Essays on Risk Appetite and Uncertainty PDF Download
Are you looking for read ebook online? Search for your book and save it on your Kindle device, PC, phones or tablets. Download Essays on Risk Appetite and Uncertainty PDF full book. Access full book title Essays on Risk Appetite and Uncertainty by Nancy R. Xu. Download full books in PDF and EPUB format.
Author: Nancy R. Xu Publisher: ISBN: Category : Languages : en Pages :
Book Description
This research contributes to an under-explored area in the consumption-based asset pricing literature: the dynamics of the ``amount of risk''. I then explore the asset pricing implications of this procyclical source of amount of risk in a consumption-based workhorse model that allows for time-varying risk aversion. In my joint paper with Geert Bekaert and Eric Engstrom, we develop a new measure of time-varying risk aversion that is consistent with a dynamic no-arbitrage asset pricing model, using a wide range of observed asset moments, macro and option data. In addition, our findings formally support the close relationship between variance risk premium and risk aversion (as suggested in the literature), and propose a financial proxy to economic uncertainty, which is a more significant predictor of future economic growth than VIX and true economic uncertainty.
Author: Nancy R. Xu Publisher: ISBN: Category : Languages : en Pages :
Book Description
This research contributes to an under-explored area in the consumption-based asset pricing literature: the dynamics of the ``amount of risk''. I then explore the asset pricing implications of this procyclical source of amount of risk in a consumption-based workhorse model that allows for time-varying risk aversion. In my joint paper with Geert Bekaert and Eric Engstrom, we develop a new measure of time-varying risk aversion that is consistent with a dynamic no-arbitrage asset pricing model, using a wide range of observed asset moments, macro and option data. In addition, our findings formally support the close relationship between variance risk premium and risk aversion (as suggested in the literature), and propose a financial proxy to economic uncertainty, which is a more significant predictor of future economic growth than VIX and true economic uncertainty.
Author: Benjamin Keefer Publisher: ISBN: Category : Languages : en Pages : 2
Book Description
Essays on Risk and Uncertainty: Insights from Behavioral Economics Sensitization, Excess Volatility, and Extraordinary Persistence It is well-documented that stock prices are more volatile than their underlying fundamentals. A consensus has emerged that time-varying risk-premia are the likely source of this excess volatility, but no consensus has emerged regarding the source of the time-varying risk-premia. Recent microeconomic research suggests that one likely source is that risk preferences are time-varying. This same literature also suggests that variation in risk preferences can be extraordinarily persistent, on the order of decades (see Malmendier, Tate, and Yan (2011)); however this persistence has not been explained by conventional models. In this paper, we derive a model to explain both excess volatility and extraordinary persistence. To do so, we draw from the literatures of medicine, psychology, and behavioral economics. Our basic framework is that people have adaptive emotions and that these adaptive emotions create adaptive risk-aversion. This process is called sensitization, which implies that people become more risk-averse after negative shocks (Kandel 2000). To conduct our analysis, we construct an overlapping generations model of the macroeconomy to study the effect of allowing agents to be sensitized to risk. We find two main results. First, the adaptive nature of risk preferences combined with the finite horizons of agents imply that economic activities, such as investment, are too risky on the intensive margin. Second, excess risk-intensity combined with the availability heuristic implies that agents undertake too little risk (too little investment) on the extensive margin. In order to characterize the optimal monetary policy, we follow Tirole (2006), who models risk through liquidity shocks, and we derive three policy implications for policymakers. First, diversification blunts the impact of time-varying risk aversion. As a result, there is a reason to think that equity financing, under which risk diversification is easier to achieve, leads to fewer risk distortions and faster steady-state growth. Second, countercyclical risk-aversion favors countercyclical monetary policy. Third, short-term asset purchases are shown to exacerbate risk distortions. In our model, monetary policy results in greater stabilization and faster growth when conducted through long-term asset purchases such as Quantitative Easing and Operation Twist. Reference Points, Leaders, and Organizational Culture The work of Akerlof and Kranton (2005) suggests that an organization's culture affects individual behavior by shaping preferences. Yet, within the economics literature, little is known regarding the properties of the optimal culture. In this paper, we use an agency setting to determine the cultural properties that best foster incentives. To do so, we break culture down into three components: a type of performance metric (either production or cost), an expected performance level or target (that serves as the reference point, following Koszegi and Rabin (2006, 2007)), and the degree to which an agent's effort influences the benchmark (referred to as acclimation by Koszegi and Rabin (2006, 2007)). Properties of culture affect agents' consideration of effort. Under the reference-dependent preferences of Koszegi and Rabin (2006, 2007), higher effort increases the likelihood of beating the agent's target (or reference point) as well as increasing the agent's reference point. The magnitudes of these two effects depend critically on the degree of acclimation, whereas the signs of these effects depend on the type of metric used. We present three general findings. First, organizations that rely on production metrics have incentives at least as strong as those relying on cost metrics. Second, the impact of acclimation depends critically on the type of metric used. Under cost metrics, higher acclimation leads to stronger incentives. Under production metrics, higher acclimation leads to weaker incentives. Third, the optimal culture is characterized by production metrics and unacclimating reference points, which we show have implications regarding organizational tenure policies. We conclude with a discussion of testable implications. We refer to the psychology literature and argue that production metrics are most likely to emerge when production is characterized by a high degree of uncertainty, such as in sales. Our model's main prediction is that in these types of environments, we would expect to have rapid production and low tenure in order to lower acclimation. In contrast, environments in which costs are more uncertain are more likely to have cost metrics, which favor longer tenure and loose deadlines in order to generate more acclimating reference points. The Precautionary Principle in Product Markets There any many differences between the U.S. and European regulation, but one notable difference concerns assessments of risk. U.S. and European regulation are concerned about different sources of risk and these sources of risk do not always overlap. As noted by Vogel (2003), U.S. regulation gives more consideration to risk concerning environmental harms, carcinogens in food, and endangered species, whereas European regulation emphasizes risks inherent in biotechnology and carbon emissions. In fact, to justify the regulation of biotechnology, Europeans give explicit emphasis to the Precautionary Principle: faced with an irreversible choice, it is better to presume significant harm. However, when it comes to carcinogens in food, Europeans are relatively more willing to bear the risks. In this paper, we use an agency setting to determine how regulators should manage the risks inherent in new products while not placing an undue burden on potential innovators. Faced with a product quality, they can adhere to the Precautionary Principle and presume harm. Alternatively, they can adhere to the Presumption of Innocence and presume the product is harmless. This paper analyzes which is better. There are two assumptions that separate our analysis from the literature. First, we consider a static framework in which no new information arises. Second, we assume that the equilibrium risk is endogenous. Entrepreneurs' can mitigate harm if given the appropriate incentives and their choices to mitigate harm will be influenced by the regulatory framework chosen by the regulators. We present three main findings. Under the extreme assumptions of risk neutral entrepreneurs, an absence of limited liability constraints, and low levels of potential harm, we show that either the Precautionary Principle or a Presumption of Innocence can achieve the first best outcome when faced with a product of uncertain quality. However, under less extreme assumptions, we identify two factors that favor an approach more consistent with the Precautionary Principle. First, if the dominant concern of the regulators is the limited liability constraint, then relying on the Precautionary Principle will best extract rent. Second, under larger levels of harm, the introduction of agency costs (either due to risk aversion or limited liability) will interact with dynamic complementarities. As the cost to incentivize risk mitigation increases, the equilibrium likelihood of severe harm will rise, and the principle will be more likely to prevent the product from coming to the market. Preventing the product from entering the market reduces the incentives to mitigate harm further. In our model, this dynamic complementarity can only exist when the potential harm is large enough that the product's net benefit to society may be negative.
Author: Christopher Andrew Whaley Publisher: ISBN: Category : Electronic dissertations Languages : en Pages : 84
Book Description
In the first essay, we prove existence and uniqueness of equilibrium in a rent-seeking contest given a class of heterogeneous risk-loving players. We explore the role third-order risk attitude plays in equilibrium and find that imprudence is sufficient for risk lovers to increase rent-seeking investment above the risk-neutral outcome. Moreover, we show that rent can be fully dissipated in a standard Tullock contest when there is a large number of risk-loving players. In the second essay, we investigates the impact classic variables like medical care and lifestyle choices have on the mean, variance and skewness of a health distribution. We achieve this by positing health as output from a stochastic production process, a seemingly practical advantage over much of the deterministic literature. We leverage this unique approach to estimate how a set of explanatory variables impact the conditional moments of a health distribution. We then use these moments in a maximum entropy framework to analyze the shape impact of medical care. We find evidence of "flat of the curve'' medicine but also demonstrate the higher-order benefits of additional medical care. In the third and final essay, we investigate risk in the context of farmer and their choice of irrigation. While the benefits and utilization of crop irrigation have long been examined in agricultural economics, little attention is paid to the potential confounding relationship that may exist with other risk-management tools. Specifically, we pursue how standard crop insurance relates to irrigation. We identify irrigation as a form of self-protection, reducing the probability of crop loss due to adverse stochastic conditions. Given this, we investigate if irrigation acts as a complement to crop insurance. We test this relationship within a model of crop yields, identifying that jointly irrigated and insured lands both receive higher average yield and lead to variance and skewness effects on the overall yield distribution.
Author: Sang Yup Choi Publisher: ISBN: Category : Languages : en Pages : 130
Book Description
This dissertation studies how financial market volatility or uncertainty in the U.S. economy affects real economic activity both in the U.S. and other open economies. Chapter 1 critically examines a stylized fact about the effects of uncertainty shocks on the U.S. economy. A link between uncertainty and firms' investment, hiring, and production decisions has drawn much attention in contemporary discussions after the 2008 financial crisis. Bloom (2009) showed that uncertainty events, identified by spikes in stock market volatility, triggered immediate falls in output and employment, followed by rapid rebounds. I show that such stock market volatility shocks failed to produce this same pattern of responses after 1983. Chapter 2 studies the effects of risk aversion shocks, measured by increases in the VIX, on emerging market economies (EMEs). By estimating a structural vector autoregression (VAR) model, I find that, although risk aversion shocks do not have much impact on U.S. output, they do have a noticeable impact on the output of EMEs. To explain the contrast between the impact of risk appetite shocks on EMEs and the impact on the U.S. economy, a credit channel is proposed as a propagation mechanism. In the model, an increase in the VIX is translated to a risk-aversion shock that generates a "flight to quality." As international investors pull their money from EMEs, borrowing costs increase and domestic credit falls as a consequence of credit market imperfections. Higher borrowing costs, in turn, lead to a fall in investment that causes a real depreciation and a decline in total output through sectoral linkages. Finally, Chapter 3, which is co-authored with Prakash Loungani, studies the effect of uncertainty shocks on unemployment dynamics by separating out the role of aggregate and sectoral channels. Using SP500 data from the first quarter of 1963 through the third quarter of 2014, we construct a separate index to measure sectoral uncertainty and compare its effects on the unemployment rate with that of aggregate uncertainty in a standard VAR model, augmented by a local projection method. We find that aggregate uncertainty shocks lead to an immediate increase in unemployment, followed by swift reversals. In contrast, sectoral uncertainty shocks have a long-lasting impact on unemployment, with the peak impact occurring after two years. Our findings highlight an additional channel through which uncertainty shocks have persistent effects on unemployment by requiring substantial inter-industry labor reallocation.
Author: Tom Niklas Kroner Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
My dissertation consists of three independent chapters focusing on empirical questions in macroeconomics and finance. In Chapter 1, I study the role of firms’ uncertainty in the transmission of forward guidance to investment. To do so, I employ a quarterly firm-level panel of U.S. publicly traded firms. I measure forward guidance shocks based on unexpected changes in the slope of the yield curve in a 30-minute window around Federal Reserve announcements. I show that firms which are more uncertain adjust their investment as if they are more pessimistic. More uncertain firms adjust their investment relatively more downward for expected monetary tightenings and relatively less upward for expected loosenings. To explain my empirical findings, I construct a New Keynesian model with a high-uncertainty and a low-uncertainty sector. Agents in the high-uncertainty sector are ambiguous (Knightian uncertain) about the informativeness of forward guidance, and choose to take a pessimistic stance due to their ambiguity aversion. The model implies that expansionary forward guidance is less powerful in recessions due to a larger share of uncertain agents. In Chapter 2, joint with Christoph Boehm, we provide evidence for a causal link between the US economy and the global financial cycle. Using a unique intraday dataset, we show that US macroeconomic news releases have large and significant effects on global risky asset prices. Stock price indexes of 27 countries, the VIX, and commodity prices all jump instantaneously upon news releases. The responses of stock indexes co-move across countries and are large—often comparable in size to the response of the S&P 500. Further, US macroeconomic news frequently explains more than 15% of the quarterly variation in foreign stock markets. The joint behavior of stock prices and long-term bond yields suggests that systematic US monetary policy reactions to news do not drive the estimated effects. Instead, the evidence is consistent with a direct effect on investors’ risk-taking capacity. Our findings show that a byproduct of the United States’ central position in the global financial system is that news about its business cycle has large effects on global financial conditions. In Chapter 3, joint with Christoph Boehm, we are trying to better understand how FOMC announcements affect the stock market. A large literature uses high-frequency changes in interest rates around FOMC announcements to study monetary policy. These yield changes have puzzlingly low explanatory power for the stock market—even in a narrow 30-minute window. We propose a new approach to test whether the unexplained variation represents monetary policy news or just noise. In particular, we allow for a latent “Fed non-yield curve shock”, which we estimate via a heteroskedasticity-based procedure. Using a test for weak identification, we show that our shock is well identified, that is, the unexplained variation is not just noise. We then go on to show that the shock, signed to increase stock prices, leads to sizable declines in the equity and variance premium, an increase in the 10-year term premium, an increase in short-run inflation expectations, as well as a dollar depreciation against multiple non-safe-haven currencies. Hence, the evidence supports the interpretation that the shock affects risk-appetite and leads to a reverse “flight-to-safety” effect. Lastly, using a method from the computational linguistics literature, we show that our shock can be linked to specific topics discussed in FOMC statements, suggesting that it reflects written communication by the Federal Reserve
Author: Nancy R. Xu
Author: Nancy R. Xu
Author: Benjamin Keefer
Author: Mark Joseph Machina
Author: Simon Harold Grant
Author: Tan Wang
Author: Christopher Andrew Whaley
Author: Julia Stauf
Author: Benjamin Roth
Author: Sang Yup Choi
Author: Tom Niklas Kroner