how do people cope with natural disasters evidence from the great hanshin awaji kobe earthquake in 1995 this paper investigates the coping strategies employed by victims of the great hanshin awaji kobe earthquake in 1995 using a unique household data set we show that households that held a large amount of collateralizable assets before the catastrophe and were free from a binding borrowing constraint were able to maintain their consumption levels by borrowing in contrast households subject to a binding borrowing constraint before the disaster were unable to borrow to cope with the losses inflicted by the earthquake on the other hand both types of households relied on private transfers depending on the extent of the damage

debt and financial expectations an individual and household level analysis in this article we show that optimistic financial expectations impact positively on both the quantity of debt and the growth in debt at the individual and household levels our theoretical model shows that this association is predicted under a variety of plausible scenarios in the empirical analysis we explore the determinants of debt and of growth in debt using british data we find convincing support for our theoretical priors and show that it is optimistic financial expectations per se that are important in influencing debt rather than the accuracy of individuals predictions regarding their future financial situation jel d18 d84 d91

two part fractional regression model for the demand for risky assets empirical studies of household portfolio choices are often interested in quantifying the effects of various covariates on the fraction of a household s wealth invested in risky assets such as common stocks the preferred econometric specification in these studies is the two limit tobit model which can accommodate the fractional nature of the dependent variable however it is restrictive because it assumes that the same data generating process determines both whether households participate in the stock market and the fraction of wealth invested in stocks this article demonstrates that in this setting a two part version of the fractional response model of papke and wooldridge 1996 constitutes an attractive alternative to tobit by comparing the performance of the two models using data on portfolio choices of australian households we find that 1 the tobit model is rejected by our data in favour of a two part specification and 2 marginal effects of covariates on the share of risky assets conditio

ill health savings and portfolio choices in developing economies abstract this paper examines the effect of adult health on the savings and portfolio decisions of rural pakistani households it also tests whether such effects result because ill health affects income and the rates of return on specific assets by so doing it provides evidence on the sensitivity of savings to income changes and to interest rates i find that expectations of future ill health increase overall savings but reduce investments in productive assets thereby forging a link between health and poverty i also find that the number of males in a household condition the impact of the ill health of any given individual on savings outcomes

expected and realized income changes evidence from the dutch socio economic panel abstract income expectations play a central role in household decision making in the life cycle model for example consumption and savings decisions reflect expectations of future income in empirical applications where direct information on expectations is not available it is usually assumed that expectations are rational and reflected by observed future realizations in this paper we analyze direct subjective information on expected changes of household income in one panel wave of dutch families first we describe these data and investigate how the expectations can be explained by among other variables income changes in the past second we combine these data with information on realized income changes in the next panel wave and analyze the differences between expected and realized changes we find that on average households underestimate their future income changes significantly in particular this holds for those families whose income has fallen in the past

a review of recent books on credit risk the usual risk taxonomy has three types market risk credit risk and operational risk market risk arises from the movements in the level or volatility of market prices credit risk is the risk that an obligor borrower counterparty may be unable or unwilling to repay their debt and operational risk which is broadly a residual category is specified as the risk of direct or indirect loss resulting from inadequate or failed internal processes people and systems or from external events 1 credit risk makes up about 50 60 of the total risk in a typical large bank with market risk taking a smaller share 20 of the remainder than operational risk kuritzkes schuermann and weiner 2003 a securities firm or investment bank will likely have relatively more market than credit risk while insurers are somewhere in between yet the bulk of academic research has focused on market risk perhaps because data is plentiful and easy to obtain while credit risk has received less attention in the literature until recently indeed we have seen a veritable explosion of research over the past few years as the well established tools of pricing and portfolio management find their way to that vast realm of relatively illiquid credit assets it has attracted a diverse group of disciplines from traditional finance asset pricing to mathematical statistics to econometrics and because credit risk is the dominant risk for banks regulators pay particular attention to its measurement and management recently this has culminated in the proposed new basel capital accord bis 2001 2003 a radical restructuring of how credit risk is assessed and capital set against it 2 in this review i cover three books on credit risk which have appeared recently though these are far from the only books on this topic however they do represent in my view the best of the crop and illustrate the diverse set of issues and their treatments which have occupied the literature both academic and practitioner the review is organized around some of the key questions and themes of this literature and how they are addressed by these authors til schuermann ny frb org i would like to thank michelle gittelman sam hansen beverly hirtle hashem pesaran and mel weeks the editor for helpful comments and suggestions any views expressed represent those of the author only and not necessarily those of the federal reserve bank of new york or the federal reserve system this definition is used in the new basel capital accord bis 2001 547 the purpose of capital is to provide a cushion against losses for a financial institution the literature on the general rationale for capital regulation in financial institutions is extensive and has been the subject of several recent surveys santos 2001 ball and stoll 1998 berger herring and szego 1995

temperance in stock market participation evidence from france we explore empirically whether earnings uncertainty and borrowing constraints deter households from the stock market consistent with the predictions of theoretical studies of portfolio choice in the presence of uninsurable earnings since recent extensions highlight the importance of the correlation between earnings and financial risks here we use a self assessed proxy from the delta tns 2002 cross sectional survey to empirically assess the impact although income risk does not affect the participation decision of households reporting a negative correlation it does lower the participation of those who report a non negative sign consistent with economic theory predictions

income hedging and portfolio decisions we examine whether the decision to participate in the stock market and other related portfolio decisions are influenced by income hedging motives economic theory predicts that the market participation propensity should increase as the correlation between income growth and stock market returns decreases surprisingly empirical studies find limited support for the income hedging motive using a rich unique dutch data set and the national longitudinal survey of the youth nlsy from the united states we show that when the income return correlation is low individuals exhibit a greater propensity to participate in the market and allocate a larger proportion of their wealth to risky assets even when the income risk is high individuals exhibit a higher propensity to participate in the market when the hedging potential is high these findings suggest that income hedging is an important determinant of stock market participation and asset allocation decisions

does agricultural growth in poor countries harm agricultural exporting rich countries abstract the commonly held view that agricultural exporting developed countries would lose from agricultural growth in less developed countries lcds is shown to be based on an incomplete argument it considers only the effects on ldc agricultural supply or at best only that and the first round effects of increased farmer incomes on the demand for tradables what also needs to be considered is the effect on the demand for nontradables and hence the second round effects of increased spending by producers of nontradables when all these effects are considered the positive correlations obtained between agricultural output growth in ldcs and agricultural imports from developed countries is not surprising it is then shown that selling or giving away agricultural research and management skills to developing countries can be beneficial to developed countries including agricultural exporters by setting out to do good they may end up also doing well

the determinants of household risky asset holdings australian evidence on background risk and other factors we study the portfolio allocation decisions of australian households using the relatively new household income and labour dynamics in australia hilda survey we focus on household allocations to risky financial assets our empirical analysis considers a range of hypothesised determinants of these allocations we find background risk factors posed by labor income uncertainty and health risk are important credit constraints and observed risk preferences play the expected role a positive age gradient is identified for risky asset holdings and home ownership is associated with greater risky asset holdings a unifying theme for many of our empirical findings is the important role played by financial awareness and knowledge in determining risky asset holdings many non stockholding households appear to lack the experience and financial literacy that might enable them to benefit from direct investment in stocks

twin picks disentangling the determinants of risk taking in household portfolios this paper investigates risk taking in the liquid portfolios held by a large panel of swedish twins we document that the portfolio share invested in risky assets is an increasing and concave function of financial wealth leading to different risk sensitivities across investors human capital which we estimate directly from individual labor income also affects risk taking positively while internal habit and expenditure commitments tend to reduce it our microfindings lend strong support to decreasing relative risk aversion and habit formation preferences furthermore heterogeneous risk sensitivities across investors help reconcile individual preferences with representative agent models

saving and portfolio allocation before and after job loss we investigate the development of household labor income financial wealth and asset holdings over a 9 year period around job loss using unique administrative panel data from norway consistent with predictions from theory the data show additional saving and a shift toward safer assets in the years leading up to unemployment and depletion of savings after job loss in the years after job loss the households after tax labor income is reduced by about usd 12 500 over the same time period households deplete usd 3 000 of their financial assets of which one third is accumulated prior to the job loss this suggests that at least some households can foresee and prepare for the upcoming unemployment which indicates that private savings can to some extent serve as a substitute for publicly provided unemployment insurance

multiplicative background risk although there has been much attention in recent years on the effects of additive background risks the same is not true for its multiplicative counterpart we consider random wealth of the multiplicative form xy where x and y are statistically independent random variables we assume that x is endogenous to the economic agent but that y is an exogenous and nontradable background risk that represents a type of market incompleteness our main focus is on how the presence of the multiplicative background risk y affects risk taking behavior for decisions on the choice of x we extend the results of gollier and pratt 1996 to characterize conditions on preferences that lead to more cautious behavior

optimal portfolio choice for long horizon investors with nontradable labor income this paper examines how risky labor income and retirement affect optimal portfolio choice with idiosyncratic labor income risk the optimal allocation to stocks is unambiguously larger for employed investors than for retired investors consistent with the typical recommendations of investment advisors increasing idiosyncratic labor income risk raises investors willingness to save and reduces their stock portfolio allocation towards the level of retired investors positive correlation between labor income and stock returns has a further negative effect and can actually reduce stockholdings below the level of retired investors financial advisors typically recommend that their customers invest more in stocks than in safe assets when they are working and to shift their investments towards safe assets when they retire jagannathan and kocherlakota 1996 malkiel 1996 by contrast the standard academic models of portfolio choice merton 1969 1971 samuelson 1969 show that retirement is irrelevant for portfolio decisions if investment opportunities are constant and human capital is tradable in this case the fraction of wealth optimally invested in risky assets should be constant over the lifetime of an individual recent research building on the pioneering work by merton 1971 shows that time varying investment opportunities result in portfolio rules with an intertemporal hedging component whose magnitude depends on the investment horizon of the investor kim and omberg 1996 balduzzi and lynch 1997 brennan schwartz and lagnado 1997 brandt 1999 campbell and viceira 1999 2001 barberis 2000 with time variation in investment opportunities retirement and death play an instrumental role as events that exogenously fix the individual s investment horizon more importantly retirement also marks the time at which individuals stop working and thereafter must live off their lifetime savings and possibly transfers from this perspective retirement matters for portfolio choice

assistance to expand agricultural production abstract bilateral and multilateral development assistance agencies have devoted major resources to programs to support more rapid growth of agricultural production in developing countries in this paper i review the effectiveness of assistance activities in land and water development agricultural research and extension the reform of land tenure arrangement and the development of agricultural credit institutions investments in several of these activities particularly land and water resource development and agricultural research have had relatively high rate of return yet in almost all areas there has been a continuous cycling of program priorities and thrusts there has been a persistent failure to learn from failure or from success in the future more attention needs to be given to the generation of socialscience knowledge for the design and reform of the institutional infrastructure needed to sustain agricultural development

assortative matching and risk sharing abstract this paper explores the sorting patterns in a two sided matching market where agents facing different risks match to share them when preference belongs to the class of harmonic absolute risk aversion hara the risk premium is perfectly transferable within each partnership thus a stable match minimizes the social cost of risk in the systematic risk model where agents are ranked by their holdings of a common risky asset the convexity of the joint risk premium in joint risk size leads to negative assortative matching nam in the idiosyncratic risk model where agents are ranked by their independent riskiness in the sense of second order stochastic dominance ssd nam arises when preference exhibits decreasing absolute risk aversion dara in the sense of ross and riskier background risk leads to more risk averse behavior however nam may fail to arise when riskier background risk leads to more risk tolerant behavior

self directed pensions gender risk and portfolio choices in this paper i investigate gender differences in financial risk taking from a new perspective and i show that gender plays a different role across the risk distribution to evaluate risk taking i exploit portfolio choices following a reform that entitles almost the entire swedish workforce to choose a risk profile for a part of their public pension contributions the novel finding is that portfolio risk does not differ much between the men and women who choose less risky portfolios while the men who choose risky portfolios take on significantly more risk than do the women who choose risky portfolios the findings are robust to investors choosing the default alternative chasing past returns rebalancing and different measures of risk taking

a panel data model for subjective information on household income growth abstract subjective expectations about future income changes are analyzed using household panel data the models used are extensions of existing binary choice panel data models to the case of ordered response we consider static models with random and fixed individual effects we also look at a dynamic random effects model which includes a measure for permanent and transitory income we find that income change expectations strongly depend on realized income changes in the past those whose income fell are more pessimistic than others while those whose income rose are more optimistic expected income changes are also significantly affected by employment status family composition permanent income and past expectations expectations are then compared to the head of household s ex post perception of the realized income change for the same period the main finding is that rational expectations are rejected and that in particular households whose income has decreased in the past underestimate their future income growth

farm development in poor countries the disputed consequences for u s farm trade a growing body of evidence suggests that farm development in poor countries is not necessarily menacing to u s farm trade to the contrary by helping to stimulate broadbased income growth in poor countries which is often followed by dietary enrichment and food import expansion farm development in poor countries can actually be beneficial to u s farm trade here we shall review some of the evidence which agricultural economists have recently put forward to support this paradoxical argument and we shall ask why this evidence has not yet been persuasive to the u s farm community in poor countries where incomes are low where diets are not yet rich and where a majority of citizens often depend upon farming for income and employment rapid agricultural development can stimulate the broad based income growth and eventually the industrial development usually necessary to turn loose pent up demands for dietary enrichment the paradoxical result can be that local food consumption may grow even more rapidly than local food production and the net farm imports of agriculturally successful developing countries can then actually increase to the presumed benefit of u s farmers a significant body of evidence has recently been assembled to document this paradoxical claim in 1979 bachman and paulino examined the trade consequences of rapid food production growth in sixteen developing countries and found that while the proportion of domestic food consumption satisfied by imports generally fell in these countries net imports of staple foods nonetheless increased annual net staple food imports in these agriculturally successful poor countries actually rose in volume by 133 between 1961 65 and 1974 76 bachman and paulino p 14 a similar pattern of rapid food import growth has more recently been documented by lee and shane in two developing countries malaysia and brazil often cited as threats to u s farm trade both of these coun

how general are risk preferences choices under uncertainty in different domains we analyze the extent to which individuals choices over five employer provided insurance coverage decisions and one 401 k investment decision exhibit systematic patterns as would be implied by a general utility component of risk preferences we provide evidence consistent with an important domain general component that operates across all insurance choices we find a considerably weaker relationship between one s insurance decisions and 401 k asset allocation although this relationship appears larger for more financially sophisticated individuals estimates from a stylized coverage choice model suggest that up to thirty percent of our sample makes choices that may be consistent across all six domains

wealth inequality and asset pricing in an arrow debreu exchange economy with identical agents except for their initial endowment we examine how wealth inequality affects the equilibrium level of the equity premium and the risk free rate we first show that wealth inequality raises the equity premium if and only if the inverse of absolute risk aversion is concave in wealth we then show that the equilibrium risk free rate is reduced by wealth inequality if the inverse of the coefficient of absolute prudence is concave we also prove that the combination of a small uninsurable background risk with wealth inequality biases asset pricing towards a larger equity premium and a smaller risk free rate the model of the representative consumer a la lucas 1978 failed to explain observed security prices more specifically as first stated by mehra and prescott 1985 the model predicts an equity premium that is too low and a risk free rate that is too high given the observed low variability of consumption growth a recent strand of the literature with papers by constantinides and duffie 1996 heaton and lucas 1996 and krusell and smith 1997 for example explores whether incomplete asset markets and heterogeneity among consumers can explain these puzzles constantinides and duffie 1996 in particular conclude that it is at least in principle possible to generate larger equity premia when such ingredients are introduced the aim of this paper is not to provide another explanation of the puzzles but rather to better understand the relationship between asset prices the heterogeneity of consumers wealth and the market incompleteness when markets are complete heterogeneous consumers are able to equalize their marginal rates of substitution across states and across time as shown by constantinides 1982 this implies that the equilibrium of the heterogeneous consumer economy can be duplicated by the equilibrium in a lucas economy with a representative agent this means that taking account of the heterogeneity in the population alone cannot explain why the representative agent model is rejected hansen and singleton 1982 this does not mean however that the distribution of wealth in the population for example has no effect on asset prices in general in order to understand this consider the departure from an egalitarian distribution of wealth by introducing a mean preserving transfer of endowment under decreasing absolute risk aversion poorer agents will be more risk averse whereas wealthier people will be less risk averse there is no reason a priori for that the group s attitude towards risk be unaffected by this transfer we first show that if absolute risk tolerance i e the inverse of the arrow pratt coefficient of absolute risk aversion is concave then the risk aversion of the agent with the mean wealth will be smaller than the risk aversion of the representative agent thus if an outside observer overlooks wealth inequality he consequently underestimates the aversion to risk of society this leads to

cognitive abilities and portfolio choice we study the relation between cognitive abilities and stockholding using the recent survey of health ageing and retirement in europe share which has detailed data on wealth and portfolio composition of individuals aged 50 in 11 european countries and three indicators of cognitive abilities mathematical verbal fluency and recall skills we find that the propensity to invest in stocks is strongly associated with cognitive abilities for both direct stock market participation and indirect participation through mutual funds and retirement accounts since the decision to invest in less information intensive assets such as bonds is less strongly related to cognitive abilities we conclude that the association between cognitive abilities and stockholding is driven by information constraints rather than by features of preferences or psychological traits

what makes a landlord ownership of real estate by us households households supply about three quarters of us rental housing the paper examines the real estate investment decision and the proportion of wealth invested in real estate hypotheses drawn primarily from the real estate finance literature about the role of wealth expected inflation human capital income tax rates race health risk aversion and inheritance are tested against data from the health and retirement study wealth has a powerful non linear effect on ownership of real estate but ownership is negatively associated with human capital marginal tax rates race and property gifts affect real estate investment poor health risk aversion and expected inflation do not seem to

the role of labor income risk in household risk taking abstract in fifteen european countries china and the us stocks and business equity as a share of total household assets are represented by an increasing and convex function of income wealth a parsimonious model fitted to the data shows why background labor income risk can explain much of this risk taking pattern uncontrollable labor income risk stresses middle income households more because labor income is a larger fraction of their total lifetime resources compared with the rich in response middle income households reduce controllable financial risk richer households having less pressure can afford more risk taking the poor take low risk because they avoid jeopardizing their subsistence consumption

historical antisemitism ethnic specialization and financial development historically european jews have specialized in financial services while being the victims of antisemitism we find that the present day demand for finance is lower in german counties where historical antisemitism was higher compared to otherwise similar counties households in counties with high historical antisemitism have similar saving rates but invest less in stocks hold lower saving deposits and are less likely to get a mortgage to finance homeownership after controlling for wealth and a rich set of current and historical covariates present day antisemitism and supply side forces do not fully explain the results households in counties where historical antisemitism was higher distrust the financial sector more a potential cultural externality of historical antisemitism that reduces wealth accumulation in the long run

saving accounts versus stocks and bonds in household portfolio allocation we study the structure of household portfolios of financial wealth by analyzing both the determinants of total financial wealth and the choice between risky stocks and bonds and riskfree assets saving accounts the econometric specification is a generalized trivariate tobit model estimated on a cross section of 3 077 households in the netherlands in 1988 we account for endogeneity of financial wealth and for selectivity due to nonreporting results show that the level of financial wealth and the marginal tax rate are major determinants of the allocation between riskfree and risky assets

limited participation and consumption saving puzzles a simple explanation and the role of insurance in this paper we show that the existence of a large negative wealth shock and insufficient insurance against such a shock could explain both the limited stock market participation puzzle and the low consumption high savings puzzle we then conduct an empirical analysis on the relation between household portfolio choices and access to private insurance and various types of government safety nets the empirical results demonstrate that a lack of insurance against large negative wealth shocks is positively correlated with lower participation rates and higher saving rates overall the evidence suggests an important role of insurance in household investment and savings decisions

portfolio choices firm shocks and uninsurable wage risk assessing the importance of uninsurable wage risk for individual financial choices faces two challenges first the identification of the marginal effect requires a measure of at least one component of risk that cannot be diversified or avoided moreover measures of uninsurable wage risk must vary over time to eliminate unobserved heterogeneity secondly evaluating the economic significance of risk requires knowledge of the size of all the wage risk actually faced existing estimates are problematic because measures of wage risk fail to satisfy the non avoidability requirement this creates a downward bias which is at the root of the small estimated effect of wage risk on portfolio choices to tackle this problem we match panel data of workers and firms and use the variability in the profitability of the firm that is passed over to workers to obtain a measure of uninsurable risk using this measure to instrument total variability in individual earnings we find that the marginal effect of uninsurable wage risk is much larger than estimates that ignore endogeneity we bound the economic impact of risk and find that its overall effect is contained not because its marginal effect is small but because its size is small and the size of uninsurable wage risk is small because firms provide substantial wage insurance

time horizon and the discount rate abstract we consider an economy a la lucas 1978 econometrica46 1429 1446 with a risk averse representative agent the exogenous growth rate of the economy follows a random walk we characterize the set of utility functions for which it is efficient to discount more distant cash flows at a lower rate the benchmark result is that when the growth rate is almost surely nonnegative the yield curve is decreasing if and only if relative risk aversion is decreasing with wealth relaxing the assumption on the absence of recession requires more restrictions on preferences such as increasing relative prudence journal of economic literature classification numbers d81 d91 q25 q28

background risk of food insecurity and insurance behaviour evidence from the west bank this paper explores behavioural changes resulting from the presence of a uninsurable background risk due to markets incompleteness not all risks are insurable we empirically test the theory and the intuition suggesting that people bearing an uninsurable background risk are less willing to bear other insurable risks and therefore increase their demand for insurance against insurable risks we present a case study on the palestinian territories we consider the implications of a background risk of food insecurity a major formally uninsurable risk using nationally representative household data using a bivariate probit model we find that exposure to severe food insecurity risk increases the propensity to insure against health risks and this propensity is increasing in background risk intensity our findings point to possible incentive changes towards the desirability of insurance that have implications for policy design

borrowing costs and the demand for equity over the life cycle abstract we construct a life cycle model that delivers realistic behavior for both equity holdings and borrowing the key model ingredient is a wedge between the cost of borrowing and the risk free investment return borrowing can either raise or lower equity demand depending on the cost of borrowing a borrowing rate equal to the expected return on equity which we show roughly matches the data minimizes the demand for equity alternative models with no borrowing or limited borrowing at the risk free rate cannot simultaneously fit empirical evidence on borrowing and equity holdings

the impact of health insurance on stockholding a regression discontinuity approach economic theory predicts that a reduction in background risk should induce financial risk taking particularly for individuals with low stock market participation costs hence health insurance coverage could affect financial risk taking by offsetting health related background risk we use a regression discontinuity design to examine whether medicare eligibility at age 65 increases stockholding in the us and find that it does so for those with college education but not for their less educated counterparts who face higher stock market participation costs our results are unlikely due to the reduction of medical expenses associated with medicare coverage because the latter does not affect bondholding

income risk borrowing constraints and portfolio choice economic theory suggests that uninsurable income risk and the expectation of future borrowing constraints can reduce the share of risky assets in a household s portfolio if the utility function exhibits decreasing absolute risk aversion and decreasing prudence an individual will reduce his exposure to rate of return risks when confronted with other independent risks if there are transaction costs the expectation of future borrowing constraints should induce individuals to keep a lower proportion of their wealth in the form of illiquid and risky assets the authors find support for these propositions in a cross section of italian households copyright 1996 by american economic association

risk management housing and stockholding this article investigates the possible explanations of the stockholding puzzle by focusing on housing and other uninsurable risks associated with income health and business taking the french household wealth survey patrimoine 2004 french national statistical institute we find that the share of financial wealth invested in stocks depends on transaction and information costs risk aversion exposure to real estate risk and to a lesser extent labour market risk these results are obtained by controlling for endogenous home ownership status

default probability estimation via pair copula constructions abstract in this paper we present a novel approach for firm default probability estimation the methodology is based on multivariate contingent claim analysis and pair copula constructions for each considered firm balance sheet data are used to assess the asset value and to compute its default probability the asset pricing function is expressed via a pair copula construction and it is approximated via monte carlo simulations the methodology is illustrated through an application to the analysis of both operative and defaulted firms

the investment horizon and dynamic asset allocation some experimental evidence abstract this paper presents the results of an asset allocation experiment on the influence of the investment horizon on risk taking we investigate exposures to the risky asset for an investment horizon of one and two periods in a dynamic setting we found no significant difference in allocations

cost and preference heterogeneity in risky financial markets summary this paper estimates the magnitude of participation costs and preference parameters exploiting information on households participation decisions in the equities market a structural model for portfolio choices over the life cycle is solved numerically the parameters of interest are estimated using an indirect inference approach which makes use of the computed participation gains losses participation costs are found to be significant education and lagged participation being the major sources of heterogeneity also the least educated are the least risk averse and the positive effect of risk aversion on wealth accumulation dominates its negative influence on the risky asset demand copyright 2013 john wiley sons ltd

forecasting bankruptcy more accurately a simple hazard model i argue that hazard models are more appropriate than single period models for forecasting bankruptcy single period models are inconsistent while hazard models produce consistent estimates i describe a simple technique for estimating a discrete time hazard model i find that about half of the accounting ratios that have been used in previous models are not statistically significant moreover market size past stock returns and idiosyncratic returns variability are all strongly related to bankruptcy i propose a model that uses both accounting ratios and market driven variables to produce out of sample forecasts that are more accurate than those of alternative models copyright 2001 by university of chicago press

decreasing aversion under ambiguity abstract under which condition does the set of desirable uncertain prospects expand when wealth increases we show that the decreasing concavity dc of the utility function u is necessary and sufficient in the maxmin expected utility model in the smooth ambiguity aversion model with the ambiguity valuation function the dc of u and of u is necessary and sufficient an alternative classical definition of decreasing aversion is based on the hypothesis that the investment in a risky asset is increasing in wealth we show that this hypothesis does not hold in general under ambiguity aversion and that one needs to constrain the structure of ambiguity to obtain unambiguous results

homeownership and investment in risky assets abstract this paper uses the 1989 survey of consumer finances to show that committed expenditures related to homeownership cause agents to hold their financial assets in a safe form this work follows theoretical results by fratantoni 5 which show that the mortgage commitment leads to reduced risky asset holding and empirical results by guisoet al 7 which show that agents with uncertain labor income hold fewer risky assets i find that doubling the median homeowner s mortgage payment income ratio leads to a 15 decrease in the risky share

a multi country real business cycle model with heterogeneous agents a multicountry real business cycle model is developed capturing two important aspects of heterogeneity found in household survey data only a small fraction of the population holds stock and a significant fraction of nonstockholders are borrowing constrained the model is applied to data for twenty oecd countries it generates cross country consumption correlations consistent with those observed in the data potential welfare gains from international portfolio diversification by stockholders are large leaving the observed home bias as a significant puzzle the model can also account for the finding in u s data that consumption of stockholders is more volatile than that of nonstockholders copyright 1996 by the editors of the scandinavian journal of economics

heterogeneous background risks and portfolio choice evidence from micro level data we construct a set of household level background risk variables to capture the covariance structure of three nonfinancial assets and two financial assets these risks are in general statistically significant and economically important for a household s stock market participation and stockholdings a one standard deviation increase in background risks reduces the participation probability by 11 and the stockholdings to wealth ratio by 4 the volatilities of labor income housing value and business income reduce a household s participation and stockholdings a household with labor income highly correlated with stock bond returns is less more likely to invest in stock

prudence in bargaining the effect of uncertainty on bargaining outcomes abstract we investigate the outcome of bargaining when a player s pay off from agreement is risky we find that a risk averse player typically increases his equilibrium receipts when his pay off is made risky this is because the presence of risk makes individuals behave more patiently in bargaining strong analogies are drawn to the precautionary saving literature we show that the effect of risk on receipts can be sufficiently strong that a decreasingly risk averse player may be better off receiving a risky pay off than a certain pay off

crime punishment and background risks abstract we show that if the punishment for a property crime effectively eliminates an individual s initial wealth as with a very long prison sentence then such criminal activities become less desirable for a risk averse and prudent individual if his initial wealth distribution undergoes a second order stochastic dominant improvement similar results obtain under additional restrictions if the punishment reduces an individual s initial wealth by some factor less than 1 in a general equilibrium model where the endogenous victimization risk is part of individuals background risks we also show that the availability of insurance for the victimization risk lowers economy wide crime rates

risk aversion wealth and background risk we use household survey data to construct a direct measure of absolute risk aversion based on the maximum price a consumer is willing to pay for a risky security we relate this measure to consumer s endowments and attributes and to measures of background risk and liquidity constraints we find that risk aversion is a decreasing function of the endowment thus rejecting cara preferences we estimate the elasticity of risk aversion to consumption at about 0 7 below the unitary value predicted by crra utility we also find that households attributes are of little help in predicting their degree of risk aversion which is characterized by massive unexplained heterogeneity we show that the consumer s environment affects risk aversion individuals who are more likely to face income uncertainty or to become liquidity constrained exhibit a higher degree of absolute risk aversion consistent with recent theories of attitudes toward risk in the presence of uninsurable risks jel d1 d8

aid food policy reform and u s agricultural interests in the third world global food economy one component of this new agricultural nationalism is a growing disenchantment with american aid to agriculture in the third world the new york times on 4 june 1987 for example featured the story world bank loans stir ire of u s farm groups in which a halfdozen leading agricultural organizations argued against aid and stimulating competition against american farmers this paper assesses the aid to agriculture question from a food policy perspective it seeks to answer two broad questions is food policy reform and agricultural growth in the third world in the interest of u s agriculture if so is aid and the conditions attached to it an effective means for achieving this reform these are immense topics and the rather bold series of propositions presented here provide only partial answers four clarifying comments seem necessary before proceeding with the analysis first the focus of this paper is on food policy and its reform such a concept is not necessarily synonymous with simply increasing agricultural output although reform typically leads to additional production food policy is instead a broader view that embraces consumption marketing and trade as well as production timmer falcon and pearson some types of policy reform might significantly improve consumption but leave agricultural production unaffected or even lowered for example many developing countries now have domestic prices higher than those in comparable world markets if reform means using world or border prices as the pricing norm an imposition of that norm would increase consumption but negatively affect farmer incentives and hence reduce the production of certain commodities

exploring higher order risk effects higher order risk effects play an important role in examining economic behavior under uncertainty a precautionary demand for saving has been linked to the property of prudence and the property of temperance has been used to show how the presence of an unavoidable risk affects one s behavior towards a second risk these two properties also play key roles in aversion to negative skewness and to kurtosis respectively both properties recently have been characterized by preferences over lottery pairs in simple 50 50 gambles the simplicity of this characterization is ideal for experimental investigation this article reports the results of such experiments and concludes that there is behavioral evidence for prudence but not for temperance implications of these results for both expected utility and non expected utility models are examined

consumption smoothing and portfolio rebalancing the effects of adjustment costs abstract a household s response to income and return shocks depends on the costs of portfolio adjustment in particular the extent of portfolio rebalancing and consumption smoothing are influenced by the presence of non convex portfolio adjustment costs suppose bonds can be adjusted costlessly while adjustments to stock accounts entail adjustment costs due to these portfolio adjustment costs the household demands both stocks and bonds a household can buffer some income fluctuations without incurring adjustment costs and engage in costly portfolio rebalancing less frequently using the estimated preference parameters and portfolio adjustment costs the response to income and return shocks is nonlinear and reflects the interaction of portfolio rebalancing and consumption smoothing

background risk and university endowment funds abstract this paper tests the effect of background risk on university endowment portfolios where background risk is defined as the volatility of universities nonfinancial income the results show that higher background risk is associated with lower portfolio standard deviations universities with higher background risk invest significantly more in fixed income and less in alternative assets a 1 standard deviation increase in background risk increases the allocation to fixed income by approximately 15 relative to the mean there is also evidence that wealthier highly selective universities hold riskier portfolios

risk aversion and rising wage inequality abstract we propose a model in which as incomes grow workers become less risk averse and move from fixed wage contracts to variable pay this can explain the recent increase in wage dispersion between groups within groups and over the lifecycle

changes in background risk and risk taking behaviour economic decision making under uncertainty often takes place in the presence of multiple risks and in markets that are less than complete as a consequence choices about endogenous risks sometimes must be made while simultaneously facing one or more immutable exogenous background risks that are not under the control of the agent and that are independent of endogenous risks it is somehow natural to assume that an exogenous deterioration in background wealth will cause an individual to take more care elsewhere if we define a deterioration for example as making the individual poorer by removing a fixed amount of initial wealth we know from pratt 1964 that decreasing absolute risk aversion dara of an individual s von neumann morgenstern utility function yields this natural result if on the other hand background wealth becomes riskier due to the addition of a zero mean risk that is also statistically independent of all other risks behavior will be more risk averse if and only if preferences are risk vulnerable as defined by gollier and pratt 1996 risk vulnerability described below in section 4 is a stronger notion than dara and includes proper risk aversion pratt and zeckhauser 1987 and standard risk aversion eeckhoudt and kimball 1992 kimball 1993 as particular cases but a deterioration in background wealth may encompass more complicated distribution changes than the introduction of another statistically independent risk in this paper we examine background wealth deteriorations that take the form of both general firstand second degree stochastic dominance changes in risk fsd and ssd respectively in particular we determine conditions that are both necessary and sufficient for each of these two types of background risk changes to imply more risk averse behavior on the part of the individual for the case of fsd changes this condition turns out to be ross stronger characterization of decreasing absolute risk aversion in the case of general ssd changes in the distribution of background wealth the condition derived is a stronger version in ross sense of the conditions characterizing preferences that are locally risk vulnerable in the sense of gollier and pratt the necessary and sufficient conditions derived are fairly restrictive upon preferences however if we take as positive behavior that individuals act in a more risk averse manner whenever the distribution of background wealth deteriorates these conditions place canonical limits upon appropriate utility representations at the very least they

term structures of credit spreads with incomplete accounting information we study the implications of imperfect information for term structures of credit spreads on corporate bonds we suppose that bond investors cannot observe the issuer s assets directly and receive instead only periodic and imperfect accounting reports for a setting in which the assets of the firm are a geometric brownian motion until informed equityholders optimally liquidate we derive the conditional distribution of the assets given accounting data and survivorship contrary to the perfect information case there exists a default arrival intensity process that intensity is calculated in terms of the conditional distribution of assets credit yield spreads are characterized in terms of accounting information generalizations are provided

income risk and portfolio choice an empirical study this paper investigates the relationship between portfolio choice and labor income risk in the national longitudinal survey of youth 1979 cohort permanent income risk variability of shocks to income that have permanent effect significantly reduces the share of risky assets in the household s portfolio while transitory income risk variability of shocks with no lasting effect does not this result provides strong evidence that households portfolio choices respond to labor income risks in a manner consistent with economic theory theoretical work has shown that uninsurable labor income risk is likely to reduce the share of risky assets in an investor s portfolio pratt and zeckhauser 1987 kimball 1993 bertaut and haliassos 1997 koo 1998 1999 elmendorf and kimball 2000 in a dynamic context when labor in come consists of components of different persistence the magnitude of this effect should depend on the persistence associated with the risk the risk to a persistent component should have a larger effect than the risk to a transi tory component surprisingly however empirical work has not examined this interesting implication of the theory this paper uses the rich information con tained in the national longitudinal survey of youth 1979 cohort nlsy79 to examine this implication we assume that labor income has two components permanent and transitory we then measure the risks of the components for a sample of households in the survey and estimate their effects on the risky asset share previous empirical

decreasing relative risk aversion and tests of risk sharing the relative risk aversion rra coefficient of a household whose consumption is close to the subsistence level may be very high for example if consumption is exactly at the subsistence level the household may not be willing to bear any risk if this is the case then the rra coefficient must be a decreasing function of wealth for poor households therefore we should allow the possibility of decreasing rra drra in testing the full risk sharing hypothesis however existing tests in the empirical literature are derived using preferences that exhibit either increasing or constant rra even when they are applied to data containing low income households we therefore use a hyperbolic absolute risk aversion hara utility which implies increasing constant and decreasing rra as special cases to test full risk sharing hypothesis using the international food policy research institute ifpri and the international crops research institute of the semi arid tropics icrisat household level data sets we find evidence in support of the drra hypothesis along with evidence favoring full risk sharing hypothesis at the village level and evidence against the hypothesis at the inter village level when rra is restricted to be constant we replicate the previous results in the literature reject the full risk sharing hypothesis at both levels our tests however reject this restriction and favor drra in almost all cases these results suggest that it is important to allow for drra in testing the full risk sharing hypothesis when data containing low income households are investigated this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this this abstract was borrowed from another version of this item

precautionary portfolio behavior from a life cycle perspective abstract the literature on household asset accumulation draws a sharp distinction between short run precautionary motives to buffer consumption from annual income shocks and long run life cycle considerations under income certainty however estimates of shock persistence imply considerable career uncertainty we study long run precautionary motives for life cycle wealth accumulation and portfolios allowing for uncertain returns incomes and lifespan we separate the effects of various factors on mean and median asset holdings including education risk aversion household heterogeneity bequests impatience variance and serial correlation of income shocks numerical solutions are compared with data from the 1992 survey of consumer finances

household portfolio choice and retirement this study examines household portfolio choice through the retirement transition i show that couples significantly decrease their stock allocations after retirement whereas singles allocations remain relatively unchanged reallocations are concentrated among couples in which the wife is more risk averse than her husband husbands and wives respective retirement events are followed by opposite signed changes in stock allocations these findings are consistent with a model of collective household decision making in which spouses have heterogeneous risk preferences and suggest that dynamics in the distribution of intrahousehold bargaining power generate time varying household risk aversion

higher order risk attitudes demographics and financial decisions we conduct an experiment to study the prevalence of the higher order risk attitudes of prudence and temperance in a large demographically representative sample as well as in a sample of undergraduate students participants make pairwise choices between lotteries of the form proposed by eeckhoudt and schlesinger 2006 the choices in these lotteries isolate prudent from imprudent and temperate from intemperate behavior we relate individuals risk aversion prudence and temperance levels to demographics and financial decisions we observe that the majority of individuals decisions are consistent with risk aversion prudence and temperance in both the student and the demographically representative sample an individual s level of prudence is predictive of his wealth saving and borrowing behavior outside of the experiment while temperance predicts the riskiness of portfolio choices our findings suggest that the coefficient of relative prudence for a representative individual is approximately equal to two

portfolio selection with consumption ratcheting abstract in this paper we study the portfolio selection problem of a finite lived agent who does not tolerate a decline in standard of living the preference can be regarded as exhibiting extreme form of habit formation and also related to loss aversion in the prospect theory we show that the agent s optimal portfolio exhibits a trend chasing behavior and the portfolio share of the risky asset fluctuates between 0 and the value of an unconstrained individual the fluctuations do not attenuate as time gets near the end of the planning horizon we also explore implications of the model for asset pricing and show that the model has a potential to match better the recent us data than traditional habit models we provide a complete solution to the problem by considering a transformed problem which is similar in its formal structure to an irreversible incremental investment problem and equivalent to an infinite series of optimal stopping problems

income risk and household schooling decisions in burkina faso summary i study the effects of income uncertainty on household schooling decisions households with more volatile incomes have a greater incentive to build a buffer stock to insure against unforeseen adverse shocks and non enrollment can be part of such a strategy i use data from rural burkina faso where school attainment is low and income shocks are frequent to show that income uncertainty reduces several educational outcomes including enrollment education expenditures and years of education completed the findings suggest that income uncertainty has larger welfare costs in terms of human capital than is implied by studies that only focus on realized income shocks

uncertainty and household portfolio choice evidence from south korea abstract we examine the effect of policy uncertainty on household portfolio choice using the korea labor and income panel study klips policy uncertainty significantly reduces the amount of risky assets in a household s portfolio on both extensive and intensive margins individual heterogeneity is controlled using a risk tolerance variable furthermore we estimate heterogeneous effects of the policy uncertainty on portfolio choices of households across different levels of income volatility it turns out that households with higher levels of labor income volatility tend to respond less to aggregate policy uncertainty