Technological Growth and Asset Pricing

We study the asset‐pricing implications of technological growth in a model with “small,” disembodied productivity shocks and “large,” infrequent technological innovations, which are embodied into new capital vintages. The technological‐adoption process leads to endogenous cycles in output and asset valuations. This process can help explain stylized asset‐valuation patterns around major technological innovations. More importantly, it can help provide a unified, investment‐based theory for numerous well‐documented facts related to excess‐return predictability. To illustrate the distinguishing features of our theory, we highlight novel implications pertaining to the joint time‐series properties of consumption and excess returns.     

SATISFICING AND SEQUENTIAL TARGETS IN ECONOMIC POLICY: A POLITICO-ECONOMIC APPROACH

The standard optimising framework has difficulties in explainingmacroeconomic policy phenomena in some countries, such as long-termspiralling public debts and sequential setting of policy targets.Moreover, it has not responded convincingly to some common criticisms,such as the question of symmetry, and the failure to accountfor the existence of policy-lobbying groups. This paper suggeststhat a satisficing approach to economic policy is a possibleway of accommodating all the above. This approach combined withpriority target setting has been used in other social sciences.It concentrates on the concepts of sequential attention to policyobjectives and ‘satisfactory’ macroeconomic targets.It also provides a choice theoretical framework as a foundationof the satisficing approach to economic policy. A simple exampleof a satisficing sequential target model is presented. Thereis also an attempt to link other alternative approaches, suchas politico-economic models, with this framework.     

The Information Value of the Stress Test

We investigate whether the “stress test,” the extraordinary examination of the 19 largest U.S. bank holding companies conducted by federal bank supervisors in 2009, produced useful information for the market. Using standard event study techniques, we find that the market had largely deciphered on its own which banks would have capital gaps before the stress test results were revealed, but that the market was informed by the size of the gap; given our proxy for the expected gap, banks with larger capital gaps experienced more negative abnormal returns. Our findings are consistent with the view that the stress tests produced valuable information about banks.     

High‐Water Marks: High Risk Appetites? Convex Compensation,Long Horizons,and Portfolio Choice

We study the portfolio choice of hedge fund managers who are compensated by high-water mark contracts. We find that even risk-neutral managers do not place unbounded weights on risky assets, despite option-like contracts. Instead, they place a constant fraction of funds in a mean-variance efficient portfolio and the rest in the riskless asset, acting as would constant relative risk aversion (CRRA) investors. This result is a direct consequence of the in(de)finite horizon of the contract. We show that the risk-seeking incentives of option-like contracts rely on combining finite horizons and convex compensation schemes rather than on convexity alone.     

Superkurtosis

Very little is known on how traditional risk metrics behave under intraday trading. We fill this void by examining the finiteness of the returns' moments and assessing the impact of their infinity in a risk management framework. We show that when intraday trading is considered, assuming finite higher order moments, potential losses are materially larger than what the theory predicts, and they increase exponentially as the trading frequency increases—a phenomenon we call $superkurtosis$. Hence, the use of the current risk management techniques under intraday trading imposes threats to the stability of financial markets, as capital ratios are severely underestimated.