Using investment policy data of 857 Dutch pension funds during 1999–2006, we develop three indicators of investor sophistication. The indicators show that pension funds’ strategic portfolio choices are often based on coarse and less sophisticated approaches. First, most pension funds round strategic asset allocations to the nearest multiple of 5%, similar to age heaping in demographic and historical studies. Second, many pension funds invest little or nothing in alternative, more complex asset classes, resulting in limited asset diversification. Third, many pension funds favor regional investments and as such do not fully employ the opportunities of international risk diversification. Our indicators are correlated with pension fund size, in line with the expectation that smaller pension funds are generally less sophisticated than large pension funds. Using the indicators for investor sophistication, we show that less sophisticated pension funds tend to opt for investment strategies with less risk.

Intraday Value-at-Risk (VaR) is one of the risk measures used by market participants involved in high-frequency trading. High-frequency log-returns feature important kurtosis (fat tails) and volatility clustering (extreme log-returns appear in clusters) that VaR models should take into account. We propose a marked point process model for the excesses of the time series over a high threshold that combines Hawkes processes for the exceedances with a generalized Pareto distribution model for the marks (exceedance sizes). The conditional approach features intraday clustering of extremes and is used to calculate instantaneous conditional VaR. The models are backtested on real data and compared to a competitor approach that proposes a nonparametric extension of the classical peaks-over-threshold method. Maximum likelihood estimation is computationally intensive; we use a differential evolution genetic algorithm to find adequate starting values for the optimization process.

The option to obtain a General Education Development (GED) certificate changes the incentives facing high school students. This paper evaluates the effect of three different GED policy innovations on high school graduation rates. A six point decrease in the GED pass rate due to an increase in passing standards produced a 1.3 point decline in overall dropout rates. The introduction of a GED certification program in high schools in Oregon produced a four percent decrease in graduation rates. Introduction of GED certificates in California increased dropout rates by 3 points. The GED program induces high school students to drop out.

What determines which assets are used in transactions? We develop a framework where the extent to which assets are recognizable determines the extent to which they are acceptable in exchange—i.e. it determines their liquidity. Recognizability and liquidity are endogenized by allowing agents to invest in information. We analyse the effects of monetary policy. There can be multiple equilibria, with different transaction patterns, and these patterns are not invariant to policy. We show that small changes in information may generate large responses in asset prices, allocations, and welfare. We also discuss some issues in international economics, including exchange rates and dollarization.

The classic model of Becker (1965, “A Theory of the Allocation of Time”, Economic Journal, 125, 493–517) suggests that labour supply decisions should be analysed within the broader context of time allocation and market good consumption choices, but most empirical work on policy has focused exclusively on measuring impacts on market work. This paper examines how income taxes affect time allocation during the entire day and how these time allocation decisions interact with expenditure patterns. Using the Panel Study of Income Dynamics from 1975 to 2004, we analyse the response of single women's housework, labour supply, and other time to variation in tax and transfer schedules across income levels, number of children, states, and time. We find that when the economic reward to participating in the labour force increases, market work increases and housework decreases, with the decrease in housework accounting for approximately two-thirds of the increase in market work. Analysis of repeated cross sections of time diary data from 1975 to 2004 shows that “home production” decreases substantially when market hours of work increase in response to policy changes. Data on expenditures show some evidence that expenditures on market goods likely to substitute for housework increase in response to a greater incentive to join the labour force. The baseline estimates imply that the elasticity of substitution between consumption of home and market goods is 2·61. The results are consistent with the Becker model. Meanwhile, single men show little response to changes in tax policy, and we are able to rule out an elasticity of substitution between home and market goods for this group of more than 1·66.

The science of economics has some constraints and tensions that set it apart from other sciences. One reflection of these constraints and tensions is that, more than in most other scientific disciplines, it is easy to find economists of high reputation who disagree strongly with one another on issues of wide public interest. This may sug gest that economics, unlike most other scientific disciplines, does not really make progress. Its theories and results seem to come and go, always in hot dispute, rather than improving over time so as to build an increasing body of knowledge. There is some truth to this view; there are examples where disputes of earlier decades have been not so much resolved as replaced by new disputes. But though econom ics progresses unevenly, and not even monotonically, there are some examples of real scientific progress in economics. This essay describes one—the evolution since around 1950 of our understanding of how monetary policy is determined and what its effects are. The story described here is not a simple success story. It describes an ascent to higher ground, but the ground is still shaky. Part of the purpose of the essay is to remind readers of how views strongly held in earlier decades have since been shown to be mistaken. This should encourage continuing skepticism of consensus views and motivate critics to sharpen their efforts at looking at new data, or at old data in new ways, and generating improved theories in the light of what they see. We will be tracking two interrelated strands of intellectual effort: the methodol ogy of modeling and inference for economic time series, and the theory of policy influences on business cycle fluctuations. The starting point in the 1950s of the the ory of macroeconomic policy was Keynes's analysis of the Great Depression of the 1930s, which included an attack on the Quantity Theory of money. In the 1930s, interest rates on safe assets had been at approximately zero over long spans of time, and Keynes explained why, under these circumstances, expansion of the money sup ply was likely to have little effect. The leading American Keynesian, Alvin Hansen, included in his (1952) book A Guide to Keynes a chapter on money, in which he explained Keynes's argument for the likely ineffectiveness of monetary expansion in a period of depressed output. Hansen concluded the chapter with, Thus it is that modern countries place primary emphasis on fiscal policy, in whose service mone tary policy is relegated to the subsidiary role of a useful but necessary handmaiden. The methodology of modeling in the 1950s built on Jan Tinbergen's (1939) seminal book, which presented probably the first multiple-equation, statistically estimated economic time series model. His efforts drew heavy criticism. Keynes

This article studies the central role of the credit market. We show that the credit market facilitates optimal risk sharing by allowing less risk-averse investors to take on levered positions and consume more risk. The equilibrium amount behaves procyclically when aggregate consumption is low but countercyclically when it is high. The varying size of the credit market modifies the amount of risk sharing, which in turn influences asset prices such as expected stock returns, stock return volatility, and the term structure of interest rates. Our article provides a frictionless benchmark for the role and the behavior of the credit market. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

[We use exogenous scheduling of Wall Street Journal columnists to identify a causal relation between financial reporting and stock market performance. To measure the media's unconditional effect, we add columnist fixed effects to a daily regression of excess Dow Jones Industrial Average returns. Relative to standard control variables, these fixed effects increase the R² by about 35%, indicating each columnist's average persistent "bullishness" or "bearishness." To measure the media's conditional effect, we interact columnist fixed effects with lagged returns. This increases explanatory power by yet another one-third, and identifies amplification or attenuation of prevailing sentiment as a tool used by financial journalists.]