OPTIMAL INVESTMENT STRATEGIES FOR CONTROLLING DRAWDOWNS

We analyze the optimal risky investment policy for an investor who, at each point in time, wants to lose no more than a fixed percentage of the maximum value his wealth has achieved up to that time. In particular, if M _t is the maximum level of wealth W attained on or before time t , then the constraint imposed on his portfolio choice is that W_tα M _t, where α is an exogenous number betweenα O and 1. We show that, for constant relative risk aversion utility functions, the optimal policy involves an investment in risky assets at time t in proportion to the "surplus" W _t - α M _t. the optimal policy may appear similar to the constant-proportion portfolio insurance policy analyzed in Black and Perold (1987) and Grossman and Vila (1989). However, in those papers, the investor keeps his wealth above a nonstochastic floor F instead of a stochastic floor α M _t. the stochastic character of the floor studied here has interesting effects on the investment policy in states of nature when wealth is at an all-time high; i.e., when Wt = M _t. It can be shown that at W _t= M _t, α M _t is expected to grow at a faster rate than W _t, and therefore the investment in the risky asset can be expected to fall. We also show that the investment in the risky asset can be expected to rise when W _t is close to α M _t. We conjecture that in an equilibrium model the stochastic character of the floor creates "resistance" levels as the market approaches an all-time high (because of the reluctance of investors to take more risk when W _t= M _t).     

Leadership and group size: An experiment

Our experimental results suggest that the effectiveness of leading by example decreases with group size. The discrepancy between the leaders' and followers' incentives increases with group size. Thus, as group size increases, followers more often refuse to follow their leaders.     

Divorce and female labor force participation: Evidence from times-series data and cointegration

The divorce rate in the United States has increased over the last 40 years. This increase was accompanied both by growing female labor force participation and rising female income. These changes were accompanied by a significant reduction in the birth rate for married women. This article uses time-series data and cointegration techniques to determine the direction of causality between these variables. Analysis of the impulse functions show that the divorce rate will increase if either female labor force participation or income increases. Positive innovations to the divorce rate increase the labor force participation rate of married women. Rising levels of income lead to greater female participation in the labor market.