NBER Working Papers by Holger Kraft

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Working Papers

March 2015Optimal Carbon Abatement in a Stochastic Equilibrium Model with Climate Change
with Christoph Hambel, Eduardo Schwartz: w21044
This paper studies a dynamic stochastic general equilibrium model involving climate change. Our model allows for damages on output resulting from global warming. We compare two approaches (level and growth rate impact) and provide results for both. Our calibration captures several effects of climate change and feedback effects on the temperature dynamics. In particular, we are able to match estimates of future temperature distributions provided in the fifth assessment report of the IPCC (2014). We solve for the optimal abatement policy and find that this policy is considerably state-dependent. We also study the effect of risk aversion and elasticity of intertemporal substitution. It turns out that risk aversion matters more if climate change has a level impact on output, whereas the elasti...
February 2013Growth Options and Firm Valuation
with Eduardo S. Schwartz, Farina Weiss: w18836
This paper studies the relation between firm value and a firm's growth options. We find strong empirical evidence that (average) Tobin's Q increases with firm-level volatility. The significance mainly comes from R&D firms, which have more growth options than non-R&D firms. By decomposing firm-level volatility into its systematic and unsystematic part, we document that only idiosyncratic volatility has a significant effect on valuation. Second, we analyze the relation of stock returns to realized contemporaneous idiosyncratic volatility and R&D expenses. Single sorting on idiosyncratic volatility yields a significant negative relation between portfolio alphas and contemporaneous idiosyncratic volatility for non-R&D portfolios, whereas in a four-factor model the portfolio alphas of R&D portf...
March 2010Cash Flow Multipliers and Optimal Investment Decisions
with Eduardo S. Schwartz: w15807
By postulating a simple stochastic process for the firm's cash flows in which the drift and the variance of the process depend on the investment policy of the firm, we develop a theoretical model, determine the optimal investment policy and, given this policy, calculate the ratio of the current value of the firm and the current cash flow which we call the "cash flow multiplier''. The main contribution of the paper, however, is empirical. Using a very extensive data set comprised of more than 13,000 fims over 44 years we examine the determinants of the cash flow multiplier using as explanatory variables macro and firm specific variables suggested by the theoretical model. We find strong support for the variables suggested by the model. Perhaps the most interesting aspect of the paper is th...

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