An evolutionary explanation of the value premium puzzle

As early as 1934 Graham and Dodd conjectured that excess returns from value investment originate from a tendency of stock prices to converge towards a fundamental value. This paper confirms their insights within the evolutionary finance model of Evstigneev et al. (Econ Theory 27:449–468, (Evstigneev et al. 2006)). Our empirical results show the predictive power of the evolutionary benchmark valuation for the relative market capitalization and its dynamics in the sample of firms listed in the Dow Jones Industrial Average index in 1981–2009.     

Correlation and relative performance evaluation

This paper reexamines the issue of relative versus joint incentive schemes in a multi-agent moral-hazard framework. The model allows a full analysis of the information and dependence structure. An important result is that the widespread notion that greater correlation in outcomes calls for more competition is not robust. First, when the dependence structure is effort-sensitive, the optimal incentive scheme in general mixes elements of relative evaluation and joint evaluation. Second, under limited liability, higher equilibrium correlation tends to make joint performance evaluation more desirable. Examples are provided regarding incentives in firms, finance and innovation.     

A lottery-preference-based explanation of realized kurtosis puzzle in Chinese stock market

High kurtosis corresponds to fat tails on both sides and under risk-aversion assumption investors’ dislike of left-tail loss outweighs their preference for right-tail gain. Therefore, high kurtosis characteristic of stock should predict high expected returns. However, the high-frequency-data-based empirical results on Chinese stock market are just the opposite, which we refer to as the ‘realized kurtosis puzzle’. Using the double sorts and firm-level cross-sectional regression methods, we further demonstrate investors’ preference for lottery-like stocks or lottery preference is key to solve the puzzle. Our further empirical research verifies stocks with higher retail investors’ shareholding proportion and unavailable for short show stronger ‘realized kurtosis puzzle’. In addition, the puzzle is particularly significant in high lottery preference periods while less apparent in low lottery preference times.     

The warnings puzzle: an upstream explanation

Enforcement agencies issuing warnings are an empirical regularity in the enforcement of laws and regulations, but a challenge to the standard economic theory of public enforcement. A number of recent contributions explain the popularity of warnings as a response to information asymmetries between regulator and regulatee. We offer a distinct, but complementary explanation: Warnings can serve as a signaling device in the interaction between the enforcement agency and its budget-setting authority. By using costly warnings for minor offenses that would otherwise not be pursued, the agency can generate observable activity to escape budget cuts in subsequent periods. We show in a stylized model that warnings may indeed occur in an equilibrium of a game in which warnings are entirely unproductive in the agency-regulatee interaction, and thereby derive a testable hypothesis on regulatory agency behavior.     

Cointegration as an explanation for the Meese–Rogoff puzzle

Some economists suggest that the failure of exchange-rate models to outperform the random walk in exchange rate forecasting out of sample can be attributed to failure to take into account cointegration when it is present. We attempt to find out if cointegration matters for forecasting accuracy by examining the relation between the stationarity and size of the forecasting error. Results based on three macroeconomic models of exchange rates do not provide strong support for the proposition that cointegration matters for forecasting accuracy. The simulation results show that while stationary errors tend to be smaller than non-stationary errors, this is not a universal rule. Irrespective of the presence or absence of cointegration, none of the three models can outperform the random walk in out-of-sample forecasting, which means that cointegration cannot solve the Meese–Rogoff puzzle.     

Working hard in the wrong place: A mismatch-based explanation to the UK productivity puzzle

The UK experienced an unusually prolonged stagnation in labor productivity in the aftermath of the Great Recession. This paper analyzes the role of sectoral labor misallocation in accounting for this “productivity puzzle”. If jobseekers disproportionately search for jobs in sectors where productivity is relatively low, hires are concentrated in the wrong sectors, and the post-recession recovery in aggregate productivity can be slow. Our calculations suggest that, quantified at the level of three-digit occupations, this mechanism can explain up to two thirds of the deviations from trend-growth in UK labor productivity since 2007.     

Life with habit and expectation: A new explanation of equity premium puzzle

Previous writers have attempted to resolve the equity premium puzzle by employing a utility function that depends on current consumption minus (or relative to) past habit consumption. This paper points out that an individual's current utility may also depend upon how well off in the recent past he or she had expected to be today. Hence we add the concept “expectation formation” to the utility modification term in a model with a habit‐formation utility function. We apply the model to the equity premium puzzle and find that it is able to fit the data with a relatively low coefficient of relative risk aversion. Furthermore, we introduce an updated data sample and apply different values of discounting factors, and find that in all circumstances, the model is able to generate coefficients of risk aversion that are consistent with theory. Hence we conclude that the model is able to resolve the equity premium puzzle.     

A simple explanation of some key time preference anomalies

Abstract Individual time discounting behaviour experimentally exhibits important anomalies that are inconsistent with the standard discounted utility model. These include the time preference reversal characteristic of hyperbolic discounting, the magnitude effect and the extreme sign effect. I propose a simple explanation of discounting that accounts for these three anomalies simultaneously, within the context of the expected utility model with uncertainty, risk aversion, and preference for precautionary saving.     

Empirical evaluation of the asset-allocation puzzle

We examine the portfolio-choice puzzle posed by Canner, Mankiw, and Weil [Canner, N., Mankiw, N.G., Weil, D.N., 1997. An asset allocation puzzle. The American Economic Review 87, 181–191]. From data on the portfolio composition of 470 clients of a brokerage firm, we obtain that the bonds/stocks ratio does decrease in relation to risk tolerance. This result complements the findings of CMW (1997) by focusing on actual allocations of individual portfolios rather than recommended allocations by financial advisors.     

An explanation for the price puzzle: Asymmetric information and expectation dynamics

Using theoretical and empirical analyses, this paper shows that the expectation dynamics induced by information asymmetry between the Central Bank (CB) and the public can cause the price puzzle. The signalling and learning dynamics between the CB and a representative private-sector agent under asymmetric information is investigated. Inflation positively reacts to contractionary monetary policy because the change in the interest rate is perceived as a signal of the CB’s private information about higher future inflation and output by the public. The empirical section of the paper validates this theoretical argument using a VAR specification about the US economy. Besides providing an explanation for the price puzzle, the results of this paper has practical implications about transparency and monetary policy. The theoretical and empirical findings indicate that asymmetric information causes significant frictions in the transmission mechanism of monetary policy. These frictions induce short-run undesired effects like increase in expected inflation and actual inflation as a response to contractionary monetary policy which is identified as “the price puzzle”.     

“极化陷阱”之谜及其经济学解释

我国区域差距扩大的困境集中表现为增长极点极化过度和扩散不足并存所引致的"极化陷阱".从经济学理论来看,非平衡战略福利判别标准中补偿机制的内在冲突是极化陷阱形成的深层原因.以区域差距的分类为基础,补偿机制分为结构性补偿和功能性补偿两种类型.对增长极的过分重视导致了对结构性补偿的偏好,然而结构性补偿所带来的协调空间正在减弱,以全要素生产率增长为基础的功能性协调将成为区域协调的主要力量.因此,形成结构性协调与功能性协调的互补将在促进区域协调发展的同时弱化"极化陷阱"的困境.     

A note on the wise girls puzzle

Summary. This article analyzes the two wise girls puzzle, which is a simpler variant of the so-called three wise men puzzle, with some proof-theoretic tools. We formulate the puzzle in an epistemic logic. Our chief assumption is that the reasoning ability of each player of the puzzle is equivalent to what is described by the epistemic logic. We will interpret the behaviors of the players in the puzzle in terms of unprovability of certain statements. The proof-theoretic tools we employ are consequences of a meta-theorem, known as the cut elimination theorem. Received: August 1, 2000; revised version: May 15, 2001     

A reappraisal of the Meese–Rogoff puzzle

Several explanations have been put forward for the Meese–Rogoff puzzle that exchange rate models cannot outperform the random walk in out-of-sample forecasting. We suggest that a simple explanation for the puzzle is the use of the root mean square error (RMSE) to measure forecasting accuracy, presenting a rationale as to why it is difficult to beat the random walk in terms of the RMSE. By using exactly the same exchange rates, time periods and estimation methods as those of Meese and Rogoff, we find that their results cannot be overturned even if the models are estimated with time-varying coefficients. However, we also find that the random walk can be outperformed by the same models if forecasting accuracy is measured in terms of the ability to predict direction, in terms of a measure that combines magnitude and direction and in terms of profitability.     

Benchmarking superannuation funds based on relative performance

In this article, we assess fund performance using data envelopment analysis (DEA). For each inefficient fund, DEA provides a set of role model funds whose best practices may be emulated for performance improvement. We find that the role models of most inefficient funds consist entirely of funds different from their own type. To overcome this situation, we suggest a multi-step DEA procedure. The procedure starts by categorizing funds on a hierarchical basis. We establish the hierarchy based on the frequency of efficient funds that belong to each fund type. Thereafter, a set of role model funds for each inefficient fund is found by pooling the funds in its own category and the funds that belongs to the categories at the lower levels in the hierarchy and applying DEA. This procedure is repeated by augmenting the pool with funds at the next higher level and so on until all the sampled funds are included. At each step, a set of role models is identified. An inefficient fund can thus reach the efficient frontier in stages. Statistical evidence suggests that membership and proportion of risky assets may have a negative association, and the fund size may have a positive association with fund performance.     

Banks,relative performance,and sequential contagion

We develop a multi-period general equilibrium model of bank deposit, credit, and interim inter-bank loan markets in which banks initially specialize in their choices of debtors, leading to under-diversification, but nevertheless become entwined via inter-bank markets, leading to the fortunes of one bank affecting the profits and default rates of the other in a sequential manner. Lack of (full) diversification among credit risks arises in our model owing to a relative profit argument in each banker’s utility function, which is otherwise risk- and default-averse. We examine its implications for the welfare of depositors and debtors. An erratum to this article can be found at     

The relative performance of foreign-owned subsidiaries and domestic companies

The paper investigates the financial performance of the largest firms in Romania, by comparing foreign-owned subsidiaries (FOS) and domestic companies (DCs) over a decade. As such, the paper contributes to the literature on foreign direct investment (FDI) in transition economies, focusing on a country where few such studies have been conducted previously. Whereas most microeconomic research about Central and Eastern European (CEE) economies is concerned with the effects of FDI, this paper fills a gap in the literature by comparing the evolution of FOS and DCs performance during 2003–2012. This matter is approached in a novel methodological way, by applying the multiple correspondence analysis to explain the complex relationships between ownership, modes of entry and performance, as reflected in turnover and profit margins. One result is that FOS replaced DCs in top national positions, when taking into account size and turnover. However, although FDI via acquisitions financially outperformed DCs, the latter did better than greenfield FDI after the global economic crisis. Of all the factors analysed, the sector of activity resulted as having by far the most important influence on financial performance. The results have implications for policymakers who design FDI programmes for economic development.     

Liquidity shocks: A new solution to the forward premium puzzle

The frequent empirical failure of uncovered interest rate parity raises a question that has not been definitively answered: why do predictable excess returns on currencies persist in competitive currency markets? Supported by data from nine major currencies for 1978:08–2019:09, I provide a novel resolution to this enduring forward premium puzzle by building on the financial economics literature that explores the economic implications of limited access to capital markets. A liquidity shock, or the urgent demand for liquidity by credit-constrained arbitragers liquidating bond holdings, causes losses from sudden drops in bond prices. Arbitragers require a liquidity premium to compensate for potential losses that vary directly with the interest rate. It is this liquidity premium that explains persistent excess returns on currencies. I argue for policies favoring a low interest rate environment and macroprudential controls that ease liquidity constraints to increase the efficiency of international capital markets by reducing the liquidity premium.     

A cross country explanation of performance of heath care systems: The consumer point of view using the Euro Health Consumer Index

This paper performs an empirical analysis based on a published assessment of several health care systems. This assessment, performed by the think tank Health Consumer Powerhouse, reports outcomes, and ranks accordingly several countries. In turn, this paper explores the ability of national data at explaining the differences observed in that ranking.The innovative features of this paper are mainly two. First, it shows how the Euro Health Consumer Index – which is comprised from 6 indicators – can be used as a single-outcome latent variable. This feature expands the possibilities of incorporating EHCI in future research. Secondly, this paper also serves as an example of the use of Partial Least Squares (PLS) and its characteristics.The analytical technique is PLS. The empirical analysis uses a set of 22 European countries (20 from European Union plus Norway and Switzerland) and departs from a model that relates four latent constructs, one representing National Performance (the aggregated measure of the EHCI) and the others representing financial investment in health care and human and physical resources.The final estimates provide very interesting results. The main result, or a judgment from the point of view of political implications of this research, is that a successful health care system needs mainly financial investment. Secondly, it also benefits – to a lesser extent – from physical capabilities. Finally, the way resources – namely human resources – are organized is possibly critical to the overall performance, measured from a consumer point of view.