occupational choice and the process of development this paper models economic development as a process of institutional transformation by focusing on the interplay between agents occupational decisions and the distribution of wealth because of capital market imperfections poor agents choose working for a wage over self employment and wealthy agents become entrepreneurs who monitor workers only with sufficient inequality however will there be employment contracts otherwise there is either subsistence or self employment thus in static equilibrium the occupational structure depends on distribution since the latter is itself endogenous we demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long run effects in one case the economy develops either widespread cottage industry self employment or factory production employment contracts depending on the initial distribution in the other example it develops into prosperity or stagnation

day of the week effects and asset returns the number of empirical studies using daily stock returns is rapidly increasing researchers generally assume that the distribution of stock returns is identical for all days of the week a convenient statistical assumption but not a necessary condition of market equilibrium nevertheless there are reasons to suspect that the distribution of returns may vary according to the day of the week the most obvious is the impact of weekends on monday s return since monday s return is calculated over three instead of one calender day the mean and variance may well be higher on monday compared with any other daily return perhaps three times as large previous research has examined the daily distribution of stock returns for a monday effect while fama 1965 does not compare daily mean returns he does report that monday s variance is about 20o greater than other daily returns with a traditional distributional assumption regarding the returns on a financial asset specifies that the expected returns are identical for all days of the week contrary to this plausible assumption this paper discovers that the expected returns on common stocks and treasury bills are not constant across days of the week the most notable evidence is for monday s returns where the mean is unusually low or even negative several explanations of the results are investigated but none proves satisfactory aside from documenting significant day of the week effects the implications of the results for tests of market efficiency are examined while market adjusted returns continue to exhibit day of the week effects these effects are no longer concentrated on monday during the last year we have had many conversations with our colleagues throughout the professions we are particularly thankful to the participants at sessions of the western and american finance associations where preliminary versions of this paper were presented special thanks are due to gene fama gailen hite jon ingersoll robert jarrow merton miller clifford smith and rex thompson the expert research assistance of frank rabinovitch and youngsup yun is gratefully acknowledged 1 the list of papers using daily stock returns is too long to name recent examples include charest 1978 dodd 1980 banz 1981 and reinganum 1981

comments on plott and on kahneman knetsch and thaler both of these papers raise a number of interesting questions as to the factors that are important in determining market outcomes the kahneman knetsch and thaler in this issue paper explores whether the introduction of fairness can help explain behavior by firms that could not be easily explained by standard economic analyses charles plott s in this issue summary of experimental economic evidence suggests that market models based on rational choice principles do rather well for a certain class of problems but that there are a number of areas where the jury is still out let me first turn to the kahneman et al paper in my opinion the importance of this paper is that it lays out a set of testable propositions that are based on the deviations between a new transaction from a reference transaction on the basis of these propositions the authors offer testable hypotheses such as the following

adverse selection commitment and renegotiation extension to and evidence from insurance markets with asymmetric information full commitment to long term contracts may permit markets to approach first best allocations however commitment can be undermined by opportunistic behavior notably renegotiation we reexamine commitment in insurance markets we present an alternative model which extends laffont and tirole s procurement model to address uncertainty and competition which involves semipooling in the first period followed by separation this and competing models e g single period models and no commitment models have different predictions concerning temporal patterns of insurer profitability a test using california data suggests that some automobile insurers use commitment to attract selective portfolios comprising disproportionate numbers of low risks

financial intermediation and endogenous growth an endogenous growth model with multiple assets is developed agents who face random future liquidity needs accumulate capital and a liquid but unproductive asset the effects of introducing financial intermediation into this environment are considered conditions are provided under which the introduction of intermediaries shifts the composition of savings toward capital causing intermediation to be growth promoting in addition intermediaries generally reduce socially unnecessary capital liquidation again tending to promote growth

optimal inattention to the stock market with information costs and transactions costs recurrent intervals of inattention to the stock market are optimal if consumers incur a utility cost to observe asset values when consumers observe the value of their wealth they decide whether to transfer funds between a transactions account from which consumption must be financed and an investment portfolio of equity and riskless bonds transfers of funds are subject to a transactions cost that reduces wealth and consists of two components one is proportional to the amount of assets transferred and the other is a fixed resource cost because it is costly to transfer funds the consumer may choose not to transfer any funds on a particular observation date in general the optimal adjustment rule including the size and direction of transfers and the time of the next observation is state dependent surprisingly unless the fixed resource cost of transferring funds is large the consumer s optimal behavior eventually evolves to a situation with a purely time dependent rule with a constant interval of time between observations this interval of time can be substantial even for tiny observation costs when this situation is attained the standard consumption euler equation holds between observation dates if the consumer is sufficiently risk averse

non linearity between finance and growth abstract we present a simple model which establishes a non linear and possibly non monotonic relationship between financial development and economic growth applying a threshold regression model to king and levine s q j econ 109 1993 83 data set we find evidence consistent with the theoretical model

a flow based explanation for return predictability this paper proposes and tests an investment ow based explanation for three empirical ndings on return predictability the persistence of mutual fund performance the smart

can information heterogeneity explain the exchange rate determination puzzle empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables we introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts consistent with the evidence the model implies that a observed fundamentals account for little of exchange rate volatility in the short to medium run b over long horizons the exchange rate is closely related to observed fundamentals c exchange rate changes are a weak predictor of future fundamentals and d the exchange rate is closely related to order flow

child labor the role of financial development and income variability across countries abstract in this article we examine the link between child labor and financial development using cross country data we show that child labor and financial development display a significant negative relationship which is particularly strong in the sample of low income countries and is robust for a wide range of specifications and estimators including fixed effects and instrumental variables we identify a plausible channel through which financial development affects child labor as we find that income variability has a sizable positive impact on child labor in countries where financial markets are underdeveloped although this is not the case when financial markets are developed our results suggest that policies aimed at widening access to credit could be effective in reducing the extent of child labor

investor attention overconfidence and category learning abstract motivated by psychological evidence that attention is a scarce cognitive resource we model investors attention allocation in learning and study the effects of this on asset price dynamics we show that limited investor attention leads to category learning behavior i e investors tend to process more market and sector wide information than firm specific information this endogenous structure of information when combined with investor overconfidence generates important features observed in return comovement that are otherwise difficult to explain with standard rational expectations models our model also demonstrates new cross sectional implications for return predictability

trading volume and serial correlation in stock returns this paper investigates the relationship between aggregate stock market trading volume and the serial correlation of daily stock returns for both stock indexes and individual large stocks the first order daily return autocorrelation tends to decline with volume the paper explains this phenomenon using a model in which risk averse market makers accommodate buying or selling pressure from liquidity or noninformational traders changing expected stock returns reward market makers for playing this role the model implies that a stock price decline on a high volume day is more likely than a stock price decline on a low volume day to be associated with an increase in the expected stock return

optimal inattention to the stock market inattentive agents update their information sporadically and thus respond belatedly to news we generate optimally inattentive behavior by assuming that to observe the value of his investment portfolio the consumer must pay a cost that is proportional to the portfolio s contempo raneous value it is optimal for the consumer to check his investment portfolio at equally spaced points in time consuming from a riskless trans actions account in the interim the riskless transactions account that finances consump tion guarantees that funds are never unwittingly exhausted we show that the optimal interval of time between consecutive observations of the value of the portfolio is the unique positive solution to a nonlinear equation quantitatively even a small observation cost one basis point of wealth implies a substantial eight month decision interval under conventional parameter values

learning from prices and the dispersion in beliefs i study whether investors use an asset s price to update their beliefs about its payos i show that in a dynamic economy the relationship between the dispersion in investor beliefs and returnvolume characteristics can be used to empirically answer this question when investors have rational expectations re and condition on the price i show that belief dispersion is positively related to expected returns return volatility and correlation between volume and absolute returns but negatively related to return autocorrelation when investors do not use the price as in a dierence of opinions do model these relationships are reversed i test these predictions using the crosssection of returns volume and analyst forecast dispersion over dierent horizons the results are consistent with the re model at quarterly and longer horizons but reject both models at the monthly horizon i show that a hybrid model with some do investors and some re investors can match the short horizon evidence the empirical results are consistent with the idea that while some investors do not use the price in the short run they increase their conditioning on the price over time

financial development and poverty reduction can there be a benefit without a cost abstract this article investigates how financial development helps to reduce poverty directly through a distributional effect beyond its indirect effect through economic growth the results obtained with data for a sample of developing countries from 1966 through 2000 suggest that the poor benefit from the ability of the banking system to facilitate transactions and provide savings opportunities through the mckinnon conduit effect but to some extent fail to reap the benefit from greater availability of credit moreover financial development is accompanied by financial instability which is particularly detrimental to the poor nevertheless the benefits of financial development for the poor outweigh the cost

overreaction delayed reaction and contrarian profits this paper presents a decomposition of short horizon contrarian profits into various sources based on an analysis os stock price reactions to common factors an firm specific information in sharp contrast with the conclusions in the extant literature we find that the lead lag structure in stock prices contributes less than 5 of the observed contrarian profits with most of the profits being attributable to stock price overreaction

forecasting the forecasts of others implications for asset pricing we develop a dynamic asset pricing model with heterogeneously informed agents unlike previous research we focus on the general case where differential information leads to the problem of forecasting the forecasts of others and to non trivial dynamics of higher order expectations in particular we prove that the model does not admit a finite number of state variables using numerical analysis we compare equilibria characterized by identical fundamentals but different information structure we demonstrate that the distribution of information has substantial impact on equilibrium prices and returns in particular we show that asymmetric information can generate momentum in returns and high trading volume

how robust is a poverty profile comparison of poverty such as when poverty is greatest typically matter far more for policy choices than do aggregate measures of poverty such as how many people are deemed poor the authors examine alternative methods for constructing poverty profiles focusing on their internal consistency and appropriateness for guiding policy none is perfect but some methods appear to be preferable to others when the aim is to inform policies for fighting absolute consumption poverty a case study on indonesia reveals that the country s regional and sectoral poverty profile is highly sensitive to some aspects of measurement but quite robust to others

the dependence between hourly prices and trading volume this study provides evidence on joint characteristics of hourly common stock trading vol ume and returns on the new york stock exchange average volume traded shows signifi cant differences across trading hours of the day and across days of the week average returns differ across hours ofthe day and to some extent across days ofthe week there is a strong contemporaneous relation between trading volume and returns and also a rela tion between trading volume and returns lagged up to four hours furthermore the trading volume returns relation is steeper for positive returns than for nonpositive returns

financial development and poverty evidence from the cfa franc zone the financial liberalization in the 1980s and early 1990s led the cfa franc zone countries to deepen reforms in their financial systems these reforms fostered financial development which in turn may have reduced income poverty as emphasized by several theoretical arguments in the literature this study aims at estimating the contribution of financial development to poverty alleviation in the cfa franc zone results based on a panel of cfa franc zone countries show that financial development is associated with a drop in the proportion of poor population next financial development reduces the extent to which the income of individuals falls below the poverty line moreover in some cases the effect of financial development on poverty may be subject to nonlinearities finally financial instability or unstable financial development leading to crises may mitigate the favourable effect of financial development on poverty reduction these findings are robust to the use of alternative measures of financial development and hold after controlling for a potential simultaneity and a small sample biases

a model of competitive stock trading volume a model of competitive stock trading is developed in which investors are heterogeneous in their information and private investment opportunities and rationally trade for both informational and noninformational motives i examine the link between the nature of heterogeneity among investors and the behavior of trading volume and its relation to price dynamics it is found that volume is positively correlated with absolute changes in prices and dividends i show that informational trading and noninformational trading lead to different dynamic relations between trading volume and stock returns

does financial development contribute to poverty reduction the article examines the contribution of financial development to poverty reduction in developing countries building on earlier research which has established links between financial development and economic growth and between economic growth and poverty reduction the article tests for a causal process linking financial sector growth and poverty reduction the empirical results indicate that up to a threshold level of economic development financial sector growth contributes to poverty reduction through the growth enhancing effect the impact of financial development on poverty reduction will be affected however by any change in income inequality resulting from financial development

infrequent rebalancing return autocorrelation and seasonality a model of infrequent rebalancing can explain specific predictability patterns in the time series and cross section of stock returns first infrequent rebalancing produces return autocorrelations that are consistent with empirical evidence from intraday returns and new evidence from daily returns autocorrelations can switch sign and become positive at the rebalancing horizon second the cross sectional variance in expected returns is larger when more traders rebalance this effect generates seasonality in the cross section of stock returns which can help explain available empirical evidence

differential information and dynamic behavior of stock trading volume this article develops a multiperiod rational expectations model of stock trading in which investors have differential information concerning the underlying value of the stock investors trade competitively in the stock market based on their private information and the information revealed by the market clearing prices as well as other public news we examine how trading volume is related to the information flow in the market and how investors trading reveals their private information article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the dynamic properties of financial market equilibrium with trading fees we incorporate trading fees in a long horizon dynamic general equilibrium model in which traders optimally and endogenously decide when and how much to trade a full characterization of equilibrium is provided which allows us to study the dynamics of equilibrium trades equilibrium asset prices and rates of return in the presence of trading fees we exhibit the effect of trading fees on deviations from the consumption capm and analyze the pricing of endogenous liquidity risk we compare for the same shocks the impulse responses of this model to those of a model in which trading is infrequent because of trader inattention the current version reflects material that was previously in two papers w21421 and w19155

the dynamics of short term mutual fund flows and returns a time series and cross sectional investigation abstract this study analyzes the dynamics of daily mutual fund flows a vector auto regression var of flows and returns shows that the behavior of fund investors is more consistent with contrarian rather than momentum characteristics past fund flows have a positive impact on future fund returns with the long term information effect dominating the transient price pressure effect seasonality in daily flows such as day of week and day of month patterns are present and daily flows are generally mean reverting probit regressions indicate that fund investment objective marketing policy and level of active management explain cross sectional variation in the behavioral patterns displayed in daily flows our results are robust to the different methods of calculating daily flows based on whether or not the day end tna figures include the current day s flow throughout the analysis we contrast the dynamics of daily flows with established results for monthly fund flows and find important differences between the two

hedging demand and market intraday momentum hedging short gamma exposure requires trading in the direction of price movements thereby creating price momentum using intraday returns on over 60 futures on equities bonds commodities and currencies between 1974 and 2020 we document strong market intraday momentum everywhere the return during the last 30 minutes before the market close is positively predicted by the return during the rest of the day from previous market close to the last 30 minutes the predictive power is economically and statistically highly significant and reverts over the next days we provide novel evidence that links market intraday momentum to the gamma hedging demand from market participants such as market makers of options and leveraged etfs

estimating risk preferences from deductible choice we develop a structural econometric model to estimate risk preferences from data on deductible choices in auto insurance contracts we account for adverse selection by modeling unobserved heterogeneity in both risk claim rate and risk aversion we find large and skewed heterogeneity in risk attitudes in addition women are more risk averse than men risk aversion exhibits a u shape with respect to age and proxies for income and wealth are positively associated with absolute risk aversion finally unobserved heterogeneity in risk aversion is greater than that of risk and as we illustrate has important implications for insurance pricing

presidential address asset price dynamics with slow moving capital i describe asset price dynamics caused by the slow movement of investment capital to trading opportunities the pattern of price responses to supply or demand shocks typically involves a sharp reaction to the shock and a subsequent and more extended reversal the amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect institutional impediments to immediate trade such as search costs for trading counterparties or time to raise capital by intermediaries i discuss special impediments to capital formation during the recent financial crisis that caused asset price distortions which subsided afterward after presenting examples of price reactions to supply shocks in normal market settings i offer a simple illustrative model of price dynamics associated with slow moving capital due to the presence of inattentive investors i address the implications for asset price dynamics of the apparent slow movement of investment capital to trading opportunities the arrival of new capital to an investment opportunity can be delayed by fractions of a second in some markets for example an electronic limit order book market for equities or by months in other markets such as that for catastrophe risk insurance accordingly prices respond to supply or demand shocks with a sharp reaction because of the relatively small subset of capital and thus risk bearing capacity that is immediately available to absorb a shock on short notice such a price impact is substantially reversed over time as additional capital becomes available the amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect many sorts of attention costs to trade as well as institutional impediments to capital movement such as search costs for trading

capital account liberalisation and poverty how close is the link the literature on the theoretical and empirical aspects of the relationship between finance and economic growth is both substantial and extensive the same cannot be said on the relationship between financial development and poverty reduction an equally important aspect in this study we visit the theoretical arguments and conduct an empirical analysis of the relationship between the capital account dimension of financial liberalisation and poverty for developing countries for the period 1985 2005 in particular we employ the system gmm technique to test whether capital account liberalisation has helped alleviate poverty and also whether the extent to which capital account liberalisation affects poverty depends on the quality of institutions we also use ols and iv techniques to verify our findings our findings indicate that there is no statistically significant relationship between the degree of capital account liberalisation during the period and the poverty rate developing countries with higher institutional quality have lower poverty rates but the effect has low statistical significance a higher degree of capital account liberalisation is associated with a lower income share for the poor

repeated insurance contracts and moral hazard abstract an attempt is made to account for the frequently observed phenomenon of insurance companies offering discounts to clients who possess a favorable record of past claims we argue that such discounts provide a mechanism which enables both insurer and insured to counteract the inefficiency which arises from moral hazard

ambiguity and underwriter decision processes this paper provides empirical evidence that risk and ambiguity affect underwriters decisions on pricing insurance a field study of primary insurance underwriters in a random sample of commercial property and casualty insurance companies reveals that premiums are significantly higher for risks when there is either ambiguity regarding the probability of a particular event occurring and or uncertainty about the magnitude of the resulting loss the paper suggests economic and organizational rationales for this behaviour and offers several explanations as to why insurers in a competitive market can charge higher prices for ambiguous risks which promise to yield excess profits in the long run

tying life insurance and savings decisions a multiperiod expected utility approach abstract many whole life insurance contracts provide in addition to protection in case of death of the insured also a savings element the main purpose of this article is to provide an economic rationale for this practice two alternative models are offered in both models it is assumed that there is an asymmetry of information between the insurers and insureds where the know better their probability of death and hence adverse selection may cause a market failure it is shown that by offering several deliberately designed contracts tying savings and insurance the insurers can induce the insureds to self select that is insureds with higher probability of death will voluntarily choose different contracts than those with a lower probability of death and hence will reveal their probability of death to the insurers the problem of adverse selection is thus overcome in the first model contracts differ in the amount of insurance they specify and the amount of savings tied with insurance in the second model a multiperiod actually two period contract and a single period contract are offered the multiperiod contract specifies a savings element which will be received by the insured if he or she lives at the end of the second period it is shown that by the right choice of the return on the savings part insureds with lower probabilities of death will choose the multiperiod contract whereas insureds with higher probability of death will prefer two successive single period contracts again self selection is achieved these two models show that tie in arrangements of savings and insurance may help overcome the adverse selection problem and hence an economic rationale is provided for their existence the paper also examines the demand for life insurance and savings the sensitivity of the demand for these products to variations in key parameters is analyzed the differences between the sensitivity analyses results obtained when insurance and savings decisions are made separately and those obtained when these decisions are simultaneosly made are highlighted and explained

the effect of financial development on convergence theory and evidence we introduce imperfect creditor protection in a multicountry schumpeterian growth model the theory predicts that any country with more than some critical level of financial development will converge to the growth rate of the world technology frontier and that all other countries will have a strictly lower long run growth rate we present evidence supporting these and other implications in the form of a cross country growth regression with a significant and sizable negative coefficient on initial per capita gdp relative to the united states interacted with financial intermediation in addition we find that other variables representing schooling geography health policy politics and institutions do not affect the significance of the interaction between financial intermediation and initial per capita gdp and do not show any independent effect on convergence in the regressions our findings are robust to removal of outliers and to alternative conditioning sets estimation procedures and measures of financial development

asymmetric information and learning evidence from the automobile insurance market this paper tests the predictions of adverse selection models using data from the automobile insurance market i find that in contrast to what recent research suggests the evidence is consistent w

consumer lock in with asymmetric information abstract a two period version of the rothschild and stiglitz 1976 model of competitive screening in an insurance market is presented its features include repeat purchase of insurance among consumers no commitment among insurers or consumers asymmetric information among insurers about a consumer s accident history and state contingent contracts an equilibrium may exist in this model with full pooling in period one and consumer lock in in period two in such an equilibrium high risk consumers are experience rated and firms earn negative profits in period one and positive profits in period two