facing mean reverting expected returns our results indicate that horizon can have a significant effect on the portfolio demand of a cara investor due to inter temporal hedging

time diversification perspectives from option pricing theory despite repeated theoretical arguments to the contrary many investment professionals subscribe to the principle of time diversification this principle states that equity investments become less risky if held for longer periods of time we apply option pricing theory to the question of how the investment horizon affects equity risk financially engineered securities that guarantee a minimum return allow for greater equity market participation if the investor commits to a longer time horizon in other words the fair cost of insuring a minimum return in terms of foregone market participation is lower for longer horizons the lower cost of risk reduction suggests that risk itself is lower consistent with the pervasive practitioner belief in time diversification

accounting for u s real exchange rate changes this study measures the proportion of u s real exchange rate movements that can be accounted for by movements in the relative prices of nontraded goods the decomposition is done at all possible h

a linear model for tracking error minimization abstract this article investigates four models for minimizing the tracking error between the returns of a portfolio and a benchmark due to linear performance fees of fund managers we can argue that linear deviations give a more accurate description of the investors risk attitude than squared deviations all models have in common that absolute deviations are minimized instead of squared deviations as is the case for traditional optimization models linear programs are formulated to derive explicit solutions the models are applied to a portfolio containing six national stock market indexes usa japan uk germany france switzerland and the tracking error with respect to the msci morgan stanley capital international index world stock market index is minimized the results are compared to those of a quadratic tracking error optimization technique the portfolio weights of the optimized portfolio and its risk return properties are different across the models which implies that optimization models should be targeted to the specific investment objective finally it is shown that linear tracking error optimization is equivalent to expected utility maximization and lower partial moment minimization