Health Information and Subjective Survival Probability: Evidence from Taiwan

The effect of new health information on individuals' expectations about their longevity is examined using a Bayesian learning model. Using two‐period panel‐structured survey data from Taiwan, we find that subjective probabilities of living to age 75 and 85 are significantly smaller for respondents with more abnormal medical test outcomes and for those receiving more extensive advice on health behavior from their physicians. The subjective probability of survival declines with health shocks such as developing heart disease. Using pooled cross‐sectional data, we find that males and married persons are more optimistic about their longevity expectations than females and single persons, and that income is strongly correlated with the subjective probability of living to age 75. Consistent with previous studies, the longevity of the same‐sex parent is strongly associated with an individual's own expectation of living to age 75.     

Do subjective expectations explain asset pricing puzzles?

The structural uncertainty model with Bayesian learning, advanced by Weitzman (AER 2007), provides a framework for gauging the effect of structural uncertainty on asset prices and risk premiums. This paper provides an operational version of this approach that incorporates realistic priors about consumption growth volatility, while guaranteeing finite asset pricing quantities. In contrast to the extant literature, the resulting asset pricing model with subjective expectations yields well-defined expected utility, finite moment generating function of the predictive distribution of consumption growth, and tractable expressions for equity premium and risk-free return. Our quantitative analysis reveals that explaining the historical equity premium and risk-free return, in the context of subjective expectations, requires implausible levels of structural uncertainty. Furthermore, these implausible prior beliefs result in consumption disaster probabilities that virtually coincide with those implied by more realistic priors. At the same time, the two sets of prior beliefs have diametrically opposite asset pricing implications.     

What happened to the utility functions?: Imprecise expectations of security prices

This paper argues against the existence of a common observable stationary probability measure for security prices. Section 2 defines the notion of existence evidence and applies it to security price models. Section 3 gives a mathematical definition of imprecise expectations. Section 4 argues for a subjective interpretation of the probabilities that underlie security price movements. Section 5 holds that imprecision provides a rationale for markets to exist. Section 6 reformulates informational efficiency in the context of imprecision. Section 7 argues that security price returns include estimation uncertainty premiums. The paper concludes that finance theory may not be able to finesse analytically restrictive features inherent in using utility functions by working directly with probability measures. Instead, these analytically restrictive features may manifest themselves in the underlying probabilities.     

Divergence of Opinion in Complete Markets: A Note

We consider an Arrow-Debreu model with agents who have different subjective probabilities. In general, asset prices will depend only on aggregate consumption and the distribution of subjective probabilities in each state of nature. If all agents have identical preferences then an asset with “more dispersed” subjective probabilities will have a lower price than an asset with less dispersed subjective probabilities if risk aversion does not decline too rapidly. It seems that this condition is likely to be met in practice, so that increased dispersion of beliefs will generally be associated with reduced asset prices in a given Arrow-Debreu equilibrium.     

Learning and the Yield Curve

Two central implications of Expectations Hypothesis under rational expectations are inconsistent with yield curve data: (i) future expected long yields fall, instead of rising, when yield spread rises; (ii) long yields are excessively volatile relative to short yields. I propose an optimization framework in which boundedly rational agents use adaptive learning to form expectations. The belief structure rationalizes pattern of yields observed in the data so that the first puzzle does not arise with subjective expectations: intertemporal income and substitution effects are amplified relative to rational expectations. The second puzzle is partly accounted for by extra volatility due to parameter uncertainty.     

异质预期、群体演化与资产价格波动机制

信息和心理偏差的非完全同质性导致投资者形成异质的主观预期,因而市场中的投资者可细分为持有不同主观预期的群体。当原群体成员主观预期发生调整时,该群体成员可能就会转移到与其新预期相似的群体中,或者与其他投资者组成一个新的群体,从而引发群体间规模的此消彼长或新预期类型群体的产生,最终实现群体间的演化。据此,文章提出"个体—群体—群体"的演化路径,系统阐述了资产价格波动的形成机制:现实市场中的群体演化必然引起不同资金流的合并或分化,从而导致市场资金流分布格局发生演变,进而推动资产价格波动。这一结论从社会互动这一独特视角进一步揭示了资产价格波动及资产价格泡沫形成机制。     

Fiscal Sustainability in a New Keynesian Model

Recent work on optimal monetary and fiscal policy in New Keynesian models suggests that it is optimal to allow steady‐state debt to follow a random walk. In this paper we consider the nature of the time inconsistency involved in such a policy and its implication for discretionary policymaking. We show that governments are tempted, given inflationary expectations, to utilize their monetary and fiscal instruments in the initial period to change the ultimate debt burden they need to service. We demonstrate that this temptation is only eliminated if following shocks, the new steady‐state debt is equal to the original (efficient) debt level even though there is no explicit debt target in the government's objective function. Analytically and in a series of numerical simulations we show which instrument is used to stabilize the debt depends crucially on the degree of nominal inertia and the size of the debt stock. We also show that the welfare consequences of introducing debt are negligible for precommitment policies, but can be significant for discretionary policy. Finally, we assess the credibility of commitment policy by considering a quasi‐commitment policy, which allows for different probabilities of reneging on past promises.     

Momentum and reversion in risk neutral martingale probabilities

A time homogeneous, purely discontinuous, parsimonous Markov martingale model is proposed for the risk neutral dynamics of equity forward prices. Transition probabilities are in the variance gamma class with spot dependent parameters. Markov chain approximations give access to option prices. The model is estimated on option prices across strike and maturity for five days at a time. Properties of the estimated processes are described via an analysis of return quantiles, momentum functions that measure the response of tail probabilities to such moves. Momentum and reversion are also addressed via the construction of reverse conditional expectations. Term structures for the moments of marginal distributions support a decay in skewness and excess kurtosis with maturity at rates slower than those implied by Lévy processes. Out of sample performance is additionally reported. It is observed that risk neutral dynamics by and large reflect the presence of momentum in numerous probabilities. However, there is some reversion in the upper quantiles of risk neutral return distributions.     

The Relative Termination Experience of Adjustable to Fixed-Rate Mortgages

Our study uses a multinomial logit model to analyze the concurrent termination experience of adjustable-rate and fixed-rate mortgages. A new set of ARM-specific interactive determinants expands the conventional FRM specification to isolate the unique termination behavior of ARMs. We find that expected rate adjustments and large lifetime caps are positively related to ARM termination probabilities while long adjustment frequencies are inversely related. Caps, both periodic and lifetime, have a secondary, inverse effect on termination probabilities when interest-rate movements exceed cap limits. The model also shows that interest-rate expectations affect FRM terminations more strongly than ARM terminations.     

PRIVATE INFORMATION ACQUISITION IN EXPERIMENTAL MARKETS PRONE TO BUBBLE AND CRASH

This paper reports the results of twelve experimental markets designed to investigate whether a costly private information system decreases the propensity of price bubbles to form. A private information system is hypothesized to decrease traders' subjective uncertainty about the behavior of other traders by reinforcing common expectations for all traders. Results show that private information does not eliminate price bubbles, but asset prices converge toward the rational expectations predictions with trader experience. The price of private information is related to the expected gains derived from asset trading.     

On Optimal Insurance in the Presence of Moral Hazard

This paper expounds on the importance of identifiabilty of subjective probabilities in agency theory with moral hazard. An application to insurance is examined.     

Too Good to be True? An Analysis of the Options Market's Reactions to Earnings Releases

Using option implied risk neutral return distributions before and after earnings announcements, we study the option market's reaction to extreme events over earnings announcements. While earnings announcements generally reduce short‐term uncertainty about the stock price, very good news does not reduce uncertainty and slightly bad news actually increases uncertainty. We also find that left tail probabilities decrease over earnings releases while right tail probabilities increase. We interpret these findings as evidence of maintained investor expectations that very good news is generally not released during earnings announcements, combined with skepticism in the form of lingering uncertainty at the release of such very good news.     

Effective Use of Survey Information in Estimating the Evolution of Expected Inflation

The evolution of the term structure of expected U.S. inflation is modeled using survey data to provide timely information on structural change not contained in lagged inflation data. To capture shifts in subjective perceptions, the model is adaptive to long‐horizon survey expectations. However, even short‐horizon survey expectations inform shifting‐endpoint estimates that capture the lag between inflation and the perceived inflation target, which anchors inflation expectations. Results show movements of the perceived target are an important source of inflation persistence and suggest historical U.S. monetary policy was not fully credible for much of the postwar sample.     

Mood and Judgment of Subjective Probabilities: Evidence from the U.S. Index Option Market

Numerous psychological studies show that weather conditions affect people'smood and that mood states are correlated with people's subjective evaluationof future probabilities. In this paper, a new approach is developed and assetmarket data are employed to test the mood-subjective probability relation. Cloudcover and precipitation volume serve as two mood proxies. Our statistical analysissuggests that bad mood states are characterized by investors placing higher probabilitieson adverse events.     

Subjective Performance Indicators and Discretionary Bonus Pools

Key indicators of managerial performance are frequently subjective, that is, they are difficult to specify and/or verify for contracting purposes. When a principal must rely on subjective information to create incentives for a group of agents, discretionary bonus pools are shown to be optimal mechanisms. Despite their optimality, however, discretionary bonus pools entail an additional agency cost relative to the benchmark of optimal contracts based on objective and verifiable information. Our analysis identifies circumstances under which this additional agency cost is small, for example, the subjective information signals are precise, or the number of agents participating in the bonus pool increases. When incentive schemes can be based on both objective and subjective performance indicators, the relative weights to be placed on alternative signals are shown to differ from the ones predicted by models with objective signals only. We also demonstrate that correlation in measurement errors has a different impact on the structure of optimal incentive schemes when the performance indicators are merely subjective.     

RATIONAL EXPECTATIONS UNDER CONDITIONS OF COSTLY INFORMATION

This paper analyzes optimal formation of rational expectations where information is costly to obtain to utilize. Under these conditions, expectations normally formed by an estimator will be intermediate between those based on all available information and those which are optimal extrapolative predictors. ¹ 1 A large literature has grown out of Muth's seminal article 2 which argued that expectations should be consistent with available information. 3 and others have used the techniques of 1 to formulate expectations making use of all the information contained in the past values of the series being predicted.
Since the costs of information are likely to vary less than the value of information, this model can explain systematic differences in expectations in markets, such as, labor, for which the value of accuracy of expectations differs between or among buyers and sellers. Similarly, expectations about the same variable may differ between markets where arbitrage is also costly. Section I extends a model due to Theil toanalyzetheeffectsofcostlyinformation. Illustrative applications are discussed in Section II .     

A sequential approach to cross-impact analysis

A knowledge of the likelihoods of future scenarios is needed for planning in industry and government. The approach in this article employs the knowledge and the experience of “experts”, in the form of subjective probabilities, to determine the likelihood of the events. The necessary and sufficient conditions that the elicited information from the experts must satisfy in order to consistently compute the likelihoods of the scenarios are derived. A sequential procedure is developed that uses this information in generating the probabilities of the scenarios. Approximation schemes and sensitivity analysis are recommended to implement the approach with less time, effort, and cost.     

At What Age Do You Expect to Retire? Retirement Expectations and Increases in the Statutory Retirement Age

We analyse the extent to which an increase in the statutory retirement age affects individuals' retirement expectations. Understanding how individuals adjust their expectations is crucial to the evaluation of this policy, since retirement expectations directly affect other important decisions such as labour supply, engagement in (further) education and, of course, savings and investments. We consider the 2007 German pension reform that legislated an increase in the statutory retirement age from 65 years to 67. Our analysis is based on a longitudinal study that directly asks respondents at what age they expect to retire. Using a difference‐in‐differences approach, we look at the changes in subjective retirement expectations over time and estimate the extent to which they can be attributed to the 2007 reform. We find that the reform shifted the retirement expectations of the younger cohorts, although there is some heterogeneity in the way individuals adjusted. While there are no significant differences between men and women, lower‐educated individuals failed to revise their expectations. As these individuals usually acquire both lower pension claims and lower private savings, the fact that they have been slower in updating their retirement expectations causes concern regarding their income security after retirement.     

The role of individual personality type in subjective risk elicitation outcomes

Managing uncertainty is an unavoidable challenge in a variety of decision contexts. On many occasions, objective data are not available, necessitating the use of experts. However, research into procedures to elicit and aggregate information from experts is difficult to validate or test empirically. A controlled economic experiment was used to assess subjective probability elicitation accuracy resulting from three alternative elicitation procedures and two aggregation alternatives. The empirical results provide evidence of the impacts of elicitation techniques, distribution type, and personal characteristics such as risk preferences and personality type on subjective risk assessment accuracy. Our conclusion is that experimental approaches hold promise as a technique to assess the forecast accuracy of aggregated subjective probabilities in a variety of contexts.     

Management bias across multiple accounting estimates

Review of Accounting Studies - We examine whether managers appear to aggregate bias in multiple subjective accrual estimates to meet or just beat analyst expectations. We also consider whether the...