Imperfect Knowledge and Asset Price Dynamics: Modeling the Forecasting of Rational Agents, Dynamic Prospect Theory and Uncertainty Premia on Foreign Exchange.

Models using the Rational Expectations Hypothesis (REH) are widely recognized to be inconsistent with the observed behavior of premia in financial markets, as well as other features of asset price dynamics. Moreover, many reasons have been advanced as to why the REH cannot generally represent, even approximately, the expectations behavior of individually rational agents. In this paper, we develop a new model of the equilibrium premium in the foreign exchange market that replaces the REH with the Imperfect Knowledge Forecasting (IKF) framework. Because we maintain that agents must cope with imperfect knowledge and that they are not grossly irrational, our IKF approach imposes only qualitative conditions on the formation of individual forecasting models and their updating. We also develop a dynamic extension of the original formulation of Kahneman and Tversky’s prospect theory. We find that under IKF and dynamic prospect theory, the equilibrium premium on foreign exchange is positively related to the gap between the aggregate forecast of the exchange rate and its historical benchmark level. We test this implication, using survey data on the German mark-U.S. dollar exchange rate, and find that the behavior of the ex ante premium on foreign exchange is consistent with our model of the premium.exchange rates; risk premium; imperfect knowledge; individual rationality; expectations; prospect theory

Imperfect Knowledge Economics: Exchange Rates and Risk

Posing a major challenge to economic orthodoxy, Imperfect Knowledge Economics asserts that exact models of purposeful human behavior are beyond the reach of economic analysis. Roman Frydman and Michael Goldberg argue that the longstanding empirical failures of conventional economic models stem from their futile efforts to make exact predictions about the consequences of rational, self-interested behavior. Such predictions, based on mechanistic models of human behavior, disregard the importance of individual creativity and unforeseeable sociopolitical change. Scientific though these explanations may appear, they usually fail to predict how markets behave. And, the authors contend, recent behavioral models of the market are no less mechanistic than their conventional counterparts: they aim to generate exact predictions of "irrational" human behavior. Frydman and Goldberg offer a long-overdue response to the shortcomings of conventional economic models. Drawing attention to the inherent limits of economists' knowledge, they introduce a new approach to economic analysis: Imperfect Knowledge Economics (IKE). IKE rejects exact quantitative predictions of individual decisions and market outcomes in favor of mathematical models that generate only qualitative predictions of economic change. Using the foreign exchange market as a testing ground for IKE, this book sheds new light on exchange-rate and risk-premium movements, which have confounded conventional models for decades. Offering a fresh way to think about markets and representing a potential turning point in economics, Imperfect Knowledge Economics will be essential reading for economists, policymakers, and professional investors.knowledge, economic models, predictions, rational self-interest, markets, decisions, exchange rates, risk premiums

Imperfect Knowledge, Temporal Instability and an Uncertainty Premium: Towards a Resolution of the Excess-Returns Puzzle in the Foreign Exchange Market.

This paper offers a refinement and explores a resolution of the excess-returns puzzle in the foreign exchange market. We find that the predictions of the forward premium are not negatively biased throughout the three decades of floating, as commonly believed, but rather are sometimes positively biased, negatively biased, unbiased or possess no predictive content depending on the subperiod examined. To explain this modified puzzle, the paper makes use of a recently developed model of the risk premium, which we have called an aggregate uncertainty premium. Our model employs an alternative approach to modeling exchange rate expectations, dubbed Imperfect Knowledge Expectations (IKE), which recognizes that rational agents do form expectations based on imperfect knowledge. Our model also makes use of a dynamic extension of the assumption of myopic loss aversion. We find that our IKE-based approach can account for the pattern of positive and negative biases estimated over three decades of floating rates.exchange rates; forward-premium anomaly; instability; imperfect knowledge expectations; risk premium

The Business Boost from Marriage Equality: Evidence from the Health and Marriage Equality in Massachusetts Survey

This brief draws on two sources of data, a survey and state-collected tax revenue data, and finds that marriages have had a positive economic effect on Massachusetts -- likely providing a boost of over $100 million to the state economy. Same-sex couples' weddings injected significant spending into the Massachusetts economy and brought out-of-state guests to the state, whose spending also added to the economic boost

An Empirical Biomarker-based Calculator for Autosomal Recessive Polycystic Kidney Disease - The Nieto-Narayan Formula

Autosomal polycystic kidney disease (ARPKD) is associated with progressive enlargement of the kidneys fuelled by the formation and expansion of fluid-filled cysts. The disease is congenital and children that do not succumb to it during the neonatal period will, by age 10 years, more often than not, require nephrectomy+renal replacement therapy for management of both pain and renal insufficiency. Since increasing cystic index (CI; percent of kidney occupied by cysts) drives both renal expansion and organ dysfunction, management of these patients, including decisions such as elective nephrectomy and prioritization on the transplant waitlist, could clearly benefit from serial determination of CI. So also, clinical trials in ARPKD evaluating the efficacy of novel drug candidates could benefit from serial determination of CI. Although ultrasound is currently the imaging modality of choice for diagnosis of ARPKD, its utilization for assessing disease progression is highly limited. Magnetic resonance imaging or computed tomography, although more reliable for determination of CI, are expensive, time-consuming and somewhat impractical in the pediatric population. Using a well-established mammalian model of ARPKD, we undertook a big data-like analysis of minimally- or non-invasive serum and urine biomarkers of renal injury/dysfunction to derive a family of equations for estimating CI. We then applied a signal averaging protocol to distill these equations to a single empirical formula for calculation of CI. Such a formula will eventually find use in identifying and monitoring patients at high risk for progressing to end-stage renal disease and aid in the conduct of clinical trials.Comment: 3 tables and 8 figure

A Resolution of the Purchasing Power Parity Puzzle: Imperfect Knowledge and Long Swings

Asset prices undergo long swings that revolve around benchmark levels. In currency markets, fluctuations involve real exchange rates that are highly persistent and that move in near-parallel fashion with nominal rates. The inability to explain these two regularities with one model has been called the "Purchasing Power Parity puzzle". In this paper, we trace the puzzle to exchange rate modelers' use of the "Rational Expectations Hypothesis". We show that once imperfect knowledge is recognized, a monetary model is able to account for the puzzle, as well as other salient features of the data, including the long-swings behavior of exchange rates.PPP puzzle; long swings; imperfect knowledge; rational expectations hypothesis

Imperfect Knowledge and Asset Price Dynamics: Modeling the Forecasting of Rational Agents, Dynamic Prospect Theory and Uncertainty Premia on Foreign Exchange

Models using the Rational Expectations Hypothesis (REH) are widely recognized to be inconsistent with the observed behavior of premia in financial markets, as well as other features of asset price dynamics. Moreover, many reasons have been advanced as to why the REH cannot generally represent, even approximately, the expectations behavior of individually rational agents. In this paper, we develop a new model of the equilibrium premium in the foreign exchange market that replaces the REH with the Imperfect Knowledge Forecasting (IKF) framework. Because we maintain that agents must cope with imperfect knowledge and that they are not grossly irrational, our IKF approach imposes only qualitative conditions on the formation of individual forecasting models and their updating. We also develop a dynamic extension of the original formulation of Kahneman and Tversky’s prospect theory. We find that under IKF and dynamic prospect theory, the equilibrium premium on foreign exchange is positively related to the gap between the aggregate forecast of the exchange rate and its historical benchmark level. We test this implication, using survey data on the German mark-U.S. dollar exchange rate, and find that the behavior of the ex ante premium on foreign exchange is consistent with our model of the premium

A Resolution of the Purchasing Power Parity Puzzle: Imperfect Knowledge and Long Swings

Asset prices undergo long swings that revolve around benchmark levels. In currency markets, fluctuations involve real exchange rates that are highly persistent and that move in near-parallel fashion with nominal rates. The inability to explain these two regularities with one model has been called the “purchasing power parity puzzle.” In this paper, we trace the puzzle to exchange rate modelers ’ use of the “Rational Expectations Hypothesis. ” We show that once imperfect knowledge is recognized, a monetary model is able to account for the puzzle, as well as other salient features of Like all assets that trade freely in markets, floating currencies tend to undergo long swings that revolve around benchmark levels. This pattern is clearly evident in figure 1, which shows that the German mark-US dollar exchange rate moves away from purchasing power parity (PPP) for extended periods but eventually, at unpredictable moment

The general relativistic infinite plane

Uniform fields are one of the simplest and most pedagogically useful examples in introductory courses on electrostatics or Newtonian gravity. In general relativity there have been several proposals as to what constitutes a uniform field. In this article we examine two metrics that can be considered the general relativistic version of the infinite plane with finite mass per unit area. The first metric is the 4D version of the 5D "brane" world models which are the starting point for many current research papers. The second case is the cosmological domain wall metric. We examine to what extent these different metrics match or deviate from our Newtonian intuition about the gravitational field of an infinite plane. These solutions provide the beginning student in general relativity both computational practice and conceptual insight into Einstein's field equations. In addition they do this by introducing the student to material that is at the forefront of current research.Comment: Accepted for publication in the American Journal of Physic