The international transmission of risk: Causal relations among developed and emerging countries’ term premia

We study the effect of shocks to the United States government bonds term premium on Latin American government bonds term premia. For doing so, we compute dynamic multipliers. Our main findings indicate that Latin American countries’ term premia respond permanently to changes in United States term premium. However, impulse-response functions vary depending on the country and particular time-length for which premia are computed. Responses are larger for Brazil and Colombia. Mexico exhibits the lowest responses for the four economies in our study. We discuss some political economy implications of our main findings.     

Stock volatility and pension funds under an individual capitalization-based system

The existence of feedback effects between volatility and institutional investor holdings has been extensively studied for the United States. This article contributes to the literature by investigating this issue for Pension Fund Administrators (PFAs) in Chile. To this end, data on PFAs' holdings is gathered for 42 firms actively traded on the Santiago Stock Exchange during December 2002–July 2008. The main findings of this study are the following. First, an increase in PFAs' stock holdings translates into a mild effect on stock return volatility. Second, an increase in stock return volatility leads to a moderate decrease in PFAs' stock holdings, suggesting PFAs' preference for safer stocks. The key policy implication of these conclusions is that PFAs' stock trading does not have a destabilizing impact on the domestic stock market.     

Equilibria under monetary and fiscal policy interactions in a portfolio choice model

This paper studies how the presence of income-taxes changes the properties of general equilibrium models with monetary and fiscal policy interactions. It is found that from a global perspective, the only policy regime that leads to a unique equilibrium is one where fiscal policy is active, i.e. the fiscal theory of the price level regime in Sims (1994). From a local perspective, there are three regimes. In particular, and relative to the previous literature following Leeper (1991), a new third regime exists where a passive fiscal rule combined with a passive monetary rule can still deliver determinacy where the same area of the parameter space would lead to multiple solutions if taxes were lump sum. To obtain the size of the new regime, the paper characterizes analytically the extent to which tax cuts are self-financing and how the distortionary tax Laffer curve looks near the steady state. In the new regime, monetary and fiscal backstops are brought into play so as to rule out off equilibrium dynamics, and inflation can temporarily increase in order to increase seigniorage revenues. With this flexibility, the monetary policy is consistent with the real debt remaining bounded, and the arithmetic that follows is monetarist and unpleasant in the sense of Sargent and Wallace (1981).     

From Custer to Thermopylae: Last stand behavior in multi-stage contests

In a multi-stage contest known as a two-player race, players display two fundamental behaviors: (1) the laggard will make a last stand in order to avoid the cost of losing; and (2) the player who is ahead will defend his lead if it is threatened. Last stand behavior, in particular, contrasts with previous research where the underdog simply gives up. The distinctive results are achieved by introducing losing penalties and discounting into the racing environment. This framework permits the momentum effect, typically ascribed to the winner of early stages, to be more thoroughly examined. I study the likelihood that the underdog will catch up. I find that neck-and-neck races are common when the losing penalty is large relative to the winning prize, while landslide victories occur when the prize is relatively large. Closed-form solutions are given for the case where players have a common winning prize and losing penalty.     

Estimating the elasticity of intertemporal substitution with leverage

Following the recent literature on intermediary asset pricing models, this paper argues that the marginal utility of wealth of financial intermediaries can be used to generate enough volatility and counter-cyclicality on the recursive preference-based stochastic discount factor. Hence, a dynamic econometric strategy of an asset pricing model with the market portfolio return and the leverage growth of financial intermediaries allows for a sensible economic estimate of the elasticity of intertemporal substitution. On the contrary, the same framework with alternative measures of consumption produces extremely poor economic results.     

Complexity of occupational health in the hospitality industry: Dynamic simulation modeling to advance immigrant worker health

Hispanic immigrant workers, who are heavily employed in low-skill/low-wage lodging and foodservice jobs, work in environments that induce disproportionate health and safety risks. Traditional research approaches have produced only partial insights into the risks of Hispanic immigrant hospitality sector workers, failing to fully capture the underlying dynamic, structural, and systemic complexity of hospitality worker health. This paper has three objectives: (1) to outline the multifaceted and disproportionate health and safety risks of these workers; (2) to introduce a systems paradigm with potential to contribute to more promising approaches in occupational health and safety research in tourism and hospitality; and (3) to elaborate on how computational simulation modeling can fortify occupational health and safety research in tourism and hospitality, and offer a heuristic example of a risk prevention model among Hispanic immigrant hospitality workers rooted in a stakeholder-based system dynamics modeling approach.     

Price competition,free entry,and welfare in congested markets

In this paper we study the problem of price competition and free entry in congested markets. In particular, we consider a network with multiple origins and a common destination node, where each link is owned by a firm that sets prices in order to maximize profits, whereas users want to minimize the total cost they face, which is given by the congestion cost plus the prices set by firms. In this environment, we introduce the notion of Markovian Traffic Equilibrium to establish the existence and uniqueness of a pure strategy price equilibrium, without assuming that the demand functions are concave nor imposing particular functional forms for the latency functions. We derive explicit conditions to guarantee existence and uniqueness of equilibria. Given this existence and uniqueness result, we apply our framework to study entry decisions and welfare, and establish that in congested markets with free entry, the number of firms exceeds the social optimum.     

Minimizing CVaR in global dynamic hedging with transaction costs

This study develops a global derivatives hedging methodology which takes into account the presence of transaction costs. It extends the Hodges and Neuberger [Rev. Futures Markets, 1989, 8, 222–239] framework in two ways. First, to reduce the occurrence of extreme losses, the expected utility is replaced by the conditional Value-at-Risk (CVaR) coherent risk measure as the objective function. Second, the normality assumption for the underlying asset returns is relaxed: general distributions are considered to improve the realism of the model and to be consistent with fat tails observed empirically. Dynamic programming is used to solve the hedging problem. The CVaR minimization objective is shown to be part of a time-consistent framework. Simulations with parameters estimated from the S&P 500 financial time series show the superiority of the proposed hedging method over multiple benchmarks from the literature in terms of tail risk reduction.     

Optimal consumption under uncertainty,liquidity constraints,and bounded rationality

I study how boundedly rational agents can learn a “good” solution to an infinite horizon optimal consumption problem under uncertainty and liquidity constraints. Using an empirically plausible theory of learning I propose a class of adaptive learning algorithms that agents might use to choose a consumption rule. I show that the algorithm always has a globally asymptotically stable consumption rule, which is optimal. Additionally, I present extensions of the model to finite horizon settings, where agents have finite lives and life-cycle income patterns. This provides a simple and parsimonious model of consumption for large agent based models.