In Search of a theory of debt management

A growing literature integrates theories of debt management into models of optimal fiscal policy. One promising theory argues that the composition of government debt should be chosen so that fluctuations in the market value of debt offset changes in expected future deficits. This complete market approach to debt management is valid even when the government only issues non-contingent bonds. A number of authors conclude from this approach that governments should issue long term debt and invest in short term assets. We argue that the conclusions of this approach are too fragile to serve as a basis for policy recommendations. This is because bonds at different maturities have highly correlated returns, causing the determination of the optimal portfolio to be ill-conditioned. To make this point concrete we examine the implications of this approach to debt management in various models, both analytically and using numerical methods calibrated to the US economy. We find the complete market approach recommends asset positions which are huge multiples of GDP. Introducing persistent shocks or capital accumulation only worsens this problem. Increasing the volatility of interest rates through habits partly reduces the size of these simulations we find no presumption that governments should issue long term debt ? policy recommendations can be easily reversed through small perturbations in the specification of shocks or small variations in the maturity of bonds issued. We further extend the literature by removing the assumption that governments every period costlessly repurchase all outstanding debt. This exacerbates the size of the required positions, worsens their volatility and in some cases produces instability in debt holdings. We conclude that it is very difficult to insulate fiscal policy from shocks by using the complete markets approach to debt management. Given the limited variability of the yield curve using maturities is a poor way to substitute for state contingent debt. The result is the positions recommended by this approach conflict with a number of features that we believe are important in making bond markets incomplete e.g allowing for transaction costs, liquidity effects, etc.. Until these features are all fully incorporated we remain in search of a theory of debt management capable of providing robust policy insights.

Co-movements between US and UK stock prices: the roles of macroeconomic information and time-series varying conditional correlations

This paper provides evidence on the sources of co-movement in monthly US and UK stock price movements by investigating the role of macroeconomic and financial variables in a bivariate system with time-varying conditional correlations. Crosscountry communality in response is uncovered, with changes in the US Federal Funds rate, UK bond yields and oil prices having similar negative effects in both markets. Other variables also play a role, especially for the UK market. These effects do not, however, explain the marked increase in cross-market correlations observed from around 2000, which we attribute to time variation in the correlations of shocks to these markets. A regime-switching smooth transition model captures this time variation well and shows the correlations increase dramatically around 1999-2000. JEL classifications: C32, C51, G15 Keywords: international stock returns, DCC-GARCH model, smooth transition conditional correlation GARCH model, model evaluation.

Immunogold Detection of L-glutamate and D-serine in Small Synaptic-Like Microvesicles in Adult Hippocampal Astrocytes.

Glutamate and the N-methyl-D-aspartate receptor ligand D-serine are putative gliotransmitters. Here, we show by immunogold cytochemistry of the adult hippocampus that glutamate and D-serine accumulate in synaptic-like microvesicles (SLMVs) in the perisynaptic processes of astrocytes. The estimated concentration of fixed glutamate in the astrocytic SLMVs is comparable to that in synaptic vesicles of excitatory nerve terminals (∼45 and ∼55 mM, respectively), whereas the D-serine level is about 6 mM. The vesicles are organized in small spaced clusters located near the astrocytic plasma membrane. Endoplasmic reticulum is regularly found in close vicinity to SLMVs, suggesting that astrocytes contain functional nanodomains, where a local Ca(2+) increase can trigger release of glutamate and/or D-serine.

Three essays on the psychology of investment and financial markets

Préface My thesis consists of three essays where I consider equilibrium asset prices and investment strategies when the market is likely to experience crashes and possibly sharp windfalls. Although each part is written as an independent and self contained article, the papers share a common behavioral approach in representing investors preferences regarding to extremal returns. Investors utility is defined over their relative performance rather than over their final wealth position, a method first proposed by Markowitz (1952b) and by Kahneman and Tversky (1979), that I extend to incorporate preferences over extremal outcomes. With the failure of the traditional expected utility models in reproducing the observed stylized features of financial markets, the Prospect theory of Kahneman and Tversky (1979) offered the first significant alternative to the expected utility paradigm by considering that people focus on gains and losses rather than on final positions. Under this setting, Barberis, Huang, and Santos (2000) and McQueen and Vorkink (2004) were able to build a representative agent optimization model which solution reproduced some of the observed risk premium and excess volatility. The research in behavioral finance is relatively new and its potential still to explore. The three essays composing my thesis propose to use and extend this setting to study investors behavior and investment strategies in a market where crashes and sharp windfalls are likely to occur. In the first paper, the preferences of a representative agent, relative to time varying positive and negative extremal thresholds are modelled and estimated. A new utility function that conciliates between expected utility maximization and tail-related performance measures is proposed. The model estimation shows that the representative agent preferences reveals a significant level of crash aversion and lottery-pursuit. Assuming a single risky asset economy the proposed specification is able to reproduce some of the distributional features exhibited by financial return series. The second part proposes and illustrates a preference-based asset allocation model taking into account investors crash aversion. Using the skewed t distribution, optimal allocations are characterized as a resulting tradeoff between the distribution four moments. The specification highlights the preference for odd moments and the aversion for even moments. Qualitatively, optimal portfolios are analyzed in terms of firm characteristics and in a setting that reflects real-time asset allocation, a systematic over-performance is obtained compared to the aggregate stock market. Finally, in my third article, dynamic option-based investment strategies are derived and illustrated for investors presenting downside loss aversion. The problem is solved in closed form when the stock market exhibits stochastic volatility and jumps. The specification of downside loss averse utility functions allows corresponding terminal wealth profiles to be expressed as options on the stochastic discount factor contingent on the loss aversion level. Therefore dynamic strategies reduce to the replicating portfolio using exchange traded and well selected options, and the risky stock.

Explaining High Economic Growth in Small Tourism Countries with a Dynamic General Equilibrium Model

This paper shows that tourism specialisation can help to explain the observed high growth rates of small countries. For this purpose, two models of growth and trade are constructed to represent the trade relations between two countries. One of the countries is large, rich, has an own source of sustained growth and produces a tradable capital good. The other is a small poor economy, which does not have an own engine of growth and produces tradable tourism services. The poor country exports tourism services to and imports capital goods from the rich economy. In one model tourism is a luxury good, while in the other the expenditure elasticity of tourism imports is unitary. Two main results are obtained. In the long run, the tourism country overcomes decreasing returns and permanently grows because its terms of trade continuously improve. Since the tourism sector is relatively less productive than the capital good sector, tourism services become relatively scarcer and hence more expensive than the capital good. Moreover, along the transition the growth rate of the tourism economy holds well above the one of the rich country for a long time. The growth rate differential between countries is particularly high when tourism is a luxury good. In this case, there is a faster increase in the tourism demand. As a result, investment of the small economy is boosted and its terms of trade highly improve.

Decomposing differences in total factor productivity across firm size

This paper investigates the extent to which the gap in total factor productivity between small and large firms is due to differences in the endowment of factors determining productivity and to the returns associated with these factors. We place particular emphasis on the contribution of differences in the propensity to innovate and in the use of skilled labor across firms of different size. Empirical evidence from a representative sample of Spanish manufacturing firms corroborates that both differences in endowments and returns to innovation and skilled labor significantly contribute to the productivity gap between small and large firms. In addition, it is observed that the contribution of innovation to this gap is caused only by differences in quantity, while differences in returns have no effect; in the case of human capital, however, most of the effect can be attributed to increasing differences in returns between small and large firms.

Education and Economic Development in India

This brief survey examines the returns to education in India , and then examines the role of education on both economic growth and economic development with particular reference to India. Throughout, the objective is to draw out the implications of the empirical results for education policy. The results suggest that female education is of particular importance in India. They also suggest that perhaps because of the externalities it generates, primary education is more important than might be deduced from its relatively low private rate of return.

Public Sector Pay in Finland

This study analyses the forces determining public and private sector pay in Finland. The data used is a 7 per cent sample taken from the Finnish 2001 census. It contains information on 42 680 male workers, of which 8 759 are employed in public and 33 921 in the private sector. The study documents and describes data by education, occupation and industry. We estimate earnings equations for the whole sample as well as for four industries (construction, real estate, transportation and health) that provide an adequate mix of both public and sector workers. The results suggest that the private-public sector pay gap of about one per cent can be accounted for by differences in observable characteristics between the sectors (3.4 per cent) and lower returns from these characteristics (-2.3 per cent). However, the industry-level analysis indicates that the earnings gaps vary across industries, and are negative in some cases. These inter-industry differences in public-private gaps persist even when the usual controls are introduced. This suggests that public sector wage setters need greater local flexibility, which should result in less uniform wages within the public sector.

Official Central Bank Interventions in the Foreign Exchange Markets: A DCC Approach with Exogenous Variables

This paper assesses the impact of official central bank interventions (CBIs) on exchange rate returns, their volatility and bilateral correlations. By exploiting the recent publication of intervention data by the Bank of England, this study is able to investigate fficial interventions by a total number of four central banks, while the previous studies have been limited to three (the Federal Reserve, Bundesbank and Bank of Japan). The results of the existing literature are reappraised and refined. In particular, unilateral CBI is found to be more successful than coordinated CBI. The likely implications of these findings are then discussed.

Regional productivity variation and the impact of public capital stock: an analysis with spatial interaction, with reference to Spain

In this paper we examine whether variations in the level of public capital across Spain‟s Provinces affected productivity levels over the period 1996-2005. The analysis is motivated by contemporary urban economics theory, involving a production function for the competitive sector of the economy („industry‟) which includes the level of composite services derived from „service‟ firms under monopolistic competition. The outcome is potentially increasing returns to scale resulting from pecuniary externalities deriving from internal increasing returns in the monopolistic competition sector. We extend the production function by also making (log) labour efficiency a function of (log) total public capital stock and (log) human capital stock, leading to a simple and empirically tractable reduced form linking productivity level to density of employment, human capital and public capital stock. The model is further extended to include technological externalities or spillovers across provinces. Using panel data methodology, we find significant elasticities for total capital stock and for human capital stock, and a significant impact for employment density. The finding that the effect of public capital is significantly different from zero, indicating that it has a direct effect even after controlling for employment density, is contrary to some of the earlier research findings which leave the question of the impact of public capital unresolved.

Bayesian Model Averaging in the Instrumental Variable Regression Model

This paper considers the instrumental variable regression model when there is uncertainty about the set of instruments, exogeneity restrictions, the validity of identifying restrictions and the set of exogenous regressors. This uncertainty can result in a huge number of models. To avoid statistical problems associated with standard model selection procedures, we develop a reversible jump Markov chain Monte Carlo algorithm that allows us to do Bayesian model averaging. The algorithm is very exible and can be easily adapted to analyze any of the di¤erent priors that have been proposed in the Bayesian instrumental variables literature. We show how to calculate the probability of any relevant restriction (e.g. the posterior probability that over-identifying restrictions hold) and discuss diagnostic checking using the posterior distribution of discrepancy vectors. We illustrate our methods in a returns-to-schooling application.

Marriage as a Rat Race: Noisy Pre-Marital Investments with Assortative Matching

We study the incentive to invest to improve marriage prospects, in a frictionless marriage market with non-transferable utility. Stochastic returns to investment eliminate the multiplicity of equilibria in models with deterministic returns, and a unique equilibrium exists under reasonable conditions. Equilibrium investment is efficient when the sexes are symmetric. However, when there is any asymmetry, including an unbalanced sex ratio, investments are generically excessive. For example, if there is an excess of boys, then there is parental over-investment in boys and under-investment in girls, and total investment will be excessive.

Shallow-level migmatization of gabbros in a metamorphic contact aureole, Fuerteventura Basal Complex, Canary Islands

Migmatization of gabbroic rocks at 2-3 kbar has occurred in the metamorphic contact aureole of a mafic pluton in the Fuerteventura Basal Complex (Canary Island;). Migmatites are characterized by a dense network: of closely spaced millimetre-wide leucocratic veins with perfectly preserved igneous textures. They are all relatively enriched in Al, Na I: Sr Ba, Nb, Y and the rare earth elements compared with the unaffected country rock beyond the aureole. Migmatization under such low-pressure conditions war possible because of the unusual tectonic and magmatic contact in which ii occurred. Multiple basic intrusions associated with extrusive volcanic activity created high heat flow in a small area. Alkaline and metasomatized rocks present in the country rock of the intruding pluton were leached by high-temperature fluids during contact metamorphism. These enriched fluids then favoured partial melting of the host gabbroic rocks, and contaminated both the leucosomes and melanosomes. A transpressive tectonic setting at the time of intrusion created shearing along the contact between the intrusion and its host rock. This shearing enhanced circulation of the fluids and allowed segregation of the nea-formed melts from their restite by opening tension veins into which the melts migrated. Depending on the relative timing of melt segregation and recrystallization leucosomes range in composition from a 40-60% mixture of clinopyroxene (+/- amphibole) and plagioclase to almost pure feldspathic veins. Comparable occurrences of gabbros migmatized at low pressure are expected only at a snail scale in localized areas of high heat flow in the presence of fluids, such as in. mid-ocean ridges or ocean-islands.

Stock Market Reaction to Fed Funds Rate Surprises: State Dependence and the Financial Crisis

This paper examines the impact of Federal Funds rate (FFR) surprises on stock returns in the United States over the period 1989-2009, focusing on the impact of the recent financial crisis. We find that prior to the crisis, stock prices increased as a response to unexpected FFR cuts. State dependence is also identified with stocks exhibiting larger increases when interest rate easing coincided with recessions, bear stock markets, and tightening credit market conditions. However, an important structural shift took place during the financial crisis, which changed the stock market response to FFR shocks, as well as the nature of state dependence. Specifically, during the crisis period stock market participants did not react positively to unexpected FFR cuts. Our results highlight the severity of the recent financial turmoil episode and the ineffectiveness of conventional monetary policy close to the zero lower bound for nominal interest rates.

Lock-in, path dependence, and the Internationalization of QWERTY

This paper looks at the emergence of what is described here as the QWERTY family of standards (QWERTY and its international adaptations QZERTY, AZERTY, and QWERTZ). QWERTY has been described as an inferior solution and an accident of history. However, the analysis here finds that each member of the family represented highly efficient adaptations to specific user needs and technical challenges encountered in their own environments. These findings may be seen to have wider implications given QWERTY’s role as paradigm case in the literature on increasing returns and path dependence, and these are pursued in the paper