Pub Date : 2023-08-16DOI: 10.1146/annurev-financial-102921-111749
Frédéric Cherbonnier, C. Gollier
Most Western countries use a single discount rate to evaluate public investments and policies. This ignores the cost of risk, in a world where most risk markets exhibit surprisingly large prices of risk. The current discounting guidelines generate a misallocation of capital that entails a large welfare cost. We claim that the well-established asset pricing literature provides a strong normative justification in favor of risk-adjusting discount rates. More specifically, project-specific discount rates should be increasing in the income elasticity of the project's net benefit. This will favor projects whose net benefit materializes preferentially in low-income states, thereby recognizing their insurance benefit ex ante. The intuition is simple, the welfare benefit of the reform is large, and the methodology only requires evaluators to estimate an income elasticity on top of what is required in the current approach. It is time to fix our public discounting systems. 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":"Fixing Our Public Discounting Systems","authors":"Frédéric Cherbonnier, C. Gollier","doi":"10.1146/annurev-financial-102921-111749","DOIUrl":"https://doi.org/10.1146/annurev-financial-102921-111749","url":null,"abstract":"Most Western countries use a single discount rate to evaluate public investments and policies. This ignores the cost of risk, in a world where most risk markets exhibit surprisingly large prices of risk. The current discounting guidelines generate a misallocation of capital that entails a large welfare cost. We claim that the well-established asset pricing literature provides a strong normative justification in favor of risk-adjusting discount rates. More specifically, project-specific discount rates should be increasing in the income elasticity of the project's net benefit. This will favor projects whose net benefit materializes preferentially in low-income states, thereby recognizing their insurance benefit ex ante. The intuition is simple, the welfare benefit of the reform is large, and the methodology only requires evaluators to estimate an income elasticity on top of what is required in the current approach. It is time to fix our public discounting systems. 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":"41798525","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 : 2023-08-08DOI: 10.1146/annurev-financial-110921-104726
Anna Cieslak, Carolin Pflueger
The past half-century has seen major shifts in inflation expectations, how inflation comoves with the business cycle, and how stocks comove with Treasury bonds. Against this backdrop, we review the economic channels and empirical evidence on how inflation is priced in financial markets. Not all inflation episodes are created equal. Using a New Keynesian model, we show how “good” inflation can be linked to demand shocks and “bad” inflation to cost-push shocks driving the economy. We then discuss asset pricing implications of “good” and “bad” inflation. We conclude by providing an outlook for inflation risk premia in the world of newly rising inflation. 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":"Inflation and Asset Returns","authors":"Anna Cieslak, Carolin Pflueger","doi":"10.1146/annurev-financial-110921-104726","DOIUrl":"https://doi.org/10.1146/annurev-financial-110921-104726","url":null,"abstract":"The past half-century has seen major shifts in inflation expectations, how inflation comoves with the business cycle, and how stocks comove with Treasury bonds. Against this backdrop, we review the economic channels and empirical evidence on how inflation is priced in financial markets. Not all inflation episodes are created equal. Using a New Keynesian model, we show how “good” inflation can be linked to demand shocks and “bad” inflation to cost-push shocks driving the economy. We then discuss asset pricing implications of “good” and “bad” inflation. We conclude by providing an outlook for inflation risk premia in the world of newly rising inflation. 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":"2023-08-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135746485","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 : 2023-07-31DOI: 10.1146/annurev-financial-111021-103106
D. Sraer, D. Thesmar
Financial frictions generate misallocation of resources across firms by restricting productive firms’ access to capital. This article reviews the literature that estimates the aggregate losses generated by such misallocation. The first approach relies on structural estimations: A model of firm dynamics with financial frictions is estimated and used to compare efficiency in the actual economy with a counterfactual with perfect financial markets. We argue that robustness is a central concern for this structural literature. We discuss ways to analyze robustness in structural estimation (using well-identified moments and analyzing sensitivity to moments). The second approach relies on sufficient statistics, namely formulas that measure misallocation using simple empirical statistics and that are valid for a class of models. We discuss key contributions in that space, the generality of this approach, and the conditions under which it is valid. Sufficient statistic approaches are simpler and more robust, but they come at a cost: The range of counterfactual analyses that can be explored is more limited. 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":"How to Use Microdata for Macro-Finance","authors":"D. Sraer, D. Thesmar","doi":"10.1146/annurev-financial-111021-103106","DOIUrl":"https://doi.org/10.1146/annurev-financial-111021-103106","url":null,"abstract":"Financial frictions generate misallocation of resources across firms by restricting productive firms’ access to capital. This article reviews the literature that estimates the aggregate losses generated by such misallocation. The first approach relies on structural estimations: A model of firm dynamics with financial frictions is estimated and used to compare efficiency in the actual economy with a counterfactual with perfect financial markets. We argue that robustness is a central concern for this structural literature. We discuss ways to analyze robustness in structural estimation (using well-identified moments and analyzing sensitivity to moments). The second approach relies on sufficient statistics, namely formulas that measure misallocation using simple empirical statistics and that are valid for a class of models. We discuss key contributions in that space, the generality of this approach, and the conditions under which it is valid. Sufficient statistic approaches are simpler and more robust, but they come at a cost: The range of counterfactual analyses that can be explored is more limited. 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":"2023-07-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41821894","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 : 2023-07-31DOI: 10.1146/annurev-financial-110921-022806
Kose John, Leonid Kogan, Fahad Saleh
We explain the mechanics of smart contracts. We then highlight the benefits of smart contracts, such as overcoming commitment problems. We also discuss limitations, such as the difficulty for smart contracts to access information external to the blockchain and the difficulty of integrating smart contract code with traditional legal enforcement. We further highlight how the absence of a trusted intermediary inflates implementation costs for blockchain applications. We conclude with a discussion of the most prominent smart contract applications in decentralized finance: token issuance (e.g., initial coin offerings, nonfungible tokens), decentralized exchanges, and protocols for loanable funds. Our survey covers both institutional details and relevant literature. 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":"Smart Contracts and Decentralized Finance","authors":"Kose John, Leonid Kogan, Fahad Saleh","doi":"10.1146/annurev-financial-110921-022806","DOIUrl":"https://doi.org/10.1146/annurev-financial-110921-022806","url":null,"abstract":"We explain the mechanics of smart contracts. We then highlight the benefits of smart contracts, such as overcoming commitment problems. We also discuss limitations, such as the difficulty for smart contracts to access information external to the blockchain and the difficulty of integrating smart contract code with traditional legal enforcement. We further highlight how the absence of a trusted intermediary inflates implementation costs for blockchain applications. We conclude with a discussion of the most prominent smart contract applications in decentralized finance: token issuance (e.g., initial coin offerings, nonfungible tokens), decentralized exchanges, and protocols for loanable funds. Our survey covers both institutional details and relevant literature. 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":"2023-07-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135099426","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 : 2023-07-31DOI: 10.1146/annurev-financial-100121-114859
Carola Frydman, Chenzi Xu
This article surveys the recent empirical literature on historical banking crises, defined as events taking place before 1980. Advances in data collection and identification have provided new insights into the causes and consequences of crises both immediately and over the long run. We highlight three overarching threads that emerge from the literature: First, leverage in the financial system is a systematic precursor to crises; second, crises have sizable negative effects on the real economy; and third, government interventions can ameliorate these effects. Contrasting historical episodes reveals that the process of crisis formation and evolution varies significantly across time and space. Thus, we also highlight specific institutions, regulations, and historical contexts that give rise to these divergent experiences. We conclude by identifying important gaps in the literature and discussing avenues 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":"Banking Crises in Historical Perspective","authors":"Carola Frydman, Chenzi Xu","doi":"10.1146/annurev-financial-100121-114859","DOIUrl":"https://doi.org/10.1146/annurev-financial-100121-114859","url":null,"abstract":"This article surveys the recent empirical literature on historical banking crises, defined as events taking place before 1980. Advances in data collection and identification have provided new insights into the causes and consequences of crises both immediately and over the long run. We highlight three overarching threads that emerge from the literature: First, leverage in the financial system is a systematic precursor to crises; second, crises have sizable negative effects on the real economy; and third, government interventions can ameliorate these effects. Contrasting historical episodes reveals that the process of crisis formation and evolution varies significantly across time and space. Thus, we also highlight specific institutions, regulations, and historical contexts that give rise to these divergent experiences. We conclude by identifying important gaps in the literature and discussing avenues 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":0.0,"publicationDate":"2023-07-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135099268","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 : 2023-06-20DOI: 10.1146/annurev-financial-110921-110855
Robert A. Jarrow, Yildiray Yildirim
The purpose of this article is to review the literature on inflation-adjusted bonds, swaps, and derivatives. The methodology for valuation and risk management of these securities is an application of the foreign currency extension of a standard HJM term structure model. The two “currencies” in the extended model are real and nominal prices. Currently, for their use in monetary policy, the empirical literature primarily uses these models to estimate both the expected inflation rate and the inflation risk premium. A literature investigating the efficiency of the inflation derivative markets and a comparison of the relevant valuation models is almost nonexistent and a fruitful area 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":"Inflation-Adjusted Bonds, Swaps, and Derivatives","authors":"Robert A. Jarrow, Yildiray Yildirim","doi":"10.1146/annurev-financial-110921-110855","DOIUrl":"https://doi.org/10.1146/annurev-financial-110921-110855","url":null,"abstract":"The purpose of this article is to review the literature on inflation-adjusted bonds, swaps, and derivatives. The methodology for valuation and risk management of these securities is an application of the foreign currency extension of a standard HJM term structure model. The two “currencies” in the extended model are real and nominal prices. Currently, for their use in monetary policy, the empirical literature primarily uses these models to estimate both the expected inflation rate and the inflation risk premium. A literature investigating the efficiency of the inflation derivative markets and a comparison of the relevant valuation models is almost nonexistent and a fruitful area 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":0.0,"publicationDate":"2023-06-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135139233","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 : 2023-06-20DOI: 10.1146/annurev-financial-110921-103651
Zhengyang Jiang, Hanno Lustig, Stijn Van Nieuwerburgh, M. Xiaolan
This review revisits the literature on fiscal capacity using modern tools from asset pricing. We find that properly accounting for aggregate risk substantially reduces fiscal capacity. In this environment, the gap between the risk-free rate and the expected growth rate is not a sufficient statistic for fiscal capacity. To borrow at the risk-free rate when aggregate growth is risky, governments need to ask taxpayers to insure bondholders against aggregate risk, but governments in advanced economies tend to insure taxpayers against aggregate risk. We use this asset pricing perspective to review alternative mechanisms to boost fiscal capacity that have been explored in the literature. 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":"Fiscal Capacity: An Asset Pricing Perspective","authors":"Zhengyang Jiang, Hanno Lustig, Stijn Van Nieuwerburgh, M. Xiaolan","doi":"10.1146/annurev-financial-110921-103651","DOIUrl":"https://doi.org/10.1146/annurev-financial-110921-103651","url":null,"abstract":"This review revisits the literature on fiscal capacity using modern tools from asset pricing. We find that properly accounting for aggregate risk substantially reduces fiscal capacity. In this environment, the gap between the risk-free rate and the expected growth rate is not a sufficient statistic for fiscal capacity. To borrow at the risk-free rate when aggregate growth is risky, governments need to ask taxpayers to insure bondholders against aggregate risk, but governments in advanced economies tend to insure taxpayers against aggregate risk. We use this asset pricing perspective to review alternative mechanisms to boost fiscal capacity that have been explored in the literature. 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":"2023-06-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47681020","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 : 2023-06-01DOI: 10.1146/annurev-financial-110921-015054
Bruce Tuckman
The London Interbank Offered Rate (LIBOR), the predominant family of global short-term rate benchmarks for the past 40 years, ceased to exist in June 2023. Given the low volumes of interbank loans on which LIBOR had been based, the revelations that LIBOR had been manipulated, and the risks that countless LIBOR-dependent financial instruments without fallback rates would be cast into limbo, regulators over the last decade pushed to replace LIBOR with risk-free overnight rate benchmarks. In the United States, the new benchmark, Secured Overnight Financing Rate (SOFR), is an overnight rate based on US Treasury repo transactions: Use of term rates and derivatives on term rates is limited, and use of credit-sensitive term rates is discouraged. This article recounts the rise and fall of LIBOR; reviews the academic literature on the efficiency benefits of benchmarks, the LIBOR scandal, and the pros and cons of risk-free versus credit-sensitive rate benchmarks; and calls for further academic work on the current policy of entrenching a single-benchmark SOFR regime relative to the alternative of encouraging a two- or multi-benchmark regime of SOFR and one or more credit-sensitive term rates. 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":"Short-Term Rate Benchmarks: The Post-LIBOR Regime","authors":"Bruce Tuckman","doi":"10.1146/annurev-financial-110921-015054","DOIUrl":"https://doi.org/10.1146/annurev-financial-110921-015054","url":null,"abstract":"The London Interbank Offered Rate (LIBOR), the predominant family of global short-term rate benchmarks for the past 40 years, ceased to exist in June 2023. Given the low volumes of interbank loans on which LIBOR had been based, the revelations that LIBOR had been manipulated, and the risks that countless LIBOR-dependent financial instruments without fallback rates would be cast into limbo, regulators over the last decade pushed to replace LIBOR with risk-free overnight rate benchmarks. In the United States, the new benchmark, Secured Overnight Financing Rate (SOFR), is an overnight rate based on US Treasury repo transactions: Use of term rates and derivatives on term rates is limited, and use of credit-sensitive term rates is discouraged. This article recounts the rise and fall of LIBOR; reviews the academic literature on the efficiency benefits of benchmarks, the LIBOR scandal, and the pros and cons of risk-free versus credit-sensitive rate benchmarks; and calls for further academic work on the current policy of entrenching a single-benchmark SOFR regime relative to the alternative of encouraging a two- or multi-benchmark regime of SOFR and one or more credit-sensitive term rates. 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":"2023-06-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"135722765","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 : 2023-05-17DOI: 10.1146/annurev-financial-110821-020639
A. Atkeson
The world has been confronted in recent decades with several infectious disease outbreaks caused by novel pathogens, with the COVID-19 pandemic being the most severe of these. In this article, I review some of the main elements of epidemiological models used to forecast the trajectory of a new epidemic and to guide public health policy responses to a new infectious disease. I argue that economists have a lot to contribute to the discussion of public health policies, particularly in regard to assessing the costs and benefits of alternative policies and in improving the modeling of changes in human behavior in response to new infectious diseases. This survey is intended to serve economists interested in starting research in these areas. 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":"COVID-19: Epidemiological Models","authors":"A. Atkeson","doi":"10.1146/annurev-financial-110821-020639","DOIUrl":"https://doi.org/10.1146/annurev-financial-110821-020639","url":null,"abstract":"The world has been confronted in recent decades with several infectious disease outbreaks caused by novel pathogens, with the COVID-19 pandemic being the most severe of these. In this article, I review some of the main elements of epidemiological models used to forecast the trajectory of a new epidemic and to guide public health policy responses to a new infectious disease. I argue that economists have a lot to contribute to the discussion of public health policies, particularly in regard to assessing the costs and benefits of alternative policies and in improving the modeling of changes in human behavior in response to new infectious diseases. This survey is intended to serve economists interested in starting research in these areas. 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":"2023-05-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49329653","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 : 2023-05-17DOI: 10.1146/annurev-financial-110921-022054
Oliver Giesecke, Joshua D. Rauh
Unfunded public pension obligations represent the largest liability for state and local governments in the United States. As of fiscal year 2021, the total reported unfunded liabilities of these plans is $1.076 trillion. In contrast, the market value of the unfunded liability is approximately $6.501 trillion. As a result, the reported funding ratio of 82.5% falls to 43.8% under a market-based valuation. The market values reflect the fact that accrued pension promises are a form of government debt with strong statutory and contractual rights. The assumed discount rates are based on expected returns and remain elevated relative to risk-free rates, despite a decline since 2014. As a result, not only is the unfunded pension liability understated, but the yearly pension cost for newly accruing liabilities is also understated. In order to achieve high returns, pension funds have accumulated large exposure to risky assets, in particular alternative investments, which results in highly uncertain investment returns. 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":"Trends in State and Local Pension Funds","authors":"Oliver Giesecke, Joshua D. Rauh","doi":"10.1146/annurev-financial-110921-022054","DOIUrl":"https://doi.org/10.1146/annurev-financial-110921-022054","url":null,"abstract":"Unfunded public pension obligations represent the largest liability for state and local governments in the United States. As of fiscal year 2021, the total reported unfunded liabilities of these plans is $1.076 trillion. In contrast, the market value of the unfunded liability is approximately $6.501 trillion. As a result, the reported funding ratio of 82.5% falls to 43.8% under a market-based valuation. The market values reflect the fact that accrued pension promises are a form of government debt with strong statutory and contractual rights. The assumed discount rates are based on expected returns and remain elevated relative to risk-free rates, despite a decline since 2014. As a result, not only is the unfunded pension liability understated, but the yearly pension cost for newly accruing liabilities is also understated. In order to achieve high returns, pension funds have accumulated large exposure to risky assets, in particular alternative investments, which results in highly uncertain investment returns. 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":"2023-05-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46211940","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}
京公网安备 11010802042870号
京ICP备2023020795号-1
扫码关注我们
求助内容：
应助结果提醒方式：