We present a tractable, linear model for the simultaneous pricing of stock and bond returns that incorporates stochastic risk aversion. In this model, analytic solutions for endogenous stock and bond prices and returns are readily calculated. After estimating the parameters of the model by the general method of moments, we investigate a series of classic puzzles of the empirical asset pricing literature.
This paper analyzes China's experience under U.S. apparel and textile quotas. It makes use of a new database that tracks U.S. trading partners' performance under the quota regimes established by the global Multifiber Arrangement (1974 to 1995) and subsequent Agreement on Textiles and Clothing (1995 to 2005). We find that China was relatively more constrained under these regimes than other countries and that, as quotas were lifted, China's exports grew disproportionately. When the ATC finally ended in 2005, China's exports surged while those from nearly all other regions fell.
We develop a model of hedge fund returns, which reflect the contractual relationships between a hedge fund, its investors and its prime brokers. These relationships are modeled as short option positions held by the hedge fund, wherein the "funding option" reflects the short option position with prime brokers and the "redemption option" reflects the short option position with the investors. Given an alpha producing human capital, the hedge fund's ability to deploy leverage is shown to be sharply constrained by the presence of these short options.
In October 2003, leading Dutch supermarket chain Albert Heijn slashed prices up to 30% on more than 1,000 items to counter a loss in market share caused by consumer perception of high prices. AH continued the strategy for the ensuing three years, forcing competing supermarkets to match the markdowns or risk customer defections. Game theory adherents and analysts questioned the strategy, noting price wars often jeopardize profits of both individual companies and their industries.
This article complements the structural New Keynesian macro framework with a no-arbitrage affine term structure model. Whereas our methodology is general, we focus on an extended macro model with unobservable processes for the inflation target and the natural rate of output that are filtered from macro and term structure data. We find that term structure information helps generate large and significant parameters governing the monetary policy transmission mechanism. Our model also delivers strong contemporaneous responses of the entire term structure to various macroeconomic shocks.
The actions of different agents sometimes reinforce each other. Examples are network effects and the threshold models used by sociologists as well as Harvey Leibensteins's "bandwagon effects." We model such situations as a game with increasing differences, and show that tipping of equilibria, cascading and clubs with entrapment are natural consequences of this mutual reinforcement. If there are several equilibria, one of which Pareto dominates, then the inefficient equilibria can be tipped to the efficient one, a result of interest in the context of coordination problems.
This paper explores the link between financial conditions and economic activity. We first review existing measures, including both single indicators and composite financial conditions indexes (FCIs). We then build a new FCI that features three key innovations. First, besides interest rates and asset prices, it includes a broad range of quantitative and survey-based indicators. Second, our use of unbalanced panel estimation techniques results in a longer time series (back to 1970) than available for other indexes.
Although established money managers operate in an environment which seems competitive, they also seem to be very profitable. The present value of the expected future profits from managing a collection of funds is equal to the value of the assets under management multiplied by the profit margin, assuming that the managed funds will remain in business forever, and that there will be zero asset flow into and out of the funds, zero excess returns net of trading costs, a fixed management fee proportional to the assets under management and a fixed profit margin for the management company.
We study the economic sources of stock-bond return comovements and their time variation using a dynamic factor model. We identify the economic factors employing a semistructural regime-switching model for state variables such as interest rates, inflation, the output gap, and cash flow growth. We also view risk aversion, uncertainty about inflation and output, and liquidity proxies as additional potential factors.