1997
97-01
RONALD J. BALVERS
and MITCHELL,
DOUGLAS. "Autocorrelated Returns and Optimal Intertemporal Portfolio
Choice." Published in Management Science.
Abstract: In recent years it has been shown empirically that stock returns
exhibit positive or negative autocorrelation, depending on observation
frequency. In this context of autocorrelated returns the present paper is the
first to derive an explicit analytical solution to the dynamic portfolio
problem of an individual agent saving for retirement (or other change of
status, like the purchase of a house or starting college). Using a normal
ARMA(1,1) process, dynamic programming techniques combined with the use of
Stein's Lemma are employed to examine "dollar-cost-averaging" and
"age effects" in intertemporal portfolio choice with CARA
preferences. We show that with a positive moving average parameter and
positive riskfree rates, if first-order serial correlation is non-negative,
then the expected value of the optimal risky investment is increasing over
time, while if first-order serial correlation is negative this path can be
increasing or decreasing over time. Thus a necessary but not sufficient
condition to obtain the conventional age effect of increasing conservatism over
time is that first-order serial correlation be negative. Further, dollar-cost
averaging in the general sense of gradual entry into the risky asset does not
emerge as an optimal policy. Simulation results for U.S. data are used to
illustrate optimal portfolio paths.
97-02
MITCHELL,
DOUGLAS and STRATFORD
DOUGLAS. "Portfolio Response to a Shift in a Return Distribution: The
Case of n Dependent Assets." Forthcoming in the International Economic
Review.
Abstract: Recent papers have shown utility function conditions which
are sufficient, in a two-asset context with or without stochastic dependence,
for a conditional first-order stochastically dominating shift (or a
conditional mean-preserving contraction) of one asset's return distribution
never to result in a decline in holdings of that asset. The present paper
shows that these conditions are sufficient even when there are an arbitrary
number of assets.
97-03
KHORASSANI,
JACQUELINE. "The Effect of Deposit Insurance on Depositors' Risk
Sensitivity: A Theoretical Framework."
Abstract: This paper focuses on a theoretical analysis of the effect
of a lower deposit insurance limit on the risk sensitivity of aggregate
deposits. Given the reasonable assumption of decreasing absolute risk
aversion on the part of depositors, the results contradict the conventional
wisdom that a lower deposit insurance limit will necessarily and unconditionally
increase the sensitivity of aggregate deposits to bank risk.
97-04
MITCHELL,
DOUGLAS. "Single-Peaked Utility Functions Under Risk."
Abstract: This paper analyzes concave single-peaked utility functions,
which are commonly used in macro policy analysis. Like the quadratic, quartic
utility is shown to be analytically tractable. The quadratic is shown to be
the only utility function giving additive-risk-insensitive decisions, the
only utility function for which policy always "shoots in the right
direction," and the only utility function possessing two other
properties of note. Properties possessed by all, or by no, concave
single-peaked utility functions are also identified. Implications for choice
of a utility function are discussed.
97-05
GARRETT, THOMAS.
"The Incidence of a Lottery Tax: New Evidence from the West Virginia
State Lottery."
Abstract: As states have become increasingly reliant on lottery
revenue, the issue of whether state lotteries are regressive has become more
important. This paper provides new evidence on this issue using county-level
data. The results suggest that the incidence of the West Virginia Lottery is
progressive. However, when examined separately, on-line games are progressive
and instant games are regressive. This has important policy implications for
state lottery structure and suggests that additional studies need to be done
on a state-by-state basis in order to determine the tax incidence of different
lottery games in a particular state.
97-06
MITCHELL, DOUGLAS
and GELLES, GREGORY. "Broadly Decreasing Risk Aversion."
Abstract: This paper considers decision-making in the presence of two
risk sources, with no restrictions on the relation between the two risks. A
utility function is said to exhibit broad DARA if and only if a rise in
wealth always decreases the magnitude of the risk premium for one of the
risks vis-a-vis the other. A condition on utility functions giving this
property is derived: utility must be of the linear-plus-exponential form. It
is shown that certain problems involving portfolios and risk-averse firms
give unambiguous comparative statics if and only if utility exhibits broad
DARA.
97-07
BALVERS, RONALD J.
and JEFFREY BERGSTRAND. "Government Expenditures and Equilibrium Real
Exchange Rates."
Abstract: Economists have long investigated theoretically and
empirically the relationship between government spending and (long-run
equilibrium) real exchange rates. As Frenkel and Razin (1992) summarize for a
small open economy, government expenditures (financed by lump-sum taxes)
influence real exchange rates via a resource-withdrawal channel and a
consumption-tilting channel. Recent theoretical and empirical studies, such
as Froot and Rogoff (1991), Rogoff (1992), De Gregorio, Giovannini, and
Krueger (1994), De Gregorio, Giovannini, and Wolf (1994), De Gregorio and
Wolf (1994), and Chinn and Johnston (1996), have focused upon the effects of
government spending through the resource withdrawal channel only. Extending
Frenkel and Razin (1992), this paper generates closed-form theoretical
solutions for the relationships among the real exchange rate, relative per
capita (private) consumption, relative per capita government consumption, and
relative per capita tradables and nontradables production in a two-country
stochastic, dynamic, general equilibrium model. Application to the model's
structural equations of relative price level, private and government
consumption, and relative productivity data from Summers and Heston (1991)
and OECD Annual National Accounts (1996) for a sample of OECD countries
relative to the United States suggests that government expenditures influence
long-run equilibrium exchange rates approximately equally via the
resource-withdrawal and consumption-tilting channels.
97-08
BALVERS, RONALD J.
and JEFFREY BERGSTRAND. "Nontradable Goods, Nonseparable Utiltity, and
Global Portfolio Diversification."
Abstract: One of the most prominent explanations proposed for the
observed strong home bias in investors? portfolios is the consumption of
nontradable goods. In the presence of nontradable goods consumption,
researchers have explained home bias either by assuming that nontradable
goods are separable in utility from tradable goods (cf., Stockman and Dellas,
1989) or that nontradable goods? equities cannot be traded internationally
(cf., Tesar, 1993). However, separability in utility between tradable and
nontradable goods is a limiting assumption and equities of nontradable goods
are traded internationally. This paper provides a theoretical analysis to
demonstrate that -- in the presence of nontradable goods -- investors should
diversify portfolios completely among all tradable and nontradable goods?
claims, even if we assume nonseparable utility and frictionless exchange of
tradable and nontradable goods? equities internationally. The results suggest
that nontradable goods with nonseparable utility do not constitute a possible
source of home bias when capital is perfectly mobile, as Lewis (1996)
demonstrates empirically.
97-09
RAN, JIMMY and RONALD J. BALVERS.
"Exchange Rate Fluctuations and the Speed of Trade Price
Adjustment."
Abstract: A quantity adjustment cost model is developed in the context
of international trade, along the lines proposed by Krugman (1987). The model
implies that prices adjust slowly to exchange rate fluctuations. The price
adjustment speed is determined endogenously as a function of foreign demand
responsiveness, the appropriate discount rate, and an adjustment cost
parameter. Empirical analysis based on disaggregated data first finds the
speed of price adjustment from the time series for each industry and then in
a cross-sectional regression relates the obtained adjustment speeds to their
theoretical determinants. Results tentatively support the quantity adjustment
cost view against plausible alternative explanations.
97-10
SOBEL, RUSSELL S.
"In Defense of the Articles of Confederation and the Contribution
Mechanism as a Means of Government Finance: A General Comment on the
Literature." Published in Public Choice.
Abstract: I attempt to dispel several widely-held myths regarding government
finance under the Articles of Confederation, some of which were reiterated in
Dougherty and Cain (1997). I defend the contribution mechanism as a method of
government finance that is superior to direct taxation by the federal
government, and present evidence contradicting the belief that revenue
collections under the Articles were poor. A proper comparison is with
alternatives at that time, such as state tax collections and the federal
governments own tax collections under the new U.S. Constitution, both of
which were lower than the collection rate from states under the Articles.
97-11
RANDALL G. HOLCOMBE
and SOBEL, RUSSELL S.. "Public Policy Toward Pecuniary
Externalities."
Abstract: This paper explores the role of pecuniary externalities in the
efficiency of the market and political processes. Pecuniary externalities are
shown to result from an undefined property right to the value of assets.
Outcomes in the political process under a unanimity rule differ from market
outcomes because they would require compensation for pecuniary externalities.
We show that the internalization of pecuniary externalities creates a market
failure, inherently making the political process less efficient that private
markets. For efficiency, rights to the use property need to be clearly
defined, but rights to the value of that property should not be assigned or
enforced. Pecuniary externalities inflicted by one firm on another play an
important role in assuring efficiency in a competitive market process.
Monopoly industries are inefficient because of the internalization of
pecuniary externalities, and within this framework innovate less than
competitive firms due to this problem.
97-12
SOBEL, RUSSELL S.
"Theory and Evidence on the Political Economy of the
MinimumWage."
Abstract: Interest group pressure has been shown to affect
congressional voting on minimum wage legislation. I find that other
characteristics of minimum wage legislation, such as the timing of changes
and the level of the minimum wage, are also manipulated for political gain.
As examples, the most recent change became effective one month before an
election, and the 1938 act creating the minimum wage became effective just
eight days before an election. I estimate that a wage of approximately $5.25
is consistent with stated goals of policy and show that interest group
pressure explains the level of the minimum wage.
97-13
GARRETT, THOMAS A.
and RUSSELL S.
SOBEL. "Endogenous
Risk and Return Lottery Game Characteristics as Determinants of Lottery
Expenditures."
Abstract: Previous research into the determinants of lottery
expenditures has examined the socio-economic characteristics of lottery
players. This paper differs from that approach by examining how risk and
return characteristics endogenous to lottery games and favored by lottery
players influence lottery expenditures. The analysis uses risk and return
variables for every on-line state lottery game offered in the United States
in 1995. Not only is new light shed on the determinants of lottery
expenditures and player preferences for risk and return, the data set
presented here provides researchers with new and comprehensive information on
every lottery game offered in the county.
97-14
GARRETT, THOMAS A.
and RUSSELL S.
SOBEL. "Lottery
Players Also Love Skewness: Evidence from United States Lottery
Games."
Abstract: In this Journal, Golec and Tamarkin provide new insight why
risk adverse individuals gamble. They find evidence that while bettors at
horse tracks are risk averse, bettors favor positive skewness of returns. We
question whether these preferences are also true for lottery players. We test
Golec and Tamarkin's theory using data on all state lottery games offered in
the United States. Empirical analyses suggest that lottery players also
prefer skewness to variance. Our findings not only expand the relevance of
Golec and Tamarkin's theory, but they also provide new insight into why
individuals play lottery games.
97-15
SOBEL, RUSSELL S.
"The Anatomy of Deviations from Market Efficiency: Insights into the
Favorite-Longshot Bias and Other Anomalies."
Abstract: The tendency for racetrack betters to overbet longshots and
underbet favorites violates strong-form market efficiency. I show that
uninformed casual bettors are responsible for the bias, and that serious
betters do the opposite, overbetting favorites and underbetting longshots.
This opposite bias has been found in sports betting and in the stock market.
I present and test a theory that well-informed agents in simple situations
have an opposite bias, but as the situation becomes more complex, or information
becomes poorer, it leads to a regular favorite-longshot bias. This model
provides a common framework for analyzing many other deviations from market
efficiency.
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