Rational Asset Prices

The mean, co-variability, and predictability of the return of different classes of financial assets challenge the rational economic model for an explanation. The unconditional mean aggregate equity premium is almost seven percent per year and remains high after adjusting downwards the sample mean premium by introducing prior beliefs about the stationarity of the price-dividend ratio and the (non) forecastability of the long-term dividend growth and price-dividend ratio. Recognition that idiosyncratic income shocks are uninsurable and concentrated in recessions contributes toward an explanation. Also borrowing constraints over the investors' life cycle that shift the stock market risk to the saving middle-aged consumers contribute toward an explanation.

Stochastic Dominance Bounds on Derivative Prices in a Multiperiod Economy with Proportional Transaction Costs

By applying stochastic dominance arguments, upper bounds on the reservation write price of European calls and puts and lower bounds on the reservation purchase price of these derivatives are derived in the presence of proportional transaction costs incurred in trading the underlying security. The primary contribution is the derivation of bounds when intermediate trading in the underlying security is allowed over the life of the option. A tight upper bound is derived on the reservation write price of a call and a tight lower bound is derived on the reservation purchase price of a put. These results jointly impose tight upper and lower bounds on the implied volatility.

Apps with habits: Adaptive Interfaces for News Apps

Reading the news on smartphones has become a significant activity for users. It is also a highly individual experience with marked differences in the way people read and access news. This work explores novel methods of "smart personalisation" of news apps. It is investigating smartphone users' news reading behaviour. It is developing a prototype news app able to recognise particular kinds of news reading behaviour and adapt its display and interaction methods, i.e. an app that forms "habits". A longitudinal evaluation of the deployed app is being conducted

Optimal Bond Trading with Personal Taxes: Implications for Bond Prices and Estimated Tax Brackets and Yield Curves

The assumption that bondholders follow either a buy-and-hold or a continuous realization trading policy, rather than the optimal trading policy,is at variance with reality and, as we demonstrate, may seriously bias the estimation of the yield curve and the implied tax bracket of the marginal investor. Tax considerations which govern a bondholder's optimal trading policy include the following: realization of capital losses, short term if possible; deferment of the realization of capital gains, especially if they are short term; changing the holding period status from long term to short term by sale of the bond and repurchase, so that future capital losses may be realized short term; and raising the basis through sale of the bond and repurchase in order to deduct from ordinary income the amortized premium. Because of the interaction of these factors, no simple characterization of the optimal trading policy is possible. We can say, however, that it differs substantially from the buy-and-hold policy irrespective of whether the bondholder is a bank, a bond dealer, or an individual. We obtain these strong results even when we allow for transactions costs and explicitly consider numerous IRS regulations designed to curtail tax avoidance.

Option Pricing: Real and Risk-Neutral Distributions

The central premise of the Black and Scholes [Black, F., Scholes, M. (1973). The pricing of options and corporate liabilities. Journal of Political Economy 81, 637–659] and Merton [Merton, R. (1973). Theory of rational option pricing. Bell Journal of Economics and Management Science 4, 141–184] option pricing theory is that there exists a self-financing dynamic trading policy of the stock and risk free accounts that renders the market dynamically complete. This requires that the market be complete and perfect. In this essay, we are concerned with cases in which dynamic trading breaks down either because the market is incomplete or because it is imperfect due to the presence of trading costs, or both. Market incompleteness renders the risk-neutral probability measure non unique and allows us to determine the option price only within a range. Recognition of trading costs requires a refinement in the definition and usage of the concept of a risk-neutral probability measure. Under these market conditions, a replicating dynamic trading policy does not exist. Nevertheless, we are able to impose restrictions on the pricing kernel and derive testable restrictions on the prices of options.We illustrate the theory in a series of market setups, beginning with the single period model, the two-period model and, finally, the general multiperiod model, with or without transaction costs.We also review related empirical results that document widespread violations of these restrictions.Option; Pricing

Junior Must Pay: Pricing the Implicit Put in Privatizing Social Security

Proposals that portion of the Social Security Trust Fund assets be invested in equities entail the possibility that a severe decline in equity prices renders the Fund assets insufficient to provide the currently mandated level of benefits. In this event, existing taxpayers may be compelled to act as insurers of last resort. The cost to taxpayers of such an implicit commitment equals the value of a put option with payoff equal to the benefit's shortfall. We calibrate an OLG model that generates realistic equity premia and value the put. With 20 percent of the Fund assets invested in equities, the highest level currently under serious discussion, we value a put that guarantees the currently mandated level of benefits at one percent of GDP, or a temporary increase in Social Security taxation of at most 25 percent. We value a put that guarantees 90 percent of benefits at merely .03 percent of GDP. In contrast to earlier literature, our results account for the significant changes in the distribution of security returns resulting from Trust Fund purchases. We also explore the inter-generational welfare implications of the guarantee.

Junior is Rich: Bequests as Consumption

We explore the consequences for asset pricing of admitting a bequest motive into an otherwise standard overlapping generations model where agents trade equity and perpetual debt securities. Prices of securities are seen to be approximately 50% higher in an economy with bequests as compared to an otherwise identical one where bequests are absent. Robust estimates of the equity premium are obtained in several cases where the desire to leave bequests is modest relative to the desire for old age consumption.

The Role of Leadership in Communities of Learning

This article is a systematic literature review aimed at providing a comprehensive overview of the implementation of the Kāhui Ako | Communities of Learning policy in Aotearoa New Zealand. This policy seeks to improve student outcomes through collaborative networks of schools emphasising the importance of network leadership in initiating and co-ordinating systemic change. This review examines the available evidence on the ways in which these school networks operate and how network leadership responds to local needs and environments. Review data included a total of 16 studies from the empirical literature resulting in four main organisational processes and patterns of interaction: (1) relationships building focusing on trust; (2) press for system-wide coherence; (3) knowledge exchange; and (4) collaborative work. Our findings suggest that achieving high levels of alignment and coherence within the Kāhui Ako policy is a key factor for meaningful implementation, challenging to achieve, and requires ongoing attention