Essays in asset price bubbles

This thesis studies the field of asset price bubbles. It is comprised of three independent chapters. Each of these chapters either directly or indirectly analyse the existence or implications of asset price bubbles. The type of bubbles assumed in each of these chapters is consistent with rational expectations. Thus, the kind of price bubbles investigated here are known as rational bubbles in the literature. The following describes the three chapters. Chapter 1: This chapter attempts to explain the recent US housing price bubble by developing a heterogeneous agent endowment economy asset pricing model with risky housing, endogenous collateral and defaults. Investment in housing is subject to an idiosyncratic risk and some mortgages are defaulted in equilibrium. We analytically derive the leverage or the endogenous loan to value ratio. This variable comes from a limited participation constraint in a one period mortgage contract with monitoring costs. Our results show that low values of housing investment risk produces a credit easing effect encouraging excess leverage and generates credit driven rational price bubbles in the housing good. Conversely, high values of housing investment risk produces a credit crunch characterized by tight borrowing constraints, low leverage and low house prices. Furthermore, the leverage ratio was found to be procyclical and the rate of defaults countercyclical consistent with empirical evidence. Chapter 2: It is widely believed that financial assets have considerable persistence and are susceptible to bubbles. However, identification of this persistence and potential bubbles is not straightforward. This chapter tests for price bubbles in the United States housing market accounting for long memory and structural breaks. The intuition is that the presence of long memory negates price bubbles while the presence of breaks could artificially induce bubble behaviour. Hence, we use procedures namely semi-parametric Whittle and parametric ARFIMA procedures that are consistent for a variety of residual biases to estimate the value of the long memory parameter, d, of the log rent-price ratio. We find that the semi-parametric estimation procedures robust to non-normality and heteroskedasticity errors found far more bubble regions than parametric ones. A structural break was identified in the mean and trend of all the series which when accounted for removed bubble behaviour in a number of regions. Importantly, the United States housing market showed evidence for rational bubbles at both the aggregate and regional levels. In the third and final chapter, we attempt to answer the following question: To what extend should individuals participate in the stock market and hold risky assets over their lifecycle? We answer this question by employing a lifecycle consumption-portfolio choice model with housing, labour income and time varying predictable returns where the agents are constrained in the level of their borrowing. We first analytically characterize and then numerically solve for the optimal asset allocation on the risky asset comparing the return predictability case with that of IID returns. We successfully resolve the puzzles and find equity holding and participation rates close to the data. We also find that return predictability substantially alter both the level of risky portfolio allocation and the rate of stock market participation. High factor (dividend-price ratio) realization and high persistence of factor process indicative of stock market bubbles raise the amount of wealth invested in risky assets and the level of stock market participation, respectively. Conversely, rare disasters were found to bring down these rates, the change being severe for investors in the later years of the life-cycle. Furthermore, investors following time varying returns (return predictability) hedged background risks significantly better than the IID ones.

Epidemiology and genetic architecture of blood pressure: a family based study of Generation Scotland

Hypertension is a major risk factor for cardiovascular disease and mortality, and a growing global public health concern, with up to one-third of the world’s population affected. Despite the vast amount of evidence for the benefits of blood pressure (BP) lowering accumulated to date, elevated BP is still the leading risk factor for disease and disability worldwide. It is well established that hypertension and BP are common complex traits, where multiple genetic and environmental factors contribute to BP variation. Furthermore, family and twin studies confirmed the genetic component of BP, with a heritability estimate in the range of 30-50%. Contemporary genomic tools enabling the genotyping of millions of genetic variants across the human genome in an efficient, reliable, and cost-effective manner, has transformed hypertension genetics research. This is accompanied by the presence of international consortia that have offered unprecedentedly large sample sizes for genome-wide association studies (GWASs). While GWAS for hypertension and BP have identified more than 60 loci, variants in these loci are associated with modest effects on BP and in aggregate can explain less than 3% of the variance in BP. The aims of this thesis are to study the genetic and environmental factors that influence BP and hypertension traits in the Scottish population, by performing several genetic epidemiological analyses. In the first part of this thesis, it aims to study the burden of hypertension in the Scottish population, along with assessing the familial aggregation and heritialbity of BP and hypertension traits. In the second part, it aims to validate the association of common SNPs reported in the large GWAS and to estimate the variance explained by these variants. In this thesis, comprehensive genetic epidemiology analyses were performed on Generation Scotland: Scottish Family Health Study (GS:SFHS), one of the largest population-based family design studies. The availability of clinical, biological samples, self-reported information, and medical records for study participants has allowed several assessments to be performed to evaluate factors that influence BP variation in the Scottish population. Of the 20,753 subjects genotyped in the study, a total of 18,470 individuals (grouped into 7,025 extended families) passed the stringent quality control (QC) criteria and were available for all subsequent analysis. Based on the BP-lowering treatment exposure sources, subjects were further classified into two groups. First, subjects with both a self-reported medications (SRMs) history and electronic-prescription records (EPRs; n =12,347); second, all the subjects with at least one medication history source (n =18,470). In the first group, the analysis showed a good concordance between SRMs and EPRs (kappa =71%), indicating that SRMs can be used as a surrogate to assess the exposure to BP-lowering medication in GS:SFHS participants. Although both sources suffer from some limitations, SRMs can be considered the best available source to estimate the drug exposure history in those without EPRs. The prevalence of hypertension was 40.8% with higher prevalence in men (46.3%) compared to women (35.8%). The prevalence of awareness, treatment and controlled hypertension as defined by the study definition were 25.3%, 31.2%, and 54.3%, respectively. These findings are lower than similar reported studies in other populations, with the exception of controlled hypertension prevalence, which can be considered better than other populations. Odds of hypertension were higher in men, obese or overweight individuals, people with a parental history of hypertension, and those living in the most deprived area of Scotland. On the other hand, deprivation was associated with higher odds of treatment, awareness and controlled hypertension, suggesting that people living in the most deprived area may have been receiving better quality of care, or have higher comorbidity levels requiring greater engagement with doctors. These findings highlight the need for further work to improve hypertension management in Scotland. The family design of GS:SFHS has allowed family-based analysis to be performed to assess the familial aggregation and heritability of BP and hypertension traits. The familial correlation of BP traits ranged from 0.07 to 0.20, and from 0.18 to 0.34 for parent-offspring pairs and sibling pairs, respectively. A higher correlation of BP traits was observed among first-degree relatives than other types of relative pairs. A variance-component model that was adjusted for sex, body mass index (BMI), age, and age-squared was used to estimate heritability of BP traits, which ranged from 24% to 32% with pulse pressure (PP) having the lowest estimates. The genetic correlation between BP traits showed a high correlation between systolic (SBP), diastolic (DBP) and mean arterial pressure (MAP) (G: 81% to 94%), but lower correlations with PP (G: 22% to 78%). The sibling recurrence risk ratio (λS) for hypertension and treatment were calculated as 1.60 and 2.04 respectively. These findings confirm the genetic components of BP traits in GS:SFHS, and justify further work to investigate genetic determinants of BP. Genetic variants reported in the recent large GWAS of BP traits were selected for genotyping in GS:SFHS using a custom designed TaqMan® OpenArray®. The genotyping plate included 44 single nucleotide polymorphisms (SNPs) that have been previously reported to be associated with BP or hypertension at genome-wide significance level. A linear mixed model that is adjusted for age, age-squared, sex, and BMI was used to test for the association between the genetic variants and BP traits. Of the 43 variants that passed the QC, 11 variants showed statistically significant association with at least one BP trait. The phenotypic variance explained by these variant for the four BP traits were 1.4%, 1.5%, 1.6%, and 0.8% for SBP, DBP, MAP, and PP, respectively. The association of genetic risk score (GRS) that were constructed from selected variants has showed a positive association with BP level and hypertension prevalence, with an average effect of one mmHg increase with each 0.80 unit increases in the GRS across the different BP traits. The impact of BP-lowering medication on the genetic association study for BP traits has been established, with typical practice of adding a fixed value (i.e. 15/10 mmHg) to the measured BP values to adjust for BP treatment. Using the subset of participants with the two treatment exposure sources (i.e. SRMs and EPRs), the influence of using either source to justify the addition of fixed values in SNP association signal was analysed. BP phenotypes derived from EPRs were considered the true phenotypes, and those derived from SRMs were considered less accurate, with some phenotypic noise. Comparing SNPs association signals between the four BP traits in the two model derived from the different adjustments showed that MAP was the least impacted by the phenotypic noise. This was suggested by identifying the same overlapped significant SNPs for the two models in the case of MAP, while other BP traits had some discrepancy between the two sources

A study on the effect of functional distribution of income on aggregate demand

In this thesis, we study the causal relationship between functional distribution of income and economic growth. In particular, we focus on some of the aspects that might alter the effect of the profit share on growth. After a brief introduction and literature review, the empirical contributions will be presented in Chapters 3,4 and 5. Chapter 3 analyses the effect of a contemporaneous decrease in the wage share among countries that are major trade partners. Falling wage share and wage moderation are a global phenomenon which are hardly opposed by governments. This is because lower wages are associated with lower export prices and, therefore, have a positive effect on net-exports. There is, however, a fallacy of composition problem: not all countries can improve their balance of payments contemporaneously. Studying the country members of the North America Free Trade Agreement, we find that the effect on export of a contemporaneous decrease in the wage share in Mexico, Canada and the United States, is negative in all countries. In other words, the competitive advantage that each country gains because of a reduction in its wage share (to which is associated a decrease in export prices), is offset by a contemporaneous increase in competitiveness in the other two countries. Moreover, we find that NAFTA is overall wage-led: the profit share has a negative effect on aggregate demand. Chapter 4 tests whether it is possible that the effect of the profit share on growth is different in the long run and in the short run. Following Blecker (2014) our hypothesis is that in the short run the growth regime is less wage-led than it is in the long run. The results of our empirical investigation support this hypothesis, at least for the United States over the period 1950-2014. The effect of wages on consumption increases more than proportionally compared to the effect of profits on consumption from the short to the long run. Moreover, consumer debt seem to have only a short-run effect on consumption indicating that in the long run, when debt has to be repaid, consumption depends more on the level of income and on how it is distributed. Regarding investment, the effect of capacity utilization is always larger than the effect of the profit share and that the difference between the two effects is higher in the long run than in the short run. This confirms the hypothesis that in the long run, unless there is an increase in demand, it is likely that firms are not going to increase investments even in the presence of high profits. In addition, the rentier share of profits – that comprises dividends and interest payments – has a long-run negative effect on investment. In the long run rentiers divert firms’ profits from investment and, therefore, it weakens the effect of profits on investment. Finally, Chapter 5 studies the possibility of structural breaks in the relationship between functional distribution of income and growth. We argue that, from the 1980s, financialization and the European exchange rate agreements weakened the positive effect of the profit share on growth in Italy. The growth regime is therefore becoming less profit-led and more wage-led. Our results confirm this hypothesis and also shed light on the concept of cooperative and conflictual regimes as defined by Bhaduri and Marglin (1990).