The costs of suboptimal dynamic asset allocation: General results and applications to interest rate risk, stock volatility risk, and growth/value tilts

The recent theoretical asset allocation literature has derived optimal dynamic investment strategies in various advanced models of asset returns. But how sensitive is investor welfare to deviations from the theoretically optimal strategy? Will unsophisticated investors do almost as well as sophisticated investors? This paper develops a general theoretical framework for answering such questions and applies it to three specific models of interest rate risk, stochastic stock volatility, and mean reversion and growth/value tilts of stock portfolios. Among other things, we find that growth/value tilts are highly valuable, but the hedging of time-varying stock risk premia is less important.     

Effects of fixed and continuously distributed delays in a monopoly model with constant price elasticity

In this paper, we analyze the dynamics of a monopoly model with constant elasticity in which the monopolist faces a form of bounded rationality due to limited accessibility to information. We assume the firm adopts a gradient mechanism to adjust the output level, and we investigate how the introduction of fixed and continuously distributed delays within the resulting continuous-time system may affect the long-run dynamics. We find that the stability of the equilibrium depends on the weighting function adopted to model continuously distributed delays, and the convergence of the realized output toward the steady state is crucially affected by the choice of the delay type which, in turn, reflects the availability and the weight assigned to information. Indeed, depending on the assumptions on modeling delays, the equilibrium point may undergo a Hopf bifurcation after which a limit cycle arises.     

Stock trading dynamics and pedestrian counterflows: Analogies and differences

This paper contrasts stock trading dynamics with pedestrian counterflow movements. We apply the social force model built on pedestrian movement patterns to examine micro characteristics of the Chinese stock market. Utilizing one-minute high frequency stock trading data of the Shanghai Composite Index between 2014 and 2017, we find that stock trading dynamics under loose, prudent and austerity monetary policies closely resemble pedestrian movement patterns under wide, moderate, and narrow door width, respectively. In addition, we find that stock trading patterns with unbalanced buyers and sellers correspond to pedestrian counterflows with unbalanced flows from one side of the door to the other. Our results also show that stock trading patterns under various trading volumes are similar to pedestrian counterflows with different flow rates. In general, our results indicate that stock trading patterns are influenced by investor behaviors and conflicting interests similar to those present in the social force model of pedestrian counterflows. Thus, examining the behavioral mechanism at play in these self-driven systems will generate important insights for the behavioral foundation of financial markets.     

The effect of capital wealth on optimal diversification: Evidence from the Survey of Consumer Finances

It is well known that the wealthier the household, the larger tends to be the proportion of its total capital portfolio allocated to publicly traded stock, and the larger tends to be the number of individual stock issues included in its portfolio. Using the “homogeneous securities” case of a mean-variance model originally proposed by Michael Brennan, explicit functional forms are obtained for both the optimal proportion of the portfolio allocated to stocks and the optimal number of individual stock issues in the portfolio. An empirical evaluation of these theoretical results, using a dataset derived from the 2004 Survey of Consumer Finances, lends substantial support to the model.     

Financial markets with volatility uncertainty

We investigate financial markets under model risk caused by uncertain volatilities. To this end, we consider a financial market that features volatility uncertainty. We use the notion of G-expectation and its corresponding G-Brownian motion recently introduced by Peng (2007) to ensure a mathematically consistent framework. Our financial market consists of a riskless asset and a risky stock with price process modeled by geometric G-Brownian motion. We adapt the notion of arbitrage to this more complex situation, and consider stock price dynamics which exclude arbitrage opportunities. Volatility uncertainty results in an incomplete market. We establish the interval of no-arbitrage prices for general European contingent claims, and deduce explicit results in the Markovian case.     

Pollution,mortality and time consistent abatement taxes

We study dynamically consistent policy in a neoclassical overlapping generations growth model where pollution externalities undermine health but are mitigated via tax-financed abatement. With arbitrarily constant taxation, two steady states arise: an unstable ‘poverty trap’ and a ‘neoclassical’ steady state near which the dynamics might either be monotonically convergent or oscillating. When the planner chooses a time consistent abatement path that maximizes a weighted intergenerational sum of expected utility, the optimal tax is zero at low levels of capital and then a weakly increasing function of the capital stock. The non-homogeneity of the tax function along with its feedback effect on savings induces additional steady states, stability reversals and oscillations.     

Linear mixed-effects model for longitudinal complex data with diversified characteristics

The increasing richness of data encourages a comprehensive understanding of economic and financial activities, where variables of interest may include not only scalar (point-like) indicators, but also functional (curve-like) and compositional (pie-like) ones. In many research topics, the variables are also chronologically collected across individuals, which falls into the paradigm of longitudinal analysis. The complicated nature of data, however, increases the difficulty of modeling these variables under the classic longitudinal framework. In this study, we investigate the linear mixed-effects model (LMM) for such complex data. Different types of variables are first consistently represented using the corresponding basis expansions so that the classic LMM can then be conducted on them, which generalizes the theoretical framework of LMM to complex data analysis. A number of simulation studies indicate the feasibility and effectiveness of the proposed model. We further illustrate its practical utility in a real data study on Chinese stock market and show that the proposed method can enhance the performance and interpretability of the regression for complex data with diversified characteristics.     

Robust monetary policy in a small open economy

We study how a central bank in a small open economy should conduct monetary policy if it fears that its model is misspecified. Using a new-Keynesian model of a small open economy, we solve analytically for the optimal robust policy rule and the equilibrium dynamics, and we separately analyze the consequences of central bank robustness against misspecification concerning the determination of inflation, output, and the exchange rate. We show that an increase in the preference for robustness makes the central bank respond more aggressively or more cautiously to shocks, depending on the type of shock and the source of misspecification.     

Environmental policy and stable collusion: The case of a dynamic polluting oligopoly

We show that the imposition of a Markovian tax on emissions, that is, a tax rate which depends on the pollution stock, can induce stable cartelization in an oligopolistic polluting industry. This does not hold for a uniform tax. Thus, accounting for the feedback effect that exists within a dynamic framework, where pollution is allowed to accumulate into a stock over time, changes the result obtained within a static framework. Moreover, the cartel formation can diminish the welfare gain from environmental regulation such that welfare under environmental regulation and collusion of firms lies below that under a laissez-faire policy.     

Investment and pricing strategies of competing firms: A computational approach

We analyze the classical investment and pricing problem of a dominant firm faced with competition from substitute industries or marginal firms in the same field. The firm owns a finite level of a resource (e.g. the stock of an exhaustible one), the consumption of which is to be divided optimally over a finite planning horizon. The competitors' measures affect the demand for the resource towards the dominating firm. Rising crude oil prices and investments in forms of alternative energy are representative examples of the strategic questions which involve competitive and contradictory interests among firms within an industry. The investment and pricing problem can be solved analytically only with strong, simplifying assumptions. To make the analysis simpler and to relax these restrictions, we combine a series of numerical tools, computerize them, and build up a user-oriented, computerized decision aid, which we call a ‘computerized approach’. We solve the problem under different sets of theoretical assumptions. This chosen incremental theory building allows us to study the theoretical sensitivity of the original problem.     

One-dimensional maps with two discontinuity points and three linear branches: mathematical lessons for understanding the dynamics of financial markets

We develop a simple financial market model with heterogeneous interacting speculators. The dynamics of our model is driven by a one-dimensional discontinuous piecewise linear map, having two discontinuity points and three linear branches. On the one hand, we study this map analytically and numerically to advance our knowledge about such dynamical systems. In particular, not much is known about discontinuous maps involving three branches. On the other hand, we seek to improve our understanding of the functioning of financial markets. We find, for instance, that such maps can generate complex bull and bear market dynamics.     

Examining bias in estimators of linear rational expectations models under misspecification

Most rational expectations models involve equations in which the dependent variable is a function of its lags and its expected future value. We investigate the asymptotic bias of generalized method of moment (GMM) and maximum likelihood (ML) estimators in such models under misspecification. We consider several misspecifications, and focus more specifically on the case of omitted dynamics in the dependent variable. In a stylized DGP, we derive analytically the asymptotic biases of these estimators. We establish that in many cases of interest the two estimators of the degree of forward-lookingness are asymptotically biased in opposite direction with respect to the true value of the parameter. We also propose a quasi-Hausman test of misspecification based on the difference between the GMM and ML estimators. Using Monte-Carlo simulations, we show that the ordering and direction of the estimators still hold in a more realistic New Keynesian macroeconomic model. In this set-up, misspecification is in general found to be more harmful to GMM than to ML estimators.     

上海A股市场股价波动相互影响能力实证研究

股票市场中股票价格的波动是相互影响的,但不同的股票其价格波动时对其他股票价格行为的影响能力是不同的。本文通过对我国上海A股市场的实证分析表明,有少数股票其价格波动时对其他股票价格行为有很强的影响能力,而大多数股票的这种影响能力很小。此外,单个股票价格波动时引起其他股票价格涨、跌的能力一般都有显著差异。     

Robustness of stable volatility strategies

The paper analyzes the robustness of stable volatility strategies, i.e. strategies in which the portfolio weight of the stock is inversely proportional to its local volatility. These strategies are optimal for a CRRA investor if the stock follows a diffusion process, the expected excess return is proportional to its volatility, and the hedging demand is zero. We assess the performance of stable volatility strategies when these restrictive assumptions do not hold, in particular, when the risk premium is not proportional to volatility and when the stock price is subject to jumps. We find that stable volatility strategies are indeed robust or close to robust under a maxmin decision rule. In addition to our theoretical results, we perform a simulation analysis to evaluate strategies that scale the portfolio weight by the volatility, variance or a constant portfolio weight, and also analyze the strategies using empirical excess returns. Both analyses confirm the robustness of stable volatility strategies.     

Sustainable growth, renewable resources and pollution

Our intention is to present a growth model with an environmental resource which has its own regeneration process. The stock of this resource serves as a source of utility and an input to production. We also intend to introduce a negative externality caused by a pollution flow which we assume to be proportional to production. In the context of this model, it is shown that, by using the utility level of the Green Golden Rule as a generalization of the Ramsey's bliss point for solving an optimal growth problems with a zero discount rate, an optimal path converges to the Green Golden Rule configuration.     

A heterogeneous agent model of asset price dynamics with two time delays

This study constructs a heterogeneous agents model of a financial market in a continuous-time framework. There are two types of agents, fundamentalists and chartists. The former follows the traditional efficiency market theory and has a linear demand function, whereas the latter experiences delays in the formation of price trends and possesses a S-shaped demand function. The main feature of this study is a theoretical investigation on the effects caused by two time delays in a price adjustment process. In particular, two main results are demonstrated: One is that the stability switching curves are analytically derived, and the other is that the stability losses and gains can repeatedly occur when the shape of the curves are meandering. Although it is well known that a time delay has a destabilizing effect, these results imply that multiple delays can stabilize and destabilize a market price generating persistent deviations from the stationary price.     

Testing the Porter hypothesis: the effects of environmental investments on efficiency in Swedish industry

The main objective of this paper is to test the Porter hypothesis by assessing static and dynamic effects of environmental policy on productivity. According to the hypothesis, stringent environmental regulations have dynamic effects on firm performance, and these effects eventually generate profits that offset the adaptation costs. We extend previous analyses by using unique data on environmental protection investments in the Swedish manufacturing industry as a proxy for environmental stringency. These data enable us to separate environmental protection investments into pollution prevention and pollution control. This distinction is crucial since the hypothesis claims that it is investments in prevention that have positive dynamic effects on firm performance. To test the hypothesis, a stochastic production frontier model is estimated where firm inefficiency is a function of investments in environmental protection. In general, we find no support for the Porter hypothesis within the time frame of our study, indicating that environmental regulations lead to efficiency losses. This result is even stronger in the harshly regulated pulp and paper industry.     

On the land assembly problem

We consider a segment of the land market where the entire available land stock is needed for the realization of some indivisible development project. The stock is shared by several landholders who either collude or negotiate independently with the developer over the prices of their lots. Investigating the price setting behavior of the landowners and the optimal strategy of the developer, we show that landowners set more moderate prices under collusion than when acting independently; in the latter case, the individual asking price falls with the size of the land share, and the total price increases with the number of landowners. As regards the optimal strategy, we find that the developer will in general not offer the lowest price he expects to be accepted by the landowners.     

Non-renewable resources in the long run

We model a competitive economy in which production is dependent on labor and a non-renewable resource, the stock of which is inhomogeneous. We solve the model analytically and show how—in infinite time—the economy moves away from an initial balanced growth path (b.g.p.) and towards a mature b.g.p. The characteristics of the initial b.g.p. match historical observations of slowly declining resource price and consumption growth tracking global product. The mature b.g.p. depends on the nature of the stock; the more steeply cross-sectional area declines with depth, the faster the rate of price increase. We show how the theoretical model may be adapted and parameterized to explain and predict the evolution of markets for specific resources, applying the model in two cases, copper and petroleum.     

Analysis of the impact of COVID-19 pandemic on G20 stock markets

We examine the impact of the COVID-19 pandemic on G20 stock markets from multiple perspectives. To measure the impact of COVID-19 on cross-market linkages and deeply explore the dynamic evolution of risk transmission relations and paths among G20 stock markets, we statically and dynamically measure total, net, and pairwise volatility connectedness among G20 stock markets based on the DY approach by Diebold and Yilmaz (2012, 2014). The results indicate that the total volatility connectedness among G20 stock markets increases significantly during the COVID-19 crisis, moreover, the volatility connectedness display dynamic evolution characteristics during different periods of the COVID-19 pandemic. Besides, we also find that the developed markets are the main spillover transmitters while the emerging markets are the main spillover receivers. Furthermore, to capture the impact of COVID-19 on the volatility spillovers of G20 stock markets, we individually apply the spatial econometrics methods to analyze both the direct and indirect effects of COVID-19 on the stock markets’ volatility spillovers based on the “volatility spillover network matrix” innovatively constructed in this paper. The empirical results suggest that stock markets react more strongly to the COVID-19 confirmed cases and cured cases than the death cases. In general, our study offers some reference for both the investors and policymakers to understand the impact of COVID-19 on global stock markets.