are household portfolios efficient an analysis conditional on housing in this paper we argue that standard tests of portfolio efficiency are biased towards rejection because they neglect the existence of illiquid wealth in the case of household portfolios the most important illiquid asset is housing if housing stock adjustments are costly and therefore infrequent we show how the dynamic optimization problem produces optimal portfolios in periods of no adjustment that are affected by housing price risk through a hedge term when the housing stock is not adjusted we argue that tests for portfolio efficiency of financial asset must then be run conditionally upon housing wealth in our application we use italian household portfolio data from shiw 1998 and time series data on financial asset and housing stock returns to assess whether actual portfolios are efficient we first consider purely financial portfolios and portfolios that also treat the housing stock as another asset we then consider the consequences of treating the housing stock as given and test for efficiency in this framework our empirical results support the view that the presence of illiquid wealth can explain portfolio choice by home owners

capital market segmentation and u s farm real estate pricing in this paper we present and test a segmented capital market equilibrium we extend the traditional capm by explicitly considering barriers to the flow of external equity capital into farm real estate markets the empirical results provide a plausible explanation as to why the traditional arbitrage based pricing models fail to explain equity pricing in farmland markets

large deviations theorems for optimal investment problems with large portfolios the thrust of this paper is to develop a new theoretical framework based on large deviations theory for the problem of optimal asset allocation in large portfolios this problem is apart from being theoretically interesting also of practical relevance examples include inter alia hedge funds where optimal strategies involve a large number of assets in particular we also prove the upper bound of the shortfall probability or the risk bound for the case where there is a finite number of assets in the two assets scenario the effects of two types of asymmetries i e asymmetry in the portfolio return distribution and asymmetric dependence among assets on optimal portfolios and risk bounds are investigated we calibrate our method with international equity data in sum both a theoretical analysis of the method and an empirical application indicate the feasibility and the significance of our approach

preference reversals and the independence axiom of all of the paradoxical patterns of behavior reported in laboratory experiments one of the most perplexing for decision theorists is the preference reversal phenomenon a subject in a preference reversal experiment is typically given a choice between a lottery with a high probability of winning a modest amount of money a p bet and a lottery with a low probability of winning a large amount of money a bet the lowest amount of money for which the subject would willingly sell either of these lotteries is also elicited the most common reversal is for a subject to choose the p bet over the bet but to put a higher selling price on the bet preference reversals were first reported by harold lindman 1971 and sarah lichtenstein and paul slovic 1971 in discussing the psychologists discovery of such reversals david grether and charles plott remark the inconsistency is deeper than mere lack of transitivity or even stochastic transitivity it suggests that no optimization principles of any sort lie behind even the simplest of human choices 1979 p 623 this paper offers a simple alternative explanation of documented preference reversals an explanation that does not require the abandonment of the transitivity assumption

how do sex ratios affect marriage and labor markets evidence from america s second generation sex ratios i e relative numbers of men and women can affect marriage prospects labor force participation and other social and economic variables but the observed association between sex ratios and social and economic conditions may be confounded by omitted variables and reverse causality this paper uses variation in immigrant flows as a natural experiment to study the effect of sex ratios on the children and grandchildren of immigrants the flow of immigrants affected the second generation marriage market because second generation marriages were mostly endogamous i e to members of the same ethnic group the empirical results suggest that high sex ratios had a large positive effect on the likelihood of female marriage and a large negative effect on female labor force participation perhaps surprisingly the marriage rates of second generation men appear to be a slightly increasing function of immigrant sex ratios higher sex ratios also appear to have raised male earnings and the incomes of parents with young children the empirical results are broadly consistent with theories where higher sex ratios increase female bargaining power in the marriage market

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

quality of available mates education and household labor supply we investigate the impact of sex ratios by education and metropolitan area on spouses bargaining power and labor supplies to capture the local and qualitative nature of mate availability using current population survey and census data for 2000 1990 and 1980 we estimate these effects in a collective household framework we find that a higher relative shortage of comparably educated women in the couple s metropolitan area reduces wives labor supply and increases their husbands the impact is stronger for couples in higher education groups but not significant for high school graduates results are similar across decades no such effects are found for unmarried individuals jel d1 j22 2008 western economic association international

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

women s labor supply and marital choice this paper hypothesizes that value of time and consequently labor force participation can vary with circumstances specific to a marriage or a marriage market wives traits valued in the marriage market are expected to be associated with lower labor force participation whereas husbands traits valued in the marriage market are expected to be associated with lower participation rates on the part of wives evidence for these hypotheses is found on the basis of regressions of labor force participation for a sample of israeli married women inclusion of traits valued in the marriage market and marital sorting patterns increases the explanatory power of the regressions

further international evidence on asset pricing the case of the spanish capital market abstract a multivariate framework is used in order to study the price formation of risky assets in the spanish capital market issues regarding the efficiency of the spanish value weighted stock market index the validity of equilibrium considerations the size effect and the nature of the return generating process during january are analyzed

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

economic theory of choice and the preference reversal phenomenon a reexamination in a recent issue of this review david grether and charles plott 1979 hereinafter referred to as g p presented a series of experiments that show that individual decisions are made in a manner inconsistent with standard preference theory this inconsistency can be illustrated by the following example individuals under suitable laboratory conditions first have a choice between a lottery with a high probability of winning a small sum of money the p bet probability bet and a lottery with a high stake but low probability of winning the m bet money bet after indicating a preference for one of the lotteries in the pair the same subjects are then asked to place a monetary value on each of the individual lotteries grether and plott found that a large number of participants stated a preference for the p bet in the first round but placed a higher value on the other lottery the m bet in the second round this behavior a preference reversal is inconsistent with the traditional statements of preference theory

market line deviations and market anomalies with reference to small and large firms previous anomaly research may have misinterpreted corrected for the market index mean returns on small firms assuming mean variance preferences it is shown theoretically that corrected mean returns i e market line deviations are not indicative of the relative desirability of increasing the proportional investment in small firms the correct improvement criterion is derived and estimated tests indicate that the value weighted market index is not significantly improved with greater weight on small firms in the aver age month when seasonality is considered the observed performance improvements due to small or large firms are significant in some months but the required portfolio position is unclear if a case exists for a small firm anomaly in january it probably exists in other months and it also exists for large firms it is doubtful whether such an anomalous stock market exists

a theory of marriage formality the case of guatemala a theory of marriage formality which regards formality as an indication of commitment and loyalty is explained and tested using multiple regressions on data from the 1974 rand incap survey of 6 guatemalan ladino communities it is argued that a trade off exists between formality and the material benefits a woman receives in return for providing services to a man similar to the trade off between monetary returns and job stability found in the labor market the relations between husbands and wives are described in terms of the concepts of supply demand and market equilibrium and derived hypotheses concerning the factors leading to various combinations of marriage formality and material compensation for wife services are proposed 2 subsamples of women in the 6 guatemalan communities are compared for a range of socioeconomic indicators following which a series of regressions using formal marriage or informal unions as the dependent variable are carried out the major finding is that a marriage ceremony has tangible consequences in terms of material benefits a woman can obtain through marriage as predicted by the theory women with more physical and human assets and men with fewer such assets are more likely to marry formally rather than to live together informally

keeping up with the joneses and optimal diversification abstract peer effects have been shown to affect behavior and can generally lead to investments choices that are mean variance inefficient this paper analyzes optimal diversification with peer effects we show that if individuals have keeping up with the joneses preferences and they take their peer group reference as the market portfolio markowitz s mean variance efficiency analysis and the capm equilibrium are intact this holds for any keeping up preferences as well as heterogeneous combinations of such preferences these results also extend to the merton levy segmented market model

willingness to pay for publicly financed health care how should we use the numbers this paper addresses the question of how willingness to pay wtp values in health care evaluation can be used by policy makers the way in which wtp values are used depends on from whom values are elicited and whether the good concerned is privately financed or publicly financed through taxation thus four possible uses of wtp values are identified the focus is on the two uses which arise in the publiclyfinanced situation conventional use of wtp values where the decision as to whether or not to provide a service depends upon whether or not wtp values are greater than total cost applies only in the privately financed and not publiclyfinanced situations the situations with publicly financed goods are more complex the use of wtp values for publicly financed goods is justified and illustrated

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

a multivariate linear regression test for the arbitrage pricing theory a test for the arbitrage pricing theory which employs a multivariate linear regression model is developed given a sample of return premiums for a set of n assets which includes a subset of k linearly independent portfolios the k factor apt hypothesis is accepted if the intercept term is zero in the multivariate regression of the n k returns on the k portfolios the test may be carried out simply by using univariate multiple regression software the relation of this test to the concept of performance potential and sharpe s measure of performance is also discussed if the performance potential of the k portfolios is not significantly less than the performance potential of the complete set of n assets then the k factor apt hypothesis is accepted in roll and ross rr 10 an empirical investigation of the ross 11 arbitrage theory of pricing apt was carried out the central core of the apt as outlined in rr is that the return generating process for a population of n assets is a linear function of only a few say k k n systematic factors or components and as a consequence many portfolios are close substitutes the central conclusion of the apt is that the mean premium return vector lies in a k dimensional subspace spanned by the factor loadings the purpose of the empirical investigation as claimed by rr was to investigate the existence of the factors and their association with the risk premia as stressed by rr their methodology does not determine k but is designed to test the hypothesis that there exist several factors whose factor loadings together explain a significant portion of the variation in the mean premium returns the empirical results in rr however indicate the presence of three to four priced factors the first empirical test outlined by rr involves two steps using time series data the mean return premium vector is estimated and a factor analysis procedure is used to estimate the k factors and their loadings a complex weighted least squares procedure is then used to estimate the linear model relating the mean return premium vector to the factor loadings the weighted least squares procedure requires estimation of the matrix of weights and is carried out for t 1 2 t cross sections in this paper the central conclusion of the apt is shown to be equivalent to a statement about the intercept term in the multivariate regression function of a

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

risk perception in psychology and economics abstract the concept of rationality has been basic to most economic analysis its content has been successively refined over the generations as applied to the static world of certainty it has turned out to be a weak hypothesis not easily refuted and therefore not very useful as an explanation though not literally a tautology but recent decades have seen the development of stronger versions applied to a world in which time and uncertainty are real among its most important manifestations have been criteria for consistency in allocation over time the expected utility hypothesis of behavior under uncertainty and what may be termed the bayesian hypothesis for learning that is the consistent use of conditional probabilities for changing beliefs on the basis of new information these hypotheses have been used widely in offering explanations of empirically observed behavior though as not infrequently in economics the theoretical development has gone much further than the empirical implementation these hypotheses have also been used increasingly in normative analysis as a component of benefit cost studies therefore frequently referred to as benefit risk studies the value of reducing mortality rates from diseases for example has been studied by assuming that choice of occupations is made inter alia by comparing wage differences with mortality differences

joint estimation of factor sensitivities and risk premia for the arbitrage pricing theory the apt is represented as a multivariate regression model with across equations restrictions both observed and unobserved latent macroeconomic factors are included thus generalizing and unifying two previous strands of literature large portfolios representing unobserved factors are treated as endogenous and nonlinear 3sls estimates are shown to differ sharply from estimates that ignore this endogeneity using monthly stock returns and six factors we cannot reject january effects the following results are invariant with respect to the inclusioh of january effects we reject the capm in favor of the apt however we cannot reject the apt restrictions on the linear factor model most empirical work on the arbitrage pricing theory apt has followed a factor analysis approach papers by burmeister and wall 5 chan chen and hsieh 7 chen roll and ross 9 and mcelroy and burmeister 22 represent some exceptions in which measured macroeconomic factors such as unexpected inflation are used to explain asset prices in an apt or multifactor model both the factor analysis approach and the measured macroeconomic factor approach have their merits the primary advantages of using measured economic factors are 1 the factors and their apt prices in principle can be given economic interpretations while with a factor analysis approach it is unknown what factors are being priced and 2 rather than using only asset prices to explain asset prices measured macroeconomic factors introduce additional information linking asset price behavior to macroeconomic events in this exploratory paper we investigate an apt or multifactor model in which there are both measured macroeconomic factors and other nonobserved factors we impose the nonlinear across equation apt pricing restrictions exactly by using three multivariate estimation methods iterated nonlinear weighted least squares itnlwls iterated nonlinear seemingly unrelated regressions itnlsur and iterated nonlinear three stage least squares itnl3sls see gallant 13 and discussion below the appropriate estimation method depends upon alternative assumptions about the error terms nonsystematic risk in the asset returns equations the primary objective of this work is to investigate whether or not certain apt tests are sensitive to these alternative error assumptions the details of which are given in the text our focus is on the interrelation

discrimination in matchmaking evidence from the price policy of a french marriage bureau this article shows how a matchmaking agency may improve the quality of serious meetings between individuals seeking long term relationship thanks to a price discrimination policy its filtering is based on objective and official characteristics sex age and contract s environment and on implicit criteria the few asked characteristics by its clients

mathematical programming for the efficient allocation of health care resources previous discussions of methods for the efficient allocation of health care resources subject to a budget constraint have relied on unnecessarily restrictive assumptions this paper makes use of established optimization techniques to demonstrate that a general mathematical programming framework can accommodate much more complex information regarding returns to scale partial and complete indivisibility and program interdependence methods are also presented for incorporating ethical constraints into the resource allocation process including explicit identification of the cost of equity

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

on the jensen measure and marginal improvements in portfolio performance a note the marginal performance contribution made by new assets in a portfolio is identified the maximum change in a portfolio s sharpe performance from the addition of new assets is a simple function of a generalized jensen index and the unexplained covariances from a multivariate market model deviations from a higher dimension market line may be used to rank the desirability of asset additions to an existing portfolio statistical tests for the equality of the performance contributions by new assets is possible the portfolio performance measures of treynor 11 and jensen 12 are based on the systematic or beta measure of risk when originally developed it was advocated that these measures of performance were useful for comparing and ranking performances of various portfolios after many years of use in this area it was demonstrated by roll 7 and ross 8 that it is theoretically inappropriate to use these performance measures for this purpose since differences in portfolios performance indicate only inefficiency in the index used for the computation of beta dybvig and ross 1 subsequently proved that a portfolio can be improved by adding or shorting a small investment in another asset if the asset lies above or below the security market line a potentially important use of the market line was therefore preserved the purpose of this note is the development of a procedure which identifies the exact performance contribution made by one or more assets when they enter the investor s optimal portfolio of assets it is demonstrated that the change in squared sharpe 10 performance is a simple function of a generalized jensen index and the unexplained covariances from a multivariate market model new assets may be ranked according to the magnitude of their performance contribution the improvements in a portfolio are easily computable from the same linear regression employed to calculate an asset s jensen measure thus the appeal of the security market line as a useful financial tool may be preserved the first section briefly establishes the efficient set algebra required to develop the marginal contribution made by new assets in a portfolio section ii presents the performance contribution dependent on the number of new assets and whether partial or full optimal adjustment of the portfolio weights are permitted section iii concludes the note

a theory of allocation of time in markets for labour and marriage this paper analyzes the interdependence between labor and marriage markets it is argued that market conditions concerning marriage influence the value of time in the home according to this economic view marriage involves an exchange of household labor between individual men and women wages in labor markets affect marital behavior and conditions in the markets for household labor influence labor supply single persons must decide whether to marry and if so how much work to invest and employ in the framework of marriage in monogamous societies marriage tends to occur when a man demands the amount of household labor a woman wants to supply and a woman demands the amount of labor supplied by the man however changing outside factors can disrupt this equilibrium and produce changes in income redistribution between the spouse new marital labor relations or divorce this approach diverges from the traditional theory of labor supply in the way the value of time in the home is determined awareness that the supply of labor can shift following changes in a market determined wage for household labor opens new avenues for research in labor economics and studies of female labor supply a change in sex ratio is likely to increase the proportion of women who marry and decrease the number of hours women work outside the home group differences in patterns of division of household labor further influence the elasticity of female labor supply a positive correlation between achievements in markets for labor and household labor can provide an additional explanation for the backward bending supply of labor finally the relative position of husbands and wives in their respective marriage markets has implications for their consumption patterns and fertility this theory could provide a useful framework for analyzing the consequences of public policy for production reproduction and the distribution of wealth

the menu setting problem and subsidized prices drug formulary illustration the menu setting problem msp determines the goods and services an institution offers and the prices charged it appears widely in health care from choosing the services an insurance arrangement offers to selecting the health plans an employer proffers the challenge arises because purchases are subsidized and consumers or their physician agents may make cost ineffective choices the intuitively comprehensible msp model readily solved by computer using actual data helps structure thinking and support decision making about such problems the analysis uses drug formularies lists of approved drugs in a plan or institution to illustrate the framework

a portfolio performance index fund managers may sensibly be averse to earning a time averaged portfolio return that is less than the average return of some designated benchmark when a portfolio is expected to earn a higher average return than the benchmark return the probability that it will not approaches zero asymptotically at a computable exponential decay rate the probability decay rate is thus proposed here as a new portfolio performance index in the widely analyzed special case in which returns are normally distributed the new performance index maximizing portfolio is the same as the popular sharpe ratio maximizing portfolio the results of the two approaches generally differ however because of nonnormal levels of skewness and or kurtosis in the portfolio attributable to large asymmetrical economic shocks or investments in options and other derivative securities an illustrative example will show that the new index is easy to implement and consistent with empirical evidence on portfolio choice favors investments with

hypothesis testing with the sharpe and treynor portfolio abstract using the scholes and williams 1977 model consistent estimates of the variances and covariances of security returns under conditions of non synchronous trading are derived the effects of using such corrected estimates on the measurement of portfolio performance are illustrated by assessing the performance of a value and equally weighted portfolio of all the stocks issued under the quebec stock savings plan qssp

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

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

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

static and intertemporal household decisions we discuss the most popular static and dynamic models of household behavior our main objective is to explain which aspects of household decisions different models can account for using this insight we describe testable implications identification results and estimation findings obtained in the literature particular attention is given to the ability of different models to answer various types of policy questions

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

cross holdings estimation issues biases and distortions cross holding occurs when listed corporations own securities issued by other corporations we analyze the effect of cross holdings on market capitalization and return measures as well as implications for econometric testing of asset pricing theories we show that cross holdings generally distort standard market return and risk measures the magnitudes of such distortions are calculated for simulated economies by using a variety of crossholding patterns in addition cross holdings are shown to induce nonstationarity in the covariance matrix of security returns we examine the effect of this nonstationarity for estimating efficient frontiers and factor structures we also discuss the implications for risk return estimates in equilibrium asset pricing models article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

cost effectiveness utility analyses do current decision rules lead us to where we want to be despite the growing literature on economic evaluation of health care programmes little attention has been paid to the theoretical foundations of cost effectiveness and cost utility analyses and the validity of the decision rules adopted as methods of achieving the stated goals we show that although applications of the techniques can be used to pursue some managerial objectives in the context of highly constrained environments such applications are inconsistent with both welfare economic objectives and the interpretations of the findings of these applications alternative strategies are identified as potential and practical methods for pursuing welfare economic objectives

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

multi family households in a labour supply model a calibration method with application to poland models of cooperative and noncooperative behaviour opened the household black box and allowed for individual treatment of partners in couples however labour supply literature has so far largely ignored a broader issue the distinction of single versus multi family complex households we propose a method to account for multi family household structure by borrowing from recent applications of the collective model to identify the degree of sharing we assume that each household is characterized by a between family sharing parameter which is calibrated on estimated preferences observed labour market status and other characteristics we apply the method to polish labour market data

on equilibrium asset price processes in this article we derive necessary and sufficient conditions that must be satisfied by equilibrium asset price processes in apure exchange economy we examine a world in which asset prices follow a diffusion process asset markets are dynamically complete all investors maximize their state independent expected utility of consumption at some future date and investors have nonrandom exogenous income we show that it is necessary and suffcient that the coefficients of an equilibrium diffusion price process satisfy a partial differential equation and a boundary condition we also examine how the dynamics of asset prices are related to the shape of the representative investor s utility function through the boundary condition for example in a constant volatility economy the expected instantaneous return of the market portfolio is mean reverting if and only if the relative risk aversion of the representative investor is decreasing in terminal wealth

asset allocation without unobservable parameters some asset allocation advice for long term investors is based on maximization of expected utility most commonly used investor utilities require measurement of a risk aversion parameter appropriate to the particular investor but accurate assessment of this parameter is problematic at best maximization of expected utility is thus not only conceptually difficult for clients to understand but also difficult to implement other asset allocation advice is based on minimizing the probability of falling short of a particular investor s long term return target or of an investable benchmark this approach is easier to explain and implement but it has been criticized by advocates of expected utility these seemingly disparate criteria can be reconciled by measuring portfolio returns relative to the target or benchmark and then eliminating the usual assumption that the utility s risk aversion parameter is not also determined by maximization of expected utility financial advisors should not be persuaded by advo

applications of cost benefit analysis to health care departures from welfare economic theory in applying the principles of cost benefit analysis to real world problems of resource allocation particular care must be taken to ensure that the welfare economic theory which underlies the cost benefit technique is adhered to major problems arise where costs and benefits are used interchangeably to represent the good and bad attributes of a programme furthermore in the presence of mutually exclusive projects focussing attention upon the net benefits or cost benefit ratios of individual projects as opposed to the net benefits of the use of budgeted resources can lead to biased estimates of the shadow price of projects and consequently errors in analysts conclusions as a result economic appraisals of individual projects are not directly relevant for choosing between mutually exclusive projects of different sizes both types of problem are illustrated by reference to both simple examples and published economic appraisals of health care techniques integer programming is proposed and demonstrated as a method of selecting between mutually exclusive projects

dressing a ghost size and value of unpaid family care unpaid family care work encompasses care and assistance provided by members of a household to other members it is not considered to be a productive activity and its exclusion from national accoun

currency hedging for international portfolios this paper examines the benefits from currency hedging both for speculative and risk minimization motives in international bond and equity portfolios the riskreturn performances of globally diversified portfolios are compared with and without forward contracts over the period 1974 to 1990 inclusion of forward contracts results in statistically significant improvements in the performance of unconditional portfolios containing bonds conditional strategies are also implemented both in sample and out of sample and are shown to both significantly improve the risk return tradeoff of global portfolios and to outperform unconditional hedging strategies whether international portfolios should be hedged against currency risks is the subject of an active debate the theoretical side of the debate has been closely associated with two strands in the academic literature international asset pricing and optimal hedging in the futures markets in the international asset pricing model iapm of solnik 1974 optimal portfolios contain positions in forward contracts or equivalently foreign currency denominated bills these positions which can differ from the positions in foreign stocks have since been termed hedges black 1990 shows that under additional assumptions the hedge ratios should be identical for all investors regardless of their nationality universality and that investors should never fully hedge their foreign currency exposures similarly theoretical models from the futures literature produce demands for hedging instruments that contain both speculative and hedging components the empirical issue unanswered so far is whether adding forward contracts to international portfolios significantly improves the risk return profile of global investments empirical research has barely begun to respond to the challenges of theoretical models there exists little empirical evidence on either the relevance of black s universal hedge ratios or the optimality of hedge ratios less than one instead researchers have concentrated on the benefits of fully hedging exchange risk for example eun and resnick 1988 indicate that stock portfolios perform better when fully hedged but offer no statistical tests

tests of asset pricing with time varying expected risk premiums and market betas tests of asset pricing models are developed that allow expected risk premiums and market betas to vary over time these tests exploit the relation between expected excess returns and current market values using weekly data for 1963 through 1982 on ten common stock portfolios formed according to equity capitalization a single risk premium model is not rejected if the expected premium is time varying and is not constrained to correspond to a market factor conditional mean variance efficiency of a value weighted stock index is rejected and the rejection is insensitive to how much variability of expected risk premiums is assumed financial economists have studied valuation models in which securities expected returns are related to the covariances of unanticipated returns with the return on the market portfolio or with other risk factors empirical tests of such models typically have employed unconditional sample moments of returns recent studies provide mounting evidence that expected returns change over time with information such evidence presents an opportunity to develop new approaches for evaluating and implementing asset pricing models that exploit this time variation this paper presents new tests of financial valuation models in which expected returns are allowed to vary over time time series of relative

it s raining men hallelujah the long run consequences of male biased sex ratios we document the short and long run effects of male biased sex ratios we exploit a natural historical experiment where large numbers of male convicts and far fewer female convicts were sent to australia in the 18th and 19th centuries in areas with more male biased sex ratios women were historically more likely to get married and less likely to work outside the home in these areas today both men and women continue to have more conservative attitudes towards women working and women work fewer hours outside the home while these women enjoy more leisure they are also less likely to work in high ranking occupations we demonstrate that the consequences of uneven sex ratios on cultural attitudes labour supply decisions and occupational choices can persist in the long run well after sex ratios are back to the natural rate we document the roles of vertical cultural transmission and marriage homogamy in sustaining this cultural persistence

risk aversion in the theory of expected utility with rank dependent probabilities expected utility with rank dependent probability theory is a model of decision making under risk where the preference relations on the set of probability distributions is represented by the mathematical expectation of a utility function with respect to a transformation of the probability distributions on the set of outcomes this paper defines based on g teaux differentiability measures of risk aversion for such preferences which characterize the relation more risk averse and applies these measures to the analysis of unconditional and conditional portfolio choice problems

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

choice under uncertainty problems solved and unsolved ffifteen years ago the theory of choice under uncertainty could be considered one of the success stories of economic analysis it rested on solid axiomatic foundations it had seen important breakthroughs in the analytics of risk risk aversion and their applications to economic issues and it stood ready to provide the theoretical underpinnings for the newly emerging information revolution in economics 1 today choice under uncertainty is a field in flux the standard theory is being challenged on several grounds from both within and outside economics the nature of these challenges and of our profession s responses to them is the topic of this paper

economic behavior marriage and fertility two lessons from polygyny abstract this paper derives and estimates an index of the relative importance of children in marriage by comparing the effect of husband s income on the actual number of wives in the household with the demand for wives derived from the number of children in the household moreover the paper presents the monogamy bias as a possible explanation for often observed low or negative income effects on fertility

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

temporal risk and the nature of induced preferences abstract it has been known since the work of h markowitz portfolio selection efficient diversification of investments yale univ press 1959 and j mossin amer econ rev 59 1969 172 174 that even an individual whose underlying preferences satisfy the von neumann morgenstern axioms will not choose over delayed i e temporal risky prospects in a manner which can be modelled as expected utility maximizing since most economically important instances of risk taking insurance real investment agriculture career training involve delayed as opposed to immediately resolved risk the standard use of expected utility theory to model such decisions must be questioned in this paper the technique of generalized expected utility analysis m j machina econometrica 50 1982 277 323 and the theory of support functions r t rockafellar convex analysis princeton univ press 1970 are applied to exactly model and hence determine the nature of preferences over temporal risky prospects

measurement of health state utilities for economic appraisal health status measurement for use in economic appraisal of health care programmes is reviewed in this paper with particular emphasis on utility measurement a framework for economic appraisal is presented displaying the various components that must be measured and showing how the three forms of analysis cost effectiveness analysis cost benefit analysis and cost utility analysis relate to the framework and to each other one of the components in the framework is health status it can be measured using ad hoc numeric scales willingness to pay receive or health state utilities the determination of health state utilities is reviewed covering the following issues alternative sources of utilities health state descriptions multi attribute utility approach determination of appropriate subjects utility aggregation and accuracy three measurement techniques for health state utilities are described in detail rating scale standard gamble and time trade off the use of these methods is described for both chronic and temporary health states and for both health states considered better than death and those considered worse than death

diversification and the optimal construction of basis portfolios nontrivial diversification possibilities arise when a factor model describes security returns this paper catalogs the merits of alternative strategies for constructing basis portfolios to mimic the common factors we show how to use the 2 statistic for the joint significance of mean basis portfolio returns to rank alternative procedures and the bootstrap to perform inferences on the disparity between 2 statistics across portfolio formation procedure estimation method cross section size and number of factors our main conclusion is that maximum likelihood factor analysis coupled with minimum idiosyncratic risk portfolio formation yields economically and statistically superior basis portfolios compared with those derived from asymptotic principal components

beta in linear risk tolerance economies this paper employs numerical means to examine i the expected return beta plot in power utility linear risk tolerance lrt economies and ii whether in the power utility economies a valuation equation containing covariance and coskewness terms might better explain expected returns than one containing covariance terms alone the results show that the expected return beta plots constructed from real world return distributions are very similar to the plots found in empirical tests of the mean variance capital asset pricing model mv capm hence a power utility lrt capm may provide a better theory of asset pricing than the mv capm does while beta is not the correct measure of risk in power utility lrt economies the results show that on average a valuation equation containing covariance terms only explains expected returns better than a valuation equation containing both covariance and coskewness terms

a new model for decisions under uncertainty abstract a representation for preferences between uncertain acts that is not unduly more complex than the ramsey savage model can simultaneously accomodate allais s paradox ellsberg s paradox preference reversals and cyclic preferences

currency hedging for international stock portfolios the usefulness of mean variance analysis abstract we test whether hedging currency risk improves the performance of international stock portfolios we show that an auxiliary regression provides a wealth of information about the optimal portfolio holdings for non mean variance investors analogous to the information provided by the jensen regression about optimal portfolio holdings for the mean variance case we find that static hedging with currency forwards does not lead to significant improvements in portfolio performance for a us dollar based stock portfolio from the g5 countries whereas dynamic hedges that are conditional on the interest rate spread do these conclusions hold for both mean variance and power utility investors and show up both in sample and out of sample however the optimal forward positions can differ significantly for both types of investors

block holding and keiretsu in japan the effects of capital markets liberalization measures on the stock market abstract long term block holding among large industrial corporations and financial institutions is prevalent in japan little is known about the implications of such business practice on portfolio returns we document the portfolio relationships of parent firms sub firms and specific industry portfolios and we hypothesize that these relationships have changed substantially in japan using certain measures for evaluating portfolios and mean variance spanning we test the hypothesis our empirical results suggest that market efficiency and integration of the japanese stock market may have been greatly enhanced by the japanese government s capital markets liberalization measures implemented in the 1970s and early 1980s

international portfolio diversification currency industry and country effects revisited we examine the relative importance of country industry world market and currency risk factors for international stock returns our approach focuses on testing the mean variance efficiency of the various factor portfolios an unconditional analysis does not show significant differences between country industry and world portfolios nor any role for currency risk factors however when we allow expected returns volatilities and correlations to vary over time we find that equity returns are mainly driven by global industry and currency risk factors we propose a novel test to evaluate the relative benefits of alternative investment strategies and find that including currencies is critical to take full advantage of the diversification benefits afforded by international markets

having it all for all child care subsidies and income distribution reconciled abstract we study the design of child care policies when redistribution matters traditional mothers provide some informal child care whereas career mothers purchase full time formal care the sorting of women across career paths is endogenous and shaped by a social norm about gender roles in the family via this social norm traditional mothers informal child care imposes an externality on career mothers so that the market outcome is inefficient informal care is too large and the group of career mothers is too small so that inefficiency and gender inequality go hand in hand in a first best world redistribution across couples and efficiency are separable redistribution is performed via lump sum transfers and taxes which are designed to equalize utilities across all couples the efficient allocation of child care is obtained by subsidizing formal care at a pigouvian rate however in a second best setting a trade off between efficiency and redistribution emerges the optimal uniform subsidy is lower than the pigouvian level conversely under a nonlinear policy the first best pigouvian rule for the marginal subsidy on informal care is reestablished while the share of high career mothers continues to be distorted downward for incentive reasons this policy is effective in reconciling the objectives of reducing the child care related inefficiency and achieving a more equal income distribution across couples our results continue to hold when the norm is defined within the mothers social group rather than being based on the entire population

government bond returns measurement of interest rate risk and the arbitrage pricing theory empirical tests are reported for ross arbitrage pricing theory using monthly data for u s treasury securities during the 1960 1979 period we find that mean returns on bond portfolios are linearly related to at least two factor loadings multivariate test results however are not consistent with the apt our sample data in the u s treasury securities market are also not consistent with either version of the capm one monthahead forecasts of excess returns using factor generating models are compared with corresponding naive predictions or predictions using the market model with various

the safety first expected utility model experimental evidence and economic implications abstract roy s roy a 1952 safety first and the holding of assets econometrica 20 3 431 449 safety first criterion advocates the minimization of the probability of outcomes below a certain disaster level this paper examines safety first theoretically and experimentally we find that safety first plays a crucial role in decision making inducing choices that cannot be explained by and even contradict risk aversion prospect theory and loss aversion in general yet safety first alone cannot explain individual choice therefore we propose an expected utility safety first eu sf model where decisions are made based on a weighted average of the safety first criterion and standard expected utility maximization we experimentally estimate these relative weights and discuss their economic implications