Is integration I(d) applicable to observed economics and finance time series?

The method of cointegration in regression analysis is based on an assumption of stationary increments. Stationary increments with fixed time lag are called ‘integration I(d)’. A class of regression models where cointegration works was identified by Granger and yields the ergodic behavior required for equilibrium expectations in standard economics. Detrended finance market returns are martingales, and martingales do not satisfy regression equations. We ask if there exist detrended processes beyond standard regression models that satisfy integration I(d). We show that stationary increment martingales are confined to the Wiener process, and observe that martingales describing finance data admit neither the integration I(d) nor the ergodicity required for long time equilibrium relationships. In particular, the martingales derived from finance data do not admit the time (or ‘space’) translational invariance required for increment stationarity. Our analysis explains the lack of equilibrium observed earlier between FX rates and relative price levels.     

Household Optimism and Overborrowing

We use Finnish household‐level data from 1994 to 2013 to measure how often and what kind of forecast errors households make and how the errors are linked to the households' borrowing behavior and overindebtedness. We find that those households that make the largest optimistic forecast errors have greater debt‐to‐income ratios. They also are more likely to report that they suffer from excessive debt loads and have problems in coping with their bills. There are no such systematic effects for the households that make pessimistic forecast errors.     

Rational Expectations Model of Term Premia with Some Implications for Empirical Asset Demand Equations

This paper derives the equilibrium time series processes characterizing the prices of bonds which differ by maturity using the CAPM relationship between expected returns. The assumption of rational expectations requires that asset demand behavior, which determines bond prices in equilibrium, be based on the covariances among returns that are implied by the assumption of market clearing. This requirement imposes nonlinear restrictions on the parameters in the solution for bond prices. Some implications for the types of comparative static exercises for which it is legitimate to assume invariant demand functions are discussed, and some numerical solutions for bond prices are derived.     

Dividend Forecast Biases in Index Option Valuation

Since the early days of option pricing theory,the assumption that the dividends on the underlying stock or index over the life of the contract are known has not been challenged. We examine the sensitivity of index option prices to the assumption of dividend uncertainty. We consider a number of issues related to the forecasting of dividends and build a dividend forecasting model that passes several rigorous tests for unbiasedness. We then generate option prices using contemporary market levels and interest rates. We find that prices generated with the actual dividends are unbiased with respect to those generated using the forecasted dividends. The magnitudes of the forecast errors, however, are sufficiently large to suggest a concern, but the percentage errors are consistently small, typically amounting to less than two percent of the option price. We conclude that the convenient assumption that the stream of future dividendsis known is probably innocuous. This revised version was published online in November 2006 with corrections to the Cover Date.     

Quotes,Prices, and Estimates in a Laboratory Market

This study examines the behavior of laboratory markets in which two uninformed market makers compete to trade with heterogeneously informed investors. The data provide three main results. First, market makers set quotes to protect against adverse selection and to control inventory. Second, when investors are less well-informed, their trades are less reliable measures of their information, and market makers respond to those trades with greater skepticism. Third, errors in market makers' reactions to trades cause the time-series behavior of quotes and prices to depend on the information environment in ways beyond those captured in extant theory.     

Value at risk forecasts by extreme value models in a conditional duration framework

The analysis of extremes in financial return series is often based on the assumption of independent and identically distributed observations. However, stylized facts such as clustered extremes and serial dependence typically violate the assumption of independence. This has been the main motivation to propose an approach that is able to overcome these difficulties by considering the time between extreme events as a stochastic process. One of the advantages of the method consists in its capability to capture the short-term behavior of extremes without involving an arbitrary stochastic volatility model or a prefiltration of the data, which would certainly affect the estimate. We make use of the proposed model to obtain an improved estimate for the value at risk (VaR). The model is then compared to various competing approaches such as Engle and Marianelli's CAViaR and the GARCH-EVT model. Finally, we present a comparative empirical illustration with transaction data from Bayer AG, a typical blue chip stock from the German stock market index DAX, the DAX index itself and a hypothetical portfolio of international equity indexes already used by other authors.     

Financial Markets for Unknown Risks if Beliefs Differ

We consider a general equilibrium model with individual and collective risks. The article builds on a contribution by Chichilnisky and Heal, who show that contingent Arrow–Debreu equilibria can also be supported in economies with Arrow securities and mutual insurance contracts. However, they show this to be true in general only if beliefs are identical, a very restrictive assumption in the context of unknown risks. Moreover, they claim complete insurance in equilibrium to be impossible if beliefs are different. We show that even with different beliefs, firstly, complete insurance is possible in each statistical state, and secondly, contingent equilibrium can still be supported in economies with insurance and securities.     

Quantitative easing and related capital flows into Brazil: Measuring its effects and transmission channels through a rigorous counterfactual evaluation

We show that unconventional monetary policy in the United States appears to influence capital inflows to Brazil and, through this channel, its overall economic outlook and financial stability. In particular, quantitative easing leads to capital inflows, exchange rate appreciation, stock market price increases, credit growth and expansion of domestic activity related to consumption. Such effects are significant when considering both parameter uncertainty and a new significance test for abnormal behavior. According to a new channel identification method proposed in the paper, capital inflow is the only domestic propagation channel that systematically accounts for the estimated effects across variables and samples. Results are robust across a wide range of policy counterfactuals, regime break assumptions, testing procedures and model specifications.     

Information feedback in first price auctions

I apply the notion of a self‐confirming equilibrium (SCE) to study how feedback in first price auctions influences bidders' perceptions about their strategic environment, and consequently their bidding behavior. In a private values setting, revealing the two highest bids at the end of each auction is sufficient for bidders to have correct beliefs (justifying the assumption of Nash equilibrium). In contrast, in every symmetric SCE of a symmetric, affiliated, private values model, bidding strategies and revenue are (weakly) higher if only the highest bid is revealed. I also consider interdependent valuations and discuss implications for the empirical auction literature.     

The Great Capitol Hill Baby Sitting Co‐op: Anecdote or Evidence for the Optimum Quantity of Money?

This paper studies a centralized market with idiosyncratic uncertainty and money as a medium of exchange from a theoretical as well as an experimental perspective. In our model, prices are fixed and markets are cleared by rationing. We prove the existence of stationary monetary equilibria and of an optimum quantity of money. The rational solution of our model, which is based on the assumption of individual rationality and rational expectations, is compared with actual behavior in a laboratory experiment. The theoretical results are strongly supported by this experiment.     

The Effect of Sequential Information Arrival on Asset Prices: An Experimental Study

A complete understanding of security markets requires a simultaneous explanation of price behavior, trading volume, portfolio composition (ie., asset allocation), and bid-ask spreads. In this paper, these variables are observed in a controlled setting—a computerized double auction market, similar to NASDAQ. Our laboratory allows experimental control of information arrival—whether simultaneously or sequentially received, and whether homogeneous or heterogeneous. We compare the price, volume, and share allocations of three market equilibrium models: telepathic rational expectations, which assumes that traders can read each others minds (strong-form market efficiency); ordinary rational expectations, which assumes traders can use (some) market price information, (a type of semi-strong form efficiency); and private information, where traders use no market information. We conclude 1) that stronger-form market models predict equilibrium prices better than weaker-form models, 2) that there were fewer misallocation forecasts in simultaneous information arrival (SIM) environments, 3) that trading volume was significantly higher in SIM environments, 4) and that bid-ask spreads widen significantly when traders are exposed to price uncertainty resulting from information heterogeneity.     

Durable‐goods oligopoly with secondary markets: the case of automobiles

We study the effects of durability and secondary markets on equilibrium firm behavior in the car market. We construct a dynamic oligopoly model of a differentiated product market to incorporate the equilibrium production dynamics that arise from the durability of the goods and their active trade in secondary markets. We derive an econometric model and estimate its parameters using data from the automobile industry over a 20‐year period. Our estimates are used to provide a measure of the competitive importance of the secondary market.     

行为视角下的疫情分析:成因、影响与对策综述

本文从流行性传染病特征和医学传染病模型出发,对影响疫情的非理性因素、疫情的直接与间接结果进行文献综述,分析极端事件中的反应不足与过度反应。在成因上,本文梳理了不完全信息贝叶斯学习和显著性理论等决策行为假说,来理解人们行为背后的信息处理机制和情感作用渠道。在结果上,疫情及有关政策对经济金融活动的直接影响尚缺准确评估,恐慌情绪与羊群行为、社会信任危机、风险态度转变及异质性信念等疫情间接结果也有待深入研究。最后,本文基于已有文献和疫情行为分析,对未来学术研究及政策管理提供思路和建议。     

Nonfundamental Speculation Revisited

We show that a linear pure strategy equilibrium may not exist in the model of Madrigal (1996), contrary to the claim of the original paper. This is because Madrigal's characterization of a pure strategy equilibrium omits a second‐order condition. If the nonfundamental speculator's information about noise trading is sufficiently precise, a linear pure strategy equilibrium fails to exist. In parameter regions where a pure strategy equilibrium does exist, we identify a few calculation errors in Madrigal (1996) that result in misleading implications.     

Effect of perceived risk on nuclear power plant operators’ safety behavior and errors

Safety behavior and human errors are major concerns for nuclear power plant operators. The present study investigated how nuclear power plant operators’ perceived risk influences the quality of their own work performance in terms of safety behavior and errors. In total, 349 operators from two nuclear power plants in China participated in the present study. We found that perceived risk had a negative linear relationship with safety behavior and a quadratic relationship with errors. Leader support played a moderating role in the relationships between perceived risk, safety behavior, and errors. These results supported the job demands–resources model and provided further evidence for the relationship between perceived risk and outcomes related to safety behavior and errors. Our findings suggest that an effective way to address the issue of high perceived risk is to provide a supportive environment.     

Dodd–Frank's impact on community-bank investment models: A Bayesian structural time series analysis

We use Bayesian structural time series (BSTS) methodology to test whether the Wall Street Reform and Consumer Protection Act of 2010 (DF) caused changes in community bank business models. The BSTS methodology uses the pre-DF period to create synthetic counterfactuals for community-bank dependent variables of interest. In the post-DF period, the counterfactuals become predictions of the dependent variables had DF not been enacted. Comparing post-DF predicted versus actual dependent variables allows us to estimate the causal impact of DF on these variables of interest. We find that relative to assets, community banks significantly reduce their lending activities and significantly increase investment in securities and excess reserves.     

Competition in Lending: Theory and Experiments*

A variation of the Rothschild-Stiglitz’ equilibrium is examined in the context of competitive lending under adverse selection. The predictions of the model are tested in an experimental market setting. If equilibrium exists, the loan contracts offered and taken should separate projects by quality. When equilibrium exists, the experiments confirm the theory. The entrepreneurs with high-risk projects take bigger loans and pay higher credit spreads than those with low-risk projects. When equilibrium does not exist, which happens exactly when the candidate equilibrium does not provide a Pareto-optimal allocation, in half of the sessions loan trading stabilizes around the candidate equilibrium pair. In the other half, however, markets never settle down. This finding has important implications. When lenders can offer menus of contracts, as is usually the case in reality, the outcome may not be the zero-profit separating contracts of the standard model. Worse, fitting the standard model to field data may lead to serious biases in estimated parameters while falsely accepting the model’s main restriction (separation). *The financial support of the Division of Humanities and Social Sciences at Caltech is gratefully acknowledged. I would like to thank Charles Plott, Thomas Palfrey, Bill Zame, Mike Lemmon, as well as the seminar participants at Caltech, UCSD, Duke, Berkeley, Stanford, University of Utah, Columbia, Georgia State University, Tulane, University of Houston, and Arizona State University for helpful comments, and the staff of EEPS, SSEL, and CASSEL for their help in running the experiments. I am especially grateful to my advisor and mentor Peter Bossaerts for his guidance and encouragement. All errors are my own.     

Are inflation expectations rational?

Several recent papers report evidence of an apparent statistical bias in inflation expectations and interpret these findings as overturning the rational expectations hypothesis. In this paper, we investigate the validity of such an interpretation. We present a computational dynamic general equilibrium model capable of generating aggregate behavior similar to the data along several dimensions. By construction, model agents form “rational” expectations. We run a standard regression on equilibrium realizations of inflation and inflation expectations over sample periods corresponding to those tests performed on actual data and find evidence of an apparent bias in inflation expectations. Our experiments suggest that this incorrect inference is largely the product of a small sample problem, exacerbated by short-run learning dynamics in response to infrequent shifts in monetary policy regimes.     

信贷配给及信息甄别博弈理论的文献分析及评述

自从Stiglitz＆Weiss和Jaffee＆Russell这两篇经典文献从信息不对称角度解释信贷配给现象之后,涌现出众多的理论文献对信贷市场的信贷配给现象和信息甄别问题进行了研究。现有的信贷市场基本理论研究在以下几方面取得成果：一是信贷配给的信息不对称成因;二是抵押物可以成为银行的风险分类工具：三是贷款额度可以成为银行的风险分类工具。同时其理论研究框架在银行类型假定、借款人类型假定、以及描述借款人行为的效用函数等方面存在局限性,有待进一步深入研究。     

Strategic execution in the presence of an uninformed arbitrageur

We consider a trader who aims to liquidate a large position in the presence of an arbitrageur who hopes to profit from the trader's activity. The arbitrageur is uncertain about the trader's position and learns from observed price fluctuations. This is a dynamic game with asymmetric information. We present an algorithm for computing perfect Bayesian equilibrium behavior and conduct numerical experiments. Our results demonstrate that the trader's strategy differs significantly from one that would be optimal in the absence of the arbitrageur. In particular, the trader must balance the conflicting desires of minimizing price impact and minimizing information that is signaled through trading. Accounting for information signaling and the presence of strategic adversaries can greatly reduce execution costs.