Overconfidence in financial markets and consumption over the life cycle

Overconfidence is a widely documented phenomenon. Empirical evidence reveal two types of overconfidence in financial markets: investors both overestimate the average rate of return to their assets and underestimate uncertainty associated with the return. This paper explores implications of overconfidence in financial markets for consumption over the life cycle. The authors obtain a closed-form solution to the time-inconsistent problem facing an overconfident investor/consumer who has a CRRA utility function. They use this solution to show that overestimation of the mean return gives rise to a hump in consumption during the work life if and only if the elasticity of intertemporal substitution in consumption is less than unit. They find that underestimation of uncertainty has little effect on the long-run average behavior of consumption over the work life. Their calibrated model produces a hump-shaped work-life consumption profile with both the age and the amplitude of peak consumption consistent with empirical observations.Consumption (Economics) ; Financial markets

Intermediated quantities and returns

The difference between average borrowing and lending rates in the United States is over 2 percent. In spite of this large difference, there is over 1.7 times GNP in 2007 of intermediated borrowing and lending between households. In this paper a model is developed consistent with these facts. The only difference within an age cohort is preferences for bequests. Individuals with little or no bequest motive are lenders, while individuals with strong bequest motive are borrowers and owners of productive capital. Given no aggregate uncertainty, the return on equity is the same as the household borrowing rate. The government can borrow at the household lending rate, so there is a 2 percent equity premium in our world with no aggregate uncertainty. We examine the distribution and life cycle patterns of asset holding and consumption and find there is large dispersion in asset holdings and little in consumption. ; Updated by Working Paper 685.Equilibrium (Economics) ; Financial markets

Market reaction as an impact of announcement increase fed interest rate in Asian and European area

The purpose of this study is to determine whether there is a difference in the average abnormal return around the date of the announcement of the Fed's interest rate hike in Asia and the European region. The sample of this study was 18 emerging market countries' index indices in Asia and Europe with sample collection techniques using purposive sampling. This study uses One Way Anova analysis techniques and One Sample T-test. The results found that there was no difference in the average abnormal return before and after the announcement of the Fed's interest rate increase. This condition shows that markets in the two regions do not react significantly because markets in Asia and the European region are in an efficient condition in the form of half strong, where the market absorbs information quickly and is reflected in stock prices so there is no difference in the average abnormal return in both regions. The absence of a difference in the average abnormal return is also caused by the uncertainty of the global economy making investors more careful in making investment decisions

Stock Returns and the Term Structure

It is well known that in the postwar period stockreturns have tended to be low when the short term nominal interest rate is high. In this paper I show that more generally the state of the term structure of interest rates predicts stock returns. Risk premia on stocks appear to move closely together with those on 20-year Treasury bonds, while risk premia on Treasury bills move somewhat independently. Average returns on 20-year bonds have been very low relative to average returns on stocks. I use these observations to test some simple asset pricing models. First I consider latent variable models in which betas are constant and risk premia vary with expected returns on a small number of unobservable hedge portfolios. The data strongly reject a single-latent-variable model.The last part of the paper examines the relationship between conditional means and variances of returns on bills, bonds and stocks. Bill returns tend to be high when their conditional variance is high, but there is a perverse negative relationship between stock returns and their conditional variance. A model is estimated which assumes that asset returns are determined by their time-varying betas with a fixed-weight "benchmark" portfolio of bills, bonds and stocks, whose return is proportional to its conditional variance. This portfolio is estimated to place almost all its weight on bills, indicating that uncertainty about nominal interest rates is important in pricing both short- and long-term assets.

Risk-assessment V1.0: A new interactive software to develop risk assessment using MATLAB®

This article presents the use of an interactive computer tool developed in MATLAB® called RISKASSESSMENT v1.0, to perform market risk analysis of commercial products, through the development of cash flow, sensitivity analysis, and SpiderPlot graphics, which allow the identification of the economic-financial equilibrium point of a company. The tool facilitates the reduction of the uncertainty produced in the return on investment due to changes in the economic environment of the sector in which the company operates, through statistical techniques and tools that involve parameters such as the annual effective rate in the Colombian national currency, net present value, internal rate of return, period of recovery of capital, through a sensitivity analysis. To validate the effectiveness of using software in the development of risk analysis, a case study was conducted for an alcohol beverage sales business, where, based on the portfolio containing the product quantity, unit variable cost, sales price, percentage of sales growth and annual sales volume, in addition to detailed information on the initial investment, the cash flow with a 5-year horizon, the net present value, the internal rate of return, the period of capital recovery and the average accounting profitability are calculated. The tool also performs sensitivity analysis and SpiderPlot for each of the products. Finally, the program presented allows to calculate the annual cash flows in a fast and didactic way, which normally requires time and specialized training in a traditional exercise

Risk-assessment V1.0: A new interactive software to develop risk assessment using MATLAB®

This article presents the use of an interactive computer tool developed in MATLAB® called RISKASSESSMENT v1.0, to perform market risk analysis of commercial products, through the development of cash flow, sensitivity analysis, and SpiderPlot graphics, which allow the identification of the economic-financial equilibrium point of a company. The tool facilitates the reduction of the uncertainty produced in the return on investment due to changes in the economic environment of the sector in which the company operates, through statistical techniques and tools that involve parameters such as the annual effective rate in the Colombian national currency, net present value, internal rate of return, period of recovery of capital, through a sensitivity analysis. To validate the effectiveness of using software in the development of risk analysis, a case study was conducted for an alcohol beverage sales business, where, based on the portfolio containing the product quantity, unit variable cost, sales price, percentage of sales growth and annual sales volume, in addition to detailed information on the initial investment, the cash flow with a 5-year horizon, the net present value, the internal rate of return, the period of capital recovery and the average accounting profitability are calculated. The tool also performs sensitivity analysis and SpiderPlot for each of the products. Finally, the program presented allows to calculate the annual cash flows in a fast and didactic way, which normally requires time and specialized training in a traditional exercise

Touch attention Bayesian models for robotic active haptic exploration of heterogeneous surfaces

This work contributes to the development of active haptic exploration strategies of surfaces using robotic hands in environments with an unknown structure. The architecture of the proposed approach consists two main Bayesian models, implementing the touch attention mechanisms of the system. The model πper perceives and discriminates different categories of materials (haptic stimulus) integrating compliance and texture features extracted from haptic sensory data. The model πtar actively infers the next region of the workspace that should be explored by the robotic system, integrating the task information, the permanently updated saliency and uncertainty maps extracted from the perceived haptic stimulus map, as well as, inhibition-of-return mechanisms. The experimental results demonstrate that the Bayesian model πper can be used to discriminate 10 different classes of materials with an average recognition rate higher than 90%. The generalization capability of the proposed models was demonstrated experimentally. The ATLAS robot, in the simulation, was able to perform the following of a discontinuity between two regions made of different materials with a divergence smaller than 1cm (30 trials). The tests were performed in scenarios with 3 different configurations of the discontinuity. The Bayesian models have demonstrated the capability to manage the uncertainty about the structure of the surfaces and sensory noise to make correct motor decisions from haptic percepts

ASSESSMENT OF TORNADO HAZARD MAPS FOR SOUTHERN ONTARIO

Probabilistic quantitative tornado hazard assessment is often based on the consideration that the spatial distribution of tornado occurrence is homogeneous in a region. While this assumption simplifies the analysis, it could over- and under- estimate tornado hazard for regions with lower and higher tomadic activity if an average rate of tornado occurrence is employed. The degree of over- and under-estimation is unknown. This study is focused on the assessment of the impact of spatial inhomogeneity of tornado occurrence on the estimated tornado hazard, and the development of tornado hazard maps for southern Ontario. The obtained results indicate that the tornado hazard at the factoted design wind speed level is much smaller than the wind hazard due to synoptic winds even if the spatial inhomogeneity of tornado occurrence is considered. Furthermore, the results show that the spatial inhomogeneity of tornado occurrence has significant impact on the spatial tornado hazard level, that the return period values of tornado wind speed vary significantly over the considered region, and that the inhomogeneity must be considered in developing probabilistic quantitative tornado hazard maps. Also, an attempt is made to assemble an approach for assessing the tornado hazard considering the uncertainty in the tornado occurrence rate in time and space. The quantification of this uncertainty is carried out by using the hierarchical Bayesian modeling and Markov Chain Monte Carlo technique. Results showed that it is feasible to use such an assembled approach to assess the tornado hazard maps, which incorporate the uncertainty in tornado occurrences

Analysis Of Income And Financial Feasibility Of Capture Fisheries Business In Cilacap Regency (Case Study: Debtor Of Ultra Micro Financing Of Fisheries Sector Kud Mino Saroyo)

Capture fisheries business is a business with high uncertainty because it is strongly influenced by natural factors, namely weather, season, and geographical conditions of the fishing area. Ultra micro credit in the fisheries sector really helps fishermen and coastal communities to access capital but there are still many debtors who experience problems in paying their obligations. Objective: To analyze the income, efficiency and financial feasibility of business capture fisheries run by debtors of ultra-micro financing in the fisheries sector in Cilacap Regency. Data analysis technique: descriptive analysis quantitative analysis of income, efficiency with R/C Ratio, and business financial feasibility with indicators of Net Present Value, Internal Rate of Return, Benefit/Net Cost Ratio, Dynamic Payback Period, and Return on Investment. Results: (1) The average income of capture fisheries for each group ranging from IDR 28,776,100 to IDR 30,800,019 per year. (2) All capture fisheries businesses that are debtors for ultra-micro financing for the fisheries sector in Cilacap Regency are efficient businesses. (3) Capture fisheries business in Cilacap Regency is financially feasible based on the indicators of NPV, IRR, Net B/C, DPP and ROI. Keywords: Capture Fisheries; Income; Efficiency; Business Financial Feasibility; R/C Ratio; NPV; IRR; Net B/C; Dynamic Payback Period; ROI.

Efficient Price Regulations of Networks that have Sunk Costs: Should Caps be Based on Historical or Replacement Costs

Incentive regulation allows decentralised decision-making under regulatory settings that are based upon industry characteristics. This study considers the design of regulatory profit caps and the choice of historical or replacement cost for incentive regulation when there is uncertainty sunk costs and flexibility in the timing of investment. It demonstrates that which of historical or replacement cost regulation is desirable depends upon the sources and extent of supply and demand uncertainties and trends and thereby characteristics of the industry. The welfare optimising level of the cap differs between historical and replacement cost regulation the caps are generally higher than the weighted average cost of capital and welfare is degraded much more if the cap is set below as opposed to above the optimal cap.In the presence of uncertainty and sunk costs investment thresholds that exceed the standard WACC are required to enable investment. The WACC just reflects systematic risk. It does not reflect the probability of bankruptcy or idiosyncratic risks that firms prudently consider when making investment decisions. From society's point of view the WACC is frequently too low to act as an investment hurdle rate. In practice hurdle rates are often distinctly higher than equity holders' average rates of return and much higher than return on debt.We have considered a situation where the firm has no competition. The presence of competition will generally mean that firms' investments are desirably timed from society's point of view although investment will not occur immediately. The imposition of a cap to improve welfare may if it is too tight reduce welfare substantially even relative to the situation of no regulation and no competition. It arises because investment is delayed. In such circumstances the regulator may respond by removing scope for decentralised investment by forcing investment or reaching some regulatory pact with the firm. It is easy to show that such regulation does not remove the issues of specific risks and timing considered in this paper: they are intrinsic to the industry. Unless the regulator agrees to pick up the costs of risks - eg the costs of stranded assets - a reasonable rate of return under regulatory investment requirements should cover the real options that these risks imply.We have focussed on encouraging the optimal timing of sunk investments. While the approach has been cast as provision of the entire network the same approach applies to maintenance of an existing network that is also sunk. Unless maintenance expenditure is allowable in line with the optimal caps considered in this paper networks may deteriorate or require forced maintenance by regulation. The issues are the same