National Bureau of Economic Research

About: National Bureau of Economic Research is a nonprofit organization based out in Cambridge, Massachusetts, United States. It is known for research contribution in the topics: Monetary policy & Population. The organization has 2626 authors who have published 34177 publications receiving 2818124 citations. The organization is also known as: NBER & The National Bureau of Economic Research.

Empirical Pricing Kernels

Abstract: This paper investigates the empirical characteristics of investor risk aversion over equity return states by estimating a daily semi-parametric pricing kernel. The two key features of this estimator are: (1) the functional form of the pricing kernel is estimated semi-parametrically, instead of being prespecified and (2) the pricing kernel is re-estimated on a daily basis, allowing measurement of time-variation in riskaversion over equity return states.Important empirical findings of the paper are as follows. Constant relative risk aversion over S&P500 return states is rejected in favor of a model in which relative risk aversion is stochastic. Empirical relative risk aversion over equity return states is found to be positively autocorrelated and positively correlated with the spread between implied and objective volatilities. In addition, the constant relative risk aversion (power utility) pricing kernel is found to underestimate the value of payoffs in large negative return states.An option hedging methodology is developed as a test of the predictive information in the empirical pricing kernel and its associated state probability model. The results of hedging performance tests for out-of-the-money S&P500 index put options indicate that time-varying risk aversion over equity return states is an important factor affecting option prices.

Inefficient Credit Booms

Abstract: This paper studies the welfare properties of competitive equilibria in an economy with financial frictions hit by aggregate shocks. In particular, it shows that competitive financial contracts can result in excessive borrowing ex ante and excessive volatility ex post. Even though, from a first-best perspective the equilibrium always displays under-borrowing, from a second-best point of view excessive borrowing can arise. The inefficiency is due to the combination of limited commitment in financial contracts and the fact that asset prices are determined in a spot market. This generates a pecuniary externality that is not internalized in private contracts. The model provides a framework to evaluate preventive policies which can be used during a credit boom to reduce the expected costs of a financial crisis.

Training, Wages, and Sample Selection: Estimating Sharp Bounds on Treatment Effects

Abstract: This paper empirically assesses the wage effects of the Job Corps program, one of the largest federally-funded job training programs in the United States. Even with the aid of a randomized experiment, the impact of a training program on wages is difficult to study because of sample selection, a pervasive problem in applied micro-econometric research. Wage rates are only observed for those who are employed, and employment status itself may be affected by the training program. This paper develops an intuitive trimming procedure for bounding average treatment effects in the presence of sample selection. In contrast to existing methods, the procedure requires neither exclusion restrictions nor a bounded support for the outcome of interest. Identification results, estimators, and their asymptotic distribution, are presented. The bounds suggest that the program raised wages, consistent with the notion that the Job Corps raises earnings by increasing human capital, rather than solely through encouraging work. The estimator is generally applicable to typical treatment evaluation problems in which there is non-random sample selection/attrition.

Financial Literacy, Financial Education and Economic Outcomes

Abstract: In this article we review the literature on financial literacy, financial education, and consumer financial outcomes. We consider how financial literacy is measured in the current literature, and examine how well the existing literature addresses whether financial education improves financial literacy or personal financial outcomes. We discuss the extent to which a competitive market provides incentives for firms to educate consumers or offer products that facilitate informed choice. We review the literature on alternative policies to improve financial outcomes, and compare the evidence to evidence on the efficacy and cost of financial education. Finally, we discuss directions for future research.

The Value of Waiting to Invest

Abstract: This paper studies the optimal timing of investment in an irreversible project where the benefits from the project and the investment cost follow continuous-time stochastic processes. The optimal time to invest and an explicit formula for the value of the option to invest are derived. The rule "invest if benefits exceed costs" does not properly account for the option value of waiting.Simulations show that this option value can be significant, and that for surprisingly reasonable parameter values it may be optimal to wait until benefits are twice the investment cost. Finally, we perform comparative static analysis on the valuation formula and on the rule for when to invest.