BKK the EZ way: An International Production Economy with Recursive Preferences |
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We characterize an international production economy in which: (1) agents have Epstein and Zin (1989) preferences,
(2) international productivity frontiers are exposed to both short- and long-run shocks, and
(3) consumption features a larger degree of home bias relative to investment. Under our recursive risk-sharing scheme,
relative good long-run news to domestic productivity create a net outflow of domestic investments.
This response accounts for the Backus, Kehoe and Kydland (1994) anomaly, concerning the lower degree of
correlation of international consumption relative to output. We document that our model is strongly consistent with
novel empirical evidence on both international quantities and prices. (with Max Croce, Steven Ho, and Philip Howard)
Someone Likes it Skewed: an Experimental Analysis of Skewness and Risk Aversion |
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We modify the multiple price listing design of Holt and Laury (2002) to study
the trade-off between expected payoff and payoff’s skewness. We find that our subjects
are equally split between those that are and those that are not averse to negative
skewness, despite the fact that they all display risk aversion in the standard
Holt and Laury (2002) treatment. We estimate the parameters of a power-expo
utility function only on the subset of subjects, whose behavior across treatments
is consistent with this functional form and find that relative risk aversion can be
twice as large as what is typically found in these experiments. (with A. Bassi and P. Fulghieri) Coming soon!
Skewness in Expected Macro Fundamentals and the Predictability of Equity Returns: Evidence and Theory |
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We show that introducing time-varying skewness in the distribution of expected growth prospects in an otherwise standard endowment economy
can up to double the model implied equity Sharpe ratios, and produce a substantial amount of fluctuation in equity risk premia. Looking at
the Livingston Survey, we document that the first and third cross-sectional moments of the distribution of GDP growth rates made
by professional forecasters can predict equity excess returns, a finding which is consistent with our consumption based asset
pricing model. (with E. Ghysels and J. Meng)
Recursive allocations and wealth distribution with multiple goods: existence, survivorship, and dynamics. |
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We characterize the equilibrium of a complete markets economy with multiple agents displaying a preference for the timing of the resolution of uncertainty.
Utilities are defined over an aggregate of two goods. We provide conditions under
which the solution of the planner’s problem exists and it features a non-degenerate
invariant distribution of Pareto weights. We show that a first order Taylor expansion
about the unconditional mean of the economy is not only highly inaccurate,
but it also implies that one of the two agents receives no wealth in the long-run
positive probability. (with Max Croce)
Six Anomalies looking for a model. A consumption based explanation of International Finance Puzzles |
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When agents have a preference for the timing of the resolution of uncertainty
the presence of a low frequency component in the dynamics of consumption growth
can account for a number of anomalies including the Backus and Smith puzzle
and the high correlation of stock markets given the almost absence of correlation
in the fundamentals. The introduction of stochastic volatility allows also to
resolve the forward rate premium anomaly, providing a unified framework to
study international finance puzzles.
On the existence of the exchange rate when agents have complete home bias and non-time separable preferences |
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Colacito and Croce (2006) study the dynamics of the growth rate of the real
exchange rate, when the preferences of the representative consumers in the
two countries are defined only over the domestic good and characterized
by non-time separability a la Epstein and Zin (1989). This paper shows
that an equilibrium of this economy exists in which exchange rates are well
defined and it can be interpreted as the limiting case of an economy in which
preferences are defined over both domestic and foreign goods. This note was
originated as a response to a number of people that questioned the existence
of an exchange rate in the absence of trade.