balancing skilled with unskilled migration in an urbanizing agricultural economy summary in the early stages of economic development the migration of unskilled workers contributes to labor intensive manufacturing production in middle income countries however the migration of skilled workers becomes the more important factor in economic progress evaluating the skill content of migration patterns therefore is essential to understanding migration s economic implications for this purpose we investigate the determinants of skilled and unskilled migration decisions in vietnam rural higher education is shown to promote knowledge intensive production by encouraging skilled individuals to migrate to cities in complementary fashion commercial farm development helps alleviate urban overcrowding by encouraging unskilled individuals to remain at home

the pricing of currency risk in japan abstract previous work on the pricing of exchange rate risk has primarily focused on us firms and surprisingly found stock returns were not significantly affected by exchange rate fluctuations in this paper we conduct an in depth investigation that examines whether exchange rate risk is priced in the equity market of japan using an intertemporal asset pricing testing procedure that allows risk premia to change through time in response to changes in macroeconomic conditions our multiperiod asset pricing tests show that the foreign exchange rate risk premium is a significant component of japanese stock returns specifically the results suggest that currency risk exposure commands a significant risk premium for multinationals and high exporting japanese firms the currency risk factor is found to be less influential in explaining the behavior of average returns for low exporting and domestic firms however it is shown to exhibit large return volatility that is likely to be perceived by investors who wish to control portfolio risk as an important underlying source of risk furthermore japanese stock returns are found to be related to the relative distress and size factors above and beyond the covariation explained by the currency risk factor

on the exclusion of assets from tests of the mean variance efficiency of the market portfolio this paper presents an analysis of the testability of the mean variance efficiency of a market index when the returns on some components of the index itself are not perfectly observable the results are basically not supportive of the notion that mean variance efficiency is testable on a subset of the assets bounding the market share of the missing asset and its expected return is not sufficient to produce a valid test when the variance of the missing asset is bounded and the amount of wealth that might be missing is small it is possible in principle to reject correctly the mean variance efficiency of a market index in his famous critique of the asset pricing theory tests roll 7 concludes that the only testable hypothesis associated with the generalized two parameter asset pricing model of black 1 is that the market portfolio is mean variance efficient it has been emphasized by ross 10 and roll 7 that the mean variance efficiency of the market portfolio is mathematically equivalent to a positive linear relation between expected returns and the betas calculated against such a portfolio roll 7 deduces that the theory capm is not testable unless the exact composition of the market portfolio is known and used in the tests this implies that the theory is not testable unless all individual assets are included in the sample errors of type one or two might occur when a market proxy is used instead of the true market portfolio even if the ex ante true expected returns and the covariance variance matrix of the returns on all the assets are used these errors are the result of the choice of the portfolio and as roll puts it even a small misspecification of the proxy s composition can lead to the wrong conclusion the market proxy might be mean variance efficient while the true market portfolio is not and vice versa in principle however there are cases in which the above two conditions are not both necessary to reject the theory one such exception presented by roll 7 is the case in which no totally positive portfolio is efficient if any totally positive market proxy is used a large sample would reject the null hypothesis unambiguously while the market portfolio identification problem constitutes a severe limitation to the testability of the theory the question of the mean variance efficiency of a particular market index with respect to a subset of assets is a typical problem of statistical inference the mean variance efficiency can be tested directly or by

measuring the pricing error of the arbitrage pricing theory this article provides an exact bayesian frame work for analyzing the arbitrage pricing the ory apt based on the gibbs sampler we show how to obtain the exact posterior distributions for functions of interest in the factor model in particular we propose a measure of the apt pricing deviations and obtain its exact posterior distribution using monthly portfolio returns grouped by industry and market capitalization we find that there is little improvement in reduc ing the pricing errors by including more factors beyond the first one as an important extension of the asset pricing model of sharpe 1964 and lintner 196 5 ross 1976 1977 derived the arbitrage pricing theory apt which addresses a fundamental problem in finance to char acterize the expected return on a security the apt implies that the expected return is approximately a

supply side interventions and redistribution we evaluate the eect on welfare of shifting the burden of capi tal income taxes to labor taxes in a dynamic equilibrium model with heterogeneous agents and constant tax rates we calibrate and simu late the economy we nd that lowering capital taxes has two eects i it increases e ciency in terms of aggregate production and ii it redistributes wealth in favor of those agents with a low wage wealth ratio when the parameters of the model are calibrated to match the distribution of income in terms of the wage wealth ratio the redis tributive eect dominates and agents with a high wage wealth ratio would experience a large loss in utility if capital income taxes were eliminated

reprint of crop prices and the individual decision to migrate abstract this paper investigates the effect of commodity prices in particular rice and coffee on the decision of migrating at the individual level as most coffee production is sold by households for exports we would expect that coffee price shocks would have a direct effect on the probability to migrate on the other hand we would anticipate that fluctuations in rice prices have little or no effect on migration decisions given that rice is mainly produced for household consumption we test these hypotheses drawing evidence from migration in viet nam we show that the lower the price of coffee the higher the likelihood of migrating this evidence seems to suggest that migration acts as a shock coping strategy we find that rice prices have no effect on the probability of migrating we further explore the extent of migrants self selection and show that lower coffee prices increase the migration probability of individuals with lower education

local market and national components in house price appreciation abstract we analyze real home price appreciation using a long time series 1971 1989 and large cross section 56 metro areas our findings yield important new insights into two outstanding issues in real estate finance and economics the first deals with the implications for investment opportunities in housing across metro areas a striking result is that we cannot reject the null hypothesis of equal appreciation rates across locales a priori the results are suggestive of equal expected appreciation across the different local markets however it is noteworthy that we find significant serial correlation in some local appreciation series this is consistent with previous findings by case and shiller 6 and suggests that prescient market timers might have been able to make money in selective markets we then consider the potential implications of equal appreciation rates across cities for housing market equilibrium in light of the fact that price levels do materially differ across metro areas we argue that equal real appreciation rates starting from different price levels imply increasingly divergent prices of local traits in terms of foregone consumption without special assumptions with respect to income and productivity differentials across locations or to local trait income elasticities of demand the appreciation rates in high housing price level areas ultimately have to fall below those in low price level areas preliminary evidence indicates that higher priced areas tend to have significantly lower appreciation rates controlling for local fixed effects and a common time varying effect

using generalized method of moments to test mean variance efficiency this paper develops tests of unconditional mean variance efflciency under weak distributional assumptions using a generalized method of moments framework these tests are potentially more robust than commonly employed tests which rely on the assumption that asset returns are normally distributed and temporarily i i d using returns for size based portfolios from 1926 to 1988 we show that the conclusion concerning the mean variance effilciency of market indexes can be sensitive to the test considered the application of multivariate statistical techniques in financial economics has become common practice in recent years much of the development has been in the area of testing asset pricing models the assumption that asset returns follow a time invariant multivariate normal distribution permits tests of restrictions on model parameters in a pooled time series cross section framework these tests can be interpreted as tests of the mean variance efficiency of a portfolio or combination of portfolios gibbons 1982 jobson and korkie 1982 stambaugh 1982 shanken 1985 1987 kandel and stambaugh 1987 mackinlay 1987 and gibbons ross and shanken 1989 are examples of work presenting multivariate tests of the capital asset pricing model connor and korajczyk 1988 and lehmann and modest 1988 present multivariate tests of the arbitrage pricing model breeden gibbons and litzenberger 1989 present multivariate tests of the consumption based capm although these papers assume the normality of asset returns little analysis has been conducted to understand the sensitivity of the inferences to violations of this assumption 2 3

the mean variance efficiency of benchmark portfolios uk evidence abstract this paper examines the ex ante mean variance efficiency of four alternative benchmark portfolios within a uk context each of the benchmark portfolios is shown to be mean variance inefficient over the period january 1980 to december 1989 additionally the gibbons et al test statistic of efficiency appears to be fairly robust to violations in the distributional assumptions gibbons m r s a ross and j shanken 1989 test of the efficiency of a given portfolio econometrica 57 1121 1152

portfolio rebalancing and the turn of the year effect this paper finds that for the 1935 1986 period the market s risk return relation does not have a january seasonal the findings differ from those of other studies due to the use of value weighted rather than equally weighted portfolios inferences are sensitive to the weighting procedure because of the small firm return patterns in january in particular even in those januaries for which the market return is negative small firm returns are positive and they are more positive the higher is beta this is consistent with the portfolio rebalancing explanation of the turn of the year effect since at least 1926 the average return on small firms in january has been unusually high a phenomenon known as the turn of the year effect in this paper we present new evidence regarding the risk return characteristics of small firms in january we find that for small firms there is a positively sloped riskreturn relation in both up and down markets this pattern is difficult to reconcile with the belief that the high return on small firms in january is equilibrium compensation for risk bearing we show how these patterns in small firms returns have led others to conclude that the market s risk return relation has a january seasonal in particular rozeff and kinney 21 and tinic and west 22 23 among others using equally weighted portfolios formed on the basis of historical betas have found a steeper slope for the capm s risk return relation in january than in other months we demonstrate that this pattern exists only for small firms consequently statistical inferences about the risk return relation are heavily dependent upon whether equally weighted or value weighted portfolio returns are used in the estimation we show that for 1935 86 when monthly cross sectional regressions are estimated using value weighted portfolio returns there is no more of a statistically significant difference in the estimated return to risk bearing in january than in the other eleven months of the year the notion that there is a january seasonal in the capm s risk return relation for the us has rapidly become accepted knowledge for example corhay hawawini and michel 6 accept this conclusion and investigate whether other

multivariate tests of the zero beta capm abstract a cross sectional regression test csrt of the capm is developed and its connection to the hotelling t2 test of multivariate statistical analysis is explored algebraic relations between the csrt the likehood ratio test and the langrange multiplier test are derived and a useful small sample bound on the distribution function of the csrt is obtained an application of the csrt suggests that the crsp equally weighted index is inefficient but that the inefficiency is not explained by a firm size effect from february to december

an empirical model of labor supply in a life cycle setting this paper formulates and estimates a structural intertemporal model of labor supply using theoretical characterizations derived from an economic model of lifetime behavior a two step empirical analysis yields estimates of intertemporal and uncompensated substitution effects which provide the information needed to predict the response of hours of work to life cycle wage growth and shifts in the lifetime wage path

some results in the theory of arbitrage pricing this paper derives a stronger version of huberman s recent preference free pricing theorem this pricing result relates the expected return on an asset to its factor responses and the covariance structure of the residuals from a linear factor model it must characterize any infinite asset economy in which no arbitrage opportunities are present whether or not the factor model has uncorrelated residuals this result provides the intuition for the role of residual risk in the pricing model and eliminates some classes of arbitrage opportunities still present under huberman s bound some applications to empirical tests and performance measurement are also discussed the arbitrage pricing theory is one of several financial pricing models which attempts to explain the cross sectional variation in expected returns on assets in certain respects it is similar to the capital asset pricing model but there are both substantive and subtle differences one of the key advantages of the apt is that it derives a simple linear pricing relation approximating that in the capm without some of the latter s objectionable assumptions perhaps the key disadvantage of the apt is that it provides no clues as to what might be important factors nor as to how to interpret the factor premiums which appear in the pricing equation this paper serves several purposes after reviewing the linear factor model formulation in section i it derives in section ii a stronger version of huberman s 9 recent preference free pricing theorem this pricing result relates the expected return on an asset to its factor responses and the covariance structure of the residuals this relation must characterize any infinite asset economy in which no arbitrage opportunities are present whether or not a linear factor model with uncorrelated residuals is the appropriate returns generating mechanism section iii specializes this result by eliminating the effects of residual covariances and compares the results here to those of previous apt models when applied to the standard linear factor model with uncorrelated residuals this new pricing bound eliminates arbitrage opportunities which remain under huberman s bound this result also provides for the first time the intuition for the role of residual risk in the approximate pricing relation section v provides an interpretation of the factor premiums and gives a valid asset pricing model interpretation to the apt which is consistent with merton s

marginal income tax rates in the united states a non parametric approach abstract the objective of this paper is to estimate both the u s federal marginal income tax rate and the state and local marginal income tax rates we use the non parametric regression method and data on income and tax extracted from u s individual tax model files for the period 1985 1995 the flexibility of the non parametric approach and the information at the individual level enable us to construct a more reliable time series of the average federal marginal income tax rates and that of the average state and local marginal income tax rates our results suggest that the average federal marginal income tax rate varies from 18 2 to 21 8 and the average state and local marginal income tax rate varies from 4 7 to 5 6 we also find that the state and local income tax accounts for roughly 18 of the total income taxes paid during 1985 1995 moreover our analysis shows that stephenson journal of monetary economics 41 1998 pp 389 409 provides the most consistent tax rate series for use in applications that require estimates of tax rates for years prior to 1985

sensitivity of multivariate tests of the capital asset pricing model to the return measurement interval the capital asset pricing model s capm primary empirical implication is a positively sloped linear relation between a security s expected rate of return and its relative risk beta recent research indicates that inferences about the riskreturn relation are sensitive to the choice of the return measurement interval we perform multivariate tests of the sharpe lintner capm using monthly and annual returns on market value ranked portfolios the capm is rejected using monthly returns a result consistent with previous research in contrast we fail to reject the capm when annual holding period returns are used the capital asset pricing model s capm primary empirical implication is a positively sloped linear relation between a security s expected rate of return and its relative risk beta

are carbon taxes good for the poor a general equilibrium analysis for vietnam summary we evaluate effects of an environmental tax using a general equilibrium model linked to a household database the burden of the tax applied mainly to energy is passed forward by non tradable industries and backward by tradable industries facing fixed world prices the tax is thus equivalent to a real exchange rate appreciation and since export industries are labor intensive reduces employment and increases poverty especially when labor supply is responsive to wages the use of revenues to increase transfers to households can offset poverty increases but does not create jobs thus the tax will likely conflict with other development policy objectives

on multivariate tests of the capm abstract this paper evaluates the power of multivariate tests of the capital asset pricing model the results indicate that when employing an unspecified alternative hypothesis the ability of the tests to distinguish between the capm and other pricing models is poor an upper bound is derived for the distance the alternative distribution of the test statistic can be from the null distribution when the deviations from the capm are due to missing factors this upper bound explains the low power of the tests

taxation of human capital and wage inequality a cross country analysis wage inequality has been significantly higher in the united states than in continental european countries ceu since the 1970s moreover this inequality gap has further widened during this period as the us has experienced a large increase in wage inequality whereas the ceu has seen only modest changes this paper studies the role of labor income tax policies for understanding these facts we begin by documenting two new empirical facts that link these inequality differences to tax policies first we show that countries with more progressive labor income tax schedules have significantly lower before tax wage inequality at different points in time second progressivity is also negatively correlated with the rise in wage inequality during this period we then construct a life cycle model in which individuals decide each period whether to go to school work or be unemployed individuals can accumulate skills either in school or while working wage inequality arises from differences across individuals in their ability to learn new skills as well as from idiosyncratic shocks progressive taxation compresses the after tax wage structure thereby distorting the incentives to accumulate human capital in turn reducing the cross sectional dispersion of before tax wages we find that these policies can account for half of the difference between the us and the ceu in overall wage inequality and 76 of the difference in inequality at the upper end log 90 50 differential when this economy experiences skill biased technological change progressivity also dampens the rise in wage dispersion over time the model explains 41 of the difference in the total rise in inequality and 58 of the difference at the upper end

a note on the geometry of shanken s csr t2 test for mean variance efficiency abstract shanken 1985 derives a test for the zero beta capital asset pricing model capm which as he points out is equivalent to a test of the mean variance efficiency of the market portfolio this note illustrates the geometry of shanken s test in the mean variance space

measuring poverty in a growing world or measuring growth in a poor world the extent to which growth reduces global poverty has been disputed for 30 years although there are better data than ever before controversies are not resolved a major problem is that consumption measured from household surveys which is used to measure poverty grows less rapidly than consumption measured in national accounts in the world as a whole and in large countries particularly india china and the united states in consequence measured poverty has fallen less rapidly than appears warranted by measured growth in poor countries one plausible cause is that richer households are less likely to participate in surveys but growth in the national accounts is also upward biased and consumption in the national accounts contains large and rapidly growing items that are not consumed by the poor and not included in surveys so it is possible for consumption of the poor to grow less rapidly than national consumption without any increase in measured inequality current statistical procedures in poor

small sample tests of portfolio efficiency abstract this paper presents an eigenvalue test of the efficiency of a portfolio when there is no riskless asset complementing the test of gibbons ross and shanken 1989 besides optimal upper and lower bounds an easily implented numerical method is provided for computing the exact p value our approach makes it possible to draw statistical inferences on the efficiency of a given portfolio both in the context of the zero beta capm and with respect to other linear pricing models as an application using monthly data for every consecutive five year period from 1926 to 1986 we reject the efficiency of the crsp value weighted index for most periods

nonnormalities and tests of asset pricing theories the robustness of the multivariate test of gibbons ross and shanken 1986 to nonnormalities in the residual covariance matrix is examined after considering the relative performance of various tests of normality simulation techniques are used to determine the effects of nonnormalities on the multivariate test it is found that where the sample nonnormalities are severe the size and or power of the test can be seriously misstated however it is also shown that these extreme sample values may overestimate the population parameters hence we conclude that the multivariate test is reasonably robust with respect to typical levels of nonnormality in traditional hypothesis testing a nonrandom test maps the values of a random variable into a sample space dichotomized into regions where a hypothesis is either accepted or rejected there are three possible outcomes from this process 1 a correct decision 2 a false rejection type i error or 3 failure to reject the hypothesis when it is false type ii error of the latter two types of error an error of the first kind is usually considered less desirable so typically a level of significance is selected with low probability of type i error e g 0 05 or 0 01 and a test is chosen so as to maximize power minimize probability of type ii error for the specified level of type i error knowledge of the relative level of these two errors is critical in assimilating the results of an experiment for example if the power of a test is equal to its significance level i e a weak test rejection of the null contains zero information 2 additionally in constructing parametric tests of hypotheses it is necessary to assume some distribution for the underlying data consequently when using parametric tests rejection of the null is only equivalent to rejection of at least one of the underlying hypotheses i e the null hypothesis or the distributional assumption interestingly the size significance level and power of procedures used to test

progressive tax and inequality in a unionized economy in this paper we develop a heterogeneous agent endogenous growth model of a unionized economy with distinct progressive tax schedules on labor and capital income with time preference heterogeneity the effective labor force balanced growth and income inequality are endogenously determined and these interact with each other a reduction in the degree of progressive labor tax yields a double dividend in terms of reducing income inequality and boosting economic growth while capital income progressivity displays the usual growth inequality trade off particularly the double dividend effect becomes more pronounced when unionization is declined or trade unions become more wage oriented leading to the so called cheshire cat phenomenon

the likelihood ratio test statistic of mean variance efficiency without a riskless asset abstract the question whether a given porfolio is mean variance efficient is a basic problem of investment analysis mean variance efficiency is also the basis of the capital asset pricing model this paper presents the explicit form of the likelihood ratio test of the hypothesis that a given portfolio or a particular market index is ex ante mean variance efficient in the case where there is no riskless asset geometric relations are illustrated to provide intuition about the constrained maximum likelihood estimators and the test statistic and two simple economic interpretations of the test are given

subperiod aggregation and the power of multivariate tests of portfolio efficiency abstract when testing portfolio efficiency empiricists usually perform tests using subperiods and aggregate the results in some manner although the power of individual subperiod tests has been studied previously little is known about the power of the aggregate test power is evaluated here through simulations using two different aggregation techniques aggregate power is substantially higher than that for a single subperiod for example in one scenario the aggregate power is 0 77 over a sixty year period but only 0 17 for each five year subperiod in addition the level of power depends on the method of aggregation

on the exclusion of assets from tests of the mean variance efficiency of the market portfolio an extension this paper extends kandel s 3 analysis of the testability of the mean variance efficiency of a market index when the return on some component of the index is not perfectly observable in addition to information about the mean and variance of the missing asset considered by kandel we explore the usefulness of information about the beta of the missing asset on the observed sub portfolio in an economy with a riskless asset the results are somewhat more supportive of the notion that mean variance efficiency is testable on a subset of the assets in his important critique of tests of the capital asset pricing model roll 4 emphasizes that empirical results obtained with market proxies need not be indicative of the results that would be obtained in testing the efficiency of the true market portfolio were it observable more recently kandel 3 has analyzed the testability of the mean variance efficiency of a market portfolio when the return on some component of the portfolio is not perfectly observable but partial information about its characteristics is available he finds that knowledge of the market share and expected return of the missing asset is not sufficient to permit a test however bounding the variance of return on the missing asset does make it possible in principle to correctly reject the efficiency of the portfolio provided that the market share of the missing asset is not too large building on the analytical framework established by kandel we explore the value of information about the riskless rate of return and the covariance betwen the return on the missing asset and the observed sub portfolio given a riskless asset the question we address is whether the unobservable market portfolio of risky assets is equal to the tangency portfolio of the efficient frontier we find that knowledge of the market share and expected return of the missing asset is still not sufficient to permit a test of this more restrictive efficiency condition as in the no riskless asset case given a bound on the variance of the missing asset it is sometimes possible to correctly infer that the unobserved portfolio is inefficient this occurs when the market share of the missing asset or the variance of its return is small and the sub portfolio is sufficiently far from the linear

global market shocks and poverty in vietnam the case of rice world food prices have experienced dramatic increases in recent years these shocks affect food importers and exporters alike vietnam is a major exporter of rice and rice is also a key item in domestic production employment and consumption accordingly rice price shocks from the world market have general equilibrium impacts and as such their implications for household welfare are not known ex ante in this paper we first present a simple framework for understanding the direct and indirect welfare effects of a global market shock of this kind second we quantify the transmission of the price shock from global indicator prices to domestic markets third we then we use an applied general equilibrium age model to simulate the effects of domestic price changes in more detail fourth a recursive mapping to a large nationally representative living standards survey permits us to identify in detail the ceteris paribus effects of the shock on household incomes and welfare in this analysis interregional and intersectoral adjustments in the labor market emerge as key channels transmitting the effects of global price shocks across sectors and among households

fiscal policy driven bond risk premia abstract fiscal policy matters for bond risk premia empirically government spending level and uncertainty predict bond excess returns as well as term structure level and slope movements shocks to government spending level and uncertainty are also priced in the cross section of bond and stock portfolios theoretically government spending level shocks raise inflation when marginal utility is high thus generating positive inflation risk premia term structure level effect uncertainty shocks steepen the yield curve slope effect producing positive term premia these effects are consistent with evidence from a structural vector autoregression asset pricing tests using model simulated data corroborate our empirical findings

a critical reexamination of the empirical evidence on the arbitrage pricing theory this paper demonstrates that the roll and ross rr and other previously published tests of the apt are subject to several basic limitations there is a general nonequivalence of factor analyzing small groups of securities and factor analyzing a group of securities sufficiently large for the apt model to hold it is found that as one increases the number of securities the number of factors determined increases this increase in the number of factors with larger groups of securities cannot readily be explained by a distinction between priced and nonpriced risk factors as it is impermissible to carry out tests on whether a given risk factor is priced using factor analytic procedures the apt model as exposited by ross 17 18 and extended by huberman 9 has provided the basis of an extensive literature as for example brown and weinstein 1 chen 3 hughes 10 ingersoll 11 jobson 12 reinganum 15 roll and ross rr 16 and shanken 17 to mention but a few it has also been treated in a more general context by chamberlain and rothschild 2 our purpose here is not to comment on this collection of papers many of which are unpublished but to reexamine the evidence presented by rr and point out major pitfalls involved in the empirical methodology employed by them and others who have followed their lead rr claim that on theoretical and more importantly on empirical grounds arbitrage pricing theory apt is an attractive alternative to the capital asset pricing model capm the apt it is argued requires less stringent and presumably more plausible assumptions is more readily testable since it does not require the measurement of the market portfolio and may be better able to explain the anomalies found in the application of the capm to asset returns the acceptability of the apt like that of the capm or any other theory ultimately depends on its ability to explain the relevant empirical evidence our subsequent discussion will show that many of the prqblems associated with the capm are also present in the apt context and that its ability to explain the relevant empirical evidence is not markedly superior moreover it raises questions not only about the rr and related empirical investigations of the apt but also about the testability of that theory in the present state of the art a major part of the problem results from the necessity to break down the universe being analyzed through the apt model this is forced upon the investigator by the fact

the empirical foundations of the arbitrage pricing theory abstract this paper uses maximum likelihood factor analysis of large cross sections to examine the validity of the arbitrage pricing theory apt we are unable to explain the expected returns on firm size portfolios although we do explain the expected returns on portfolios formed on the basis of dividend yield and own variance where risk adjustment using the usual capm market proxies fails we also compare alternate versions of the apt and sharply reject the hypothesis that basis portfolios formed to mimic the factors span the mean variance frontier of the individual assets

potential performance and tests of portfolio efficiency abstract the potential performance of an asset set may be obtained by choosing the portfolio proportions to maximize the sharpe 1966 performance measure if a portfolio has a sharpe measure equivalent to the potential performance of the underlying set of assets then it is efficient multivariate statistical procedures for comparing potential performance and testing portfolio efficiency are developed and then evaluated using simulations two likelihood ratio statistics are then used to compare stock and bond indices against sets of 20 and 40 portfolios the procedures are also compared to the gibbons 1982 methodology for testing financial models

marginal tax rates and income inequality in a life cycle model in this paper we perform computational counterfactual experiments to examine the quantitative impact of marginal tax rates on the distribution of income our methodology builds on previous simulation models developed by auerbach and kotlikoff and fullerton and rogers and uses an algorithm that allows us to examine marginal tax rate structures in their literal form we find that distortions associated with particular marginal tax rate structures have sizable effects on income inequality in a reasonably quantified life cycle setting in our baseline experiments the change in steady state income inequality under 1989 u s income tax rates vis a vis 1984 rates is about half as large as the change actually seen in the data over those two years when measured in terms of a monetary metric derived from gini coefficients

factor pricing in a finite economy abstract prior theoretical derivations of the arbitrage pricing theory apt bound an aggregate measure of the deviation of mean asset returns from that predicted by a linear pricing equation it is conceivable given this bound that some assets might be badly mispriced by the model in this paper a more intuitive derivation of the factor pricing equation is presented which describes the deviation on an asset by asset basis the deviation is shown to be small for assets in a realistic finite economy and is arbitrarily close to zero for those assets with arbitrarily small size relative to aggregate wealth it follows that the linear pricing equation provides a good approximation for the mean returns of all traded assets

the effect of marginal tax rates on taxable income a panel study of the 1986 tax reform act this paper uses a treasury department panel of more than 4 000 taxpayers to estimate the sensitivity of taxable income to changes in tax rates on the basis of a comparison of the tax returns of the same individual taxpayers before and after the 1986 tax reform the analysis emphasizes that the response of taxable income involves much more than a change in the traditional measures of labor supply the evidence shows an elasticity of taxable income with respect to the marginal net of tax rate that is at least one and could be substantially higher the implications for recent tax rate changes are discussed

multivariate proxies and asset pricing relations abstract a framework is developed in which inferences can be made about the validity of an equilibrium asset pricing relation even though the central aggregate in this relation is unobservable a multivariate proxy for the true market portfolio consisting of an equal weighted stock index and a long term government bond index is employed in an investigation of the sharpe lintner capm the empirical evidence suggests that we can reject the joint hypothesis that a capm is valid and b multiple correlation between the true market portfolio and proxy assets exceeds 0 7 connections to the equilibrium factor pricing literature are also explored

event studies in economics and finance the event study is an important research tool in economics and finance the goal of an event study is to measure the effects of an economic event on the value of firms event study methods exploit the fact that given rationality in the marketplace the effects of an event will be reflected immediately in security prices thus the impact can be measured by examining security prices surrounding the event in this paper event study methods are described including some of the potential complications an example is included to illustrate the approach

consumption volatility production volatility spot rate volatility and the returns on treasury bills and bonds abstract the study documents a relation between the expected holding period premiums on treasury bills and the ex ante conditional volatilities of consumption spot one month interest rate and industrial production a model portraying the relation as a risk and return phenomenon is presented and tested consistent with the model the coefficients of the relation appear to depend on the sensitivity of the realized premium to the ex post shocks in consumption industrial production and the spot rate the model fits the data better than the traditional term premium models

taxing top earners a human capital perspective we assess the consequences of substantially increasing the marginal tax rate on u s top earners using a human capital model we nd that 1 the peak of the model laer curve occurs at a 52 percent top tax rate 2 if human capital were exogenous then the top of the laer curve would occur at a 66 percent top tax rate and 3 applying the theory and methods that diamond and saez 2011 use to provide quantitative guidance for setting the top tax rate to model data produces a tax rate that substantially exceeds 52 percent

labor market consequences of internal migration in turkey abstractduring the past 30 years turkey has undergone profound economic and social transformations including fundamental shifts from a state oriented economy to a market oriented economy large scale modernization investments in telecommunication and transportation services and low intensity ongoing armed conflict concentrated in the country s southeastern region for such a period using the 1990 and 2000 turkish censuses i evaluated the labor market consequences of internal migration that might have been sparked by such significant economic and social changes overall the results suggest that provinces with a higher share of recent migrants may observe decreases in their native population s labor market opportunities while this adverse impact of the recent migrant inflows remains robust it exhibits heterogeneity with respect to the skill level of natives as well as for the labor market outcomes of different native and migrant groups

simulating fundamental tax reform in the united states this paper uses a new large scale dynamic life cycle simulation model to compare the welfare and macroeconomic effects of transitions to five fundamental alternatives to the u s federal income tax including a proportional consumption tax and a flat tax the model incorporates intragenerational heterogeneity and a detailed specification of alternative tax systems simulation results project significant long run increases in output for some reforms for other reforms namely those that seek to insulate the poor and initial older generations from adverse welfare changes long run output gains are modest

a test of dual labor market theory despite substantial differences in their views of the appropriate policy response to the existence of poverty neither the proponents of dual market theory nor its critics have proposed potentially conclusive tests of the dual market hypothesis this paper presents a test of the two central propositions of dual market theory 1 the existence of two distinct labor markets with different wage setting mechanisms and 2 the existence of barriers to mobility between the labor markets we find considerable support for both hypothesis estimation of a switching model of wage determination with unknown regimes yields two distinct wage equations the one which most workers are associated with closely resembles the standard human capital regression with significant returns to education and experience the other equation is flat with no returns to human capital these two equations resemble the predictions of dual market theory for the primary and secondary markets respectively further we present evidence that at least some non white workers are involuntarily confined to the secondary market this crowding of minority workers into the low wage labor market accounts for a substantial portion of white non white wage differences we interpret these results as providing empirical support for the dual market hypothesis and for recent theoretical work on efficiency wagemodels in addition combining the efficiency wage argument with the observation that much of the white non white wage difference is explained by the exclusion of non whites from the primary sector suggests an explanation for the persistance of wage differences this abstract was borrowed from another version of this item

an empirical comparison of alternative models of capital asset pricing in germany abstract in an empirical investigation this research finds that the capm is a better explanatory model of risk return relationships in the german stock market than the ccapm

a unified beta pricing theory abstract this paper derives ross s mutual fund separation theory and a new equilibrium version of ross s arbitrage pricing theory as special cases of a general theory the paper also reveals that the two theories are identical in their predictions of asset prices and portfolio returns the capital asset pricing model a restricted case of the mutual fund separation theory receives special treatment

a monte carlo investigation of the accuracy of multivariate capm tests abstract in a multivariate regression model relating individual returns to the market return capm implies non linear restrictions on the parameters several asymptotically valid tests of these restrictions have been suggested the existing monte carlo evidence shows that some of these tests are unreliable for reasonable sample sizes but does not indicate well which tests are reliable this paper reports the results of an extensive monte carlo experiment shanken s csr test and jobson and korkie s corrected likelihood ratio test are quite accurate in all cases we consider

fiscal policy with heterogeneous agents and incomplete markets i undertake a quantitative investigation into the short run effects of changes in the timing of proportional income taxes for model economies in which heterogeneous households face a borrowing constraint temporary tax changes are found to have large real effects in the benchmark model a temporary tax cut increases aggregate consumption on impact by around 29 cents for every dollar of tax revenue lost comparing the benchmark incomplete markets model to a complete markets economy income tax cuts provide a larger boost to consumption and a smaller investment stimulus when asset markets are incomplete copyright 2005 wiley blackwell

determinants of rural urban inequality in vietnam detailed decomposition analyses based on unconditional quantile regressions abstractthis study examines determinants of the rural urban gap of household welfare in vietnam during 2008 2012 using national household data we have used unconditional quantile regressions uqr

reference variables factor structure and the approximate multibeta representation the arbitrage pricing theory apt implies that if asset returns have a factor structure then an approximate multibeta representation holds with respect to the factors as reference variables this paper assumes that asset returns satisfy a factor structure and derives a condition under which the approximate multibeta representation holds with respect to a set of reference variables which may not be the factors this condition is that the regression matrix of the reference variables on the factors is nonsingular implications for the testability of the apt are also discussed

posterior predictive and utility based approaches to testing the arbitrage pricing theory abstract to provide a framework for judging the economic significance of departures from the arbitrage pricing theory we adopt a utility based metric based on optimal portfolio choices this measure is examined using both predictive and posterior analysis our predictive analysis shows very large and economically significant departures from the model restrictions however the high level of parameter uncertainty suggests that we cannot conclusively either affirm or reject the apt our conclusions differ markedly from other studies which employ traditional significance testing procedures and in many instances fail to reject the apt restrictions

on the identification of frisch labor supplies abstract this paper determines which structural components of the intertemporal decision process can be recovered from labor supply estimates obtained using heckman and macurdy s approach

asset trading transaction costs and the equity premium summary a model is developed that attempts to explain the historical size of the us equity premium by distinguishing between gross and net returns accruing to agents the model derived by mehra and prescott 1985 is augmented with a bid ask spread calibrated and simulated equity premia in the order of 3 4 are generated for plausible values of the transactions parameters this contrasts with mehra and prescott who find a maximum equity premium of 0 4 while the historic equity premium has been about 6 2 estimates of the bid ask spread are obtained using gmm and tests of the overidentifying restrictions are not rejected for several lists of instrumental variables

the current state of the arbitrage pricing theory this paper provides a simple proof of a recent theorem presented by reisman 1992 concerning the use of proxies for the factors in the return generating process of the arbitrage pricing theory apt in the single factor case the theorem asserts that any variable correlated with the factor can serve as the benchmark in an approximate apt expected return relation the significance of this result is considered and a new direction for empirical work on arbitrage pricing is outlined given a factor model for an infinite sequence of asset returns ross 1976 showed that the absence of arbitrage implies an approximate linear relation between expected returns and the factor betas ross assumed that returns conform to a strict factor structure i e a factor model with uncorrelated disturbances but noted that this condition could be weakened in deriving the arbitrage pricing theory apt nonetheless statistical methods based on the strict factor model assumption dominated the early empirical work on the apt at first glance the requirement of a strict factor structure appeared to impose a strong restriction on the sets of factors that could be used as a benchmark for measuring systematic risk shanken 1982 demonstrated though that virtually any variables could serve as the factors in a welldefined strict factor model one need only repackage an initial finite set of assets into an equivalent set of portfolios in order to fundamentally alter the associated factor space 2 thus the statistical assumptions underlying the apt cannot by themselves characterize the economically relevant components of returns chamberlain and rothschild 1983 shifted attention away from strict factor structures by proving that the apt holds more generally if returns conform to an approximate factor model 3 in this case the disturbances need

on correlations and inferences about mean variance efficiency a framework is presented for investigating the mean variance efficiency of an unobservable portfolio based on its correlation with a proxy portfolio a sensitivity analysis derives the highest correlation between the proxy and a portfolio that reverses the inference of a test of sharpe lintner tangency for example the maximum correlation between the value weighted nyse amex portfolio and a portfolio inferred tangent ranges from 0 76 to 0 48 we also test whether the correlation between the proxy and the tangent portfolio exceeds a given level this hypothesis is often rejected for the nyse amex proxy at a correlation of 0 7

orthogonal frontiers and alternative mean variance efficiency tests this paper catalogues properties of minimum norm orthogonal portfolios portfolios which minimize a quadratic objective function and have returns uncorrelated with those of a candidate portfolio that is not mean variance efficient the analysis shows that the dollar versions of these portfolios correspond to estimators of zero beta rates based on alternative statistical criteria and grouping procedures while costless orthogonal portfolios represent candidate mean variance efficiency tests it also develops inference procedures for zero and unit net investment portfolios of individual securities instead of grouped portfolios that have zero expected betas the resulting mean variance efficiency tests are reasonably insensitive to the underlying statistical assumptions i introduction most mean variance efficiency tests follow from the following simple intuition if a given portfolio p is mean variance efficient all portfolios that cost a dollar and have returns uncorrelated with those of p i e zero beta portfolios have identical expected returns hence all costless zero beta portfolios have expected returns of zero when p is mean variance efficient however the situation is altered considerably when p is not a mean variance efficient portfolio in this case roll 1980 has shown that there are portfolios that cost a dollar and have returns uncorrelated with those ofp at all levels of mean return as a consequence there are costless zero beta portfolios at all levels of expected return as well when p is inefficient mean variance efficiency tests typically involve asking whether particular costless zero beta portfolios have zero expected returns the translation of this intuition into operational test statistics is a problem in sampling theory for example when tests are based on costless portfolios with zero sample betas appropriate allowance must be made for the impact of sampling error in the sample betas on the distribution of its mean return such analysis is extremely complicated when the number of assets included in such portfolios exceeds the number of time series observations on asset returns hence previous investigations have restricted their attention to the special case where the number of assets is taken to be smaller than the number of time series observations an enormous amount has been learned about both the statistical properties and economic interpretation of two such tests in these circumstances shanken s 1985 csr test and the related likelihood ratio test of kandel 1984 a partial list of relevant papers includes roll 1979 1985 gibbons 1982 stambaugh

an explicit bound on individual assets deviations from apt pricing in a finite economy abstract ross s arbitrage pricing theory apt is a tractible and reasonable alternative to the mean variance model nonetheless understanding of the theory has been obscured by the complexity of the sequence economy models used for motivation by contrast we give a simple and direct derivation of the apt in a finite economy using an explicit bound on the deviations from apt prices across assets a coarse calculation shows that theoretical deviations from apt pricing are negligible in our economy

new estimates of intertemporal substitution abstract this paper estimates the intertemporal elasticity of substitution for married males taking into account that many individuals are at a corner solution for weeks worked by virtue of working year round the fact that these individuals do not choose to engage in much intertemporal substitution may simply indicate that the corner solution inhibits their ability to do so rather than indicating a low desire to intertemporally substitute our estimates are able to distinguish between these two cases with the results showing much higher intertemporal elasticities of substitution than reported in earlier studies

yes the apt is testable the arbitrage pricing theory apt has been proposed as an alternative to the meanvariance capital asset pricing model capm this paper considers the testability of the apt and points out the irrelevance for testing of the approximation error we refute shanken s objections including his assertion that roll s critique of the capm is applicable to the apt we also explain the testability of the apt on subsets and we explore the relationship between the apt and the capm the arbitrage pricing theory apt has been the subject of extensive research efforts since it was introduced by ross 36 37 the research has included theoretical papers and a growing empirical literature 2 nonetheless there seems to be some confusion in the literature about the relation between the theoretical underpinnings of the apt and its empirical tests this paper is an attempt to alleviate the confusion to illustrate the issues and to provide a focus section i of this paper is devoted to examining and refuting some points raised in shanken 40 which considers the testability of the apt the underlying premise of the apt is that asset returns ri are generated by a factor model of the form

crop prices and the individual decision to migrate abstract this paper investigates the effect of commodity prices in particular rice and coffee on the decision of migrating at the individual level as most coffee production is sold by households for exports we would expect that coffee price shocks would have a direct effect on the probability to migrate on the other hand we would anticipate that fluctuations in rice prices have little or no effect on migration decisions given that rice is mainly produced for household consumption we test these hypotheses drawing evidence from migration in viet nam we show that the lower the price of coffee the higher the likelihood of migrating this evidence seems to suggest that migration acts as a shock coping strategy we find that rice prices have no effect on the probability of migrating we further explore the extent of migrants self selection and show that lower coffee prices increase the migration probability of individuals with lower education

multivariate tests of asset pricing the comparative power of alternative statistics this paper examines estimation issues associated with multivariate tests of asset pricing two issues are considered 1 the constraint that the sample size n must be less than the time series t and 2 the relative effect on power of using the multivariate statistic versus a univariate counterpart we find that an alternative statistic that allows for large n does not dominate the usual portfolio tests more notably we find that the power of a simple diagonal statistic usually dominates the multivariate statistic for cases considered inthis study

inter provincial migration and inequality during vietnam s transition abstract vietnam s economic boom during the transition to a market economy has centered on very rapid growth in some sectors and provinces yet poverty has diminished across the entire country with capital investments highly concentrated by province and sector geographic labor mobility may be critical in spreading the gains from growth conversely rising income inequality may be attributable in part to impediments to migration we first use census data to investigate migration patterns and determinants we then examine the role of migration as an influence on income ratios between pairs of provinces the former analysis robustly confirms economic motives for migration but also suggests the existence of poverty related labor immobility at the provincial level examination of income ratios between pairs of provinces reveals that the impact of migration on inequality can be either negative or positive a robust inequality reducing impact of migration is found for migration flows into provinces where most of vietnam s trade oriented industrial investments are located

the computational experiment an econometric tool an economic experiment consists of the act of placing people in an environment desired by the experimenter who then records the time paths of their economic behavior performing experiments that use actual people at the level of national economies is obviously not practical but constructing a model economy and computing the economic behavior of the model s people is such experiments are termed computational this essay specifies the steps in designing a computational experiment to address some well posed quantitative question the authors emphasize that the computational experiment is an econometric tool used in the task of deriving the quantitative implications of theory

commodity prices and intra household labor allocation volatility in commodity markets poses a distinct risk to farmers in developing countries who rely on cash crop agriculture we combine a time series of international coffee prices with a long running panel on coffee growing households in vietnam to investigate coping mechanisms employed by farmers in a transitioning economy we find that households cope with lower coffee prices by increasing wage labor of adults with children and adolescents substituting for adults on the farm heterogeneity analysis indicates a stronger substitution pattern among women ethnic minorities and households with fewer assets a variety of robustness checks corroborate these findings account of this finding should be taken in formulating and implementing social protection and inclusive growth policies

progressive taxation and long run growth since the emergence of early endogenous growth models larry e jones and rodolfo e manuelli 1990 sergio rebelo 1991 a large body of work has studied the growth effects of tax reform while virtually all of this literature has confined itself to the analysis of flat rate taxes tax codes are generally progressive this paper therefore explores the effects of progressive taxes in conventional growth models with heterogenous households in such frameworks the tax code helps to determine simultaneously the pre tax income distribution and the rate of technical progress we present three main findings first we show that when variations in tax codes stem from differences in progressivity shares of tax revenue in gdp or income may constitute poor proxies for average marginal tax rates in particular we find that the decrease in progressivity associated with the tax reform act of 1986 tra 86 lowered the u s average marginal tax rate by 0 06 to 0 37 percentage points depending on the model used at the same time however the endogenous adjustment in the distribution of income produced by this progressivity change contributed to raising the tax share of income by approximately 0 8 percentage points because marginal tax rates are not easily observable empirical work often has to make use of tax shares in income as an alternative to the degree that lower marginal rates entail less tax distortion our study suggests that relying on tax shares may cause less progressive tax codes to be incorrectly perceived as more distortional second we find that the progressivity decrease implied by tra 86 helped raise u s per capita gdp growth by 0 12 to 0 34 percentage points given the prominence of tra 86 compared with other u s tax reforms over the past four decades these growth effects while not negligible as in robert e lucas 1990 shed doubt on the potential for tax policy to alter significantly prospects for u s long run growth finally consistent with previous work our analysis suggests that the progressivity change associated with tra 86 had a significant effect on income inequality resulting in a 20to 24percent increase in the gini coefficient of income we carry out our analysis using two prototypical endogenous growth models augmented to include a nondegenerate distribution of income these models one first formulated by robert j barro 1990 and the other by rebelo 1991 account for two polar extremes regarding the use of tax proceeds on the one hand in rebelo s two sector framework tax revenue is spent in a way that affects neither the marginal utility of private consumption nor the production possibilities of the private sector on the other hand in the environment envisioned by barro 1990 all tax revenue serves to finance public services that enhance private production interestingly the results we have just described emerge irrespective of the framework under consideration

portfolio analysis with a large universe of assets covariance matrix optimization algorithms are applied to a large number of assets a previous paper by burgess and bey 1988 suggests that attempting to optimize a large number of securities with the traditional covariance matrix model is not practical an alternative approach ranks the securities with the reward to volatility reward to beta ratio and then optimizes a smaller subset of securities with the covariance matrix model this study proposes additional screening methods such as stochastic dominance reward to variability r v ratios reward to lower partial moment r lpm ratios and the optimization of subgroups and provides an empirical test of the various screening methodologies the results indicate that the full covariance critical line optimization algorithm is surprisingly robust compared to the other techniques

multi beta capm or equilibrium apt a reply in their influential empirical paper roll and ross 11 state we think that in many discussions of the capm scholars were actually thinking of the apt and of process 1 the factor model with just a single factor in light of recent developments in the asset pricing literature i think it can now meaningfully be suggested that in many discussions of the apt scholars may have actually been thinking of a multi beta interpretation of the capm indeed much can be said in support of each of these perspectives for a single paradigm is emerging which integrates fundamental aspects of both the capm and the apt broadly speaking the equilibrium capm paradigm emphasizes the role of covariance between asset returns and an endogenous preference based aggregate while the arbitrage apt paradigm focuses on the covariance between asset returns and factors in the return generating process the emerging equilibrium factor paradigm encompasses each of these relations as well as a third covariance between the factors and the equilibrium aggregate my thesis in shanken 17 was that i the arbitrage paradigm has not produced a refutable hypothesis and that ii recognition of the role of the factor aggregate covariance relation appears to be essential if positive economic significance is to be attributed to asset pricing empirical work dybvig and ross d r attempt to resolve the empirical indeterminacy of the arbitrage paradigm by appealing to the condition that residual variance should not be too large i explain in section ii that this condition is inherently ambiguous from an empirical perspective and does not permit the formulation of a precise testable implication the equilibrium factor models which d r discuss do yield testable restrictions on parameters in the return generating process however consistent with my second point above these restrictions involve joint hypotheses that cannot be verified without observing the entire universe of assets thus contrary to their claim considerations similar to those in roll s 10 critique are indeed relevant to the testing of these models this and other similarities between the equilibrium apt and the capm are discussed in section iii i begin by clarifying some basic terminology

making inefficient market indices efficient this paper uses the concept of marginal conditional stochastic dominance and a generalization of the 50 portfolio rule to develop a tractable and parsimonious methodology for constructing a second degree stochastic dominance ssd efficient portfolio from a given inefficient index because the ssd approach considers the entire probability distributions of asset returns the resulting portfolios are efficient with respect to all risk averse utility maximizing investors regardless of the form of their utility functions or the distributions of asset returns

out migration wealth constraints and the quality of local amenities the relation between income and migration intentions can be monotonically decreasing increasing or inverse u shaped dependent on the level of migration cost relative to wealth and if individuals are credit constrained using unique individual level data covering countries in three geographic regions sub saharan africa asia and latin america we show that migration intentions respond to individual wealth and that the pattern differs across the country groups studied in a manner compatible with the predictions of our simple model we also show that contentment with various dimensions of local amenities such as public services and security are key determinants of migration intentions

modeling overlapping generations in a complementarity format abstract this paper provides an introduction to numerical simulation of overlapping generations models with perfect foresight and finite lifetimes the exposition presents the fundamental characteristics of this class of problems and gams programs illustrate how models can be formulated in applied research using the complementarity framework issues addressed in the paper include how to calibrate to baseyear data and how to represent international trade bequests government tax and expenditure policies and a labor leisure choice with endogenous retirement