Multimarket Trading and Liquidity: Theory and Evidence

We develop a new model of multimarket trading to explain the differences in the foreign share of trading volume of internationally cross‐listed stocks. The model predicts that the trading volume of a cross‐listed stock is proportionally higher on the exchange in which the cross‐listed asset returns have greater correlation with returns of other assets traded on that market. We find robust empirical support for this prediction using stock return and volume data on 251 non‐U.S. stocks cross‐listed on major U.S. exchanges.     

Reinforcement Learning and Savings Behavior

We show that individual investors over‐extrapolate from their personal experience when making savings decisions. Investors who experience particularly rewarding outcomes from 401(k) saving—a high average and/or low variance return—increase their 401(k) savings rate more than investors who have less rewarding experiences. This finding is not driven by aggregate time‐series shocks, income effects, rational learning about investing skill, investor fixed effects, or time‐varying investor‐level heterogeneity that is correlated with portfolio allocations to stock, bond, and cash asset classes. We discuss implications for the equity premium puzzle and interventions aimed at improving household financial outcomes.     

Savings and the Budget

The fall in the personal sector savings ratio to a record low last year has been a major factor behind the rapid growth of domestic demand in the past two years and the associated deterioration in the current account. It is also a major uncertainty in the Chancellor's Budget judgement. Existing econometric relationships for the consumption function have failed to predict the fall in personal savings over the past few years. Possible explanations include statistical error, the effects of financial deregulation, the housing boom, expectations of higher growth in incomes, and demographic influences. In this Viewpoint, we report on a new consumption function that successfully explains the decline in savings. It provides evidence of a major demographic influence resulting from the decline in the proportion of the population in the 45–64 age cohort, the main savers in society. Subsidiary effects arise from the boom in house prices, and statistical mis-measurement. The equation predicts an appreciable revival of savings over the next few years as the 45–64 age cohort grows again. These shifts in demographic structure reflect the after-effects of the Second World War. This new evidence suggests that the Chancellor has done quite enough to ensure a slowdown in consumption, and that he would be ill-advised to heed calls for special measures to boost savings. By contrast, well conceived tax changes that remove microeconomic distortions in the tax system (perhaps moving in the direction of an expenditure tax) would improve the tax structure, and may well increase the scope for tax cuts in future budgets. Our new consumption function also lends weight to the Chancellor's argument that the current account deficit is not a source of concern, insofar as it arises from a shift in savings associated with demographic changes that will be reversed in due course.     

The Integration of Insurance and Taxes in Corporate Pension Strategy

This paper examines the implications of the joint effects of insurance and taxes for the optimal corporate pension strategy. It is shown that neither the “mini-max” nor the “maxi-min” strategy advocated by previous authors is necessarily best in corporate pension management. In the presence of capital market imperfections, the analysis via a single-period contingent-claims model indicates that optimal corporate pension strategy in both asset-allocation and funding decisions can be a noncorner interior solution.