What Does It Cost To Guarantee Returns?

The financial crisis has dramatically demonstrated how a collapse in equity prices can decimate retirement accounts. The crisis highlights the fragility of existing 401(k) plans as the only supplement to Social Security and has sparked proposals to reform the retirement income system. One component of such a system could be a new tier of retirement accounts. Given the declines in the share of earnings Social Security will replace, these accounts would bolster replacement rates for low-wage workers and increase the security of middle- and upper-wage workers who increasingly rely on their 401(k) plans to supplement Social Security. However, these new accounts could face the same risk of collapse in value seen over the past year in 401(k)s. So policymakers may find some form of guaranteed return or risk sharing desirable to prevent huge variations in outcomes. This brief explores the feasible range and the cost of the first option – guarantees...

Returns to Inventors

A key input to inventive activity is human capital. Hence it is important to understand the monetary incentives of inventors. We estimate the effect of patented inventions on individual earnings by linking data on U.S. patents and their inventors to Finnish employer-employee data. Returns are heterogeneous: Inventors get a temporary reward of 3% of annual earnings for a patent grant and for highly-cited patents a longer-lasting premium of 30% in earnings three years later. Similar medium-term premia accrue to inventors who initially hold the patent rights, although they forego earnings at the time of the grant

Boomerang returns unexpectedly

Experimental study of the anisotropy in the cosmic microwave background (CMB) is gathering momentum. The eagerly awaited Boomerang results have lived up to expectations. They provide convincing evidence in favor of the standard paradigm: the Universe is close to flat and with primordial fluctuations which are redolent of inflation. Further scrutiny reveals something even more exciting however -- two hints that there may be some unforeseen physical effects. Firstly the primary acoustic peak appears at slightly larger scales than expected. Although this may be explicable through a combination of mundane effects, we suggest it is also prudent to consider the possibility that the Universe might be marginally closed. The other hint is provided by a second peak which appears less prominent than expected. This may indicate one of a number of possibilities, including increased damping length or tilted initial conditions, but also breaking of coherence or features in the initial power spectrum. Further data should test whether the current concordance model needs only to be tweaked, or to be enhanced in some fundamental way.Comment: 11 pages, 3 figures, final version accepted by Ap

Multifactor consumption based asset pricing model of the UK stock market: The US stock market as a wealth reference

Copyright @ 2011 University of BirminghamHere a multifactor model of UK stock returns is developed, replac- ingHere a multifactor model of UK stock returns is developed, replacing the conventional consumption habit reference by a relation that depends on US wealth. Two step Instrumental Variables and Generalized Method of Moments estimators are applied to reduce the impact of weak instruments. The standard errors are corrected for the generated regressor problem and the model is found to explain UK excess returns by UK consumption growth and expected US excess returns. Hence, controlling for nominal effects by subtracting a risk free rate and conditioning on real US excess returns provides an appealing explanation of the equity premium puzzle. US excess returns. Hence, controlling for nominal e¤ects by subtracting a risk free rate and conditioning on real US excess returns provides an appealing explanation of the equity premium puzzle

Property fund flows and returns

This study is concerned with the impacts on property returns from property fund flows, and with the possibility of a reverse transmission from property fund flows to property returns. In other words this study investigates whether property returns “cause” fund flow changes, or whether fund flow changes “cause” property returns, or causality works in both directions

The fine structure of volatility feedback II: overnight and intra-day effects

We decompose, within an ARCH framework, the daily volatility of stocks into overnight and intra-day contributions. We find, as perhaps expected, that the overnight and intra-day returns behave completely differently. For example, while past intra-day returns affect equally the future intra-day and overnight volatilities, past overnight returns have a weak effect on future intra-day volatilities (except for the very next one) but impact substantially future overnight volatilities. The exogenous component of overnight volatilities is found to be close to zero, which means that the lion's share of overnight volatility comes from feedback effects. The residual kurtosis of returns is small for intra-day returns but infinite for overnight returns. We provide a plausible interpretation for these findings, and show that our Intra-Day/Overnight model significantly outperforms the standard ARCH framework based on daily returns for Out-of-Sample predictions