The Independence Axiom and Asset Returns

This paper integrates models of atemporal risk preference that relax the independence axiom into a recursive intertemporal asset-pricing framework. The resulting models are amenable to empirical analysis using market data and standard Euler equation methods. We are thereby able to provide the first non-laboratory-based evidence regarding the usefulness of several new theories of risk preference for addressing standard problems in dynamic economics. Using both stock and bond returns data, we find that a model incorporating risk preferences that exhibit firstorder risk aversion accounts for significantly more of the mean and autocorrelation properties of the data than models that exhibit only second-order risk aversion. Unlike the latter class of models which require parameter estimates that are outside of the admissible parameter space, e.g., negative rates of time preference, the model with first-order risk aversion generates point estimates that are economically meaningful. We also examine the relationship between first-order risk aversion and models that employ exogenous stochastic switching processes for consumption growth.

Judging the Rationality of Decisions in the Presence of Vague Alternatives

The standard framework of the decision theory is subjected to partial revision in regard to the usage of the notion of alternative. An approach to judging the rationality of decision-maker's behavior is suggested for various cases of incomplete observability and/or controllability of alternatives. The approach stems from the conventional axiomatic treatment of rationality in the general choice theory and proceeds via modifying the description of alternative modes of behavior into a generalized model that requires no explicit consideration of alternatives. The criteria of rationality in the generalized decision model are proposed. For the conventional model in the choice theory, these criteria can be reduced to the well known criteria of the regularity (binariness) of choice functions. Game and economic examples are considered

Predictability of Asset Returns and the Efficient Market Hypothesis

This paper is concerned with empirical and theoretical basis of the Efficient Market Hypothesis (EMH). The paper begins with an overview of the statistical properties of asset returns at different frequencies (daily, weekly and monthly), and considers the evidence on return predictability, risk aversion and market efficiency. The paper then focuses on the theoretical foundation of the EMH, and show that market efficiency could co-exit with heterogeneous beliefs and individual irrationality so long as individual errors are cross sectionally weakly dependent in the sense defined by Chudik, Pesaran, and Tosetti (2010). But at times of market euphoria or gloom these individual errors are likely to become cross sectionally strongly dependent and the collective outcome could display significant departures from market efficiency. Market efficiency could be the norm, but it is likely to be punctuated with episodes of bubbles and crashes. The paper also considers if market inefficiencies (assuming that they exist) can be exploited for profit.forecast averaging, heterogeneity of expectations, predictability, market efficiency, equity premium puzzle

Two-dimensional models of type theory

We describe a non-extensional variant of Martin-L\"of type theory which we call two-dimensional type theory, and equip it with a sound and complete semantics valued in 2-categories.Comment: 46 pages; v2: final journal versio