Economics

Obesity and Hyperbolic Discounting: An Experimental Analysis

Timothy J. Richards et al. — Fri, 05 Apr 2013 16:05:56 PDT

Models of rational addiction suggest that obesity is consistent with time-consistent preferences. Behavioral economists maintain that addictions such as alcoholism, smoking and over-eating represent examples of present-bias in decision making that is fundamentally irrational. In this article, conduct an experiment to test whether individual discount schedules are time-consistent and whether discount rates are higher for subjects who exhibit patterns of risky behavior. Our results show that discount functions are quasi-hyperbolic in shape, and that obesity and drinking are positively related to the discount rate. Anti-obesity policy, therefore, would be best directed to informing individuals as to the long-term implications of short-term gratification, rather than taxing foods directly.

The choice of a mixing distribution in duration models

Sanjiv Jaggia — Fri, 27 Jan 2012 14:38:57 PST

The Hougaard mixing distribution is considered for a Weibull duration model. This distribution is flexible and also encompasses the gamma and the inverse Gaussian distributions making it useful in discriminating between alternate distributions.

A partial defense of the giant squid

Sanjiv Jaggia et al. — Fri, 27 Jan 2012 14:38:54 PST

Identifiability of the misspecified split hazard models

Sanjiv Jaggia — Fri, 27 Jan 2012 14:38:51 PST

Unlike standard models, a split population hazard model allows the exit probability to be less than one. Although conceptually attractive, split models are prone to identification problems. In the reduced form estimation of the hazard function, the influence of split may not be distinguishable from that of neglected heterogeneity. For illustration, I use Monte Carlo simulations to highlight the problem of interpreting the structural parameters of the split Weibull and the Weibull-gamma models.

Joint and separate score tests for state dependence and unobserved heterogeneity

Sanjiv Jaggia et al. — Fri, 27 Jan 2012 14:38:47 PST

The paper compares separate, conditional, and joint score tests of duration dependence and unobserved heterogeneity when the null is the exponential model and the alternative is the heterogeneous Weibull model. The score tests based on the conditional score function include the Neyman C(x) test as a special case. An examination of the non-null distribution of the joint test explains when all score tests have low power in the presence of multiple misspecifications. Monte Carlo experiments show that the conditional score tests are superior to the standard separate tests which confound unobserved heterogeneity and duration dependence.

Modelling skewness and elongation in financial returns: the case of exchange-traded funds

Sanjiv Jaggia et al. — Fri, 27 Jan 2012 14:38:37 PST

Recent studies have documented the importance of asymmetry and tail-fatness of returns on portfolio-choice, asset-pricing, value-at-risk and option-valuation models. This article explores the nature of skewness and elongation in daily Exchange-traded Fund (ETF) return distributions using g, h and (g x h) distributions. These exploratory data analytic techniques of Tukey (1977) reveal patterns that are hidden from a cursory glance at conventional measures for skewness and elongation. The g, h and (g x h) distributions provide parameter estimates that indicate substantial variation in skewness and elongation for individual ETFs; nonetheless, some trends are discovered when the funds arc grouped by fund size and style of investing. Monte Carlo simulations suggest that these exploratory techniques are able to capture patterns found in commonly used Generalized Autoregressive Conditional Heteroskedasticity (GARCH) family of models.

Risk Aversion and the Investment Horizon: A New Perspective on the Time Diversification Debate

Sanjiv Jaggia et al. — Fri, 27 Jan 2012 14:38:32 PST

Investment managers generally subscribe to the principle of time diversification. This implies that a larger portion of the portfolio should be devoted to risky assets as the investment horizon increases. In contrast, academics have shown that for investors with utility functions characterized by constant relative risk aversion, the optimal asset-allocation strategy is independent of the investment horizon. The relative risk avers ion in these studies is assumed to be constant both with respect to wealth as well as investment horizon. We suggest a utility function that explicitly captures the notion that individuals are more risk tolerant when the investment horizon is long, thereby validating the intuitively appealing time diversification argument.

Mean Reversion and the Asset Allocation Decisions

Sanjiv Jaggia et al. — Fri, 27 Jan 2012 14:38:29 PST

Until fairly recently the conventional wisdom in the finance academic community was that security prices follow a random walk. Some influential papers have uncovered evidence of mean reversion particularly over longer horizons. Siegel (1998) has suggested that given this evidence: "the holding period becomes a crucial issue when the data reveal the mean reversion of the stock returns." In this paper, we explore the pattern of mean reversion in post-World War ll U.S. stock returns and find that it peaks in a 4-year cycle. Given this empirical regularity we show that a buy-and-hold investment strategy, which is appropriate under a random walk, is no longer optimal.

Markets, the Environment and Liberty: The Case of Elephants and Air Quality

Gordon L. Brady et al. — Fri, 27 Jan 2012 14:38:21 PST

No Abstract

Why does tobacco-control spending vary so much across states?

Michael L. Marlow — Mon, 23 Jan 2012 13:15:51 PST

Although tobacco-control spending is considered an essential component of comprehensive programmes aimed at lowering smoking, substantial variation exists across states. This article examines if variation is systematically related to cross-state differences in smoking prevalence, holding other factors constant that are expected to influence spending. An econometric model is estimated which considers effects of tobacco-settlement revenues, income, unemployment, political party of the governor, state debt and smoking prevalence on tobacco-control spending in all states during 2000--2007. Estimations control for the possibility that spending and smoking prevalence are co-determined to clearly determine the causal link from prevalence to spending. Spending variation is determined to be inconsistent with a 'rational needs' strategy whereby states with higher prevalence choose more funding than states with lower prevalence. This empirical result is consistent with recent studies indicating that spending on tobacco control exerts little to no effect on cigarette sales or smoking prevalence.

Specification Tests Based on the Heterogeneous Generalized Gamma Model of Duration: With an Application to Kennan's Strike Data

Sanjiv Jaggia — Mon, 23 Jan 2012 11:32:13 PST

In this paper, tests for neglected heterogeneity and functional form misspeciftcation of some commonly used parametric distributions are derived within a heterogeneous generalized gamma model. It is argued that the conventional test of heterogeneity may not be valid when the underlying hazard function is misspecified. Hence, if the estimated hazard function is deemed restrictive, tests for functional form misspecification should accompany any test of heterogeneity. An empirical illustration based on Kennan's (1985) model of strikes is used to show that incorrect inferences may be drawn, as in a number of previous analyses, if the relevant restrictions are not tested jointly.

Multiple Bids as a Consequence of Target Management Resistance: A Count Data Approach

Sanjiv Jaggia et al. — Mon, 23 Jan 2012 11:32:08 PST

In this article, we focus on the question of target management resistance and the incidence of subsequent bids. A Poisson count data model is used where the dependent variable represents the number of bids (count) received and the independent variables comprise target management actions and firm specific characteristics. Of the target management actions considered, legal defense and the entry of a white knight are associated with additional bids. With respect to firm specific characteristics, we find that a high initial bid premium deters subsequent bids. Firm size is also significant and has an interesting relationship with the number of bids received. Larger target firms tend to receive more bids; however, the number of bids tails off for firms with assets exceeding $12 billion.

Contested Tender Offers: An Estimate of the Hazard Function

Sanjiv Jaggia et al. — Mon, 23 Jan 2012 11:32:01 PST

In this article we estimate the hazard function (takeover probabilities) for firms that are targets in unsolicited tender offers. The data support a Weibull-gamma specification and imply a hazard rate that increases sharply in the initial period following the bid announcement, after which it declines steadily. In explaining the hazard, we find that the initial bid premium has no explanatory power, but the onset of an auction and the proportion of institutional ownership In the target firm significantly enhance the hazard. Legal and financial restructuring actions by target management are effective in reducing the hazard, thereby prolonging the contest.

Alternative Forms of the Score Test for Heterogeneity in a Censored Exponential Model

Sanjiv Jaggia — Mon, 23 Jan 2012 11:31:56 PST

Different versions of the score test for neglected heterogeneity for a right censored exponential model are analyzed. These tests depend on how the information matrix is estimated. A test based on the theoretical information matrix is derived that is shown to outperform all the other tests. Further, the noncentrality parameter of the test is examined to show how the power of the test is reduced when data are censored.

An Analysis of the Factors that Influence Student Performance: A Fresh Approach to an Old Debate

Sanjiv Jaggia et al. — Mon, 23 Jan 2012 11:31:51 PST

There is a general consensus that student performance at all levels has been deteriorating. Despite numerous attempts by researchers to link school expenditures with student performance, a clear relationship does not exist. Since a number of difficulties plague earlier studies, this paper attempts to remedy these problems by offering a better data design and a sounder methodology. This study uses the 1992 Massachusetts Educational Assessment Program (MEAP) test scores from 4th, 8th, and 12th grade students to measure student performance. Since each students grade falls into one of five possible categories, the application of an ordered log it model incorporates the natural ordering of the MEAP scores. The results indicate that family background and the stability of a community are the main factors a/feeling student performance. The data suggest that higher levels of spending have no consistent or systematic relation with student performance.

An analysis of second time around bankruptcies using a split-population duration model

Arindam Bandopadhyaya et al. — Mon, 23 Jan 2012 11:31:47 PST

A significant proportion of firms that reorganize under Chapter 11 file for a second Chapter 11 protection or liquidate. We use a "split-population" duration model that provides useful information regarding factors that could lead to a second bankruptcy. We find that the probability (hazard) of a firm re-entering bankruptcy is lower for firms that take a long time to reorganize, reduce their debt-to-assets ratio, do not divest, belong to an industry that has low capacity utilization and low demand growth. We also find that the probability of an average firm re-entering bankruptcy increases for about 4 years before declining.

The Medium-Term Aftermarket in High-Tech IPOs: Patterns and Implications

Sanjiv Jaggia et al. — Mon, 23 Jan 2012 11:31:41 PST

A number of theoretical models, loosely characterized under the rubric of behavioral finance, suggest that price convergence to value is far from instantaneous and possibly involves interplay between noise and informed traders. These models are motivated by documented anomalous patterns in equity markets and assume some form of psychological bias that affects investor behavior. With the benefit of hindsight it seems clear that the technology sector went through a bubble-like pattern in the late 1990s and that investor biases (if indeed they exist and can be inferred) may have been even more pronounced. Accordingly, our study focuses on the medium-term aftermarket in high-tech US IPOs during this period. Using both ordered logit regression and split-population hazard modeling approaches, we document momentum and reversal patterns that are consistent with the predictions of some behavioral finance models. Our findings indicate that momentum variables are important while fundamental variables have at best weak explanatory power.

Survival Analysis with Artificially Constructed Events

Sanjiv Jaggia et al. — Mon, 23 Jan 2012 11:31:34 PST

One of the key elements of survival models is that they enable the researcher to determine whether the length of time an individual (or economic entity) spends in a particular state affects the probability of exiting that state. Natural applications in economics and finance include the analysis of unemployment spells, corporate bankruptcies and mortgage pre-payments. The distinguishing feature of most applications is the definitive event that marks the transition from the origin to the transition state. We believe that limiting the use of survival analysis to applications in which the event duration appears to be 'naturally' available is an unnecessary constraint. For example, the date of emergence from Chapter 11 bankruptcy protection is a subjective management decision and the true event duration, though treated as definitive, is in reality quite ambiguous. We propose that survival models can and should be extended to analyze researcher-defined events such as the length of time a stock takes to reach a pre-set price target. We illustrate our point with an examination of IPO aftermarket behavior.

Momentum Investing: The Case of High-Tech IPOs

Sanjiv Jaggia et al. — Mon, 23 Jan 2012 11:31:25 PST

We document significant momentum effects in the high-tech IPO aftermarket beyond the initial (underpricing) run-up. Cumulative market-adjusted returns (CMARs) reveal a striking pattern. A local peak of just over 10 percent is reached around 20 trading days post-IPO coinciding with the expiry of the “quiet period”. A global peak (of about 33 percent) is reached after 105 trading days. The CMAR decays fairly rapidly thereafter possibly in anticipation of the expiry of the six-month lockup period. Further, we find strong evidence of a linkage between technical ex-ante observable variables and the momentum build-up. We conjecture that visceral factors may at least partially underlie the investor behavior that gives rise to the bubble-like CMAR pattern.

Rent-to-own agreements: Customer characteristics and contract outcomes

Michael H. Anderson et al. — Mon, 23 Jan 2012 11:31:20 PST

The rent-to-own (RTO) industry, by offering immediate access to household goods for a small periodic fee with no credit check or down payment, has strong appeal to low income and financially distressed consumers. An important policy question is whether an RTO agreement is used as a rental/lease with build-in purchase option or as something more akin to an installment loan. Given the embedded options to return the item or to purchase it early, the actual rent paid by RTO customers is substantially lower than the oft-reported total rent which assumes that agreements go to term. We employ a log-normal censored regression model to analyze the influence of customer demographics as well as the transactional details of the contract on the rent paid by consumers using rent-to-own. Our main conclusions are (1) it is the “working poor” that are likely to pay more rent, (2) there appears to be a clientele effect with customers paying more rent under bi-weekly and monthly, as opposed to weekly, payment schedules, and (3) customers who exhibit delinquency in making contractual payments generally end up paying more rent. Further, our data allows some observations on annual percentage rates by illustrating the business risk present for RTO stores as well as the cross-subsidization of consumers.