Intertemporal Asset Pricing Without Consumption Data

This paper proposes a new way to generalize the insights of static asset pricing theory to a multi-period setting. The paper uses a loglinear approximation to the budget constraint to substitute out consumption from a standard intertemporal asset pricing model. In a homoskedastic lognormal selling, the consumption-wealth ratio is shown to depend on the elasticity of intertemporal substitution in consumption, while asset risk premia are determined by the coefficient of relative risk aversion. Risk premia are related to the covariances of asset returns with the market return and with news about the discounted value of all future market returns.

Consumption and Hedging in Oil Importing Developing Countries

We study the consumption and hedging strategy of an oil-importing developing country that faces multiple crude oil shocks. In our model, developing countries have two particular characteristics: their economies are mainly driven by natural resources and their technologies are less e cient in energy usage. The natural resource exports can be correlated with the crude oil shocks. The country can hedge against the crude oil uncertainty by taking long/short positions in existing crude oil futures contracts. We find that both, ine ciencies in energy usage and shocks to the crude oil price, lower the productivity of capital. This generates a negative income e ect and a positive substitution e ect, because today's consumption is relatively cheaper than tomorrow's consumption. Optimal consumption of the country depends on the magnitudes of these e ects and on its risk-aversion degree. Shocks to other crude oil factors, such as the convenience yield, are also studied. We nd that the persistence of the shocks magni es the income and substitution e ects on consumption, thus a ecting also the hedging strategy of the country. The demand for futures contracts is decomposed in a myopic demand, a pure hedging term and productive hedging demands. These hedging demands arise to hedge against changes in the productivity of capital due to changes in crude oil spot prices. We calibrate the model for Chile and study up to what extent the country's copper exports can be used to hedge the crude oil risk.Crude oil prices, convenience yields, risk management, emerging markets, government policy, two-sector economies

An alternative unifying measure of welfare gains from risk-sharing

Following Lucas's (1987) standard approach, welfare gains from international risk-sharing have been measured as the percentage increase in consumption levels that leaves individuals indifferent between, autarky and risk-sharing. The author proposes to measure welfare gains as the increase in consumption growth, instead of consumption levels. When the consumption process is non-stationary, the author's proposed measure has several attractive features: it does not depend on the horizon, and it is robust to alternative specifications of the consumption stochastic processes (from geometric Brownian processes, to Orstein-Ulhenbeck mean-reverting processes), and preferences (from constant relative risk aversion preferences to Kreps-Porteus preferences). The author then uses this measure to estimate potential welfare gains from international risk-sharing for a representative U.S. consumer. The author finds that if international risk-sharing leads only to a complete elimination of aggregate consumption volatility (with no impact on consumption growth), it represents gains to a U.S. consumer of only $12 a year on average. But if international risk-sharing also permits an increase in consumption growth, it may have a sizable impact on welfare. Each 0.5 percentage point increase in consumption growth, represents gains to a U.S. consumer of about$ 160 a year on average.Consumption,Financial Intermediation,Economic Theory&Research,Environmental Economics&Policies,Insurance&Risk Mitigation,Economic Theory&Research,Environmental Economics&Policies,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Inequality,Financial Intermediation

Price Bubbles of New-Technology IPOs

Asset pricing models with atomistic agents typically relax assumptions concerning rationality and/or homogenous information in order to track endogenous bubbles. In this model, identically informed rational agents hold a Perceived Law of Motion (PLM) for a single new technology asset at IPO, yet they differ with respect to risk aversion. By mapping risk preferences to strategies, we use marginal supply and demand functions to solve for the PLM if REE holds. By relaxing the assumption of complete knowledge of agent\u27s tastes and wealth, post-IPO bubbles emerge where the Actual Law of Motion is an amplification (bubble) of the price processes vs. the PLM

Baby Boom, Population Aging, and Capital Markets

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Optimal portfolio choice under loss aversion

Prospect theory and loss aversion play a dominant role in behavioral finance. In this paper we derive closed-form solutions for optimal portfolio choice under loss aversion. When confronted with gains a loss averse investor behaves similar to a portfolio insurer. When confronted with losses, the investor aims at maximizing the probability that terminal wealth exceeds his aspiration level. Our analysis indicates that a representative agent model with loss aversion cannot resolve the equity premium puzzle. We also extend the martingale methodology to allow for more general utility functions and provide a simple approach to incorporate skewed and fat-tailed return distributions

Nonparametric Regression on Latent Covariates with an Application to Semiparametric GARCH-in-Mean Models

We consider time series models in which the conditional mean of the response variable given the past depends on latent covariates. We assume that the covariates can be estimated consistently and use an iterative nonparametric kernel smoothing procedure for estimating the conditional mean function. The covariates are assumed to depend (non)parametrically on past values of the covariates and of the observations. Our procedure is based on iterative ¯ts of the covariates and nonparametric kernel smoothing of the conditional mean function. An asymptotic theory for the resulting kernel estimator is developed and the estimator is used for testing parametric speci¯cations of the mean function. Our leading example is a semiparametric class of GARCH-in-Mean models. In this set-up our procedure provides a formal framework for testing economic theories that postulate functional relations between macroeconomic or ¯nancial variables and their conditional second moments. We illustrate the usefulness of the methodology by testing the linear risk-return relation predicted by the ICAPM.Speci¯cation test, GARCH-M, semiparametric regression, risk premium, ICAPM.

Pricing Kernel Specification for User Cost of Monetary Assets

This paper studies the nonlinear asset pricing kernel approximation by using orthonormal polynomials of state variables in which the pricing kernel specification is restricted by preference theory. We approximate the true asset pricing kernel for monetary assets by considering consumption-based and Fama-French asset pricing models in which the consumer is assumed to have inter-temporally non-separable preference. We study the classical consumption-based kernels and multifactor (Fama-French) kernels in our asset pricing models. Our results suggest that the multi-factor pricing kernels with nonlinearity and non-separable utility specifications have significantly improved performance