Two experiments were designed to explore the existence of systematic differences in risk perceptions and risk attitudes between Chinese and US participants. The first experiment involved ranking monetary lotteries using measures of perceived riskiness and willingness to pay (WTP). Several simple heuristics were evaluated to predict perceived riskiness and WTP. Using WTP responses, Cumulative
Prospect Theory functions were determined for participants from both countries. The second experiment involved ranking multi-attribute real-world risks and associated risk-mitigation programs using measures of concern and preference,respectively. Compared to their US counterparts, Chinese participants are found to be less risk averse, more concerned about risks with higher catastrophic potential, and more in favor of risk-mitigation programs with greater scope of benefit. The results also reveal higher within-group agreement by Chinese participants for all tasks. For both national groups, the within-group agreement was highest when ranking risk-mitigation programs, but lowest when ranking lotteries with negative expected value. The implications of cross-cultural versus cross-task variation are discussed.
We discuss the theoretical and empirical foundations of modern economic theories of cultural transmission. The importance of cultural factors in shaping economic and social transformations has been the focus of a long-standing debate in social sciences since the XIXth Century. Neoclassical economics has remained at the
marging of this debate. However, there has been a recent surge of interest among economists for cultural factors. The economic models of cultural transmission borrow the main ideas from the anthropological literature, but endogeneize the efforts parents exert to transmit specific cultural variants or preference parameters. We distinguish between paternalistic models where parents use their own
values to evaluate their children’s utility, and non-paternalistic or utilitarian models in which parents choose their children’s preferences to maximize the children’s well-being. We discuss recent examples, focusing in particular on corruption, patience, and work ethic.
We propose a new method for pricing options based on GARCH models with filtered historical innovations. In an incomplete market framework, we allow for different distributions of historical and pricing return dynamics, which enhances the model's flexibility to fit market option prices. An extensive empirical analysis based on S&P 500 index options shows that our model outperforms other competing GARCH pricing models and ad hoc Black-Scholes models. We show that the flexible change of measure, the asymmetric GARCH volatility, and the nonparametric innovation distribution induce the accurate pricing performance of our model. Using a nonparametric approach, we obtain decreasing state-price densities per unit probability as suggested by economic theory and corroborating our GARCH pricing model. Implied volatility smiles appear to be explained by asymmetric volatility and negative skewness of filtered historical innovations.
Luca Taschini outlines how collaboration between the academic and the business world has helped one company in the cement industry to tackle the EU emissions trading scheme.
We study investment and disinvestment decisions in situations where there is a time lag 0 from the time t when the decision is taken to the time when the decision is implemented. Applying the probabilistic approach to the combined entry and exit decisions under the Parisian implementation delay, we solve the constrained maximization problem, obtaining an analytic solution to the optimal "starting" and "stopping" levels. We compare our results with the instantaneous entry and exit situation, and show that an increase in the uncertainty of the underlying process hastens the decision to invest or disinvest, extending a result of Bar-Ilan and Strange (1996).
Recently, a number of authors have argued that the standard search model cannot generate the observed business-cycle-frequency fluctuations in unemployment and job vacancies, given shocks of a plausible magnitude. We propose a new calibration strategy of the standard model that uses data on the cost of vacancy creation and cyclicality of wages to identify the two key parameters - the value of nonmarket activity and the bargaining weights. Our calibration implies that the model is consistent with the data.
Knowledge of the statistical distribution of the prices of emission allowances, and their forecastability, are crucial in constructing, among other things, purchasing and risk management strategies in the emissions-constrained markets. This paper analyzes the two emission permits markets, CO2 in Europe, and SO2 in the US, and investigates a model for dealing with the unique stylized facts of this type of data. Its effectiveness in terms of model fit and out-of-sample value-at-risk-forecasting, as compared to models commonly used in risk-forecasting contexts, is demonstrated.
Starting from the reward-risk model for portfolio selection introduced in De Giorgi (2004), we derive the reward-risk Capital Asset Pricing Model (CAPM) analogously to the classical mean-variance CAPM. The reward-risk portfolio selection arises from an axiomatic definition of reward and risk measures based on few basic principles, including consistency with second order stochastic dominance. With complete markets, we show that at any financial market equilibrium, investors’ optimal allocations are comonotonic and therefore the capital market equilibrium model can be reduced to a representative investor model. Moreover, the pricing kernel is an explicitly given, monotone function of the market portfolio return, corresponding to the increments
of the distortion function characterizing the epresentative investor’s risk perceptions. Finally, an empirical application shows that the reward-risk CAPM better captures
the cross-section of US stock returns than the ean-variance CAPM does.
Empirical studies show that people tend to be overconfident about the precision of their knowledge, leading to miscalibration. Consistent with this, we found that on overage the decision makers of Swiss pension plans provide too narrow confidence intervals when asked to estimate the past return of various assets. Their confidence intervals are also systematically too narrow in their forecast of future returns, in comparison with the historical volatility. They are less miscalibrated, however, than our laymen sample. Individual differences between the participants’ degree of overconfidence are large and stable across those two different tasks. In a linear regression model we present evi-dence that miscalibration is linked to individual characteristics. In our sample younger people with an education from university and with more experience in finance or pension plans are less over-confident than older people without such an education and with less experience.
In this paper, I discuss some recent research in the area of economic growth and development emphasizing the endogenous dynamics of policies and organizational forms in a world characterized by credit-market and labor-market imperfections. I present a simple model of technological convergence featuring an endogenous evolution of contractual arrangements. The key assumption is that economic growth is associated with investments as well as with the adoption and imitation of existing technologies in economies lying far from the technology frontier. In contrast, growth is increasingly driven by innovation as economies approach the technological frontier. The theory predicts that contractual arrangements evolve and adapt spontaneously to the changing needs of technological progress. However, this evolution is neither necessary nor serendipitous. Economies that fail to introduce
economic reforms as they advance may become stuck in non-convergence traps. I discuss a number of empirical applications, including the wave of reforms of industrial policy in India in the 1980s and 1990s.
