78 research outputs found
Informed Trading and the "Leakage" of Information
This paper, in a Shapley-Shubik market game framework, examines the effect of "leakage" of information: private information becoming available to uninformed traders at a later date. We show that (a) if information acquisition by the informed traders is costless, this leads to faster revelation of information; (b) if information acquisition is costly, there may be no acquisition of information; (c) information leakage leads to a fall in the value of information and, hence, increases the incentive for informed traders to sell the information.
Non-Fungibility and Mental Accounting: A Model of Bounded Rationality with Sunspot
In this paper we consider a model where some consumers act in a boundedly rational way by treating money as non-fungible (Kahneman and Tversky (1979) and (1984), Thaler (1987) and (1990). The budget is broken up into different expenditure groups (cookie-jars). Given the amount of resources allocated to a given expenditure group, boundedly rational consumers then decide how to spend the resources on commodities in that expenditure group. We study the general equilibrium effects of these `mental accounting systems'. An important implication of such behaviour is that consumers can act as if they are credit constrained even when they are not. It is shown that such environments are prone to self-fulfilling fluctuations. In three polar cases: (i) Where nearly every consumer is rational; (ii) Where the consumers are either rational or nearly rational; or (iii) If every consumer is boundedly rational and has an expenditure weight for each commodity, there are no self-fulfilling fluctuations. We also characterize properties of the demand functions so the demand of boundedly rational consumers can be distinguished from that of consumers whose first best behaviour is to have fixed expenditure weightsBehavioral economics; bounded rationality; sunspot equilibrium; mental accounting; fungibility; economic fluctuations.
Factor Intensity Reversal and Ergodic Chaos
This paper studies a two-sector endogenous growth model with labour augmenting externalities or Harrod-Neutral technical change. The technologies are general and the preferences are of the CES class. If con- sumers are su±ciently patient, ergodic chaos and geometric sensitivity to initial conditions can emerge if either (1) there is factor intensity reversal; or (2) if the consumption goods producing sector is always capital intensive. The upper bound on the discount rate is determined only by the transver- sality condition. If utility is linear, there can be chaos only if there is factor intensity reversalErgodic Chaos; Two-sector endogenous growth model; Factor intensity reversal; Labor-augmenting externalities
Habit formation and the transmission of financial crises
We study how external habit formation by investors affects the transmission of financial crises. Habit formation increases the effective risk premium on assets when there is a negative wealth shock and introduces non-linearities which can lead to multiple equilibria. We embed this investor�s behavior in the Jeanne (1997) model which allows for a competitiveness effect and for contagion through changes in fundamentals. Habit formation, however, can lead to transmission of financial crises even in the absence of the competitiveness effect, and makes multiple equilibria more likely. The possible stabilization effects of capital controls and a Tobin tax on the international transmission of financial crises are also discussed.
Are Sunspots Inevitable?
This paper examines the welfare of consumers in an incomplete markets economy with extrinsic uncertainty. It is shown that the utility of one consumer may be minimized at the Walrasian allocation relative to all other equilibrium allocations for a given security structure. Thus, this consumer will have no incentive to trade the new securities if they complete the insurance markets.Sunspot equilibrium, incomplete markets, financial innovation, welfare analysis.
Informed Trading and the "Leakage" of Information
This paper, in a Shapley-Shubik market game framework, examines the effect of "leakage" of information: private information becoming available to uninformed traders at a later date. We show that (a) If information acquisition by
the informed traders is costless, this leads to faster revelation of information; (b) If information acquisition is costly, there may be no acquisition of information; (c) Information leakage leads to a fall in value of information and hence, increases the incentive for informed traders to sell the information
International capital flows and transmission of financial crises
This paper proposes a model encompassing alternative views of contagion by highlighting the different channels of transmission of financial crises in an unifying framework. We study investor behaviour when they are affected by external habit formation. It is shown how international portfolio choice in frictionless financial markets with habit formation is in itself a channel of contagion. The possible stabilization effects of capital controls and Tobin tax on the international transmission of financial crises are also discussedCurrency crises; contagion; habit formation; portfolio rebalancing; capital controls; Tobin tax
Existence of competitive equilibrium in an optimal growth model with elastic labor supply and smoothness of the policy function
TESTING HABITS IN AN ASSET PRICING MODEL
We develop a model of asset pricing assuming that investor's behavior is habit forming. The model predicts that the effect of consumption growth shocks on the risk premium depends on the business cycle phase of the economy. This empirical implication is tested with a Markovswitching VAR model on the US postwar economy. The results show that the response of the risk premium to shocks to consumption is not significantly different over the business cycle phases of the economy. We interpret this as evidence against the habit formation hypothesis of the investor's behavior.Habit formation, Equity premium, Business cycle, Markovswitching VAR models
Existence of competitive equilibrium in an optimal growth model with heterogeneous agents and endogenous leisure
This paper proves the existence of competitive equilibrium in a single-sector dynamic economy with heterogeneous agents, elastic labor supply and complete assets markets. The method of proof relies on some recent results concerning the existence of Lagrande multipliers in infinite dimensional spaces and their representation as a summable sequence and a direct application of the inward boundary fixed point theorem.Optimal growth model, Lagrange multipliers, competitive equilibrium, individually rational Pareto Optimum, elastic labor supply.
- …