Stochastic dominance relationships between stock and stock index futures markets: International evidence

In this paper, we first modify the stochastic dominance (SD) test for risk averters proposed by Davidson and Duclos (2000) to be the SD test for risk seekers. We then adopt both tests to examine the SD relationships between stock indices and their corresponding index futures for 10 countries. The sample contains data from 6 developed countries and 4 developing countries. The study proposes that there should be no SD relationship between spot and futures markets in developed financial markets in which arbitrage opportunities (both pure and quasi) are rare and short-lived. However, we expect that SD relationships could be found in emerging financial markets that have more impediments to arbitrage. Consistent with this conjecture, our study finds that there are no SD relationships between spot and futures markets in the mature market sample, implying that these markets could be efficient. However, for the emerging markets, spot dominates futures for risk averters, while futures dominate spot for risk seekers in the second- and third-order SD. These results indicate that there are potential gains in expected utilities for risk averters (seekers) if they switch their investment from futures (spot) to spot (futures) in the emerging markets.     

Knightian uncertainty and poverty trap in a model of economic growth

This paper explores how Knightian uncertainty affects dynamic properties in an economic growth model. The decision-making theory employed in the analysis is the theory of expected utility under a non-additive probability measure, i.e., the Choquet expected utility model of preference. We apply this decision-making theory to an overlapping generations model where producers face “uncertainty” in their technologies. When the producer is averse to uncertainty, the firm's profit function may not be differentiable. Therefore, the firm's decision to invest and hire labor becomes rigid for a certain measurable range of real interest rates. In dynamic equilibrium, the existence of firm-level rigidity causes discontinuity in the wage function; this makes multiple equilibria the more likely outcomes under the log utility and Cobb–Douglas production functions. In this paper, we show that even if aversion to uncertainty is small, the “poverty trap” can arise for a wide range of parameter values.     

Theories of choice under risk: Insights from financial markets

To date, the plausibility of theories of choice under risk hinges are mainly on experimental evidence. This paper devises and implements an approach amenable of assessing the performance of three families of models (expected utility, rank-dependent expected utility, and the cumulative prospect theory) using information from financial asset markets. Our findings unequivocally support reference-point dependence, diminishing marginal sensitivity, loss aversion, and nonlinear weighting of (gain and loss) physical probabilities. The empirical observations are found to be robust to, inter alia, the parameterization of the utility and probability weighting functions, “day-of-the-week effects”, the choice of a reference point, and the introduction of possible, low-probability market crashes (peso component).     

Conceptions of the dual economy

Due to the current labor market problems and to the increase in personal “free time,” the “other half” of the economy is attracting increased attention: the household economy, the informal sector, black labor, the shadow economy, etc. The purpose of this paper is to summarize the current terminology and conceptual diversity in this field, in order to clarify the notions and thus the theoretical approaches which are a prerequisite for further work at the present stage of research.     

Exact arbitrage, well-diversified portfolios and asset pricing in large markets

For a market with an atomless continuum of assets, we formulate the intuitive idea of a “well-diversified” portfolio, and present a notion of “exact arbitrage”, strictly weaker than the more conventional notion of “asymptotic arbitrage”, and necessary and sufficient for the validity of an APT pricing formula. Our formula involves “essential” risk, one based on a specific index portfolio constructed from factors and factor loadings that are endogenously extracted to satisfy an optimality property involving a finite number of factors. We illustrate how our results can be translated to markets with a large but finite number of assets.     

Strategy-proof risk sharing

We consider risk sharing problems with a single good and a finite number of states. Agents have a common prior and their preferences are represented in the expected utility form and are risk averse. We study efficient and individually rational risk sharing rules satisfying strategy-proofness, the requirement that no one can ever benefit by misrepresenting his preference. When aggregate certainty holds, we show that “fixed price selections” from Walrasian correspondence are the only rules satisfying efficiency, individual rationality, and strategy-proofness. However, when aggregate uncertainty holds, we show that there exists no rule satisfying the three requirements. Moreover, in the two agents case, we show that dictatorial rules are the only efficient and strategy-proof rules. Dropping the common prior assumption in the model, we show that this assumption is necessary and sufficient for the existence of rules satisfying the three main requirements in the two agents and aggregate certainty case.     

Perpetual youth and endogenous labor supply: A problem and a possible solution

In the “perpetual youth” overlapping-generations model of Blanchard and Yaari, if leisure is a “normal” good then some agents will have negative labor supply. We suggest a solution to this problem by using a modified version of Greenwood, Hercowitz and Huffman’s utility function. The modification incorporates real money balances, so that the model may be used to analyze monetary as well as fiscal policy. In a Walrasian version of the economy, we show that increased government debt and increased government spending raise the interest rate and lower output, while an open-market operation to increase the money supply lowers the interest rate and raises output.     

Can the share economy cure our macroeconomic woes? Probably not

This paper introduces the major ideas in Martin Weitzman's The Share Economy. It notes that a “share” economy is one in which the marginal cost of labor is less than the average cost of labor; moreover, this condition can be induced by sharing revenues or profits. According to share theory, such contracts will lead firms to create more vacancies and thereby lower the average unemployment rate. Weitzman proposes to induce more share arrangements by giving a tax preference to share-type income.     

Risk aversion,fanning preference and volatility smirk on S&P 500 index options

This article proposes a novel way of pricing S&P 500 index options in the presence of jump risk. Our analysis is built upon an equilibrium option pricing rule for a representative agent economy. In particular, we use the weighted utility’s certainty equivalent to specify agent’s risk preference, which displays a fanning-out characteristic. We find that the fanning effect captures a remarkably large portion of the total market risk premium implicit in options. As a result, the model with fanning effect generates pronounced volatility smirks.     

Combining stated and revealed choice research to simulate the neighbor effect: The case of hybrid-electric vehicles

According to intuition and theories of diffusion, consumer preferences develop along with technological change. However, most economic models designed for policy simulation unrealistically assume static preferences. To improve the behavioral realism of an energy–economy policy model, this study investigates the “neighbor effect,” where a new technology becomes more desirable as its adoption becomes more widespread in the market. We measure this effect as a change in aggregated willingness to pay under different levels of technology penetration. Focusing on hybrid-electric vehicles (HEVs), an online survey experiment collected stated preference (SP) data from 535 Canadian and 408 Californian vehicle owners under different hypothetical market conditions.Revealed preference (RP) data was collected from the same respondents by eliciting the year, make and model of recent vehicle purchases from regions with different degrees of HEV popularity: Canada with 0.17% new market share, and California with 3.0% new market share. We compare choice models estimated from RP data only with three joint SP–RP estimation techniques, each assigning a different weight to the influence of SP and RP data in coefficient estimates. Statistically, models allowing more RP influence outperform SP influenced models. However, results suggest that because the RP data in this study is afflicted by multicollinearity, techniques that allow more SP influence in the beta estimates while maintaining RP data for calibrating vehicle class constraints produce more realistic estimates of willingness to pay. Furthermore, SP influenced coefficient estimates also translate to more realistic behavioral parameters for CIMS, allowing more sensitivity to policy simulations.     

Symmetry and order in the portfolio allocation problem

Summary. This research studies the role of multivariate distribution structures on random asset returns in determining the optimal allocation vector for an expected utility maximizer. All our conclusions pertain for the set of risk averters. By carefully disturbing symmetry in the distribution of the, possibly covarying, returns, we ascertain the ordinal structure of the optimized allocation vector. Rank order of allocations is also established when a permutation symmetric random vector is mapped into the returns vector through location and scale shifts. It is shown that increased dispersion in the vectors of location and scale parameters benefit, ex-ante, investors as does a decrease in the rank correlation coefficient between the location and scale parameter vectors. Revealed preference comparative static results are identified for the location and scale vectors of asset returns. For most issues addressed, we arrive at much stronger inferences when a safe asset is available. Received: August 8, 2000; revised version: January 8, 2001     

Bubblelepsy: The Behavioral Wellspring of the Internet Stock Phenomenon

This paper studies daily returns of Internet stocks before and after the Internet Crash of March 27, 2000. We find evidence of a bubble before the Crash. We argue that this bubble was propelled by overconfident investors suffering from biased self-attribution. Our analysis of subgroups of Internet firms finds the stocks that were perhaps the most salient in investors' minds drove the death spiral of Internet stocks and, although the evidence is at best marginal, the entire U.S. market.     

Alternate forecasts of the job content and skill requirements of the American economy in 1980

This paper analyzes the potential job content and skill requirements of the American economy in 1980 under three alternate economic futures. Detailed occupational manpower requirements are generated on the basis of a “Status Quo” economy, a “Social Welfare” economy, and a “Defense” economy in the near future. Occupational manpower requirements are then translated into a Job Family-Skill Content classification to determine how these alternate national priority choices may affect future requirements for specific jobs, skills, educational preparation, and vocational training. The results obtained indicate the job families and skill classifications most sensitive to changes in basic economic parameters, and also identify long run trends in manpower and educational requirements unaffected by shifting social priorities and patterns of federal expenditures. The implications of these findings for manpower and educational planning are briefly discussed.     

“Very Nice” trivial equilibria in strategic market games

Following Shapley [Theory of Measurement of Economic Externalities, Academic Press, New York, 1976], we study the problem of the existence of a Nash Equilibrium (NE) in which each trading post is either active or “legitimately” inactive, and we call it a Shapley NE. We consider an example of an exchange economy, borrowed from Cordella and Gabszewicz [Games Econ. Behav. 22 (1998) 162–169], which satisfies the assumptions of Dubey and Shubik [J. Econ. Theory 17 (1978) 1–20], and we show that the trivial equilibrium, the unique NE of the associated strategic market game, is not “very nice,” in the sense that it is not “legitimately” trivial. This result has the more general implication that, under the Dubey and Shubik's assumptions, a Shapley NE may fail to exist.     

Existence and Uniqueness of Ordinal Nash Outcomes

In this paper we present necessary and sufficient conditions for existence and uniqueness of ordinal Nash outcomes. These outcomes are derived from the ordinal Nash solution—a reinterpretation and an extension of the Nash bargaining solution that allows bargainers to have preference relations that are more general than expected utility. Our task is undertaken by the construction of a new notion called “induced utilities”. Journal of Economic Literature Classification Number: C78.     

Economic and environmental efficiency using a social accounting matrix

This paper aims to show the utility of the so-called Social Accounting Matrix and Environmental Accounts (SAMEA) for economic and environmental efficiency analysis. The article uses the SAMEA for Spain in 2000, applied to water resources and greenhouse gas emissions. This matrix is used as a central core of a multisectorial model of economic and environmental performance, and it calculates the denominated “domestics SAMEA multipliers” and their decomposition into characteristic, direct, indirect and induced effects. These multipliers show some evaluation of economic and environmental efficiency. Also, we present an application of these multipliers that demonstrates that there is no causal interrelation between those sectors with higher economic backward linkages and those with higher environmental deterioration backward linkages.     

On preferences for being self-employed

The concept of procedural utility assumes that agents not only receive utility from outcomes but also attach an independent value to the procedures that lead to these outcomes. This paper analyzes whether the preferences that underlie procedural utility are homogeneous using the case of independence at the workplace. I exploit the event of German reunification to assign preferences for independence to respondents without using data on occupational choice or directly reported procedural preferences. I find that the self-employed report higher job satisfaction than the employed, even after controlling for income and hours worked. However, there is a significant amount of heterogeneity in this effect: while “independent types” experience a large increase in job satisfaction from being self-employed, the most “hierarchical types” could even experience a decrease.     

An equilibrium model of a second economy market in a centrally planned economy

We study a CPE in which an identical good is sold on the official market (OM) and a “second economy” market (SEM ). Planners set parameters. Managers divide inputs between markets to maximize expected utility of wealth. Consumers are expected utility maximizers who purchase the good on the OM or SEM. On the OM, excess demand exists at the non-Walrasian price; delivery date is stochastic. The SEM offers immediate availability. Our solution concept involves the rational expectations of managers, the consistency of consumers' decisions, and a market-clearing SEM. We solve for SEM price and supply and investigate various comparative statics.     

Government spending, capital accumulation and the optimal policy rule: The role of public service capital

In this paper, we modify the Djajić [Djajić, S., 1987. “Government Spending and the Optimal Rates of Consumption and Capital Accumulation,” Canadian Journal of Economics 20, 544–554.] model in such a way that government consumption expenditure provides utility to households via the total stock of government services rather than the government consumption flow alone. By using such a framework, we show that the optimality condition for the public service capital stock is the marginal rate of substitution between public service capital and consumption that equals the intertemporal marginal rate of transformation between the two goods. In addition, we show that the relationship between private consumption and public service capital in a household's utility plays an important role in determining the transitional behavior of relevant variables. We also examine the second-best government consumption expenditure policy. By contrast, in the standard flow specification, e.g., Turnovsky and Brock [Turnovsky, S.J. and Brock, W.A., 1980. “Time Consistency and Optimal Government Policies in Perfect Foresight Equilibrium,” Journal of Public Economics 13, 183–212.], Ihori [Ihori, T., 1990. “Government Spending and Private Consumption,” Canadian Journal of Economics 23, 60–69.], and Turnovsky and Fisher [Turnovsky, S.J. and Fisher, W.H., 1995. “The Composition of Government Expenditure and its Consequences for Macroeconomic Performance,” Journal of Economic Dynamics and Control 19, 747–786.], the second-best government consumption expenditure is decided on the basis that the marginal utility of consumption is equal to the discounted sum of the marginal utility of the government's flow spending.