I estimate the social discount rate allowing returns on investment to differ from returns on wealth. The rate of return on investment is below that on wealth, and both are declining. U.S. data imply pure time preference of 1% and relative risk aversion of 3, which I use to project returns going forward. The analysis suggests a descriptive social discount rate of 7.1%, and a prescriptive rate of 6.1%. Zero pure time preference implies only a modest increase in investment over historical and projected rates.
{"title":"Social Discounting with Diminishing Returns on Investment","authors":"Marc H. Vatter","doi":"10.2139/ssrn.1078502","DOIUrl":"https://doi.org/10.2139/ssrn.1078502","url":null,"abstract":"I estimate the social discount rate allowing returns on investment to differ from returns on wealth. The rate of return on investment is below that on wealth, and both are declining. U.S. data imply pure time preference of 1% and relative risk aversion of 3, which I use to project returns going forward. The analysis suggests a descriptive social discount rate of 7.1%, and a prescriptive rate of 6.1%. Zero pure time preference implies only a modest increase in investment over historical and projected rates.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"72 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-01-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125611566","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Using three natural experiments, we test the hypothesis that investor overconfidence produces overpricing of high idiosyncratic volatility stocks in the presence of binding short-sale constraints. We study three events: IPO lockup expirations, option introductions, and the 2008 short-sale ban on financial firms. Consistent with our prediction, we show that when short-sale constraints are relaxed, event stocks with high idiosyncratic volatility tend to experience greater price reductions, as well as larger increases in trading volume and short interest, than those with low idiosyncratic volatility. These results hold when we benchmark event stocks with non-event stocks with comparable idiosyncratic volatility. Overall, our findings suggest that biased investor beliefs and binding short-sale constraints contribute to idiosyncratic volatility overpricing.
{"title":"Short-Sale Constraints and the Idiosyncratic Volatility Puzzle: An Event Study Approach","authors":"Danling Jiang, David R. Peterson, James S. Doran","doi":"10.2139/ssrn.1016112","DOIUrl":"https://doi.org/10.2139/ssrn.1016112","url":null,"abstract":"Using three natural experiments, we test the hypothesis that investor overconfidence produces overpricing of high idiosyncratic volatility stocks in the presence of binding short-sale constraints. We study three events: IPO lockup expirations, option introductions, and the 2008 short-sale ban on financial firms. Consistent with our prediction, we show that when short-sale constraints are relaxed, event stocks with high idiosyncratic volatility tend to experience greater price reductions, as well as larger increases in trading volume and short interest, than those with low idiosyncratic volatility. These results hold when we benchmark event stocks with non-event stocks with comparable idiosyncratic volatility. Overall, our findings suggest that biased investor beliefs and binding short-sale constraints contribute to idiosyncratic volatility overpricing.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-02-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122007248","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Spanish Abstract: Se presentan 7 ejemplos reales de empresas que tuvieron un aumento vertiginoso de la cotizacion, seguido de un descenso tambien vertiginoso. El analisis de las causas a las que se debio el aumento y el descenso posterior de las cotizaciones ayuda a comprender las burbujas. En todos los casos las acciones llegaron a estar sobrevaloradas. Levitz, Home Shopping Network, MCI, Telepizza y Boston Chicken son claros ejemplos de exagerado optimismo sobre la magnitud y el crecimiento de los flujos futuros de las empresas. OM Scott es un claro ejemplo de mala comunicacion con el mercado. LTCM (Long Term Capital Management) es un ejemplo de riesgo no percibido por el mercado (y de deficiente control de riesgos de la empresa). English Abstract: Between December 1996 and October 1998, the value destroyed by Boston Chicken for its shareholders amounted to 3,293 million euros (a return of -100%). During the same period, the stock market yield (S&P500) was 54%. Between June 1998 and October 1999, the value destroyed by TelePizza for its shareholders amounted to 1,543 million euros (a return of -55%). During the same period, the stock market yield (IBEX 35) was -7%. It is very interesting to compare and try to differentiate what happened to these two companies. We also urge the reader to analyze the history of companies such as Levitz, Home Shopping Network, OM Scott, MCI, and LTCM.
西班牙语摘要:7个真实的例子，公司有一个令人眩目的增长，随后也令人眩目的下降。对价格上涨和随后下跌的原因的分析有助于理解泡沫。在所有情况下，股票都被高估了。莱维茨(Levitz)、家庭购物网络(Home Shopping Network)、MCI、Telepizza和波士顿鸡(Boston Chicken)都是对未来业务流动规模和增长过度乐观的明显例子。OM Scott是与市场沟通不力的一个明显例子。长期资本管理(LTCM)是市场未察觉到的风险(以及公司风险控制不足)的一个例子。从1996年12月到1998年10月，波士顿鸡公司为其股东损失了329.3万欧元(回报-100%)。在同一时期，股票市场收益率(标准普尔500指数)为54%。在1998年6月至1999年10月期间，TelePizza为其股东损失了1543万欧元(-55%的利润)。在同一时期，股票市场收益率(IBEX 35)为-7%。比较和区分这两家公司的情况是很有趣的。我们还需要the reader to analyze the history of companies如Levitz OM, Home Shopping Network,斯科特,MCI, LTCM。
{"title":"Ejemplos de burbujas: Telepizza y otras 6 empresas (Telepizza and Boston Chicken: Examples of Value Destruction)","authors":"Pablo Fernández","doi":"10.2139/SSRN.951174","DOIUrl":"https://doi.org/10.2139/SSRN.951174","url":null,"abstract":"Spanish Abstract: Se presentan 7 ejemplos reales de empresas que tuvieron un aumento vertiginoso de la cotizacion, seguido de un descenso tambien vertiginoso. El analisis de las causas a las que se debio el aumento y el descenso posterior de las cotizaciones ayuda a comprender las burbujas. En todos los casos las acciones llegaron a estar sobrevaloradas. Levitz, Home Shopping Network, MCI, Telepizza y Boston Chicken son claros ejemplos de exagerado optimismo sobre la magnitud y el crecimiento de los flujos futuros de las empresas. OM Scott es un claro ejemplo de mala comunicacion con el mercado. LTCM (Long Term Capital Management) es un ejemplo de riesgo no percibido por el mercado (y de deficiente control de riesgos de la empresa). English Abstract: Between December 1996 and October 1998, the value destroyed by Boston Chicken for its shareholders amounted to 3,293 million euros (a return of -100%). During the same period, the stock market yield (S&P500) was 54%. Between June 1998 and October 1999, the value destroyed by TelePizza for its shareholders amounted to 1,543 million euros (a return of -55%). During the same period, the stock market yield (IBEX 35) was -7%. It is very interesting to compare and try to differentiate what happened to these two companies. We also urge the reader to analyze the history of companies such as Levitz, Home Shopping Network, OM Scott, MCI, and LTCM.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"134 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-04-27","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134250446","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
I construct a model in which money and bond holdings are consistent with individual decisions and aggregate variables such as production and interest rates. The agents are infinitely-lived, have constant-elasticity preferences, and receive a fraction of their income in money. Each agent solves a Baumol-Tobin money management problem. Markets are segmented because financial frictions make agents trade bonds for money at different times. Trading frequency, consumption, government decisions and prices are mutually consistent. An increase in inflation, for example, implies higher trading frequency, more bonds sold to account for seigniorage, and lower real balances.
{"title":"Individual and Aggregate Money Demands","authors":"Andre C. Silva","doi":"10.2139/ssrn.997223","DOIUrl":"https://doi.org/10.2139/ssrn.997223","url":null,"abstract":"I construct a model in which money and bond holdings are consistent with individual decisions and aggregate variables such as production and interest rates. The agents are infinitely-lived, have constant-elasticity preferences, and receive a fraction of their income in money. Each agent solves a Baumol-Tobin money management problem. Markets are segmented because financial frictions make agents trade bonds for money at different times. Trading frequency, consumption, government decisions and prices are mutually consistent. An increase in inflation, for example, implies higher trading frequency, more bonds sold to account for seigniorage, and lower real balances.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121987428","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper analyses the interaction between internal agency problems within firms and external search frictions when workers have private information. We show that the allocation of resources is determined by a modified Hosios Rule. We then analyze the effect of changes in the macro economic variables on the wage contract and the unemployment rate. We find that private information may increase the responsiveness of the unemployment rate to changes in productivity. The incentive power of the wage contracts is positively related to high productivity, low unemployment benefits and high search frictions.
{"title":"Incentives in Competitive Search Equilibrium","authors":"Espen R. Moen, Åsa Rosén","doi":"10.2139/ssrn.1013296","DOIUrl":"https://doi.org/10.2139/ssrn.1013296","url":null,"abstract":"This paper analyses the interaction between internal agency problems within firms and external search frictions when workers have private information. We show that the allocation of resources is determined by a modified Hosios Rule. We then analyze the effect of changes in the macro economic variables on the wage contract and the unemployment rate. We find that private information may increase the responsiveness of the unemployment rate to changes in productivity. The incentive power of the wage contracts is positively related to high productivity, low unemployment benefits and high search frictions.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"54 5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123551736","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The Big Mac Index, introduced by The Economist magazine more than two decades ago, claims to provide the “true value” of a large number of currencies. This paper assesses the economic value of this index. We show that (i) the index suffers from a substantial bias; (ii) once the bias is allowed for, the index tracks exchange rates reasonably well over the medium to longer term in accordance with relative purchasing power parity theory; (iii) the index is at least as good as the industry standard, the random walk model, in predicting future currency values for all but shortterm horizons; and (iv) future nominal exchange rates are more responsive than prices to currency mispricing. While not perfect, at a cost of less than $US10 per year, the index seems to provide good value for money.
{"title":"The Big Mac Index Two Decades on: An Evaluation of Burgernomics","authors":"K. Clements, Yihui Lan, Shi Pei Seah","doi":"10.2139/ssrn.1081843","DOIUrl":"https://doi.org/10.2139/ssrn.1081843","url":null,"abstract":"The Big Mac Index, introduced by The Economist magazine more than two decades ago, claims to provide the “true value” of a large number of currencies. This paper assesses the economic value of this index. We show that (i) the index suffers from a substantial bias; (ii) once the bias is allowed for, the index tracks exchange rates reasonably well over the medium to longer term in accordance with relative purchasing power parity theory; (iii) the index is at least as good as the industry standard, the random walk model, in predicting future currency values for all but shortterm horizons; and (iv) future nominal exchange rates are more responsive than prices to currency mispricing. While not perfect, at a cost of less than $US10 per year, the index seems to provide good value for money.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"5 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-07-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131448107","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We offer the first direct evidence of an implicit contract in a goods market. The evidence we offer comes from the market for Coca-Cola. We demonstrate that the Coca-Cola Company left a substantial amount of written evidence of its implicit contract with its consumers—a very explicit form of an implicit contract. The contract represented the promise of a five cent (nominal) price and adherence to the “Secret Formula”. In general, the implicit nature of such contracts makes observation difficult. To overcome this difficulty, we adopt a narrative approach. Based on the analysis of a large number of historical documents obtained from the Coca-Cola Archives and other sources, we offer evidence of the Coca-Cola Company both acknowledging and acting on this implicit contract. We also make another unique contribution by exploring quality as a margin of adjustment available to Coca-Cola. The implicit contract included a promise not only of a constant nominal price but also a constant quality (i.e., 6.5 oz. of the Secret Formula). During a period of over 70 years, we find evidence of only a single case of true quality change. By studying the margin of adjustment the Coca-Cola Company chose in response to changes in market conditions, we demonstrate that the perceived costs of breaking the implicit contract were large. We argue that one piece of direct evidence on the magnitude of these costs is the aftermath “New Coke’s” introduction in 1985.
{"title":"Explicit Evidence on an Implicit Contract","authors":"A. Young, Daniel Levy","doi":"10.2139/ssrn.739984","DOIUrl":"https://doi.org/10.2139/ssrn.739984","url":null,"abstract":"We offer the first direct evidence of an implicit contract in a goods market. The evidence we offer comes from the market for Coca-Cola. We demonstrate that the Coca-Cola Company left a substantial amount of written evidence of its implicit contract with its consumers—a very explicit form of an implicit contract. The contract represented the promise of a five cent (nominal) price and adherence to the “Secret Formula”. In general, the implicit nature of such contracts makes observation difficult. To overcome this difficulty, we adopt a narrative approach. Based on the analysis of a large number of historical documents obtained from the Coca-Cola Archives and other sources, we offer evidence of the Coca-Cola Company both acknowledging and acting on this implicit contract. We also make another unique contribution by exploring quality as a margin of adjustment available to Coca-Cola. The implicit contract included a promise not only of a constant nominal price but also a constant quality (i.e., 6.5 oz. of the Secret Formula). During a period of over 70 years, we find evidence of only a single case of true quality change. By studying the margin of adjustment the Coca-Cola Company chose in response to changes in market conditions, we demonstrate that the perceived costs of breaking the implicit contract were large. We argue that one piece of direct evidence on the magnitude of these costs is the aftermath “New Coke’s” introduction in 1985.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"39 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-06-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124506841","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We analyze how global economic integration of factor markets affects the stability of the macroeconomy, with respect to expectations-driven fluctuations, when countries differ in their labor market institutions. It is shown that, due to the occurrence of equilibrium indeterminacy, liberalization of capital movements is likely to be accompanied by persistent fluctuations at the world level, while allowing also for labor movements may bring macroeconomic stability. Whether this also implies higher welfare in the long run depends on differentials in average firm size across countries. If the average firm size in a country operating under perfect competition and full employment is small relative to a country with rigid wages and unemployment, then free migration reduces unemployment, narrows wage differentials and expands world output.
{"title":"National Labour Markets, International Factor Mobility and Macroeconomic Instability","authors":"Marta Aloi, Teresa Lloyd-Braga","doi":"10.2139/ssrn.952269","DOIUrl":"https://doi.org/10.2139/ssrn.952269","url":null,"abstract":"We analyze how global economic integration of factor markets affects the stability of the macroeconomy, with respect to expectations-driven fluctuations, when countries differ in their labor market institutions. It is shown that, due to the occurrence of equilibrium indeterminacy, liberalization of capital movements is likely to be accompanied by persistent fluctuations at the world level, while allowing also for labor movements may bring macroeconomic stability. Whether this also implies higher welfare in the long run depends on differentials in average firm size across countries. If the average firm size in a country operating under perfect competition and full employment is small relative to a country with rigid wages and unemployment, then free migration reduces unemployment, narrows wage differentials and expands world output.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"31 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126668518","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The impacts of production and transportation technology changes are studied in a general-equilibrium trade model with an analytical solution where agents in each location produce different varieties of a common set of goods. Wages are equalized in nominal terms across locations, with differences in purchasing power offset by agents' preferences for particular locations in the initial steady-state. Instead of assuming iceberg costs, a transportation sector is modeled to allow an efficient distribution of workers across the production and transportation sectors. The counterfactuals have current and historical implications on the national, regional, and industrial variables of the U.S. economy.
{"title":"Production versus Transportation Technologies: Theory and Evidence","authors":"H. Yilmazkuday","doi":"10.2139/ssrn.995540","DOIUrl":"https://doi.org/10.2139/ssrn.995540","url":null,"abstract":"The impacts of production and transportation technology changes are studied in a general-equilibrium trade model with an analytical solution where agents in each location produce different varieties of a common set of goods. Wages are equalized in nominal terms across locations, with differences in purchasing power offset by agents' preferences for particular locations in the initial steady-state. Instead of assuming iceberg costs, a transportation sector is modeled to allow an efficient distribution of workers across the production and transportation sectors. The counterfactuals have current and historical implications on the national, regional, and industrial variables of the U.S. economy.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"16 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125193316","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper compares real and nominal foreign exchange volatility effects on exports. Using a flexible lag version of the Goldstein-Khan two-country imperfect substitutes model for bilateral trade, we identify the overall effect into both a timing as well as a size impact. We find that the size impact of forecasted foreign exchange volatility does not vary according to the measure used in terms of magnitude and direction. However, there are very different timing effects, when we compare real and nominal foreign exchange rate volatility.
{"title":"Real & Nominal Foreign Exchange Volatility Effects on Exports - The Importance of Timing","authors":"J. Cotter, Don Bredin","doi":"10.2139/ssrn.998452","DOIUrl":"https://doi.org/10.2139/ssrn.998452","url":null,"abstract":"This paper compares real and nominal foreign exchange volatility effects on exports. Using a flexible lag version of the Goldstein-Khan two-country imperfect substitutes model for bilateral trade, we identify the overall effect into both a timing as well as a size impact. We find that the size impact of forecasted foreign exchange volatility does not vary according to the measure used in terms of magnitude and direction. However, there are very different timing effects, when we compare real and nominal foreign exchange rate volatility.","PeriodicalId":170505,"journal":{"name":"Macroeconomics eJournal","volume":"102 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2009-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115582853","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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