A note on the notion of “theory”

Quality & Quantity -     

The distributive impact of terms of trade shocks: The case of the oil price changes in Russia

The halving of oil prices, during a short period between 2014 and 2015, has generated major terms of trade losses for oil exporting countries. This terms of trade shock has economy‐wide effects and significant distributive impacts. This paper, using a macro‐micro simulation model, describes and quantifies the channels of transmission from the drop of oil prices, to changes in welfare distribution at the household level for the case of the Russian Federation. The oil price reduction generates a reverse Dutch disease impacting sectoral employment, factor returns and consumption prices. It causes a contraction of employment and wages in more skill‐intensive (non‐tradable) sectors, and a reduction in consumption prices that is more pronounced for non‐food than for food goods. When these shifts are mapped to changes in incomes at the micro level, all households are affected. Poverty rates increase by 1 to 4 percentage points, depending on the poverty line used. At the US$ 10 a day threshold, 4.1 million additional people fall into poverty. Along the consumption distribution, richer people are affected more than those in the bottom 40%. However, this minor progressive impact may be reversed due to increases in unemployment and cuts in social programmes.     

Diverse beliefs and time variability of risk premia

Why do risk premia vary over time? We examine this problem theoretically and empirically by studying the effect of market belief on risk premia. Individual belief is taken as a fundamental primitive state variable. Market belief is observable; it is central to the empirical evaluation and we show how to measure it. Our asset pricing model is familiar from the noisy REE literature but we adapt it to an economy with diverse beliefs. We derive equilibrium asset prices and implied risk premium. Our approach permits a closed form solution of prices; hence we trace the exact effect of market belief on the time variability of asset prices and risk premia. We test empirically the theoretical conclusions. Our main result is that, above the effect of business cycles on risk premia, fluctuations in market belief have significant independent effect on the time variability of risk premia. We study the premia on long positions in Federal Funds Futures, 3- and 6-month Treasury Bills (T-Bills). The annual mean risk premium on holding such assets for 1?C12?months is about 40?C60 basis points and we find that, on average, the component of market belief in the risk premium exceeds 50% of the mean. Since time variability of market belief is large, this component frequently exceeds 50% of the mean premium. This component is larger the shorter is the holding period of an asset and it dominates the premium for very short holding returns of less than 2?months. As to the structure of the premium we show that when the market holds abnormally favorable belief about the future payoff of an asset the market views the long position as less risky hence the risk premium on that asset declines. More generally, periods of market optimism (i.e. ??bull?? markets) are shown to be periods when the market risk premium is low while in periods of pessimism (i.e. ??bear?? markets) the market??s risk premium is high. Fluctuations in risk premia are thus inversely related to the degree of market optimism about future prospects of asset payoffs. This effect is strong and economically very significant.     

Do Upgradings and Downgradings Convey Information? An Event Study of the French Bond Market

This study has two purposes:

• 1 

  To present an alternative method for the study of events related to bond spreads applicable when only a small number of events is available;

       

Individual Differences in the Disposition Effect

The authors model the role of personality traits in explaining the disposition effect building on realization utility theory and Big 5 model and moving from an aggregate level to interindividual differences. The experimental analysis, combining NEO Revised Personality Inventory measures with individual financial data from a trading simulation run by 230 individuals in China and Italy, shows that the disposition effect is driven by 2 distinct psychological processes, one related to holding losers and the other to selling winners. These 2 behavioral mechanisms are uncorrelated and influenced by different personality traits. Controlling for different demographic variables, the authors show (a) a greater sensitivity of the rewarding system that motivates “extroverts” to quickly sell the stock at gain to receive a burst of utility; (b) a tendency for “conscientious” subjects to suppress impulsivity, patiently waiting for higher cumulative returns; and (c) the importance of “openness to experience” to better value information to achieve higher outcomes.     

Attitudes and Preferences of Kosovar Consumer Segments Toward Quality Attributes of Milk and Dairy Products

ABSTRACT

The dairy market is one of the fastest growing agri-food sectors in Kosovo, yet the farm structure is fragmented. The level of productivity is lower compared with European Union levels and shows potential for improvements. The consumption of dairy products is expected to rise due to income growth and segmentation of consumers that would reflect different preferences for low-fat or zero-fat products, products with natural additives, and so on. On the market level, a significant share of the consumed milk and dairy products is imported. This study aims to better understand attitudes and preferences of Kosovar consumer segments toward milk and dairy products. A quantitative survey with 300 consumers was conducted in major Kosovo cities. Applying a reduced version of the Food Related Lifestyle instrument identified three distinct consumer segments: the conservative consumer segment, the socially oriented foodie, and the information-seeking eco-consumer. The latter two segments are especially open to trying new food products and actively search information about food. All three consumer segments show strong consumer patriotism by believing that domestic milk and cheese are safer than imported products and are of higher quality. This indicates the strong market potential for dairy farmers and companies in the Kosovo, which should develop new food products having these segments in mind. The authors explore the strategies that farmers and companies should use to better target these consumer groups and gain greater access to desirable segments.     

A quantitative view on policymakers’ goal,institutions and tax evasion

We develop a general theoretical model to compare two different policymakers both facing tax evasion. Policymakers differs in that they aim to maximize either the fiscal revenues ( $T$ ) as in a social-democracy as, e.g., Sweden, or the GDP as in a capitalistic country as, e.g., the USA. Both Bureaus can manoeuvre the tax rate and the share of tax receipts spent to fight the tax evasion rather than to increase the public capital. Our model merges the indications of two distinct, and sometimes conflicting, approaches to the analysis of tax evasion in that reconciling them. We also find that the feedbacks between the private and public sector are linked to some Laffer-type relationships usually unexplored by the existing literature. As compared to capitalistic systems, then, our results show that social-democracies end up imposing higher tax rates and, possibly, more pervasive regulations. Consequently, they are likely to suffer from larger tax-evasion-to-GDP ratios. This notwithstanding, social-democracies spend relatively more to contrast tax dodgers. On the other hand, $T$ -maximizing governments have better institutional settings and greater employment rates. Whichever the preferred target, however, no policymaker is able to erase totally the tax evasion, which may explain why this latter is so pervasive and persistent even among the richest countries.