Pub Date : 2023-11-01DOI: 10.1146/annurev-financial-053122-021925
William T. Ziemba
This survey discusses the state of the art in research in racetrack and lottery investment markets. Market efficiency and the pricing of various wagers are studied along with new developments since the Thaler & Ziemba (1988) review. The weak form inefficient market pricing approach using stochastic programming optimization models changed racetrack betting from handicapping to a financial market allowing professional syndicates to operate as hedge funds. Topics discussed include arbitrage and risk arbitrage, syndicates, betting exchange rebates, behavioral biases, and fundamental and mispricing information in racetrack and lottery markets. Similar models can be used to successfully trade stock market anomalies. Supplemental Materials are included online.
{"title":"Pari-Mutuel Betting Markets: Racetracks and Lotteries Revisited","authors":"William T. Ziemba","doi":"10.1146/annurev-financial-053122-021925","DOIUrl":"https://doi.org/10.1146/annurev-financial-053122-021925","url":null,"abstract":"This survey discusses the state of the art in research in racetrack and lottery investment markets. Market efficiency and the pricing of various wagers are studied along with new developments since the Thaler & Ziemba (1988) review. The weak form inefficient market pricing approach using stochastic programming optimization models changed racetrack betting from handicapping to a financial market allowing professional syndicates to operate as hedge funds. Topics discussed include arbitrage and risk arbitrage, syndicates, betting exchange rebates, behavioral biases, and fundamental and mispricing information in racetrack and lottery markets. Similar models can be used to successfully trade stock market anomalies. Supplemental Materials are included online.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135222084","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2023-10-03DOI: 10.1146/annurev-financial-110921-101555
Viral V. Acharya, Richard Berner, Robert Engle, Hyeyoon Jung, Johannes Stroebel, Xuran Zeng, Yihao Zhao
We explore the design of climate stress tests to assess and manage macroprudential risks from climate change in the financial sector. We review the climate stress scenarios currently employed by regulators, highlighting the need to ( a) consider many transition risks as dynamic policy choices, ( b) better understand and incorporate feedback loops between climate change and the economy, and ( c) further explore compound risk scenarios in which climate risks co-occur with other risks. We discuss how the process of mapping climate stress scenarios into financial firm outcomes can incorporate existing evidence on the effects of various climate-related risks on credit and market outcomes. We argue that more research is required to ( a) identify channels through which plausible scenarios can lead to meaningful short-run impact on credit risks given typical bank loan maturities, ( b) incorporate bank-lending responses to climate risks, ( c) assess the adequacy of climate risk pricing in financial markets, and ( d) better understand how market participants form climate risk expectations and how that affects financial stability. Finally, we discuss the advantages and disadvantages of using market-based climate stress tests that can be conducted with publicly available data to complement existing stress-testing frameworks. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"Climate Stress Testing","authors":"Viral V. Acharya, Richard Berner, Robert Engle, Hyeyoon Jung, Johannes Stroebel, Xuran Zeng, Yihao Zhao","doi":"10.1146/annurev-financial-110921-101555","DOIUrl":"https://doi.org/10.1146/annurev-financial-110921-101555","url":null,"abstract":"We explore the design of climate stress tests to assess and manage macroprudential risks from climate change in the financial sector. We review the climate stress scenarios currently employed by regulators, highlighting the need to ( a) consider many transition risks as dynamic policy choices, ( b) better understand and incorporate feedback loops between climate change and the economy, and ( c) further explore compound risk scenarios in which climate risks co-occur with other risks. We discuss how the process of mapping climate stress scenarios into financial firm outcomes can incorporate existing evidence on the effects of various climate-related risks on credit and market outcomes. We argue that more research is required to ( a) identify channels through which plausible scenarios can lead to meaningful short-run impact on credit risks given typical bank loan maturities, ( b) incorporate bank-lending responses to climate risks, ( c) assess the adequacy of climate risk pricing in financial markets, and ( d) better understand how market participants form climate risk expectations and how that affects financial stability. Finally, we discuss the advantages and disadvantages of using market-based climate stress tests that can be conducted with publicly available data to complement existing stress-testing frameworks. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-10-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135739456","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2023-09-08DOI: 10.1146/annurev-financial-110821-022107
Tobias Adrian, Fabio M. Natalucci, Mahvash S. Qureshi
The global financial system showed remarkable resilience during the COVID-19 pandemic, despite a sharp decline in economic activity and the initial financial market upheaval in March 2020. This article takes stock of the factors that contributed to this resilience, focusing on the role of monetary and financial policies. Drawing on the existing literature, it argues that the swift and decisive policy actions of major central banks in response to the pandemic-induced crisis played a key role in easing financial conditions and sustaining the flow of credit to the real economy. While the pandemic crisis has underscored the importance of policies in preventing calamitous financial outcomes, it has also brought to the fore some unintended consequences of policy actions—in particular, of providing prolonged monetary policy support and of applying regulation to specific segments of the financial system rather than taking a broader approach—that could undermine financial stability in the future. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"Macro-Financial Stability in the COVID-19 Crisis: Some Reflections","authors":"Tobias Adrian, Fabio M. Natalucci, Mahvash S. Qureshi","doi":"10.1146/annurev-financial-110821-022107","DOIUrl":"https://doi.org/10.1146/annurev-financial-110821-022107","url":null,"abstract":"The global financial system showed remarkable resilience during the COVID-19 pandemic, despite a sharp decline in economic activity and the initial financial market upheaval in March 2020. This article takes stock of the factors that contributed to this resilience, focusing on the role of monetary and financial policies. Drawing on the existing literature, it argues that the swift and decisive policy actions of major central banks in response to the pandemic-induced crisis played a key role in easing financial conditions and sustaining the flow of credit to the real economy. While the pandemic crisis has underscored the importance of policies in preventing calamitous financial outcomes, it has also brought to the fore some unintended consequences of policy actions—in particular, of providing prolonged monetary policy support and of applying regulation to specific segments of the financial system rather than taking a broader approach—that could undermine financial stability in the future. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":null,"pages":null},"PeriodicalIF":0.0,"publicationDate":"2023-09-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"136299693","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2023-09-08DOI: 10.1146/annurev-financial-060623-032258
Matthew Richardson
The COVID-19 pandemic has arguably been one of the worst global catastrophes over the last several decades. A plethora of real-time research has been produced by the finance profession to try and understand the impact COVID-19 had on financial markets. In this issue, the Annual Review of Financial Economics provides five articles, all touching on different aspects of the COVID-19 crisis. This introductory article provides a brief review of these articles. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"Introduction to the ARFE Theme on Financial Economics and COVID-19","authors":"Matthew Richardson","doi":"10.1146/annurev-financial-060623-032258","DOIUrl":"https://doi.org/10.1146/annurev-financial-060623-032258","url":null,"abstract":"The COVID-19 pandemic has arguably been one of the worst global catastrophes over the last several decades. A plethora of real-time research has been produced by the finance profession to try and understand the impact COVID-19 had on financial markets. In this issue, the Annual Review of Financial Economics provides five articles, all touching on different aspects of the COVID-19 crisis. This introductory article provides a brief review of these articles. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":null,"pages":null},"PeriodicalIF":3.2,"publicationDate":"2023-09-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45061969","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2023-08-25DOI: 10.1146/annurev-financial-110921-021453
R. Rebonato
I review how the theoretical modeling of the dynamics of forward rates in the context of derivatives pricing has evolved over time. I review the theoretical developments from the short rate models of the 1980s to the stochastic-volatility extensions of the SABR model. I argue that how the theory developed can be understood only by taking into account the institutional setting of derivatives trading and that the modeling choices were motivated to a surprisingly large extent by how the market evolved. I conclude with an assessment of which of these theoretical contributions have had a lasting and meaningful effect on the financial theory of asset pricing. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"The Q-Measure Dynamics of Forward Rates","authors":"R. Rebonato","doi":"10.1146/annurev-financial-110921-021453","DOIUrl":"https://doi.org/10.1146/annurev-financial-110921-021453","url":null,"abstract":"I review how the theoretical modeling of the dynamics of forward rates in the context of derivatives pricing has evolved over time. I review the theoretical developments from the short rate models of the 1980s to the stochastic-volatility extensions of the SABR model. I argue that how the theory developed can be understood only by taking into account the institutional setting of derivatives trading and that the modeling choices were motivated to a surprisingly large extent by how the market evolved. I conclude with an assessment of which of these theoretical contributions have had a lasting and meaningful effect on the financial theory of asset pricing. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":null,"pages":null},"PeriodicalIF":3.2,"publicationDate":"2023-08-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48759297","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2023-08-25DOI: 10.1146/annurev-financial-111820-084531
Deborah J. Lucas
Governments allocate a large share of real and financial capital globally, and their choices of discount rates for project and policy evaluation have a first-order effect on social welfare. The importance of adopting a principles-based approach to selecting discount rates has new urgency in light of the very long horizons over which the benefits and costs of policies to address climate change are being evaluated. The four articles in this theme provide an interpretive overview of the literature on many of the theoretical, practical, legal, and philosophical considerations for discount rate selection by governments. This introduction summarizes the main points of each article and highlights some of the common threads that emerge. These include the importance of using risk-adjusted rates, the problems that arise when discount rates are chosen to be artificially low, and the large disconnect between common government practices and the principles of financial economics. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"Introduction to the ARFE Theme on the Social Discount Rate","authors":"Deborah J. Lucas","doi":"10.1146/annurev-financial-111820-084531","DOIUrl":"https://doi.org/10.1146/annurev-financial-111820-084531","url":null,"abstract":"Governments allocate a large share of real and financial capital globally, and their choices of discount rates for project and policy evaluation have a first-order effect on social welfare. The importance of adopting a principles-based approach to selecting discount rates has new urgency in light of the very long horizons over which the benefits and costs of policies to address climate change are being evaluated. The four articles in this theme provide an interpretive overview of the literature on many of the theoretical, practical, legal, and philosophical considerations for discount rate selection by governments. This introduction summarizes the main points of each article and highlights some of the common threads that emerge. These include the importance of using risk-adjusted rates, the problems that arise when discount rates are chosen to be artificially low, and the large disconnect between common government practices and the principles of financial economics. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":null,"pages":null},"PeriodicalIF":3.2,"publicationDate":"2023-08-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43317966","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2023-08-25DOI: 10.1146/annurev-financial-041123-123258
Deborah J. Lucas
The principles of financial economics provide equally important insights into the optimal choice of discount rates for both public and private sector decision-makers. However, most governments largely ignore those principles, taking their cost of capital for most purposes as their borrowing rate. This article reviews the arguments often made in support of status quo discounting practices, along with the counterarguments to them. Governments have a choice between several methodologies for risk adjustment, and the practical and conceptual reasons that favor a fair value approach are recapped. The limitations of a financial economics approach become apparent for decisions involving very long time horizons, such as for climate policies. For policies with long-term impacts, intergenerational concerns become paramount, projections of cash flows and discount rates become highly uncertain, and present value calculations are an intrinsically unreliable measure of value. No approach to discount rate selection can overcome those problems; alternative decision criteria need to be established. However, most government investments involve much shorter horizons, and the adoption of standard approaches to risk adjustment could significantly improve social welfare. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"Reflections on What Financial Economics Can and Cannot Teach Us About the Social Discount Rate","authors":"Deborah J. Lucas","doi":"10.1146/annurev-financial-041123-123258","DOIUrl":"https://doi.org/10.1146/annurev-financial-041123-123258","url":null,"abstract":"The principles of financial economics provide equally important insights into the optimal choice of discount rates for both public and private sector decision-makers. However, most governments largely ignore those principles, taking their cost of capital for most purposes as their borrowing rate. This article reviews the arguments often made in support of status quo discounting practices, along with the counterarguments to them. Governments have a choice between several methodologies for risk adjustment, and the practical and conceptual reasons that favor a fair value approach are recapped. The limitations of a financial economics approach become apparent for decisions involving very long time horizons, such as for climate policies. For policies with long-term impacts, intergenerational concerns become paramount, projections of cash flows and discount rates become highly uncertain, and present value calculations are an intrinsically unreliable measure of value. No approach to discount rate selection can overcome those problems; alternative decision criteria need to be established. However, most government investments involve much shorter horizons, and the adoption of standard approaches to risk adjustment could significantly improve social welfare. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":null,"pages":null},"PeriodicalIF":3.2,"publicationDate":"2023-08-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42125079","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2023-08-22DOI: 10.1146/annurev-financial-110821-020444
N. J. Gormsen, R. Koijen
We review the literature on the impact of the COVID-19 pandemic on financial markets. We first document several key facts about equity and fixed-income markets during this period. We then discuss various literatures that analyze broad movements in prices, market dislocations, and the impact of fiscal and monetary policy interventions. We conclude by discussing potential directions for future research. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"Financial Markets and the COVID-19 Pandemic","authors":"N. J. Gormsen, R. Koijen","doi":"10.1146/annurev-financial-110821-020444","DOIUrl":"https://doi.org/10.1146/annurev-financial-110821-020444","url":null,"abstract":"We review the literature on the impact of the COVID-19 pandemic on financial markets. We first document several key facts about equity and fixed-income markets during this period. We then discuss various literatures that analyze broad movements in prices, market dislocations, and the impact of fiscal and monetary policy interventions. We conclude by discussing potential directions for future research. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":null,"pages":null},"PeriodicalIF":3.2,"publicationDate":"2023-08-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42502773","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2023-08-16DOI: 10.1146/annurev-financial-110921-125930
Sanjiv Ranjan Das, Richard Stanton, N. Wallace
This article reviews the recent literature on algorithmic fairness, with a particular emphasis on credit scoring. We discuss human versus machine bias, bias measurement, group versus individual fairness, and a collection of fairness metrics. We then apply these metrics to the US mortgage market, analyzing Home Mortgage Disclosure Act data on mortgage applications between 2009 and 2015. We find evidence of group imbalance in the dataset for both gender and (especially) minority status, which can lead to poorer estimation/prediction for female/minority applicants. Loan applicants are handled mostly fairly across both groups and individuals, though we find that some local male (nonminority) neighbors of otherwise similar rejected female (minority) applicants were granted loans, something that warrants further study. Finally modern machine learning techniques substantially outperform logistic regression (the industry standard), though at the cost of being substantially harder to explain to denied applicants, regulators, or the courts. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"Algorithmic Fairness","authors":"Sanjiv Ranjan Das, Richard Stanton, N. Wallace","doi":"10.1146/annurev-financial-110921-125930","DOIUrl":"https://doi.org/10.1146/annurev-financial-110921-125930","url":null,"abstract":"This article reviews the recent literature on algorithmic fairness, with a particular emphasis on credit scoring. We discuss human versus machine bias, bias measurement, group versus individual fairness, and a collection of fairness metrics. We then apply these metrics to the US mortgage market, analyzing Home Mortgage Disclosure Act data on mortgage applications between 2009 and 2015. We find evidence of group imbalance in the dataset for both gender and (especially) minority status, which can lead to poorer estimation/prediction for female/minority applicants. Loan applicants are handled mostly fairly across both groups and individuals, though we find that some local male (nonminority) neighbors of otherwise similar rejected female (minority) applicants were granted loans, something that warrants further study. Finally modern machine learning techniques substantially outperform logistic regression (the industry standard), though at the cost of being substantially harder to explain to denied applicants, regulators, or the courts. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":null,"pages":null},"PeriodicalIF":3.2,"publicationDate":"2023-08-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48723739","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2023-08-16DOI: 10.1146/annurev-financial-101822-112948
Andrew Caplin, John Leahy
Market interest rates reflect the preferences of market participants. When market participants are missing, the average discount rate in the population may therefore differ from the market rate. Missing current market participants, such as constrained borrowers, tends to imply an average discount rate that is above the market rate, whereas missing future market participants, such as future generations, tends to imply an average rate below the market rate. Nonetheless, a government with the ability to transfer wealth intratemporally across agents will generally wish to use the market interest rate as a guide to policy. One robust argument for the use of a lower social discount rate is intrapersonal: Future selves discount the past, whereas current selves discount the future. Legacy utility may also justify a low social discount rate. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.
{"title":"Missing Participants, Missing Markets, and the Social Discount Rate: Borrowing Constraints, Intergenerational Transfers, Altruism, and the Desire for Legacy","authors":"Andrew Caplin, John Leahy","doi":"10.1146/annurev-financial-101822-112948","DOIUrl":"https://doi.org/10.1146/annurev-financial-101822-112948","url":null,"abstract":"Market interest rates reflect the preferences of market participants. When market participants are missing, the average discount rate in the population may therefore differ from the market rate. Missing current market participants, such as constrained borrowers, tends to imply an average discount rate that is above the market rate, whereas missing future market participants, such as future generations, tends to imply an average rate below the market rate. Nonetheless, a government with the ability to transfer wealth intratemporally across agents will generally wish to use the market interest rate as a guide to policy. One robust argument for the use of a lower social discount rate is intrapersonal: Future selves discount the past, whereas current selves discount the future. Legacy utility may also justify a low social discount rate. Expected final online publication date for the Annual Review of Financial Economics, Volume 15 is November 2023. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.","PeriodicalId":47162,"journal":{"name":"Annual Review of Financial Economics","volume":null,"pages":null},"PeriodicalIF":3.2,"publicationDate":"2023-08-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44927715","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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