World Income Components: Measuring and Exploiting International Risk Sharing Opportunities

We provide methods of decomposing the variance of world national incomes into components in such a way as to indicate the most important risk-sharing opportunities, and, therefore, the most important missing international risk markets to establish. One method uses a total variance reduction criterion, and identified risk-sharing opportunities in terms of eigenvectors of a variance matrix of residuals produced when country incomes are regressed on world income. Another method uses a mean-variance utility-maximizing criterion and identifies risk-sharing opportunities in terms of eigenvectors of a variance matrix of deviations of country incomes from their respective contract-year shares of world income. The two methods are applied using Summers-Heston [1991] data on national incomes for large countries 1950-1990, each using two different methods of estimating variances. While these data are not sufficient to provide accurate estimates of the requisite variance matrices of (transformed) national incomes, the results are suggestive of important new markets that could actually be created, and show that there may be large welfare gains to creating some of these markets.

The Significance of the Market Portfolio

The market portfolio (world portfolio) is in one sense a least important portfolio to provide to investors; there is always a better portfolio for social planners to make available to them. In a J-agent one-period stochastic endowment economy, where preferences are quadratic, the market portfolio is never spanned by the optimal markets a social planner would create. With identical preferences, the market portfolio is orthogonal to all J - 1 portfolios which achieve a first best solution. These conclusions rely on the assumption that the social planner has perfect information about agents' utilities. We also show that as the contract designer's information about agents' utilities becomes more imperfect, the optimal contracts approach contracts that weight individual endowments in proportion to elements of eigenvectors of the variance matrix of endowments. If there is a substantial market component to endowments than a social planner, for reasons of robustness and simplicity, may conclude that creating a contract to allow trading the market portfolio would be a significant innovation.

The Significance of the Market Portfolio

The market portfolio, the portfolio of all endowments in the world, has great significance in the capital asset pricing model (CAPM) in finance. The Sharpe-Lintner CAPM characterization of optimal risk sharing implies that in equilibrium no one will be subject to a random shock that is not shared by everyone else. ^ Thus, the CAPM gives us the mutual fund theorem, which asserts that only one risky portfolio need be available to individual investors, the mutual fund that holds the market portfolio. In this paper we seek further clarification of the significance of the market portfolio beyond the bounds of the restrictive assumptions of the CAPM

World Income Components: Measuring and Exploiting Risk-Sharing Opportunities

We provide a method for decomposing the variance of changes in incomes in the world into components, world income components (WICs), in such a way as to indicate the most important risk-sharing opportunities among people of the world. We develop a constant absolute risk premium model, an intertemporal general equilibrium model of the world that facilitates consideration of optimal contract design. We show that for a contract designer maximizing a social welfare function, the optimal risk-management contracts maximize the equilibrium world real interest rate. That is the contract designer achieves the risk-optimal interest rate. We show that these WIC securities are defined in terms of eigenvectors of a transformed variance matrix of income changes. The method is applied with a variance matrix estimated using Penn World Table data on the G-7 countries, 1950-92.Constant Absolute Risk Premium, risk-optimal interest rate, three-level income model, WIC securities, contract design, macro markets, hedging

Testing for rational speculative bubbles in the Brazilian residential real-estate market

Speculative bubbles have been occurring periodically in local or global real estate markets and are considered a potential cause of economic crises. In this context, the detection of explosive behaviors in the financial market and the implementation of early warning diagnosis tests are of critical importance. The recent increase in Brazilian housing prices has risen concerns that the Brazilian economy may have a speculative housing bubble. In the present paper, we employ a recently proposed recursive unit root test in order to identify possible speculative bubbles in data from the Brazilian residential real-estate market. The empirical results show evidence for speculative price bubbles both in Rio de Janeiro and Sao Paulo, the two main Brazilian cities

World Income Components: Measuring and Exploiting International Risk Sharing Opportunities

We provide a method for decomposing the variance of world national income (present values) into components in such a way as to indicate the most important risk-sharing opportunities among nations of the world. We identify risk-sharing opportunities in terms of eigenvectors of a variance matrix of deviations of the present value of country incomes from their respective shares (adjusted for population and risk aversion) of world income. The method is applied to data on national incomes of six large countries 1870-1992 (Maddison [1995]): Canada, France, Germany, Italy, United Kingdom and United States. The method reveals that, assuming symmetric risk aversions, the most important risk sharing contract to devise for these countries would be essentially a national income swap between the United States, and together on the other side, France, Germany and Italy, i.e., approximately a US-Europe national income swap. A contract that is essentially a France-Germany swap is the second most important risk-sharing contract

World Income Components: Measuring and Exploiting Risk-Sharing Opportunities

We provide a method for decomposing the variance of changes in incomes in the world into components, world income components (WICs), in such a way as to indicate the most important risk-sharing opportunities among people of the world. We develop a constant absolute risk premium model, an intertemporal general equilibrium model of the world that facilitates consideration of optimal contract design. We show that for a contract designer maximizing a social welfare function, the optimal risk-management contracts maximize the equilibrium world real interest rate. That is the contract designer achieves the risk-optimal interest rate. We show that these WIC securities are defined in terms of eigenvectors of a transformed variance matrix of income changes. The method is applied with a variance matrix estimated using Penn World Table data on the G-7 countries, 1950-92

Variability in the Bulk Composition and Abundance of Dissolved Organic Matter In the Lower Mississippi and Pearl Rivers

[1] In this study, we examined the temporal and spatial variability of dissolved organic matter (DOM) abundance and composition in the lower Mississippi and Pearl rivers and effects of human and natural influences. In particular, we looked at bulk C/N ratio, stable isotopes (delta N-15 and delta C-13) and C-13 nuclear magnetic resonance (NMR) spectrometry of high molecular weight (HMW; 0.2 mu m to 1 kDa) DOM. Monthly water samples were collected at one station in each river from August 2001 to 2003. Surveys of spatial variability of total dissolved organic carbon (DOC) and nitrogen ( DON) were also conducted in June 2003, from 390 km downstream in the Mississippi River and from Jackson to Stennis Space Center in the Pearl River. Higher DOC ( 336 - 1170 mu M), C/N ratio,% aromaticity, and more depleted delta N-15 (0.76 - 2.1 parts per thousand) were observed in the Pearl than in the lower Mississippi River (223 - 380 mu M, 4.7 - 11.5 parts per thousand, respectively). DOC, C/N ratio, delta C-13, delta N-15, and % aromaticity of Pearl River HMW DOM were correlated with water discharge, which indicated a coupling between local soil inputs and regional precipitation events. Conversely, seasonal variability in the lower Mississippi River was more controlled by spatial variability of a larger integrative signal from the watershed as well as in situ DOM processing. Spatially, very little change occurred in total DOC in the downstream survey of the lower Mississippi River, compared to a decrease of 24% in the Pearl River. Differences in DOM between these two rivers were reflective of the Mississippi River having more extensive river processing of terrestrial DOM, more phytoplankton inputs, and greater anthropogenic perturbation than the Pearl River

Theory of Fano-Kondo effect of transport properties through quantum dots

The Fano-Kondo effect in zero-bias conductance is investigated based on a theoretical model for the T-shaped quantum dot. The conductance as a function of the gate voltage is generally characterized by a Fano asymmetric parameter q. With varying temperature the conductance shows a crossover between the high and low temperature regions compared with the Kondo temperature T_K: two Fano asymmetric peaks at high temperatures and the Fano-Kondo plateau inside a Fano peak at low temperatures. Temperature dependence of conductance is calculated numerically by the Finite temperature density matrix renormalization group method (FT-DMRG).Comment: 8 pages, 7 figure

Constituting monetary conservatives via the 'savings habit': New Labour and the British housing market bubble

The ongoing world credit crunch might well kill off the most recent bubble dynamics in the British housing market by driving prices systematically downwards from their 2007 peak. Nonetheless, the experience of that bubble still warrants analytical attention. The Labour Government might not have been responsible for consciously creating it, but it has certainly grasped the opportunities the bubble has provided in an attempt to enforce a process of agential change at the heart of the British economy. The key issue in this respect is the way in which the Government has challenged the legitimacy of passive welfare receipts in favour of establishing a welfare system based on incorporating the individual into an active asset-holding society. The housing market has taken on new political significance as a means for individuals first to acquire assets and then to accumulate wealth on the back of asset ownership. The ensuing integration of the housing market into an increasingly reconfigured welfare system has permeated into the politics of everyday life. It has been consistent with individuals remaking their political subjectivities in line with preferences for the type of conservative monetary policies that typically keep house price bubbles inflated