This paper utilizes a unique data set of credit card accounts to analyze how people respond to credit supply. Increases in credit limits generate an immediate and significant rise in debt, counter to the Permanent-Income Hypothesis. The “MPC out of liquidity” is largest for people starting near their limit, consistent with binding liquidity constraints. However, the MPC is significant even for people starting well below their limit, consistent with precautionary models. Nonetheless, there are other results that conventional models cannot easily explain, for example, why so many people are borrowing on their credit cards, and simultaneously holding low yielding assets. The long-run elasticity of debt to the interest rate is approximately -1.3, less than half of which represents balance-shifting across cards.

Using a system of three simultaneous equations, we test the predictions of Datar, Feltham, and Hughes 1991 and Hughes 1986 between auditor choice, earnings disclosures, and retained ownership in U.S. firms making initial public offerings of securities. Using a sample of initial public offerings between 1990 and 1997, we find that the demand for high‐quality auditors increases with firm risk. Additionally, we find that auditor choice, earnings disclosure, and risk are determinants of retained ownership, which is consistent with the predictions of Datar et al. and Hughes that auditor choice and direct disclosure are substitute signals for ownership retention. Further, our results suggest that the signals chosen (i.e., retained ownership, auditor choice, and disclosure) are related through their cost structures and are chosen jointly to minimize the overall cost to the entrepreneur.

Brian D. Kluger, Steve B. Wyatt, Preferencing, Internalization of Order Flow, and Tacit Collusion: Evidence from Experiments, The Journal of Financial and Quantitative Analysis, Vol. 37, No. 3 (Sep., 2002), pp. 449-469

This paper proposes a dynamic GE model with standard business cycle properties that also achieves a satisfactory replication of the major financial stylized facts. We ride on two major ideas. First, we show that operating leverage, originating in the priority status of wage claims given the observed business cycle characteristics of the latter, magnifies the risk properties of the residual payments to firm owners and justifies a substantial risk premium. Further we build on the observation that the low frequency variations in income shares constitute a significant source of risk, one that is unlikely to be insurable. When we price this risk in an incomplete market framework, we obtain a GE model with return volatilities close to observations and a sizable equity premium. This is accomplished in a world of low risk aversion and standard utility function but with agent heterogeneity. Workers with restricted access to financial markets are insured by firms and the consumption and preferences of firm owners solely determine the pricing kernel.

Journal Article Competing Theories of Financial Anomalies Get access Alon Brav, Alon Brav Duke University Address correspondence to Alon Brav, Fuqua School of Business, Duke University, Box 90120, Durham, NC 27708-0120, or e-mail: [email protected]. Search for other works by this author on: Oxford Academic Google Scholar J.B. Heaton J.B. Heaton Bartlit Beck Herman Palenchar & Scott and Duke University Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 15, Issue 2, 2 January 2002, Pages 575–606, https://doi.org/10.1093/rfs/15.2.575 Published: 16 June 2015

Self-selected migration presents one potential explanation for why observed returns to a college education in local labor markets vary widely even though U.S. workers are highly mobile.To assess the impact of self-selection on estimated returns, this paper first develops a Roy model of mobility and earnings where workers choose in which of the 50 states (plus the District of Columbia) to live and work.Available estimation methods are either infeasible for a selection model with so many alternatives or place potentially severe restrictions on earnings and the selection process.This paper develops an alternative econometric methodology which combines Lee's (1983) parametric maximum order statistic approach to reduce the dimensionality of the error terms with more recent work on semiparametric estimation of selection models (e.g., Ahn and Powell, 1993).The resulting semiparametric correction is easy to implement and can be adapted to a variety of other polychotomous choice problems.The empirical work, which uses 1990 U.S. Census data, confirms the role of comparative advantage in mobility decisions.The results suggest that self-selection of higher educated individuals to states with higher returns to education generally leads to upward biases in OLS estimates of the returns to education in state-specific labor markets.While the estimated returns to a college education are significantly biased, correcting for the bias does not narrow the range of returns across states.Consistent with the finding that the corrected return to a college education differs across the U.S., the relative state-to-state migration flows of college-versus high school-educated individuals respond strongly to differences in the return to education and amenities across states.

Self–selected migration presents one potential explanation for why observed returns to a college education in local labor markets vary widely even though U.S. workers are highly mobile. To assess the impact of self–selection on estimated returns, this paper first develops a Roy model of mobility and earnings where workers choose in which of the 50 states (plus the District of Columbia) to live and work. Available estimation methods are either infeasible for a selection model with so many alternatives or place potentially severe restrictions on earnings and the selection process. This paper develops an alternative econometric methodology that combines Lee's (1983) parametric maximum order statistic approach to reduce the dimensionality of the error terms with more recent work on semiparametric estimation of selection models (e.g., Ahn and Powell (1993)). The resulting semiparametric correction is easy to implement and can be adapted to a variety of other polychotomous choice problems. The empirical work, which uses 1990 U.S. Census data, confirms the role of comparative advantage in mobility decisions. The results suggest that self–selection of higher educated individuals to states with higher returns to education generally leads to upward biases in OLS estimates of the returns to education in state–specific labor markets. While the estimated returns to a college education are significantly biased, correcting for the bias does not narrow the range of returns across states. Consistent with the finding that the corrected return to a college education differs across the U.S., the relative state–to–state migration flows of college– versus high school–educated individuals respond strongly to differences in the return to education and amenities across states.

CreditRisk+ is an influential and widely implemented model of portfolio credit risk. As a close variant of models long used for insurance risk, it retains the analytical tractability for which the insurance models were designed. Value-at-risk (VaR) can be obtained via a recurrence-rule algorithm, so Monte Carlo simulation can be avoided. Little recognized, however, is that the algorithm is fragile. Under empirically realistic conditions, numerical error can accumulate in the execution of the recurrence rule and produce wildly inaccurate results for VaR. This paper provides new tools for users of CreditRisk+ based on the cumulant generating function (cgf) of the portfolio loss distribution. Direct solution for the moments of the loss distribution from the cgf is almost instantaneous and is computationally robust. Thus, the moments provide a convenient, quick and independent diagnostic on the implementation and execution of the standard solution algorithm. Better still, with the cgf in hand we have an alternative to the standard algorithm. I show how tail percentiles of the loss distribution can be calculated quickly and easily by saddlepoint approximation. On a large and varied sample of simulated test portfolios, I find a natural complementarity between the two algorithms: Saddlepoint approximation is accurate and robust in those situations for which the standard algorithm performs least well, and is less accurate in those situations for which the standard algorithm is fast and reliable.

Ongoing questions on the historical mean and standard deviation of the return on equities and bonds and on the equilibrium demand for these securities are addressed in the context of a stationary, overlapping-generations economy in which consumers are subject to a borrowing constraint. The key feature captured by the OLG economy is that the bulk of the future income of the young consumers is derived from their wages forthcoming in their middle age, while the bulk of the future income of the middle-aged consumers is derived from their savings in equity and bonds. The young would like to borrow and invest in equity but the borrowing constraint prevents them from doing so. The middle-aged choose to hold a diversified portfolio that includes positive holdings of bonds and this explains the demand for bonds. Without the borrowing constraint, the young borrow and invest in equity, thereby decreasing the mean equity premium and increasing the rate of interest.

A large body of literature suggests that firm-level stock prices “underreact” to news about future cash flows; i.e., shocks to a firm's expected cash flows are positively correlated with shocks to expected returns on its stock. We examine the joint behavior of returns, cash-flow news, and trading between individuals and institutions. Institutions buy shares from (sell shares to) individuals in response to positive (negative) cash-flow news, thus exploiting the underreaction phenomenon. Institutions are not simply following price momentum strategies: When price goes up (down) in the absence of any cash-flow news, institutions sell shares to (buy shares from) individuals. Although institutions are trading in the “right” direction, institutions as a group outperform individuals by only 1.44% per annum before transaction and other costs, because they are extremely conservative in deviating from the value-weighted market index.