Speculative Dynamics and the Role of Feedback Traders

This paper summarizes our earlier research documenting the characteristic speculative dynamics of many asset markets and suggests a framework for understanding them. Our model incorporates "feedback traders," traders whose demand is based on the history of past returns rather than the expectation of future fundamentals. We use this framework to describe ways in which the characteristic return patterns might be generated, and also to address the long-standing question of whether profitable speculation stabilizes asset markets.

Speculative Dynamics

This paper presents evidence on the characteristic speculative dynamics of a wide range of asset returns. It highlights three stylized facts. First, returns tend to be positively serially correlated at high frequency. Second, returns tend to be negatively serially correlated over long horizons. Third, deviations of asset values from proxies for fundamental value have predictive power for returns. These patterns emerge repeatedly in our analyses of stocks, bonds, foreign exchange, real estate, collectibles, and precious metals, and they appear too strong to be attributed only to small sample biases. The pervasive nature of these patterns suggests that they may be lie to inherent features of the speculative process, rather than to variation in risk factors which affect particular markets.

An Aging Society: Opportunity or Challenge?

macroeconomics, Aging Society

The long-run effect of education on obesity in the US

The proportion of obese population has been gradually increasing in the US over the past few decades. In this study I investigate how education is associated with Body Mass Index (BMI) in later stages of life. BMI, weight(kg)/height(m)(2), is the principle measure used for classifying people as obese. Using sibling data and methods that take account of unobserved endowments and environment shared by siblings, I find that there is large variation in BMI between siblings and that education is negatively associated with BMI. One more year of schooling is associated with an estimated reduction of 0.15 in BMI. When considering different education levels, completing college education is associated with 0.7 reduction in BMI relative to high school graduation only. The significant effect of education on obesity that remains in the long-run has policy implications

Why are households that report the lowest incomes so well-off

Using data from the Living Costs and Food Survey in the UK over 1978-2009 we document that households with extremely low measured income (below 10% of median income) on average spend much more than those with merely moderately low income (those below 50% of median income): in short, the graph of median expenditure against income contains a sharp non-monotonicity (or `tick'). We show that this tick appears, to a greater or lesser extent, over the whole period and across different employment states, levels of education and marital statuses. Of the likely explanations, we provide several arguments that discount over-reporting of expenditure and argue that under-reporting of income plays the major role. In particular, by using a dynamic model of consumption and saving, and paying special attention to poverty dynamics, we show that consumption smoothing cannot explain all the apparent dissaving. Finally, and whatever the reason for the tick, we document that low consumption is better correlated with other measures of living standards than having low income

A three-regime model of speculative behaviour: modelling the evolution of the S&P 500 composite index

We examine whether a three-regime model that allows for dormant, explosive and collapsing speculative behaviour can explain the dynamics of the S&P 500. We extend existing models of speculative behaviour by including a third regime that allows a bubble to grow at a steady rate, and propose abnormal volume as an indicator of the probable time of bubble collapse. We also examine the financial usefulness of the three-regime model by studying a trading rule formed using inferences from it, whose use leads to higher Sharpe ratios and end of period wealth than from employing existing models or a buy-and-hold strategy

Government Debt

This paper surveys the literature on the macroeconomic effects of government debt. It begins by discussing the data on debt and deficits, including the historical time series, measurement issues, and projections of future fiscal policy. The paper then presents the conventional theory of government debt, which emphasizes aggregate demand in the short run and crowding out in the long run. It next examines the theoretical and empirical debate over the theory of debt neutrality called Ricardian equivalence. Finally, the paper considers the various normative perspectives about how the government should use its ability to borrow.Economic

Time series momentum

We document significant ‘‘time series momentum’’ in equity index, currency, commodity, and bond futures for each of the 58 liquid instruments we consider. We find persistence in returns for one to 12 months that partially reverses over longer horizons, consistent with sentiment theories of initial under-reaction and delayed over-reaction. A diversified portfolio of time series momentum strategies across all asset classes delivers substantial abnormal returns with little exposure to standard asset pricing factors and performs best during extreme markets. Examining the trading activities of speculators and hedgers, we find that speculators profit from time series momentum at the expense of hedgers

Optimal Social Insurance and Health Inequality

This paper integrates into public economics a biologically founded, stochastic process of individual ageing. The novel approach enables us to quantitatively characterize the optimal joint design of health and retirement policy behind the veil of ignorance for today and in response to future medical progress. Calibrating our model to Germany, we find that future progress in medical technology calls for a potentially drastic increase in health spending that typically should be accompanied by a lower pension savings rate and a higher retirement age. Interestingly, medical progress and higher health spending are in conflict with the goal to reduce health inequality