128 research outputs found
Strategic trading and manipulation with spot market power
When a spot market monopolist has a position in a corresponding futures market, he has an incentive to deviate from the spot market optimum to make this position more profitable. Rational futures market makers take this into account when setting prices. We show that the monopolist, by randomizing his futures market position, can strategically exploit his market power at the expense of other futures market participants. Furthermore, traders without market power can manipulate futures prices by hiding their orders behind the monopolist's strategic trades. The moral hazard problem stemming from spot market power thus provides a venue for strategic trading and manipulation that parallels the adverse selection problem stemming from inside information. Klassifikation: D82, G1
Monopoly power limits hedging
When a spot market monopolist participates in a derivatives market, she has an incentive to deviate from the spot market monopoly optimum to make her derivatives market position more profitable. When contracts can only be written contingent on the spot price, a risk-averse monopolist chooses to participate in the derivatives market to hedge her risk, and she reduces expected profits by doing so. However, eliminating all risk is impossible. These results are independent of the shape of the demand function, the distribution of demand shocks, the nature of preferences or the set of derivatives contracts
Changes in the Distribution of Income Volatility
Recent research has documented a significant rise in the volatility (e.g.,
expected squared change) of individual incomes in the U.S. since the 1970s.
Existing measures of this trend abstract from individual heterogeneity,
effectively estimating an increase in average volatility. We decompose this
increase in average volatility and find that it is far from representative of
the experience of most people: there has been no systematic rise in volatility
for the vast majority of individuals. The rise in average volatility has been
driven almost entirely by a sharp rise in the income volatility of those
expected to have the most volatile incomes, identified ex-ante by large income
changes in the past. We document that the self-employed and those who
self-identify as risk-tolerant are much more likely to have such volatile
incomes; these groups have experienced much larger increases in income
volatility than the population at large. These results color the policy
implications one might draw from the rise in average volatility. While the
basic results are apparent from PSID summary statistics, providing a complete
characterization of the dynamics of the volatility distribution is a
methodological challenge. We resolve these difficulties with a Markovian
hierarchical Dirichlet process that builds on work from the non-parametric
Bayesian statistics literature
Commitment, Risk, and Consumption: Do Birds of a Feather Have Bigger Nests?
Consumption commitments—goods like housing for which adjustment is costly—change the relationship between risk and consumption. Commitment provides a motive to reduce consumption when possible future losses are too small to warrant adjustment but not when losses are large enough that adjustment would be worthwhile. This implies conditions under which mean-preserving increases in risk can increase housing consumption. Our empirical evidence exploits the interaction of these conditions with a novel proxy for unemployment risk: couples sharing an occupation. Consistent with our model, same-occupation couples consume more housing only when adjustment costs are high and potential losses are sufficiently large
Semiparametric Bayesian Modeling of Income Volatility Heterogeneity
Research on income risk typically treats its proxy—income volatility, the expected magnitude of income changes—as if it were unchanged for an individual over time, the same for everyone at a point in time, or both. In reality, income risk evolves over time, and some people face more of it than others. To model heterogeneity and dynamics in (unobserved) income volatility, we develop a novel semiparametric Bayesian stochastic volatility model. Our Markovian hierarchical Dirichlet process (MHDP) prior augments the recently developed hierarchical Dirichlet process (HDP) prior to accommodate the serial dependence of panel data. We document dynamics and substantial heterogeneity in income volatility
Semiparametric Bayesian Modeling of Income Volatility Heterogeneity
Research on income risk typically treats its proxy—income volatility, the expected magnitude of income changes—as if it were unchanged for an individual over time, the same for everyone at a point in time, or both. In reality, income risk evolves over time, and some people face more of it than others. To model heterogeneity and dynamics in (unobserved) income volatility, we develop a novel semiparametric Bayesian stochastic volatility model. Our Markovian hierarchical Dirichlet process (MHDP) prior augments the recently developed hierarchical Dirichlet process (HDP) prior to accommodate the serial dependence of panel data. We document dynamics and substantial heterogeneity in income volatility
Identifying Idiosyncratic Career Taste and Skill with Income Risk
How important to well-being is choosing a career with the right fit? This question is difficult to answer because we observe individuals only in their chosen careers, not in the other (presumably inferior) options they did not choose. To overcome this problem, we use expected utility to cardinalize a logit model of career choice in a setting where we observe the income risk of chosen careers and the risk-aversion of the people who choose them. The key parameter of interest - the importance of idiosyncratic taste and skill in career choice - is identified from the shift in the distribution of income risk with risk aversion. We estimate the model using individual-specific measures of income volatility to proxy for income risk and survey questions about hypothetical income gambles to proxy for risk preference, both from the PSID. We separate idiosyncratic career taste from skill using the pay gap between high and low-income risk people with high and low risk-aversion
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