infonet-economy

The British Industrial Revolution triggered a socioeconomic transformation whereby the landowning aristocracy was replaced by industrial capitalists rising from the middle classes as the economically dominant group. We propose a theory of preference formation under financial-market imperfections that can account for this pattern. Parents shape their children’s preferences in response to economic incentives. Middleclass families in occupations requiring effort, skill, and experience develop patience and work ethic, whereas upper-class families relying on rental income cultivate a refined taste for leisure. These class-specific attitudes, which are rooted in the nature of pre-industrial professions, become key determinants of success once industrialization transforms the economic landscape.

In the heart of the Great Crisis, amidst great uncertainty and concerns surrounding the future of capitalism, John Maynard Keynes launched his optimistic prophecy that growth and technological change would allow mankind to solve its economic problem within a century. He envisioned a world where people would work much less and be less oppressed by the satisfaction of material needs. He made quantitative statements predicting that “the standard of life in
progressive countries one hundred years hence will be between four and eight times as high...” as in his time. And he wrote about worktime that “...a fifteen-hour week may put off the problem for a great while.” He also expected the new era to bring about “great changes in
the code of morals”, such that the new society will “honour those who can teach (us) how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things....”
To what extent have his predictions turned out to be accurate? Economic growth indeed resumed during the 1930s, but the conflagration of World War II was soon to come. Yet, after the end of the war, the engine of growth restarted, and the world thereafter underwent an
unprecedented transformation. And people today indeed spend a smaller fraction of their lives in work activity. However, there are large differences in both standards of living and attitudes towards work across countries and individuals.
In this essay, I assess Keynes’ forecasts from a global perspective. In the first section, I review and discuss the growth experience of the world in the second half of the Twentieth Century. Next, I discuss Keynes’ predictions about working time and leisure. Finally, I conclude.

We review the recent literature in macroeconomics that analyses Markov equilibria in dynamic general equilibrium model. After defining the Markov equilibrium concept we first summarize what is known about the existence and uniqueness of such equilibria in models where sequential equilibria can be obtained by solving a suitable social planner problem. We then discuss the existence problems of Markov equilibria in models where equivalence of equilibrium allocations and solutions to social planner problems cannot be established and review techniques the literature has developed to deal with the existence problem, as well as recent applications of these techniques in macroeconomics.

In this article, I review two recent developments in the theory of computation of general equilibria. First, following Brown, DeMarzo and Eaves (1996) several papers have developed globally convergent algorithms for the computation of general equilibria in models with incomplete asset markets. I review some of the developments in that area. Second, new developments in computational algebraic geometry lead to algorithms to compute effectively all equilibria of systems of polynomial equations. I point out some applications of these algorithms to general equilibrium theory.

Abstract:
In the modern world of finance, understanding the drivers of
asset value is crucial. This thesis is divided into three research articles that covers various aspects of this issue.
The first paper estimates the pricing kernel from equity data. The pricing kernel is an essential tool to price a given random stream of payment, for example, a stock. While standard economic theory suggests a decreasing pricing kernel; empirical literature on the other hand often finds a U-shaped one. The main contribution of this paper to the existing literature is the systematic testing of the increasing parts for statistical significance, and the
finding that the increases are not statistically significant. Even if not significant, the U-shaped pricing kernels are found in various datasets and in different time periods, thus indicating the existence of increasing parts in the kernel. It is also found that the U-shape can be obtained by estimating the kernel with various functional forms, thereby ruling out the role of the specificity of the pricing kernel functional form.
The second paper develops a model to analyze the impact of financial constraints on the value and investment behavior of a firm. The model explains many puzzling effects found in empirical literature such as the highgrowth, high-risk nature of small firms, pro-cyclical investment behavior, the
leverage effect and the higher average returns of value stocks.
The last paper uses simulations to show that in the long run, a strategy based on the fundamental value of an asset (more specifically, the expected discounted value of dividend payments) is better than many other potentially
irrational investment strategies, and that this is particularly true when firms can default and dividends are nonstationary. This finding extends the existing literature on evolutionary finance.

Zusammenfassung: In modernen Finanzmärkten ist es wichtig zu verstehen, wie der Wert eines Wertpapiers bestimmt wird. Diese Dissertation behandelt dieses Thema in drei Teilen.
Der erste Teil schätzt den Pricing Kernel mit Hilfe von Aktiendaten.

Mit dem Pricing Kernel kann der Wert eines zufälligen Zahlungsstroms, z.B. einer Aktie, bestimmt werden. Gemäss den üblichen ökonomischen Annahmen muss der Kernel fallend sein; empirische Schätzungen finden jedoch häufig U-förmige Teile im Pricing Kernel. Im Wesentlichen zeigt dieser Teil,
dass die steigenden Teile im Kernel nicht statistisch signifikant sind. Jedoch kann die U-Form in verschiedenen Datensätzen und Zeitperioden gefunden werden. Dies deutet darauf hin, dass der Kernel trotzdem steigende Teile enthalten kann. Gestützt wird dies durch die Tatsache, dass die U-Form bestehen bleibt, auch wenn unterschiedliche funktionale Formen für den Kernel verwendet werden.
Der zweite Teil entwickelt und analysiert, was mit dem Wert und den Investitionen einer Firma geschieht, wenn diese keinen Zugriff auf externe Finanzierung hat. Es stellt sich heraus, dass verschiedene Puzzles aus der empirischen Literatur, wie das hohe Wachstum und Risiko kleiner Firmen,
das pro-zyklische Investitionsverhalten, der Leverage Effekt oder die höhere Durchschnittsrendite von Value Aktien, dadurch erklärt werden können.
Der letzte Teil simuliert Investitionsstrategien. Dabei wird aufgezeigt, dass sich eine Strategie, welche auf Basis der Fundamentalwerte der Firmen (der Summe der erwarteten, abdiskontierten Dividendenzahlungen) investiert, eine bessere langfristige Performance erzielt als andere potentiell irrationale Strategien. Dies gilt im Besonderen auch dann, wenn die Dividenden nicht stationär sind und Firmen Bankrott gehen können. Letzteres trägt zur Erweiterung der bestehenden Literatur in Evolutionary Finance bei.

In this paper, I examine ε-equilibria of stationary dynamic economies with heterogeneous agents and possibly incomplete financial markets. I give a simple example to show that even for arbitrarily small ε > 0, allocation and prices can be far away from exact equilibrium allocations and prices. That is, errors in market clearing or individuals' optimality conditions do not provide enough information to assess the quality of an approximation. I derive a sufficient condition for an ε-equilibrium to be close to an exact equilibrium. If the economic fundamentals are semi-algebraic, one can verify computationally whether this condition holds. The condition can be interpreted economically as a robustness requirement on the set of ε-equilibria which form a neighbourhood of the computed approximation. I illustrate the main result and the computational method using an infinite horizon economy with overlapping generations and incomplete financial markets.

Der Zürcher Bankenprofessor Hans Geiger hält komplexere Regeln für die Bankenaufsicht für überflüssig, radikale Einschnitte aber für notwendig.