Browsing by Division "SEPS - School of Economics and Political Science"

This paper combines a behavioral reward-risk model based on prospect theory with multiple investment accounts to explain the asset allocation puzzle, that is, the observation that investors violate the two-fund separation property of optimal mean-variance allocations. In a empirical analysis with U.S. data, the authors show that investors with preference according to the behavioral reward-risk model and multiple investment accounts, invest a higher proportion into bonds and large cap stocks as their risk tolerance diminishes, consistently with the empirical findings.

This article examines whether the chances of job placements improve if the unemployed are counselled by caseworkers who belong to the same social group, defined by gender, age, education and nationality. Based on an unusually informative dataset, which links Swiss unemployed to their caseworkers, we find positive employment effects of about 3 percentage points if the caseworker and his unemployed client belong to the same social group. Coincidence in a single characteristic, e.g., same gender of caseworker and unemployed, does not lead to detectable effects on employment. These results, obtained by statistical matching methods, are confirmed by several robustness checks.

This paper examines whether the chances of job placements improve if unemployed persons are counselled by caseworkers who belong to the same social group, defined by gender, age, education, and nationality. Based on an unusually informative dataset, which links Swiss unemployed to their caseworkers, we find positive employment effects of about 4 percentage points if caseworker and unemployed belong to the same social group. Coincidence in a single characteristic, e.g. same gender of caseworker and unemployed, does not lead to detectable effects on employment. These results, obtained by statistical matching methods, are confirmed by several robustness checks.

Since the second half of the 2000s, relations between Russia and Estonia have been steadily declining. This has also had an effect on the relationship between the Estonian majority and the Russophone minority in Estonia. Additionally, the situation is negatively affected by the influence of the Russian media. The Russian-speaking minority, however, is not to be viewed as a mere agent of Moscow in Estonia, but appears as an independent protagonist in a three-cornered relationship.

We provide theoretical and empirical arguments in favor of a diminishing marginal premium for market risk. In capital market equilibrium with binding portfolio restrictions, investors with different risk aversion levels generally hold different sets of risky securities. Whereas the traditional linear relation breaks down, equilibrium can be described or approximated by a concave relation between expected return and market beta, and a concave relationship between market alpha and market beta. An empirical analysis of U.S. stock market data confirms the existence of a significant concave cross-sectional relation between average return and estimated market beta. We estimate that the market risk premium is at least four to six percent per annum, substantially above traditional estimates. A practical implication for active portfolio managers is that the alpha of ``betting against beta'' strategies seems dominated by the medium-minus-high-beta spread rather than the low-minus-medium-beta spread. The success of such strategies thus largely depends on underweighting or short selling high-beta stocks.

We provide theoretical and empirical arguments in favor of a concave shape for the security market line, or a diminishing marginal premium for market risk. In capital market equilibrium with binding portfolio restrictions, different investors generally hold different sets of risky securities. Despite the differences in composition, the optimal portfolios generally share a joint exposure to systematic risk. Equilibrium in this case can be approximated by a concave relation between expected return and market beta rather than the traditional linear relation. An empirical analysis of U.S. stock market data confirms the existence of a significant and robust, concave cross-sectional relation between average return and estimated past market beta. We estimate that the market-risk premium is at least five to six percent per annum for the average stock, substantially higher than conventional estimates.

We apply a consistent sexual partnership formation model which hinges on the assumption that one gender's choices drives the process (male or female dominant model). The other gender's behaviour is imputed. The model is fitted to UK sexual behaviour data and applied to a simple incidence model of HSV-2. With a male dominant model (which assumes accurate male reports on numbers of partners) the modelled incidences of HSV-2 are 77% higher for men and 50% higher for women than with a female dominant model (which assumes accurate female reports). Although highly stylized, our simple incidence model sheds light on the inconsistent

This article suggests that various dimensions of the larger project of global governance are incoherent and illegitimate. Three dimensions of global governance - the provision of global public goods; processes of transnational regulation; and efforts to spread universal human rights - are examined and found to be deficient in terms of the ability of affected populations to participate in decisions over value trade-offs. Citizens' rights to participation in democratic processes often have been diminished as the locus of political decision making has shifted: on the one hand, to institutions beyond the territorial borders of the nation state; on the other, away from political institutions and towards "global civil society," which seems oddly intolerant of diversity. But if global governance is anti-pluralist and disenfranchising, it risks devolving into an imperial project. Hence, the paper concludes with a plea for a return to international politics as a control on the threat of empire.

Equity index implied volatility functions are known to be excessively skewed in comparison with implied volatility at the single stock level. We study this stylized fact for the case of a major German stock index, the DAX, by recovering index implied volatility from simulating the 30-dimensional return system of all DAX constituents. Option prices are computed after risk neutralization of the multivariate process which is estimated under the physical probability measure. The multivariate models belong to the class of copula asymmetric dynamic conditional correlation models. We show that moderate tail dependence coupled with asymmetric correlation response to negative news is essential to explain the index implied volatility skew. Standard dynamic correlation models with zero tail dependence fail to generate a sufficiently steep implied volatility skew.

A multivariate methodology based on functional gradient descent to estimate and forecast time-varying expected bond returns is presented and discussed. Backtesting this procedure on US monthly data, empirical evidence of its strong forecasting potential in terms of the accuracy of the predictions is collected. The proposed methodology clearly outperforms the classical univariate analysis used in the literature.

This paper presents a dynamic North-South general-equilibrium model where per capita incomes shape demand patterns across regions. Innovation takes place in a rich North while firms in a poor South imitate products manufactured in North. Allowing a role for per capita incomes in determining demand delivers a complete international product cycle as described by Vernon (1966), where the different stages of the product cycle are not only determined by supply-side factors but also by the distribution of income between North and South. We analyze how changes in the gap between North and South due to changes in Southern labor productivity, population size in South and inequality across regions affect the international product cycle. In line with presented stylized facts, we predict a negative correlation between adoption time and per capita incomes.

We apply the recently introduced generalized tree-structured (GTS) model to the analysis and forecast of stock market diversity. Diversity is a measure of capital concentration across a market that plays a central role in the search for arbitrage. The GTS model allows for different conditional mean and volatility regimes that are directly related to the behavior of macroeconomic fundamentals through a binary threshold construction. Testing on US market data, we collect empirical evidence of the model's strong potential in estimating and forecasting diversity accurately in comparison with other standard approaches. In addition, the GTS model allows for the construction of very simple portfolio strategies that systematically beat the standard cap-weighted S&P500 index.