Estimating ‘gamma’ for tail-hedge discount rates when project returns are cointegrated with GDP

Martin Weitzman has suggested a method for calculating social discount rates for long-term investments when project returns are covariant with consumption or other macroeconomic variables, so-called ‘tail-hedge discounting’. This method relies on a parameter called ‘real project gamma’ that measures the proportion of project returns that is covariant with the macroeconomic variable. We compare two approaches for estimation of this gamma when the project returns and the macroeconomic variable are cointegrated. First, we use Weitzman’s own approach, and second a simple data transformation that keeps gamma within the zero to one interval. In a Monte-Carlo study, we show that the method of using a standardized series is better and robust under different data-generating processes. Both approaches are examined in a Monte-Carlo experiment and applied to Swedish time-series data from 1950–2011 for annual time-series data for rail freight (a measure of returns from rail investments) and GDP.     

Should the Social Security Trust Fund Hold Equities? An Intergenerational Welfare Analysis

In a stochastic economy with overlapping generations, fiscal policy affects the allocation of aggregate risks. The paper shows how to compute the welfare effects of marginal policy changes that shift risk across cohorts, in general and for an application to social security equity investments. I estimate the relevant correlations between macroeconomic shocks and equity returns from 1874–1996 U.S. data, calibrate the model, and find positive welfare effects for equity investments. Since stock returns are positively correlated with social security's wage-indexed benefit obligations, equity investments would also help to stabilize the payroll tax rate. Journal of Economic Literature Classification Numbers: E62, H55.     

GDP competition and corporate investment: Evidence from China

This study examines whether and how macroeconomic performance competition is related to investment at firm level. We use GDP competition as a proxy of dynamic macroeconomic conditions. We find that the effect of GDP competition on firm investments is significantly positive. We also find that GDP competition destroys investment efficiency significantly, especially by increasing overinvestment. Further tests show that GDP competition is more likely to affect the investment decisions of firms controlled by governments and firms located in regions with low marketization. In addition, our analyses reveal that the provincial officials facing competitive pressure are more likely to be promoted if firm investments accelerate. We use alternative proxies to measure GDP competition and find similar results that support our inference. Our findings support the notion that GDP competition of governments distorts investment behaviour. The present paper also elucidates investment problems and dilemmas faced by emerging economies.     

Adjusting for risk:: An improved Sharpe ratio

This paper proposes a new rule for risk adjustment and performance evaluation. This rule is a generalization of the well-known Sharpe ratio criterion, and under normal conditions enables a manager to correctly assess alternative risky investments. The rule is superior to existing rules such as the standard Sharpe rule and the RAROC, and can make a substantial difference in estimates of required returns.     

Expected risk and excess returns predictability in emerging bond markets

This study examines the predictability of expected excess returns from eight emerging bond markets within an international asset pricing framework. Two sets of instruments are used, which include both world and local factors, to forecast emerging bond returns. Besides investigating the influence of the macroeconomic factors in specific countries on bond returns in those countries, this study also divides local factors into macroeconomic and financial factors. Unlike previous studies, we apply macroeconomic instruments that contain more information on excess returns as a proxy for local risk factors via principal component analysis methodology. The information variable approach enables the prediction of excess bond returns based on world and local factors and facilitating understanding of the degree of integration between emerging bond markets and developed bond markets. The results indicate that the bond market in emerging world is partially integrated to that in the developed world and the predictability of local factors that include both financial and macroeconomic information variables can forecast around 25–66% of the returns of emerging bonds. Incorporating the macroeconomic variables increases the explanatory power of the model. Both world and country-specific local instruments can forecast excess bond returns, but local instruments appear to be better predictors of such returns, particularly the local credit spread to US. Additionally, this study finds that investor risk aversion is significant among most of sample countries.     

Materials price increases and aggregate adjustment in an open economy: A Stochastic Approach

This paper develops a stochastic macroequilibrium frameworks to analyze the differing implications of alternative types of input price disturbances. The distinctions between expected and unexpected, permanent and transitory, nominal and real disturbances are considered. The introduction of input disturbances involves a more elaborate modelling of the supply side of the economy. Both constant returns to scale and decreasing returns to scale technologies are considered. The analysis highlights the sensitivity of the macroeconomic impacts of input price shocks to their specific type. The analytical results obtained are not unambiguous and are supplemented with numerical simulations.     

A comprehensive analysis of farmland value determination: a county-level analysis

This study develops a comprehensive model of farmland value determination to analyze the effects of various economic variables such as net farm income, government payments, macroeconomic factors, and demographic conditions on farmland values for the counties along the Snake River valley in Idaho. Land values, net farm income, and population show considerable variation among the counties. Therefore, use of county level cross-sectional and time-series data helps to assess the impacts of various factors on land values more accurately. The empirical results show that net farm income, wheat yield, population, and credit availability have positive effects, and property tax rates, interest rates, and debt to asset ratio have negative effects on farmland values.     

Time is not money

In an ultimatum bargaining experiment, we study how subjects bargain over the returns to their investments of money and time. The most notable finding is that a third of the subjects demand no compensation for their time investments, whereas almost all subjects demand compensation for equally costly monetary investments.     

Predicting long-run risk factors of stock returns: Evidence from Australia

This study utilises the stock market data provided by the Australian Equity Database to analyse the long-run relationship between Australian stock returns and key macroeconomic variables over the period 1926–2017. To measure the diverse risk factors in the stock market, we examine the possible determinants in four main categories: real, financial, domestic and international. Our results reveal that historical stock returns are strongly connected to financial and international factors as compared to real and domestic factors. Both the 1973–1974 OPEC Oil Price Crisis and 2007–2008 Global Financial Crisis had dampening effects on stock returns. There is a positive association between the US and Australian stock markets in the long-run. These findings on stock market dynamics and their linkages with domestic and international macroeconomic policy changes in the long-run have important implications for traders and practitioners.     

Asymmetric effects of industrial production,money supply and exchange rate changes on stock returns in Turkey

The aim of this article is twofold: First, it examines the asymmetric effects of industrial production, money supply and RER on stock returns in Turkey by using the non-linear autoregressive distributed lag (NARDL) model over the periods of 1994:01–2017:05 and 2002:01–2017:05. Second, it tries to determine whether there is a change of these macroeconomic variables’ effects on stock returns after the 2001 financial crisis since after 2002 period represents a structural break from the past in terms of economic, political and macroeconomic policy approaches. The study finds that the effects of the changes in industrial production, money supply and RER on stock returns are asymmetric, and the asymmetries are larger after the 2002 subsample compared to the full sample period. The empirical results further suggest that tight monetary policies appear to retard the stock returns more than easy monetary policies that stimulate them.     

Pension funds' allocations to hedge funds: an empirical analysis of US and Canadian defined benefit plans

This article investigates the characteristics of US and Canadian pension funds that allocate assets to hedge funds. The typical pension fund that invests in hedge funds is a large sophisticated pension fund that diversifies its portfolio across numerous classes of investments, private equity in particular, uses a core-satellite organization and has access to low delegation costs for alternative assets. Moreover, we find that pension funds investing in hedge funds significantly obtained higher global returns.     

Behavioral rules in the distribution of sectoral investments in Hungary, 1951–1980

An attempt is made to determine empirically the basic criteria for the distribution of the available investment funds among claimants, i.e., among firms or sectors of the Hungarian economy. Time series of investments in the 1951–1980 period and behavioral equations show that investments were determined by two simple rules that were applied at the same time in virtually all sectors: (a) investments were adjusted instantaneously and unconditionally to macroeconomic tensions; (b) the sectoral distribution of investments remained relatively stable.     

The Impact of Foreign Aid Linked to Infrastructure and Pollution Abatement

This paper studies the macroeconomic effects of foreign aid taking into account environmental quality. We develop a dynamic equilibrium model in which public investments in both infrastructure and pollution abatement can be co‐financed using domestic resources and international aid. We consider untied aid, aid fully tied to either infrastructure or abatement and aid equally tied to both expenditures. We find that when the extent to which agents are affected by environmental problems is taken into account, then, regardless of the chances of substitution between factors, transfers linked to both infrastructure and pollution abatement may be the best welfare‐enhancing alternative.     

Valuing farmland with multiple quasi-fixed inputs

This study examines the impact of multiple quasi-fixed assets on the imputed returns to farmland. The results indicate that the presence of additional quasi-fixed assets causes the true shadow value of farmland to deviate from its imputed value. The results also indicate that when the potential existence of multiple quasi-fixed assets is explicitly modelled, the shadow value of farmland approaches reported cash rental values.     

The nonlinear multidimensional relationship between stock returns and the macroeconomy

We use nonparametric dimension-reduction methods to extract from a set of 15 macroeconomic variables the risk factors that are priced in the stock market. The dominant factor moves with the business cycle but, because it is a nonlinear function of observed macroeconomic variables, it captures a rich set of interactions. Low-credit risk and low-inflationary expectations have a greater positive effect on stock returns when leading macroeconomic indicators are high relative to current economic activity, i.e. early in the business cycle as the economy emerges from recession. High-stock returns also arise in periods when the economy is booming relative to its leading indicators, but such periods tend to portend crashes.     

Equilibrium Unemployment Dynamics

The global dynamics of Pissarides' (1990) equilibrium model of aggregate unemployment are studied in the case of increasing returns to scale in production and constant returns to scale in the matching process. An equilibrium is a dynamic path for the aggregate number of matches generated by best-response search and recruiting investment decisions under rational expectations. Necessary and sufficient conditions for multiple equilibria, including limit cycles, are derived, and illustrative examples are computed. The application of saddle-loop bifurcation theory is a novel feature of the analysis. Since one equilibrium Pareto dominates all the others, a macroeconomic coordination problem exists.     

Predictability of sustainable investments and the role of uncertainty: evidence from a non-parametric causality-in-quantiles test

In this article, we examine sustainable investments returns predictability based on the U.S. Dow Jones Sustainability Index (DJSI) and a wide set of uncertainty and financial distress indicators for the period 2002:01–2014:12. To this end, we employ a novel non-parametric causality-in-quantile approach that captures non-linearities in returns distribution. Based on our findings we conclude that the aggregate economic policy uncertainty (EPU) indicator and some components have predictive ability for real returns of the U.S. sustainable investments index. Moreover, if we split our sample to before and after the global financial crisis our results suggest that predictors carry causal information for real returns only in the after-crisis period. Finally, some marginal evidence of predictability from sovereign debt is also observed at the lower and upper ends of the conditional distribution of the real returns of sustainable investments. Our results might entail policy implications for investors and market authorities.     

The Pricing of Italian Equity Returns

In this paper, we investigate the relationship between common risk factors and average returns for Italian stocks. Our research has identified the Italian stock market's economic variables by using the results from factor analyses and time series regressions. We study several multi‐factor models combining the relevant macroeconomic variables with the mimicking equity portfolios SMB (small minus big) and HML (high minus low) proposed by Fama and French (1993). The key question we want to ask ourselves, is whether the influential role of the size and book‐to‐market equity factors in explaining average stock returns can stand up well when competing with some macroeconomic factors. In other words, do stock returns carry some risk premium that is independent of either the market return or the economic forces that underlie the common variation in returns? Our empirical work estimates risk premiums using both traditional two‐pass procedures and one‐pass (full information) methodologies. We show that only the market index and variables linked to interest rate shifts are consistently priced in the Italian stock returns. The role of other factors, and in particular both the size and the price‐to book ratio, are crucially dependent on the estimation procedure. (J.E.L.: G11, G12).     

Innovation and productivity in family firms: evidence from a sample of European firms

ABSTRACT

Using firm-level data, we estimate the returns to R&D investments for a sample of European manufacturing firms over the period 2007–2009. Results confirm that R&D efforts are positively related to productivity regardless of firm type (family or nonfamily firms). Additionally, we find that family firms invested more in R&D than nonfamily firms, but the returns to their R&D investments are low, emphasizing that they have a lower capacity to translate R&D investments into economic gains.     

Corporate sector liability dollarization and exchange rate balance sheet effect in Turkey

In this study, we investigate the causes and balance sheet effect consequences of Liability Dollarization (LD) of nonfinancial sectors in Turkey. The dynamic panel data Generalized Method of Moments (GMM) results suggest that both sector specific and macroeconomic variables are significant in explaining the corporate sector LD. Industries appear to partially match the currency composition of their debt with their income streams. Devaluations are found to be contractionary, in terms of investments and profits, for sectors with higher LD. Macroeconomic instability affects the performance of the industries negatively. Our results also stress the importance of strong macroeconomic policy stance for an endogenous dedollarization process.