Nonlinearity and Flight‐to‐Safety in the Risk‐Return Trade‐Off for Stocks and Bonds

We document a highly significant, strongly nonlinear dependence of stock and bond returns on past equity market volatility as measured by the VIX. We propose a new estimator for the shape of the nonlinear forecasting relationship that exploits variation in the cross‐section of returns. The nonlinearities are mirror images for stocks and bonds, revealing flight‐to‐safety: expected returns increase for stocks when volatility increases from moderate to high levels while they decline for Treasuries. These findings provide support for dynamic asset pricing theories in which the price of risk is a nonlinear function of market volatility.     

NUMERICAL SIMULATION OF NONOPTIMAL DYNAMIC EQUILIBRIUM MODELS

In this article, we propose a recursive equilibrium algorithm for the numerical simulation of nonoptimal dynamic economies. This algorithm builds upon a convergent operator over an expanded set of state variables. The fixed point of this operator defines the set of all Markovian equilibria. We study approximation properties of the operator. We also apply our recursive equilibrium algorithm to various models with heterogeneous agents, incomplete financial markets, endogenous and exogenous borrowing constraints, taxes, and money.     

Worker Pay Protection: Implications for Labor's Political Spending and Voice

Labor's participation in politics requires money. Within legal restrictions, unions use compulsory dues to pay for much of their involvement. Such usage has continually raised controversy, leading to a host of U.S. Supreme Court decisions to give nonmember dues-payers the right to object to union political spending. We examine the current legal framework and are the first to report comprehensive data on union political spending financed from dues. We estimate the potential impact of a national "worker paycheck protection" law on labor's political spending. With the potential to reduce money available to finance union involvement in politics, such a law may lessen the ability of labor to have its voice heard by lawmakers, especially in the face of shrinking density in the workforce. The importance of this is demonstrated by the large role unions played in the 2008 congressional and presidential elections. Despite Democratic victories in that historic year, "paycheck protection" is likely to loom large, fueled by efforts to enact the Employee Free Choice Act.     

Union Members' Usage of IT

An important issue in assessing the potential benefits of information technology (IT) as a tool for increasing labor's effectiveness is union members' use of IT. Using 2003 Current Population Survey data, we examine the union members' IT and Internet usage at home and work. We find that union members are more intense users of IT at work than nonunionized employees and that high-intensity IT users constitute about one-third of the union sample.