Ahead of decisions from the Federal Reserve, financial markets are more forward-looking than we thought

As happens eight times a year, this week financial markets will again turn their attention to what, if any, change the Federal Reserve will make to its policy rate. Robin L. Lumsdaine discusses research on the anticipation of such decisions via the Fed funds futures markets, which indicates that markets “set up” much farther in advance than has been previously documented. This finding emphasizes the importance of clarity in central bank communications

Aging and Labor Force Participation: A Review of Trends and Explanations

The American population is aging rapidly. Persons 65 and over who now constitute about one-fifth of the population will constitute about two-fifths of the population by 2040. In addition, individuals are living longer. Yet the labor force participation of older Americans has fallen dramatically in recent years. This paper discusses this trend and the principal arguments put forth to explain it. The paper is in two parts. The first part reviews trends in labor force participation and associated trends in Social Security (SS) coverage, firm pension plan coverage, and other factors that are likely to be associated with the labor force participation trends, including demographics. The second part of the paper discusses the incentive effects of SS and retirement plans, with emphasis on firm pension plans.

Public Information and the Persistence of Bond Market Volatility

We examine the reaction of daily bond prices to the release of government macroeconomic news. These news releases are of interest because they are released on periodic, preannounced dates and because they cause substantial bond market volatility. The news component of volatility is not positively autocorrelated on these dates, since the news is released at a specific moment in time. We find that (1) expected returns on the short end of the bond market are significantly higher on these announcement dates, and (2) the persistence pattern of daily volatility is quite different around these days.

Factors Affecting Labor Supply Decisions and Retirement Income

Recent policy has focused on alleviating poverty among the elderly, with varying degrees of success. Gains to some subsets of the elderly population have come at the expense of others. A component of the policy debate has been identifying factors which might influence labor force participation decisions and the effects such decisions will have on retirement income and its adequacy for a growing elderly population. While models of retirement behavior are becoming increasingly sophisticated, most fail to capture key elements such as expectations and uncertainty. This is in part due to the reduced form nature of policy experiments; parameters are estimated under a current policy and used to predict effects of an alternative scenario. Such an approach implicitly assumes that the only difference in the alternative setting is the change in policy and does not adequately account for endogeneity of decisions and responses to these changes. This paper reviews factors affecting the labor supply decision, their interactions with and implications for subsequent retirement income, and identifies important methods and data requirements necessary to model complicated dynamic behavior more accurately.

The Dynamics of Emerging Market Equity Flows

We study the interrelationship between capital flows, returns, dividend yields and world interest rates in 20 emerging markets. We estimate a vector autoregressionn with these variables to measure the degree to which lower interest rates contribute to increased capital flows and shocks in flows affect the cost of capital among other dynamic relations. We precede the VAR analysis by a detailed examination of endogenous break points in capital flows and the other variables. These structural breaks are traced to the liberalization of emerging equity markets. Our evidence of structural breaks call into question past research which estimates VAR models over the full sample. After a liberalization, we find that equity flows increase by 1.4% of market capitalization. We also show that shocks in equity flows initially increase returns which is consistent with a price pressure hypothesis. While the effect is diminished over time, there also appears to be a permenant impact. This is consistent with our finding that our proxy for the cost of capital, dividend yields, decreases. Finally, our analysis of the transitition dynamics from pre-liberalization to post-liberalization suggests that when capital leaves, it leaves faster than it came in. These results may help us understand the dynamics of the recent crises in Latin America and East Asia.

Why are Retirement Rates So High at Age 65?

In most data sets of labor force participation of the elderly, an empirical regularity that emerges is that retirement rates are particularly high at age 65. While there are numerous economic reasons why individuals may choose to retire at 65, empirical models that have attempted to explain the age-65 spike have met with limited success. Interpreted another way, while many models would predict a jump in the hazard rate at age 65, the magnitude of the spike indicates excessive response given the economic considerations that retirees typically face. This paper considers the puzzle of why retirement rates are so high at age 65 and explores a variety of explanations.

Three Models of Retirement: Computational Complexity Versus Predictive Validity

Empirical analysis often raises questions of approximation to underlying individual behavior. Closer approximation may require more complex statistical specifications, On the other hand, more complex specifications may presume computational facility that is beyond the grasp of most real people and therefore less consistent with the actual rules that govern their behavior, even though economic theory may push analysts to increasingly more complex specifications. Thus the issue is not only whether more complex models are worth the effort, but also whether they are better. We compare the in-sample and out-of-sample predictive performance of three models of retirement -- "option value," dynamic programming, and probit -- to determine which of the retirement rules most closely matches retirement behavior in a large firm. The primary measure of predictive validity is the correspondence between the model predictions and actual retirement under the firm's temporary early retirement window plan. The "option value" and dynamic programming models are considerably more successful than the less complex probit model in approximating the rules individuals use to make retirement decisions, but the more complex dynamic programming rule approximates behavior no better than the simpler option value rule.