A stochastic discount factor approach to asset pricing using panel data asymptotics

Using the Pricing Equation in a panel-data framework, we construct a novel consistent estimator of the stochastic discount factor (SDF) which relies on the fact that its logarithm is the "common feature" in every asset return of the economy. Our estimator is a simple function of asset returns and does not depend on any parametric function representing preferences. The techniques discussed in this paper were applied to two relevant issues in macroeconomics and finance: the first asks what type of parametric preference-representation could be validated by asset-return data, and the second asks whether or not our SDF estimator can price returns in an out-of-sample forecasting exercise. In formal testing, we cannot reject standard preference specifications used in the macro/finance literature. Estimates of the relative risk-aversion coefficient are between 1 and 2, and statistically equal to unity. We also show that our SDF proxy can price reasonably well the returns of stocks with a higher capitalization level, whereas it shows some difficulty in pricing stocks with a lower level of capitalization.

Three essays on local demand for public services

Local provision of public services has the positive effect of increasing the efficiency because each locality has its idiosyncrasies that determine a particular demand for public services. This dissertation addresses different aspects of the local demand for public goods and services and their relationship with political incentives. The text is divided in three essays. The first essay aims to test the existence of yardstick competition in education spending using panel data from Brazilian municipalities. The essay estimates two-regime spatial Durbin models with time and spatial fixed effects using maximum likelihood, where the regimes represent different electoral and educational accountability institutional settings. First, it is investigated whether the lame duck incumbents tend to engage in less strategic interaction as a result of the impossibility of reelection, which lowers the incentives for them to signal their type (good or bad) to the voters by mimicking their neighbors’ expenditures. Additionally, it is evaluated whether the lack of electorate support faced by the minority governments causes the incumbents to mimic the neighbors’ spending to a greater extent to increase their odds of reelection. Next, the essay estimates the effects of the institutional change introduced by the disclosure on April 2007 of the Basic Education Development Index (known as IDEB) and its goals on the strategic interaction at the municipality level. This institutional change potentially increased the incentives for incumbents to follow the national best practices in an attempt to signal their type to voters, thus reducing the importance of local information spillover. The same model is also tested using school inputs that are believed to improve students’ performance in place of education spending. The results show evidence for yardstick competition in education spending. Spatial auto-correlation is lower among the lame ducks and higher among the incumbents with minority support (a smaller vote margin). In addition, the institutional change introduced by the IDEB reduced the spatial interaction in education spending and input-setting, thus diminishing the importance of local information spillover. The second essay investigates the role played by the geographic distance between the poor and non-poor in the local demand for income redistribution. In particular, the study provides an empirical test of the geographically limited altruism model proposed in Pauly (1973), incorporating the possibility of participation costs associated with the provision of transfers (Van de Wale, 1998). First, the discussion is motivated by allowing for an “iceberg cost” of participation in the programs for the poor individuals in Pauly’s original model. Next, using data from the 2000 Brazilian Census and a panel of municipalities based on the National Household Sample Survey (PNAD) from 2001 to 2007, all the distance-related explanatory variables indicate that an increased proximity between poor and non-poor is associated with better targeting of the programs (demand for redistribution). For instance, a 1-hour increase in the time spent commuting by the poor reduces the targeting by 3.158 percentage points. This result is similar to that of Ashworth, Heyndels and Smolders (2002) but is definitely not due to the program leakages. To empirically disentangle participation costs and spatially restricted altruism effects, an additional test is conducted using unique panel data based on the 2004 and 2006 PNAD, which assess the number of benefits and the average benefit value received by beneficiaries. The estimates suggest that both cost and altruism play important roles in targeting determination in Brazil, and thus, in the determination of the demand for redistribution. Lastly, the results indicate that ‘size matters’; i.e., the budget for redistribution has a positive impact on targeting. The third essay aims to empirically test the validity of the median voter model for the Brazilian case. Information on municipalities are obtained from the Population Census and the Brazilian Supreme Electoral Court for the year 2000. First, the median voter demand for local public services is estimated. The bundles of services offered by reelection candidates are identified as the expenditures realized during incumbents’ first term in office. The assumption of perfect information of candidates concerning the median demand is relaxed and a weaker hypothesis, of rational expectation, is imposed. Thus, incumbents make mistakes about the median demand that are referred to as misperception errors. Thus, at a given point in time, incumbents can provide a bundle (given by the amount of expenditures per capita) that differs from median voter’s demand for public services by a multiplicative error term, which is included in the residuals of the demand equation. Next, it is estimated the impact of the module of this misperception error on the electoral performance of incumbents using a selection models. The result suggests that the median voter model is valid for the case of Brazilian municipalities.

Demand aggregation and credit risk effects in pooled procurement: evidence from the Brazilian public purchases of pharmaceuticals and medical supplies

Pooled procurement has an important role in reducing acquisition prices of goods. A pool of buyers, which aggregates demand for its members, increases bargaining power and allows suppliers to achieve economies of scale and scope in the production. Such aggregation demand e ect lowers prices paid for buyers. However, when a buyer with a good reputation for paying suppliers in a timely manner is joined in the pool by a buyer with bad reputation may have its price paid increased due to the credit risk e ect on prices. This will happen because prices paid in a pooled procurement should refect the (higher) average buyers' credit risk. Using a data set on Brazilian public purchases of pharmaceuticals and medical supplies, we nd evidence supporting both e ects. We show that the prices paid by public bodies in Brazil are lower when they buy through pooled procurement than individually. On the other hand, federal agencies (i.e. good buyers) pay higher prices for products when they are joined by state agencies (i.e. bad buyers) in a pool. Such evidence suggests that pooled procurement should be carefully designed to avoid that prices paid increase for its members.

Modelo de volatilidade estocástica com saltos aplicado a commodities agrícolas

Mensalmente são publicados relatórios pelo Departamento de Agricultura dos Estados Unidos (USDA) onde são divulgados dados de condições das safras, oferta e demanda globais, nível dos estoques, que servem como referência para todos os participantes do mercado de commodities agrícolas. Esse mercado apresenta uma volatilidade acentuada no período de divulgação dos relatórios. Um modelo de volatilidade estocástica com saltos é utilizado para a dinâmica de preços de milho e de soja. Não existe um modelo ‘ideal’ para tal fim, cada um dos existentes têm suas vantagens e desvantagens. O modelo escolhido foi o de Oztukel e Wilmott (1998), que é um modelo de volatilidade estocástica empírica, incrementado com saltos determinísticos. Empiricamente foi demonstrado que um modelo de volatilidade estocástica pode ser bem ajustado ao mercado de commodities, e o processo de jump-diffusion pode representar bem os saltos que o mercado apresenta durante a divulgação dos relatórios. As opções de commodities agrícolas que são negociadas em bolsa são do tipo americanas, então alguns métodos disponíveis poderiam ser utilizados para precificar opções seguindo a dinâmica do modelo proposto. Dado que o modelo escolhido é um modelo multi-fatores, então o método apropriado para a precificação é o proposto por Longstaff e Schwartz (2001) chamado de Monte Carlo por mínimos quadrados (LSM). As opções precificadas pelo modelo são utilizadas em uma estratégia de hedge de uma posição física de milho e de soja, e a eficiência dessa estratégia é comparada com estratégias utilizando-se instrumentos disponíveis no mercado.

Low expectations, low demand : when should the government intervene?

Este trabalho estuda o impacto de diferentes políticas que procuram mitigar falhas de coordenação em um ambiente macroeconômico. Abordamos questões relativas ao timing dos estímulos econômicos. Quando o governo deveria começar a incentivar a economia? Deveria gastar mais para prevenir crises ou para tirar a economia da recessão quando os fundamentos estão melhorando? Como o estímulo deve alterar a complementaridade estratégica? Para responder a estas perguntas, construímos um modelo macroeconômico dinâmico com concorrência monopolística e decisões de investimento sequenciais. Aplicando resultados da literatura teórica de jogos dinâmicos com fricções, selecionamos um único equilíbrio neste modelo, nos dando um instrumental tratável para a análise de políticas. Nossos resultados sugerem que o governo não deveria viesar incentivos nem para a prevenção de crises nem para resgatar a economia quando esta já está em crise.

Estimation of random coefficients logit demand models: an application to the Brazilian fixed income fund market

Estimation of demand and supply in differentiated products markets is a central issue in Empirical Industrial Organization and has been used to study the effects of taxes, merges, introduction of new goods, market power, among others. Logit and Random Coefficients Logit are examples of demand models used to study these effects. For the supply side it is generally supposed a Nash equilibrium in prices. This work presents a detailed discussion of these models of demand and supply as well as the procedure for estimation. Lastly, is made an application to the Brazilian fixed income fund market.

The access to demand

In this paper I argue that, in developing countries, sufficient aggregate demand is not enough to motivate investment and achieve full employment. Besides, according to the Keynesian developmental macroeconomics under construction, competent business enterprises must have access to that demand –access which is denied to most of them because developing countries face the tendency to the cyclical and chronic overvaluation of the exchange rate

Predicting Amazon Deforestation through the deterninants of demand for agricultural land

This paper develops a model of deforestation pressure in the Amazon. It is based on the determinants of demand for agricultural land, i.e. the interactions between population dynamics, urbanization and the growth of local markets, land prices, and government spending and policies. The mo deI is estimated using data from the period 1970 - 1985, and predictions for the period 1985 - 2010 are made under explicit assumptions about the underlying factors of deforestation. The predictions indicate that economic growth in the Amazon is likely to continue at high rates even if the federal government abandons its aggressive development policy. Deforestation will be much smaller if they do, though, since the active development policies tend to promote wasteful use of land.

Hedging options in a garch environment: testing the term structure of stochastic volatility models

This paper develops a methodology for testing the term structure of volatility forecasts derived from stochastic volatility models, and implements it to analyze models of S&P500 index volatility. U sing measurements of the ability of volatility models to hedge and value term structure dependent option positions, we fmd that hedging tests support the Black-Scholes delta and gamma hedges, but not the simple vega hedge when there is no model of the term structure of volatility. With various models, it is difficult to improve on a simple gamma hedge assuming constant volatility. Ofthe volatility models, the GARCH components estimate of term structure is preferred. Valuation tests indicate that all the models contain term structure information not incorporated in market prices.

Demand-pull stagflation

This paper explores the possibility of stagflation emanating exc1usively from monetaJy sbocks, without concurrent supply shocks or shifts in potential output. This arises in connection with a tight money paradox. in the context of a fiscal theory of the price leveI. The paper exhibits perfect foresight equilibria with output and inflation fluctuating in opposite direetions as a consequence of small monetary shocks, and also following changes in monetaJy policy regime that launch the economy into hyperinflation or that produce dramatic stabilization of already high inflation. For that purpose, an analytically convenient dynamic general equilibrium macro model is deve10ped wbere nominal rigidities are represented by a cross between staggered two-period contracts and state dependent price adjustment in the presence of menu costs.

Simulation-based smoothing and filtering in factor stochastic volatility models : two econometric applications

In this article we use factor models to describe a certain class of covariance structure for financiaI time series models. More specifical1y, we concentrate on situations where the factor variances are modeled by a multivariate stochastic volatility structure. We build on previous work by allowing the factor loadings, in the factor mo deI structure, to have a time-varying structure and to capture changes in asset weights over time motivated by applications with multi pIe time series of daily exchange rates. We explore and discuss potential extensions to the models exposed here in the prediction area. This discussion leads to open issues on real time implementation and natural model comparisons.

Simulation -based smoothing and filtering in factor stochastic volatility models : two econometric applications (July-2001)

The past decade has wítenessed a series of (well accepted and defined) financial crises periods in the world economy. Most of these events aI,"e country specific and eventually spreaded out across neighbor countries, with the concept of vicinity extrapolating the geographic maps and entering the contagion maps. Unfortunately, what contagion represents and how to measure it are still unanswered questions. In this article we measure the transmission of shocks by cross-market correlation\ coefficients following Forbes and Rigobon's (2000) notion of shift-contagion,. Our main contribution relies upon the use of traditional factor model techniques combined with stochastic volatility mo deIs to study the dependence among Latin American stock price indexes and the North American indexo More specifically, we concentrate on situations where the factor variances are modeled by a multivariate stochastic volatility structure. From a theoretical perspective, we improve currently available methodology by allowing the factor loadings, in the factor model structure, to have a time-varying structure and to capture changes in the series' weights over time. By doing this, we believe that changes and interventions experienced by those five countries are well accommodated by our models which learns and adapts reasonably fast to those economic and idiosyncratic shocks. We empirically show that the time varying covariance structure can be modeled by one or two common factors and that some sort of contagion is present in most of the series' covariances during periods of economical instability, or crisis. Open issues on real time implementation and natural model comparisons are thoroughly discussed.

Demand and supply: price elasticities and corporate performance in the UK

This paper investigates the relationship between consumer demand and corporate performance in several consumer industries in the UK, using two independent datasets. It uses data on consumer expenditures and the retail price index to estimate Almost Ideal Demand Systems on micro-data and compute timevarying price elasticities of demand for disaggregated commodity groups. Then, it matches the product definitions to the Standard Industry Classification and uses the estimated elasticities to investigate the impact of consumer behaviour on firm-level profitability equations. The time-varying household characteristics are ideal instruments for the demand effects in the firms' supply equation. The paper concludes that demand elasticities have a significant and tangible impact on the profitability of UK firms and that this impact can shed some light on the relationship between market structure and economic performance.