15 August 2012

An Options Market Based on the Probability of Inflation

Recently, a market in options based on Consumer Price Index inflation has emerged in the United States, where the payoff to investors is tied to the realized inflation rate. Yuriy Kitsul and Jonathan Wright use price quotes from this market to create implied probability density functions (pdfs) for inflation at different maturities. They then study how these pdfs respond to macroeconomic news announcements. They find that certain news announcements significantly affect the implied probabilities of deflation and of high inflation. The option-implied pdfs put substantially more weight on both high inflation and deflation than their objective counterparts, implying that investors have high marginal utility in the state of the world where inflation is high and in the deflationary state.

14 August 2012

Deep Recessions, Fast Recoveries, and Financial Crises

Looking back at America's economic history, Michael Bordo and Joseph Haubrich find that, in general, recessions associated with financial crises are followed by rapid recoveries. Three exceptions to this pattern exist: the recovery from the Great Contraction in the 1930s; the recovery after the recession of the early 1990s; and the current recovery, which is strikingly more tepid than the one in the 1990s.

13 August 2012

Has Surface Water Quality Improved Since the Clean Water Act?

On the fortieth anniversary of the federal Clean Water Act, Kerry Smith and Carlos Valcarcel Wolloh use a single standard of "water cleanliness" for the period 1975-2011 and find that for the nation as a whole, fresh water lakes are about at the same quality levels as they were in 1975. Water quality appears to be affected by the business cycle: as the unemployment rate rises, all of the national indexes for water quality improve, and the reverse seems to accompany improving economic conditions.

10 August 2012

The Returns to Education in China

Hai Fang, Karen Eggleston, John Rizzo, Scott Rozelle, and Dick Zeckhauser find that China's Compulsory Education Law of 1986 raised overall educational attainment by about 0.8 years of schooling during the period 1997-2006. The impact of the law varied by location and by gender. The authors further find that the overall returns to education after the implementation of the Act are approximately 20 percent per year on average. This is fairly consistent with, albeit slightly higher than, the returns to education in most industrialized economies.

9 August 2012

Stand Your Ground Laws and Homicides

Since 2005, eighteen states have passed legislation extending the right to self-defense, with no duty to retreat, to places a person has a legal right to be. These are known as Stand Your Ground laws. Exploiting the variation in the timing of these laws across states, and using monthly data from the U.S. Vital Statistics, Chandler McClellan and Erdal Tekin find that Stand Your Ground laws are associated with a significant increase in the number of homicides among whites, especially white males. They find no evidence that these laws increase homicides among blacks.

8 August 2012

Measuring Managerial Skill in the Mutual Fund Industry

Using data on all actively managed mutual funds and a tradable benchmark for evaluating fund managers -- all available Vanguard index funds -- Jonathan Berk and Jules van Binsbergen find that the average mutual fund manager uses his or her talents and skills to add value of about $2 million a year. They also find that skills are persistent: it is possible to predict long-term performance as far out as ten years into the future. Investors appear to be able to identify talent and compensate it: the researchers find a strong relationship between managerial compensation and value added. Furthermore, current compensation predicts future performance.

7 August 2012

Competition among University Endowments

After identifying clusters of competitive universities, William Goetzmann and Sharon Oster find that schools competing in the same markets for students follow similar asset allocation policies over time, even with endowment size and other school characteristics held constant. They also find that when a school’s endowment return lags relative to that of its closest rival, it systematically changes its asset allocation. Endowments use marketable alternatives, such as hedge funds, to attempt to catch up with their competitors. Endowments with recent positive experience with various alternative asset classes tend to increase exposure to them.

6 August 2012

A Study of Private Disability Insurance

Using data on approximately 10,000 policies and 1 million workers from a private Long Term Disability (LTD) insurer, David Autor, Mark Duggan, and Jonathan Gruber find that LTD claims rates are much lower under the private system than under its public counterpart, the Social Security Disability Insurance program. Focusing on variation in private LTD plans within firms and over time, the researchers find that a higher replacement rate – that is, a higher ratio of benefits to earnings while working -- and a shorter waiting period before the receipt of benefits -- also known as the Elimination Period, or EP - significantly increase the likelihood that workers claim LTD. In contrast, a longer EP has a deterrent effect: workers are less likely to bother to make a claim for a disability if they will only be able to collect for a short period of time.

3 August 2012

Monetary Policy Affects Inequality in the U.S.

Analyzing data on U.S. income and consumption since 1980 from the Consumer Expenditures Survey, Olivier Coibion, Yuriy Gorodnichenko, Lorenz Kueng, and John Silvia find that contractionary monetary policies are associated with increased inequality in labor earnings, total income, consumption, and total expenditures. They also find that monetary shocks can explain much of the historical cyclical variation in income and consumption inequality.

2 August 2012

Plan Selection in Medicare Part D

Analyzing administrative data on medical claims under Medicare Part D (prescription drug benefit), researchers Florian Heiss, Adam Leive, Dan McFadden, and Joachim Winter find that less than 10 percent of individuals enroll in plans that would be lowest cost for them, when cost includes both premiums and co-payments. They estimate that relative to the Medicare administration's benchmark rule, which conditions next year’s plan choice only on the drugs consumed in the current year, enrollees lost on average about $300 per year.
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