from need to affordability an analysis of uk housing objectives recent housing policy debates in the uk have shifted away from discussion of housing need to more market oriented analyses of affordability this article discusses the principles that lie behind the concepts of need and affordability and the ways in which they have been defined it then traces the development of policy and debate in the uk with respect to both need and affordability in particular it discusses the different ways in which policy is specified in different tenures and the extent to which implementation depends upon administrative allocation mechanisms it concludes that up to the present time the shift in emphasis is more one of rhetoric than of reality and more fundamentally that the forms in which current policies are implemented bear very little relationship to those suggested by analysis of basic principles

the turning black tide energy prices and the canadian dollar the authors revisit the relationship between energy prices and the canadian dollar in the amano and van norden 1995 equation which shows a negative relationship such that higher real energy prices lead to a depreciation of the canadian dollar

clearly irrational financial market behavior evidence from the early exercise of exchange traded stock options this paper analyzes the early exercise of exchange traded options by different classes of investors over the 1996 to 1999 period a large number of exercises are identified as clearly irrational without invoking any model of market equilibrium customers of discount brokers and customers of full service brokers both engage in a significant number of irrational exercises while traders at large investment houses exhibit no irrational early exercise behavior rational and irrational exercise is triggered for discount and full service customers by the underlying stock price attaining its highest level over the past year and by high returns on the underlying stock it is well known that in the absence of market frictions it is irrational to exercise american call options early except in some circumstances just before the underlying stock goes ex dividend even in the presence of market frictions it is possible to identify without the imposition of any model of market equilibrium call exercises that are clearly irrational in this paper we employ a previously unavailable data set to analyze the rationality of early exercises of chicago board option exchange cboe calls over the 1996 to 1999 period by customers of discount brokers discount customers customers of full service brokers full service customers and traders at large investment houses trading for their firms own accounts firm proprietary traders our first main finding is that there are a large number of early exercises that can be definitively identified as irrational and irrational exercise activity is not evenly distributed across the investor classes discount customers and full ser

input demand elasticities for heterogeneous labor firm level estimates and an investigation into the effects of aggregation labor economists have paid increasing attention to the estimation of demand elasticities for heterogeneous labor the majority of these studies investigate the effect on wage rates resulting from exogenous changes in factor quantities i e the measurement of elasticities of complementarity examples of these studies abound borjas for example investigates the impact of differences in labor market representation on the earnings of racial groups 8 in another paper borjas defines immigrants as a separate labor group and is able to determine the impact of immigration on the wages earned by natives 9 berger defines labor inputs along education and gender lines thereby allowing for the investigation of changes in the age education composition of the work force on wage rates 5 and grant and hamermesh study the effect of increasing female labor force participation on the wages earned by youth and adults 17 less attention has been paid to the study of the responsiveness of employment to exogenous changes in wage rates i e the measurement of elasticities of substitution less attention has been focused on this issue because the data requirements are more stringent since in order to presume that wage rates are exogenously determined the unit of observation must be small ideally establishmentor firm level data would be used the relative inaccessibility of these type of data has led researchers to use more aggregated figures such as smsa level or industry level data to address microissues as long as wage rates are determined exogenously the unit of observation chosen is appropriate there are real concerns however about the adequacy of more aggregated units to describe the behavior of firms 2 this study addresses the issue of whether micro level data are in fact needed to accurately measure elasticities of substitution among labor groups a firm level data set that includes input

how does the stock market absorb shocks abstract using a comprehensive set of news stories we find a stark difference in market responses to positive and negative price shocks accompanied by new information when there is a news story about a firm positive price shocks are followed by reversal while negative ones result in drift this is interpreted as the stock market overreaction to good news and underreaction to bad news these seemingly contradictory results can be explained in a single framework considering the interaction of retail investors with attention bias and arbitrageurs with short run capital constraints consistent with this hypothesis we find that both patterns are stronger when the attention bias is stronger and when the arbitrage capital is scarce

anchoring on historical high prices and seasoned equity offerings we document that firms financing decisions are affected by historical high prices the ratio of the monthly high price to the 12 month historical high price positively affects the probability of a seasoned equity offering seo furthermore the postannouncement market reaction is muted and the offering discount is smaller if the preannouncement stock price is high relative to its historical high price the results suggest that historical high price reference points may help managers rationally time seos to take advantage of market reception and minimize issuance costs

psychological factors and stock option exercise we investigate stock option exercise decisions by over 50 000 employees at seven corporations controlling for economic factors psychological factors influence exercise consistent with psychological models of beliefs employees exercise in response to stock price trends exercise is positively related to stock returns during the preceding month and negatively related to returns over longer horizons consistent with psychological models of values that include reference points employee exercise activity roughly doubles when the stock price exceeds the maximum price attained during the previous year

exercise behavior valuation and the incentive effects of employee stock options abstract we use a large database on eso exercises to document characteristics of exercise behavior and calibrate a utility based model for measuring how differences in exercise behavior are manifested in option values and incentives option values and incentives computed from the model calibrations are compared to those computed from models used to value tradable options our analysis provides guidance to both academics and practitioners about how differences in exercise behavior and model choice affect measures of eso values and incentives and underscores the importance of gaining a thorough understanding of the underlying economic forces that affect the behavior of eso holders

oil prices inflation and interest rates in a structural cointegrated var model for the g 7 countries sharp increases in the price of oil are generally seen as a major contributor to business cycle asymmetries moreover the very recent highs registered in the world oil market are causing concern about possible slowdowns in the economic performance of the most developed countries in this paper a structural cointegrated var model has been considered for the g 7 countries in order to study the direct effects of oil price shocks on output and prices and the reaction of monetary variables to external shocks our results can be summarized as follows i a stationary money demand as suggested by the classic theory of money can be identified for most countries ii according to the estimated coefficients of the structural part of the model for all countries except japan and u k the null hypothesis of an influence of oil prices on the inflation rate cannot be rejected inflation rate shocks are transmitted to the real economy by increasing interest rates iii impulse response analysis suggests for most countries the existence of an instantaneous temporary effect of oil price innovations on prices iv impulse response functions indicate different monetary policy reactions to inflationary and growth shocks v the simulation exercises directed to estimate the total impact of the 1990 oil price shock indicate that for some countries u s a significant part of the effects of the oil price shock is due to the monetary policy reaction function for other countries canada france and italy however the total impact is offset at least in part by an easing of monetary conditions

a general framework for evaluating executive stock options abstract motivated by recent recommendations by both european and american accounting standards boards that executive stock options be expensed in firms statements we provide an analytical and flexible framework for their evaluation our approach takes into account the vesting period american style resetting and reloading provisions that are features of many option programs and also considers the trading restriction on executives we identify a recursive structure in the stream of options that are granted to the executive over the course of her employment by exploiting this we are able to obtain a near explicit formula for the option value this enables us to discuss the joint effects of the different features on the exercising strategies and firms granting cost especially we highlight some significant interactions among these features

high yield bond and energy markets abstract high yield bonds hold a particularly unique space in the debt market from many aspects literature suggests these assets to behave more like stocks than bonds given the significant similarities between the high yield bond and stock markets it is expected for these markets to be similarly affected by certain outside factors some shocks including the ones from energy markets are known to impact the entire stock market and not just related company shares since high yield bond portfolios include some amount of energy company debt the recent volatility in energy prices has been particularly concerning to market participants however the question of whether price and volatility shocks only impact energy company bonds or the entire high yield bond market as they do with the stock market still remains unanswered this study attempts to address that question by exploring the dynamic relationships between the high yield bond and energy markets price transmission tests which account for gradual structural shifts suggest oil and ethanol markets significantly impacting the high yield bond market furthermore volatility tests find uni directional volatility transmitting from energy markets to the high yield bond market

the effects of endowment and loss aversion in managerial stock option valuation assuming a positive influence of stock price volatility on stock option value incentive alignment proponents argue that stock option compensation encourages managerial risk seeking and thus aligns managers and shareholders risk preferences our findings show that stock option holders overvalue unexercisable options relative to options being offered and to normative e g black scholes valuations further the influence of stock price volatility on holders subjective valuations depends on stock price trend in sum results suggest that during stock option valuation managers draw on heuristics that financial options theory and models fail to capture we discuss implications for compensation design and research

optimal monetary policy in open versus closed economies an integrated approach in clarida et al 1999 hereafter cgg we presented a normative analysis of monetary policy within a simple optimization based closedeconomy framework we derived the optimal policy rule and among other things characterized the gains from commitment also we made precise the implications for the kind of instrument feedback rule that a central bank should follow in practice in this paper we show how our analysis extends to the case of a small open economy openness complicates the problem of monetary management to the extent the central bank must take into account the impact of the exchange rate on real activity and inflation how to factor the exchange rate into the overall design of monetary policy accordingly becomes a central consideration here we show that under certain conditions the monetary policy design problem for the small open economy is isomorphic to the problem of the closed economy that we considered earlier hence all our qualitative results for the closed economy carry over to this case openness does affect the parameters of the model suggesting quantitative implications though the general form of the optimal interest rate feedback rule remains the same as in the closedeconomy case for example how aggressively a central bank should adjust the interest rate in response to inflationary pressures depends on the degree of openness in addition openness gives rise to an important distinction between domestic inflation and consumer price inflation as defined by the cpi to the extent that there is perfect exchange rate pass through we find that the central bank should target domestic inflation and allow the exchange rate to float despite the impact of the resulting exchangerate variability on the cpi kosuki aoki 1999 gali and tommaso monacelli 2000

broad based employee stock options grants and ipo firms this paper examines the broad based grant of employee stock options esos in the period following the initial public offering ipo stock option grants are used to reduce the negative effects of conflicts of interests associated with a firm s going public the study documents that option grants can be seen as corporate governance instruments for a number of model specifications also it is found that there is a robust relation between option grants and market and accounting returns respectively to the best of the authors knowledge no previous study has investigated the determinants of the grants of employee stock options in the post ipo period to both upper level and lower level executives during a period of sixteen years because the cross sectional data of this study amply encompasses more than a business cycle it is possible to examine the grants of esos across tight and soft labour markets during the former type of labour market it appears that more options are granted also the empirical res

revisiting the incentive effects of executive stock options abstract we develop a multiperiod framework to evaluate the incentive effects of executive stock options esos for a given increase in the grant date firm stock price and a concurrent increase in return volatility the increment of total value at the vesting date acts as a proxy for the incentive effects of esos if the option is attached to the existing contract without adjusting cash compensation we suggest that a firm should not always fix the strike price to the grant date stock price instead the strike price should vary with the length of the vesting period we also show that compared with at the money options restricted stock generates greater incentives to increase stock prices in some scenarios especially when equity based awards are vested early if the vesting period is long the firm could grant options instead of restricted stock to maximize incentives

taxation and executive compensation evidence from stock options abstract understanding the effects of taxes on executive compensation provides insight into the process determining this compensation and is a key input to top income tax rate policy a 2010 tax reform in canada which greatly increased the effective tax rate on stock option compensation for a subset of firms provides a natural experiment with which to address this issue difference in differences estimates suggest that this tax increase resulted in an immediate reduction in both stock option grants and the fraction of total compensation made up of stock options with limited if any substitution towards other components of compensation

prospect theory liquidation and the disposition effect there is a well known intuition linking prospect theory with the disposition effect the tendency of investors to sell assets that have risen in value rather than fallen recently several authors have studied rigorous models in an attempt to formalize the intuition however some have found it difficult to predict a disposition effect while others produce a more extreme prediction where investors never voluntarily sell at a loss we solve a model of asset liquidation where investors realize utility over gains and losses and utility is concave over gains and convex over losses under the preferences of tversky and kahneman tversky a d kahneman 1992 advances in prospect theory cumulative representation of uncertainty j risk uncertainty5 4 297 323 and lognormal asset prices investors exhibit a disposition effect as gains are realized at a greater rate than losses nonetheless in contrast to the extant literature we find that the investor will give up and sell at a loss when the asset has a sufficiently low sharpe ratio this paper was accepted by brad barber teck ho and terrance odean special issue editors

imperfect competition and the effects of energy price increases on economic activity the authors show that modifying the standard neoclassical growth model by assuming that competition is imperfect makes it easier to explain the size of the declines in output and real wages that follow increases in the price of oil plausibly parameterized models of this type are able to mimic the response of output and real wages in the united states the responses are particularly consistent with a model of implicit collusion where markups depend positively on the ratio of the expected present value of future profits to the current level of output copyright 1996 by ohio state university press

loss aversion in a consumption savings model abstract we propose a model of consumption and saving based on kahneman and tversky s prospect theory that implies a fundamental asymmetry in consumption behavior inconsistent with other models of consumption when there is sufficient income uncertainty a person resists lowering consumption in response to bad news about future income this resistance is greater than the resistance to increasing consumption in response to good news we present empirical evidence from five countries that confirms this behavior

executive option exercises and financial misreporting abstract several recent papers document that the magnitude of potential gains from stock based compensation is positively related to the likelihood of misreporting in a sample of firms that announce restatements of their financial statements from 1997 to 2002 we examine whether managers realize these potential gains occurring from their accounting choices after controlling for diversification needs and stock price impact we find no significant evidence of higher option exercises by executives in the misreported years however for firms that are more likely to have made deliberate aggressive accounting choices we find significant evidence of higher option exercises for these firms option exercises are higher by 20 60 in comparison to industry and size matched nonrestating firms options exercises by executives are also increasing in the magnitude of the restatement as captured by the effect of the restatement on net income these higher option exercises tend to be more pervasive and are not just confined to the ceo and cfo of the firm

the timing of 52 week high price and momentum abstract we propose a new momentum strategy based on the timing of a stock s 52 week high price we find that the stocks that attained the 52 week high price in the recent past significantly outperform the stocks that attained the 52 week high price in the distant past in particular the top 10 of the stocks with the most recent 52 week high price outperform the bottom 10 of the stocks with most distant 52 week high price by 0 70 per month further conditioning on the recency of 52 week high price significantly increases the profitability of momentum strategy based on the nearness of current price to the 52 week high price specifically the average monthly return of this strategy is about twice as large for stocks with recent 52 week high price as compared with stocks with distant 52 week high price

portfolio choice and trading volume with loss averse investors this paper presents a model of portfolio choice and stock trading volume with lossaverse investors the demand function for risky assets is discontinuous and non monotonic as wealth rises beyond a threshold investors follow a generalized portfolio insurance strategy this behavior is consistent with the evidence in favor of the disposition effect in addition loss averse investors will not hold stocks unless the equity premium is quite high the elasticity of the aggregate demand curve changes substantially depending on the distribution of wealth across investors in an equilibrium setting the model generates positive correlation between trading volume and stock return volatility but suggests that this relationship should be non linear

real investment implications of employee stock option exercises this paper examines a real cost of awarding employee stock options based on the observation that managers are extremely concerned about earnings per share dilution in equity related compensation we predict and find that firms experiencing significant employee stock option eso exercises shift resources away from real investments towards the repurchase of their own stocks we further find weak evidence of a decline in subsequent firm performance as measured by return on assets for several years following the cut in discretionary investments as a result of stock option exercises though this result is sensitive to the metric used to measure performance collectively our findings indicate that eso exercises potentially impose a real cost on the firm in terms of foregone investment opportunities

what caused the early millennium slowdown evidence based on vector autoregressions this paper uses a simple var for the usa and euro area to analyse the underlying shocks of the early millennium slowdown i e supply demand monetary policy and oil price shocks the results of two identification strategies are compared one is based on traditional zero restrictions and as an alternative an identification scheme based on more recent sign restrictions is proposed the main conclusion is that the recent slowdown is caused by a combination of several shocks negative aggregate supply and aggregate spending shocks the increase of oil prices in 1999 and restrictive monetary policy in 2000 these shocks are more pronounced in the usa than the euro area the results are somewhat different depending on the identification strategy it is illustrated that traditional zero restrictions can have an influence on the estimated impact of certain shocks copyright 2005 john wiley sons ltd

the courage of misguided convictions the field of modern financial economics assumes that people behave with extreme rationality but they do not furthermore people s deviations from rationality are often systematic behavioral finance relaxes the traditional assumptions of financial economics by incorporating these observable systematic and very human departures from rationality into standard models of financial markets we highlight two common mistakes investors make excessive trading and the tendency to disproportionately hold on to losing investments while selling winners we argue that these systematic biases have their origins in human psychology the tendency for human beings to be overconfident causes the first bias in investors and the human desire to avoid regret prompts the second

forecasting volatility using long memory and comovements an application to option valuation under sfas 123r horizon matched historical volatility is commonly used to forecast future volatility for op tion valuation under the statement of financial accounting standards sfas 123r in this paper we empirically investigate the performance of using historical volatility to forecast long term stock return volatility in comparison with a number of alternative forecasting methods in analyzing forecasting errors and their impact on reported income due to option expensing we find that historical volatility is a poor forecast for long term volatility and that shrinkage adjustment toward comparable firm volatility only slightly improves its per formance forecasting performance can be improved substantially by incorporating both long memory and comovements with common market factors we also experiment with a simple mixed horizon realized volatility model and find its long term forecasting perfor mance to be more accurate than historical forecasts but less accurate than long memory forecasts

terms of trade and real exchange rates the canadian evidence abstract this paper presents empirical evidence linking the canada us real exchange rate with the terms of trade using recently developed econometric methods for nondashstationary data we find that the real exchange rate is cointegrated with terms of trade variables and that causality runs from the terms of trade to the exchange rate we then construct a simple exchange rate equation that satisfies several specification tests and performs better than a random walk in post sample forecasting experiments the results suggest that much of the variation in the real exchange rate is attributable to movements in the terms of trade and that the influence of monetary factors is secondary

capital gains overhang with a dynamic reference point financial models incorporating a reference point such as the capital gains overhang cgo model typically assume it is fixed at the purchase price combining experimental and market data this pa

the international transmission of economic fluctuations abstract this paper suggests that for a wide class of international real business cycle models including models with imperfect competition the traditional channels of international transmission of business cycles through world interest rate and terms of trade variations cannot explain the cyclical response of the canadian economy to innovations in u s output empirically testable quantitative models of the effects on canadian economic activity of shocks to the u s economy are developed and their empirical relevance is tested by comparing impulse responses estimated from vector autoregressions to the quantitative predictions of the theoretical models

identifying control motives in managerial ownership evidence from antitakeover legislation this study uses the introduction of second generation antitakeover legislation as a natural experimental setting to infer the value that managers place on the control rights conferred by stock ownership we conjecture that managers will reduce their stockholdings in the post legislation period because they can ensure their prior level of control while holding fewer risky shares using a variety of specifications we find robust evidence consistent with this revealed preference hypothesis further demonstrating the key role played by control considerations in managers stockholding decisions the reductions in ownership are concentrated in management teams with higher levels of initial ownership and in firms without poison pills

the 52 week high momentum strategy in international stock markets abstract we study the 52 week high momentum strategy in international stock markets proposed by george and hwang george t hwang c y 2004 the 52 week high and momentum investing journal of finance 59 2145 2176 this strategy produces profits in 18 of the 20 markets studied and the profits are significant in 10 markets the 52 week high momentum profits exist independently from the jegadeesh and titman jegadeesh n titman s 1993 returns to buying winners and selling losers implications for market efficiency journal of finance 48 65 91 individual stock and moskowitz and grinblatt moskowitz t j grinblatt m 1999 do industries explain momentum journal of finance 54 1249 1290 industry momentum strategies these profits do not show reversals in the long run we find that the 52 week high is a better predictor of future returns than macroeconomic risk factors or the acquisition price the individualism index a proxy to the level of overconfidence has no explanatory power to the variations of the 52 week high momentum profits across different markets however the profits are no longer significant in most markets once transaction costs are taken into account

employee stock options as warrants abstract previous studies ignore the fact that employee stock options are warrants because these options have been an insignificant component of firms capital structures i show that this assumption is no longer correct for example for more than 36 of my sample firms employee stock options represent a more significant claim on firm value than the firm s debt and preferred stock combined moreover in contrast to the suggestions of previous research i show that employee stock options are a significant claim on firms throughout the economy including larger firms older firms and firms in old economy industries finally i show that the presumption in prior studies that employee stock options are not warrants causes a potential misunderstanding of the risk shifting interests of securityholders and biases the analysis of capital structure issues

oil prices monetary policy and counterfactual experiments recessions are associated with both rising oil prices and increases in the federal funds rate are recessions caused by the spikes in oil prices or by the sharp tightening of monetary policy this paper discusses the difficulties in disentangling these two effects

identifying monetary policy in a small open economy under flexible exchange rates abstract previous empirical study on the effects of monetary policy shocks in small open economies has generated puzzling dynamic responses in various macroeconomic variables this paper argues that these puzzles derive from an identification of monetary policy that is inappropriate for such economies to remedy this it is proposed that a structural model be estimated to explicitly account for the features of the small open economy such a model is applied to canada with tightly estimated results overall the dynamic responses to the identified monetary policy shock are consistent with standard theory and highlight the exchange rate as a transmission mechanism

oil price shocks and their transmission mechanism in an oil exporting economy a var analysis informed by a dsge model abstract this paper examines the macroeconomic effects of oil price shocks and the oil shock transmission mechanism in an oil exporting country canada we use a structural var with sign restrictions that comes from a two country dynamic stochastic general equilibrium dsge model to jointly identify oil price domestic supply and u s and domestic monetary policy shocks this identification strategy not only controls for reverse causality from the canadian and u s macroeconomic conditions to the real oil prices but more importantly it also allows for contemporaneous interactions between the canadian and u s variables we find that oil shocks have a stimulative effect on canadian aggregate demand appreciate the canadian dollar improve the terms of trade and reduce real wages foreign disturbances including innovations in oil prices and the u s interest rate have a significant influence on canadian economic activities our counterfactual analysis indicates that the reaction of the u s interest rate as an indirect transmission channel for oil price shocks plays a moderate role in explaining the real exchange rate and inflation but has negligible impacts on the canadian output and interest rate

moving closer to the action examining compensation design effects on firm risk we examine the influence of ceo equity based compensation on strategic risk taking by the firm building off the behavioral agency model agency theory and prospect theory we develop arguments about when equity based compensation elements will increase or decrease executive risk propensity and in turn strategic risk taking incorporating a behavioral perspective into our models of incentive alignment provides us with new and potentially more accurate predictions about how individual elements of ceo pay will influence risk selection as well as how equity compensation interacts with cash compensation and with other factors to influence risk preferences in general this study provides evidence that ceo equity based compensation significantly influences strategic risk but that this influence is more nuanced and complex than conventional treatments of executive compensation assume in particular we find that different forms of equity based pay exhibit dissimilar influences on strategic risk and that their influence changes as their value and vesting status change second we find that cash based forms of pay moderate the incentive properties of equity based pay indicating that cash based pay may affect how executives perceive risks associated with equity pay finally we find that stock price volatility and board actions each also moderate the incentive effects of equity based pay in sum our results argue for increased recognition of a behavioral perspective on executive compensation and greater precision in how we measure and model the incentive alignment properties of ceo compensation

portfolio choice and risk attitudes an experiment i introduction suppose an investor is faced with a decision concerning how to allocate financial resources between a risky lottery asset with a higher expected return and an asset with a fixed and guaranteed lower return is the choice of portfolio independent of preferences outside the standard neoclassical model in experiments with financial incentives we study how portfolio choice depends on three well documented behavioral phenomena ambiguity aversion the illusion of control and myopic loss aversion we also investigate whether participants are willing to explicitly pay a small sum of money to indulge such preferences pay for more perceived control less ambiguity or more frequent opportunities to change the portfolio based on feedback about its performance while standard finance theory presumes that investors successfully identify and process information relevant to reaching optimal decisions in recent years a body of empirical evidence suggests that there are systematic departures from this behavior behavioral finance is concerned with psychological influences in financial decision making and markets investors make decisions while trying to stay afloat in a sea of uncertainty when predictability is low people may be prone to unjustified beliefs that may survive and even flourish in such an environment 1 people may resort to rules of thumb on a conscious or subconscious level to the extent that psychological influences are present it is economically important to consider which of these actually affect risk attitudes and portfolio choice a key issue is whether any such influences disappear when monetary incentives are present we pursue a systematic experimental comparison of three of the most prominent behavioral phenomena documented in the literature the illusion of control langer 1975 is concerned with greater confidence in one s predictive ability or in a favorable outcome when one has a higher degree of personal involvement even when one s involvement is not actually relevant ambiguity aversion ellsberg 1961 is the desire to avoid unclear circumstances even when this will not increase the expected utility myopic loss aversion benartzi and thaler 1995 combines loss aversion kahneman and tversky 1979 tversky and kahneman 1992 and a tendency to evaluate outcomes frequently this combination leads investors to be more willing to invest a greater proportion of their portfolio in risky assets if they evaluate their investments less frequently we show that these phenomena are present with monetary incentives and also investigate whether people are willing to pay money to accommodate such preferences or whether they are closer to the rational model when incentives are present with the procedure we chose the willingness to actually pa for such preferences depends on the preference the great majority of investors pay for less ambiguity or more frequent feedback investment opportunities but fewer than 10 pay to roll a determinative die themselves 2 we then examine how the preferences between lotteries in the different treatments affect portfolio choice we have participants allocate their investment capital between an asset with a sure return and a risky asset with a higher expected rate of return in fact there is very little variation in investment behavior across any of the illusion of control or ambiguity aversion treatments in contrast the results found in previous experimental studies of myopic loss aversion suggest that participants invest less in their preferred option the main conclusion we draw from these findings is that the relation between which procedure or lottery people prefer and how much they are willing to actually invest in this lottery is not trivial at all people are generally unwilling to pay even small amounts of money to indulge the illusion of control and it does not influence their portfolio choice people are generally willing to pay money for less ambiguity but having less ambiguity does not influence their portfolio choice finally in some cases people are willing to pay money for more frequent feedback and opportunities to change their portfolio but again previous studies have shown that people invest less with this additional information and greater flexibility

loss aversion in aggregate macroeconomic time series abstract prospect theory has been the focus of increasing attention in many fields of economics however it has scarcely been addressed in macroeconomic growth models neither on theoretical nor on empirical grounds in this paper we use prospect theory in a stochastic optimal growth model thereafter the focus lies on linking the euler equation obtained from a prospect theory growth model of this kind to real macroeconomic data we will use generalized method of moments gmm estimation to test the implications of such a non linear prospect utility euler equation our results indicate that loss aversion can be traced in aggregate macroeconomic time series

uncertainty avoidance and the timing of employee stock option exercise we examine the impact of the cultural norm of uncertainty avoidance on employee stock option eso exercise behavior using proprietary data from a multinational firm we find that employees from countries with higher levels of uncertainty avoidance exercise their stock options earlier these findings lend support to a maintained assumption in the eso literature that employee attitudes toward uncertainty influence stock option exercise behaviors our findings further help to explain prior findings of cross cultural differences in firms compensation practices by indicating that employee responses to option based pay and firms consequent financial reporting costs vary as functions of employee uncertainty avoidance

employee stock option exercises an empirical analysis this paper describes the exercise behavior of over 50 000 employees who hold longterm options on employer stock at eight corporations employees typically exercise options years before expiration commonly sacrificing half of the black scholes value exercise is strongly associated with recent stock price movements the market to strike ratio proximity to vesting dates time to maturity volatility and the employee s level within the company these findings have implications for compensation planners the fasb as it develops a new accounting standard for options and financial statement users and preparers who apply and interpret the new fasb standard

the economic effects of energy price shocks large fluctuations in energy prices have been a distinguishing characteristic of the u s economy since the 1970s turmoil in the middle east rising energy prices in the u s and evidence of global warming recently have reignited interest in the link between energy prices and economic performance this paper addresses a number of the key issues in this debate what are energy price shocks and where do they come from how responsive is energy demand to changes in energy prices how do consumers expenditure patterns evolve in response to energy price shocks how do energy price shocks affect u s real output inflation and stock prices why do energy price increases seem to cause recessions but energy price decreases do not seem to cause expansions why has there been a surge in the price of oil in recent years why has this new energy price shock not caused a recession so far have the effects of energy price shocks waned since the 1980s and if so why as the paper demonstrates it is critical to account for the endogeneity of energy prices and to differentiate between the effects of demand and supply shocks in energy markets when answering these questions

developments in non expected utility theory the hunt for a descriptive theory of choice under risk this article reviews recent developments in the economic theory of individual decision making under risk since the 1950s it has been known that individual choices violate the standard model of expected utility in predictable ways considerable research effort has now been devoted to the project of developing a superior descriptive model following an overview of non expected utility theories which distinguishes between conventional and non conventional approaches the paper seeks to assess these alternative models in terms of empirical success using laboratory and field data and theoretical usefulness the closing sections reflect on some new directions emerging in this literature

the structural dynamics of output growth and inflation some international evidence we examine the dynamics of output growth and inflation in the us euro area and uk using a structural time varying coefficient var there are important similarities in structural inflation dynamics across countries output growth dynamics differ swings in the magnitude of inflation and output growth volatilities and persistences are accounted for by a combination of three structural shocks changes over time in the structure of the economy are limited and permanent variations largely absent changes in the volatilities of structural shocks matter

comparing with the average reference points and market reactions to above average earnings surprises abstract we examine whether the average earnings surprises announced yesterday affect investors responses to earnings news announced today we find that in the short window surrounding an earnings announcement the market rewards today s earnings news that is above yesterday s average earnings surprises with a premium consistent with yesterday s average becoming a reference point for investors to classify today s earnings news as a gain or a loss the price premium for an above average earnings surprise is larger when more earnings announcements are made on the same day and when investors face greater uncertainty in assessing firms performance we interpret this evidence as suggesting that investors rely more on the average as a reference point when they are more likely to be subject to cognitive constraints in processing information we also find that firms announcing above average earnings surprises exhibit a greater abnormal trading volume consistent with the notion that beating reference points prompts investors to trade

probability weighting and employee stock options this paper documents that riskier firms with higher idiosyncratic volatility grant more stock options to nonexecutive employees standard models in the literature cannot easily explain this pattern a model in which a risk neutral firm and an employee with prospect theory preferences bargain over the employee s pay package can the key feature which makes stock options attractive is probability weighting the model fits the data on option grants well when calibrated using standard parameters from the experimental literature the results are the first evidence that risky firms can profitably use stock options to cater to an employee demand for long shot bets

oil shocks and aggregate macroeconomic behavior the role of monetary policy hamilton and herrera hh have provided an interesting comment on our 1997 paper bernanke gertler and watson 1997 bgw we take the opportunity offered to us by the editors to respond briefly the goal of bgw was to show that the magnitude and shape of the economy s response to a particular exogenous shock will typically depend critically on how monetary policy makers choose to react to the shock as a consequence we argued that assessments of the importance of monetary policy for real activity should take into account the systematic portion of policy i e the policy rule as well as the unsystematic component i e monetary policy shocks the specific type of exogenous shock that we considered in bgw was a sharp increase in the price of oil of the magnitude observed during several episodes in the 1970s using a modified var framework we considered counterfactual scenarios in which monetary policy represented by the level of the federal funds rate does not respond to an oil price shock we found that the adverse effects of an oil price shock on output are reduced considerably when the endogenous response of the funds rate is shut off indeed our point estimates suggested that the endogenous response of monetary policy accounted for virtually all the negative impact of the oil shock on this research was funded in part by nsf grants to each of the authors we thank michele cavallo for research assistance

private information in executive stock option trades evidence of insider trading in the uk uk executives stock option exercises and associated sell decisions are motivated by private inside information executives use their inside information to lock in short term gains and to sell stock acquired prior to negative abnormal stock returns this informed trading is robust to the alternative factors that might motivate the exercise of executive stock options including option moneyness and value of exercise we suggest that the disparity in informed trading between us and uk executives option trades is related to important differences in the proportion of executive remuneration linked to options the regulation of options and the taxation of option gains

risk aversion and block exercise of executive stock options abstract it is well documented that executives granted stock options tend to exercise early and in a few large transactions or blocks standard risk neutral valuation models cannot explain these patterns and attempts to capture the exercise behavior of risk averse executives have been limited to the special case of one option this paper solves for the optimal exercise behavior for a risk averse executive who is granted multiple stock options we show that utility based models do not predict block exercise behavior rather the risk averse executive exercises stock options individually at a sequence of increasing price thresholds when in addition the executive faces frictions such as costly exercise he faces a trade off between exercising little and often to maximize return and exercising larger quantities on fewer occasions to minimize effort this generates realistic block exercise behavior and yields new predictions in particular executives should begin by exercising large blocks of options but the block sizes should become smaller over time our framework also allows us to study the impact of multiple exercise dates on estimates of the cost of options to the company we find that assuming the executive can only exercise on a single occasion underestimates the cost of the options compared with allowing for optimal exercise behavior

prospect theory and liquidation decisions we solve a liquidation problem for an agent with preferences consistent with the prospect theory of kahneman and tversky econometrica 47 1979 263 291 we find that the agent is willing to hold a risky project with a relatively inferior sharpe ratio if the project is currently making losses and intends to liquidate it when it breaks even on the other hand the agent may liquidate a project with a relatively superior sharpe ratio if its current profits rise or drop to the break even point our results capture the spirit of the disposition effect and the break even effect documented in empirical and experimental studies

discussion of information distribution within firms evidence from stock option exercises abstract huddart and lang j accounting econom 34 2003 documents that higher level of employee option exercise during a particular month is associated with lower returns in subsequent months suggesting employees exploit private information in their exercise decisions while the paper extends the insider trading literature that has focused on top executives a number of inconsistencies with prior studies remain unresolved moreover the study does not establish a direct link to the private information employees supposedly exploit establishing such a link is warranted here in the light of the surprising finding that exercises by senior employees are no more informative than those by lower rank employees

monetary policy in a low pass through environment in a dynamic new keynesian optimizing model we introduce incomplete exchange rate pass through on import prices three results stand out first unlike canonical models with perfect pass through which emphasize a type of isomorphism incomplete pass through renders the analysis of monetary policy of an open economy fundamentally different from the one of a closed economy second productivity driven deviations from the law of one price assume the interpretation of endogenous cost push shocks third the optimal commitment policy relative to discretion entails a smoothing of the deviations from the law of one price and requires more stable nominal and real exchange rates

an index of loss aversion to a considerable extent risk aversion as it is commonly observed is caused by loss aversion several indexes of loss aversion have been proposed in the literature the one proposed in this paper leads to a clear decomposition of risk attitude into three distinct components basic utility probability weighting and loss aversion the index is independent of the unit of payment the main theorem shows how the indexes of different decision makers can be compared through observed choices

forecasting the real prices of crude oil using forecast combinations over time varying parameter models abstract in this paper we forecast real prices of crude oil using real time forecast combinations over time varying parameter tvp models with single predictor we reveal the significant predictability at all horizons up to 24 months the mean squared predictive error reduction over the benchmark of no change forecast is as high as 17 and the directional accuracy as high as 0 645 a combination with tvp models is found to generate more accurate forecasts than the same combination with constant coefficient models because the forecast errors of individual tvp models are correlated at a lower degree we also evaluate the forecasting performance in the framework of density forecasting our results indicate that the benchmark model can be significantly outperformed by forecast combination at the horizons longer than 3 months

the disposition effect in securities trading an experimental analysis the disposition effect is the tendency to sell assets that have gained value winners and keep assets that have lost value losers disposition effects can be explained by the two features of prospect theory the idea that people value gains and losses relative to a reference point the initial purchase price of shares and the tendency to seek risk when faced with possible losses and avoid risk when a certain gain is possible our experiments were designed to see if subjects would exhibit disposition effects subjects bought and sold shares in six risky assets asset prices fluctuated in each period contrary to bayesian optimization subjects did tend to sell winners and keep losers when the shares were automatically sold after each period the disposition effect was greatly reduced

the risk preferences of u s executives in this paper i elicit risk attitudes of u s executives by calibrating a subjective option valuation model for option exercising data 1996 to 2008 yielding approximately 65 000 values of relative risk aversion rra for almost 7 000 executives the observed behavior is generally consistent with moderate risk aversion and a median mean rra close to one three values are validated for chief executive officers ceos by testing theory based predictions on the influence of individual characteristics on risk preferences such as gender marital status religiosity and intelligence senior managers such as ceos presidents and chairpersons of the boards of directors are significantly less risk averse than non senior executives rra heterogeneity is strongly correlated with sector membership and firm level variables such as size performance and capital structure alternative factors influencing option exercises are tested for their influence on rra values this paper was accepted by brad barber finance

do stock options overcome managerial risk aversion evidence from exercises of executive stock options we report that the probability that executives exercise options early decreases with the volatility of the underlying stock return we interpret this to mean that executives subjective option value increases with volatility and that option grants increase executives risk appetite further decomposition reveals that the results are most pronounced for idiosyncratic volatility consistent with our conjecture that executives believe they can better predict or influence the resolution of idiosyncratic uncertainty than systematic uncertainty and thus favor the former data are available at http dx doi org 10 1287 mnsc 2016 2495 this paper was accepted by wei jiang finance

prior consequences and subsequent risk taking new field evidence from the taiwan futures exchange we use a data set from market participants in the taiwan stock exchange capitalization weighted stock index options markets to demonstrate a strong positive relationship between prior trading outcomes and subsequent risk taking in particular investors in this market take above average risks in afternoon trading after morning gains the phenomenon is prevalent in all three types of market makers accounts and across different types of market participants our findings are consistent with the argument that prior outcomes affect subsequent risk taking through a relationship that is sensitive to the model parameters i e expected return trading period and curvature of the value function because prospect theory can predict both increased and decreased levels of subsequent risk taking we provide possible explanations behind the phenomenon and discuss reasons for the variety of findings in the existing literature

loss aversion under prospect theory a parameter free measurement agrowing body of qualitative evidence shows that loss aversion a phenomenon formalized in prospect theory can explain a variety of field and experimental data quantifications of loss aversion are however hindered by the absence of a general preference based method to elicit the utility for gains and losses simultaneously this paper proposes such a method and uses it to measure loss aversion in an experimental study without making any parametric assumptions thus it is the first to obtain a parameter free elicitation of prospect theory s utility function on the whole domain our method also provides an efficient way to elicit utility midpoints which are important in axiomatizations of utility several definitions of loss aversion have been put forward in the literature according to most definitions we find strong evidence of loss aversion at both the aggregate and the individual level the degree of loss aversion varies with the definition used which underlines the need for a commonly accepted definition of loss aversion

oil shocks and aggregate macroeconomic behavior the role of monetary policy a recent paper by bernanke gertler and watson 1997 suggests that monetary policy could be used to eliminate any recessionary consequences of an oil price shock this paper challenges this conclusion on two grounds first we question whether the federal reserve actually has the power to implement such a policy for example we consider it unlikely that additional money creation would have succeeded in reducing the fed funds rate by 900 basis points relative to the values seen in 1974 second we point out that the size of the effect that bernanke gertler and watson attribute to oil shocks is substantially smaller than that reported by other researchers primarily due to their choice of a shorter lag length than that used by other researchers we offer evidence in favor of the longer lag length employed by previous research and show that under this specification even the aggressive federal reserve policies proposed would not have succeeded in averting a downturn