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13-41 Kotchoni, Rachidi; Dalibor, Stevanovic - Probability and Severity of Recessions

This paper tackles the prediction of the probability and severity of US recessions. We employ parsimonious Probit models to estimate the probability of a recession h periods ahead, for h varying between 1 and 8 quarters. A novel goodness-of-fit measure derived from the Kullback-Leibler Information Criterion is developed and used to select the regressors to include in the Probit models. Next, an autoregression (AR) augmented with inverse Mills ratio (IMR) and diffusion indices (DI) is fitted to selected measures of real economic activity. The resulting “IMR-DI-AR” model is used to generate forecasts conditional on optimistic and pessimistic scenarios for the horizon of interest. The severity of recessions is defined as the gap between the pessimistic scenario and the recent trend of the series. For a time series of GDP growth, our measure of recession severity has the interpretation of the output loss. Our results support that U.S. recessions are predictable to a great extent, both in terms of occurrence and severity. All recessions are not alike: some are more predictable than others while some are more severe than expected.

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13-40 Dessy, Sylvain; Ragued, Safa - Whither the Progressive Tax ?

The progressive wage tax is the instrument commonly used by democracies to fund public expenditures. Yet it still divides opinions about its impact on skill formation. We develop a general equilibrium model to analyze this impact, in the context of uncertain return on higher education. We show that the quantitative impact on skill formation of switching from the flat to the progressive tax varies with the level of efficiency with which higher education imparts graduates with suitable skills. This impact is negative when the level of efficiency of higher education is low and positive when it is high.

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13-39 Duclos, Jean-Yves; Tiberti, Luca; Araar, Abdelkrim - Multidimensional Poverty Targeting

The importance of taking into account multiple dimensions of wellbeing in the measurement of poverty has been emphasized in the recent literature. The poverty alleviation literature has not, however, yet addressed the important issue of policy  design for efficient multidimensional poverty reduction. From a normative perspective,  it can be argued that, in addition to being concerned with impacts on multiple dimensions of poverty, policy should also consider impacts on their joint distribution. From a positive perspective, it is regularly observed that different poverty dimensions are often correlated and mutually reinforced, especially over time. The paper integrates these two perspectives into a consistent policy evaluation framework. Targeting dominance techniques are also proposed to assess the normative robustness of targeting strategies. The analytical results are applied to data from Vietnam and South Africa and illustrate the role of both normative and positive perspectives in designing efficient multidimensional poverty targeting policies.

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13-38 Emons, Winand; Fluet, Claude - Why Plaintiffs' Attorneys Use Contingent and Defense Attorneys Fixed Fee Contracts

Victims want to collect damages from injurers. Cases differ with respect to the judgment. Attorneys observe the expected judgment, clients do not. Victims need an attorney to sue; defense attorneys reduce the probability that the plaintiff prevails. Plaintiffs’ attorneys offer contingent fees providing incentives to proceed with strong and drop weak cases. By contrast, defense attorneys work for fixed fees under which they accept all cases. Since the defense commits to fight all cases, few victims sue in the first place. We thus explain the fact that in the US virtually all plaintiffs use contingency while defendants tend to rely exclusively on fixed fees.

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13-37 Mnasri, Mohamed; Dionne, Georges; Gueyie, Jean-Pierre - The Maturity Structure of Corporate Hedging: the Case of the U.S. Oil and Gas Industry

This paper investigates how firms design the maturity of their hedging programs, and the real effects of maturity choice on firm value and risk. Using a new dataset on hedging activities of 150 U.S. oil and gas producers, we find strong evidence that hedging maturity is influenced by investment programs, market conditions, production specificities, and hedging contract features. We also give empirical evidence of a non-monotonic relationship between hedging maturity and measures of financial distress. We further investigate the motivations of early termination of contracts. Finally, we show that longer hedging maturities could attenuate the impacts of commodity price risk on firm value and risk.

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13-36 Mirman, Leonard J.; Reffett, Kevin; Santugini, Marc - On Learning and Growth

We study optimal growth under learning. We extend the Mirman-Zilcha stochastic growth results characterizing optimal programs for general utility and production functions to the case of learning. We then use recursive methods to study the effect of learning on the dynamic program by considering the case of iso-elastic utility and linear production, for general distributions of the random shocks and beliefs (i.e., without the use of conjugate priors), for any horizon. Finally, we address the issue of experimentation by providing a solution to an infinite-horizon optimal dynamic program.

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13-35 Gendron-Saulnier, Catherine; Santugini, Marc - Noisy Learning and Price Discrimination: Implications for Information Dissemination and Profits

We study third-degree price discrimination in the presence of uninformed buyers who extract noisy information from observing prices. In a noisy learning environment, price discrimination can be detrimental to the firm and beneficial to the consumers. On the one hand, discriminatory pricing reduces consumers’ uncertainty, i.e., the variance of posterior beliefs upon observing prices is reduced. Specifically, observing two prices under discriminatory pricing provides more information than one price under uniform pricing even when discriminatory pricing reduces the amount of information contained in each price. On the other hand, it is not always optimal for the firm to use discriminatory pricing since the presence of uninformed buyers provides the firm with the incentive to engage in noisy price signaling. Indeed, if the benefit from price flexibility (through discriminatory pricing) is offset by the cost signaling quality through two distinct prices, then it is optimal to integrate markets and thus to use uniform pricing.

 

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13-34 Haeck, Catherine; Lefebvre, Pierre; Merrigan, Philip - Canadian Evidence on Ten Years of Universal Preschool Policies: the Good and the Bad

More than ten years ago, to increase mothers’ participation in the labour market and to enhance child development, the province of Québec implemented a $5 per day universal childcare policy. This paper provides a comprehensive review of the costs and benefits of the program over that period. A non-experimental evaluation framework based on multiple pre- and post-treatment periods is used to estimate the policy effects. We find that the reform had important and lasting effects on the number of children aged 1 to 4 attending childcare and the numbers of hours they spend in daycare. For children aged 5, we uncovered strong evidence that implementing full-day kindergarten alone was not enough to increase maternal labour force participation and weeks worked, but when combined with the low-fee daycare program it was, and these effects were also long lasting. Our results on cognitive development suggest that the school setting is more successful in raising children’s cognitive ability than the daycare setting. Finally, we show that the fiscal costs were most likely larger than the benefits.

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13-33 Mirman, Leonard J.; Salgueiro, Egas M.; Santugini, Marc - Integrating Real and Financial Decisions of the Firm

We study the issue of integrating real and financial decisions in a monopoly firm with risk-averse decision-makers. To that end, we combine the decisions of the firm and of the shareholders in a very simple but robust model, with uncertainty in the real market and CARA preferences. We show the existence of equilibrium either in a competitive and a uncompetitive financial market, though different assumptions are needed in each case. In all situations, access to the financial market leads to risk-sharing and an increase in production, but only the competitive case is Pareto optimal. When either the firm or the outside investors act as leaders, the optimal risk-sharing is distorted to favor the leader. We also discuss the effect that changes on the coefficients of risk aversion have on the equilibrium outcomes.

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13-32 Fluet, Claude; Garella, Paolo G. - Debt Rescheduling with Multiple Lenders: Relying on the Information of Others

Can debt rescheduling decisions differ in multiple lenders’ versus a single lender loan? Do multiple lenders efficiently react to information? We show that the precision of information plays an essential role. Foreclosing by one lender is disruptive so that a lender can rationally wait for the decision of other lenders, rescheduling her loan, if she expects that other lenders receive more precise information. We develop a Bayesian game where signals of different precision are randomly distributed to lenders. Both, premature liquidation and excessive rescheduling are possible in equilibrium, according to the pattern of information. However this is a second-best outcome, given that private information cannot be optimally shared.

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13-31 Barattieri, Alessandro; Eden, Maya; Stevanovic, Dalibor - The Connection between Wall Street and Main Street: Measurement and Implications for Monetary Policy

We propose a measure of the extent to which a financial sector is connected to the real economy. The Measure of Connectedness is a mesure of composition of the assets, namely the share of the credit to the non-financial sectors over the total credit market instruments. The aggregate U.S. Measure of Connectedness declines by about 27% in the period 1952-2009. We suggest that this increase in disconnectedness between the financial sector and the real economy may have dampened the sensitivity of the real economy to monetary shocks. We present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to the entrepreneur’s net worth, thereby dampening the credit channel transmission of monetary policy. Finally, we interact our measure with both a SVAR and a FAVAR for the U.S. economy, and establish that the impulse responses to monetary policy shocks are dampened as the level of connection declines.

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13-30 Mésonnier, Jean-Stéphane; Stevanovic, Dalibor - Bank Leverage Shocks and the Macroeconomy: a New Look in a Data-Rich Environment

The recent crisis has revealed the potentially dramatic consequences of allowing the build-up of an overstretched leverage of the financial system, and prompted proposals by bank supervisors to significantly tighten bank capital requirements as part of the new Basel 3 regulations. Although these proposals have been fiercely debated ever since, the empirical question of the macroeconomic consequences of shocks to banks’ leverage, be they policy induced or not, remains still largely unsettled. In this paper, we aim to overcome some longstanding identification issues hampering such assessments and propose a new approach based on a data-rich environment at both the micro (bank) level and the macro level, using a combination of bank panel regressions and macroeconomic factor models. We first identify bank leverage shocks at the micro level and aggregate them to an economy-wide measure. We then compute impulse responses of a large array of macroeconomic indicators to our aggregate bank leverage shock, using the new methodology developed by Ng and Stevanovic (2012). We find significant and robust evidence of a contractionary impact of an unexpected shock reducing the leverage of large banks.

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13-29 Ardia, David; Boudt, Kris - The Peer Performance of Hedge Funds

An essential component in the analysis of (hedge) fund returns is to measure its performance with respect to the group of peer funds. Through the analysis of risk-adjusted return percentiles an answer is given to the question how many funds are out-performed by the focal fund. In case all funds perform equally well, this approach will lead a random number between zero and one, depending on how lucky the fund is. We use the false discovery rate approach to construct relative performance ratios that account for the uncertainty in estimating the performance differential of two funds. Our application is on hedge funds, which leads us to develop a test for equality of the modified Sharpe ratio of two funds. The effectiveness of the method is illustrated with a Monte Carlo study and an empirical study is performed on the Hedge Fund Research database.

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13-28 Ardia, David; Boudt, Kris - Implied Expected Returns and the Choice of a Mean-Variance Efficient Portfolio Proxy

We propose to compute the implied expected returns from several candidate mean-variance efficient portfolios, exploiting the fundamental relation between the expected returns, covariance matrix and the corresponding set of mean-variance efficient portfolios. Over the 1987-2012 period and for the universe of S&P 100 stocks, we find that a mean-variance efficient investor would have been willing to pay between a 1.7% and 4.2% management fee to switch from mean-variance investing using implied expected returns from the market capitalization weighted portfolio to mean-variance investing using the implied expected returns from the equal-risk-contribution portfolio.

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13-27 Behrens, Kristian; Bougna, Théophile - An Anatomy of the Geographical Concentration of Canadian Manufacturing Industries

We document the location patterns of Canadian manufacturing industries – as well as changes in those patterns over the first decade of 2000 – using detailed micro-geographic data. Depending on industry definitions and years, 40 to 60 percent of industries are clustered. According to our measures, manufacturing industries become less geographically concentrated in Canada, i.e., localization is decreasing. Yet, some of the most localized industries are becoming even more localized. We also document the locational trends specific to small firms, young firms, and exporters. We find that their location patterns do not differ significantly from that of the other firms in their industries.

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13-26 Fonseca, Raquel; Michaud, Pierre-Carl; Kapteyn, Arie; Galama, Titus - Accounting for the Rise of Health Spending and Longevity

We estimate a stochastic life-cycle model of endogenous health spending, asset accumulation and retirement to investigate the causes behind the increase in health spending and longevity in the U.S. over the period 1965-2005. We estimate that technological change and the increase in the generosity of health insurance on their own may explain 36% of the rise in health spending (technology 30% and insurance 6%), while income explains only 4% and other health trends 0.5%. By simultaneously occurring over this period, these changes may have led to complementarity effects which we find to explain an additional 57% increase in health spending. The estimates suggest that the elasticity of health spending with respect to changes in both income and insurance is larger with co-occurring improvements in technology. Technological change, taking the form of increased health care productivity at an annual rate of 1.3%, explains almost all of the rise in life expectancy at age 25 over this period while changes in insurance and income together explain less than 10%. Welfare gains are substantial and most of the gain appears to be due to technological change.

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13-25 Fonseca, Raquel; Zheng, Yuhui - The Effect of Education on Health: Cross-Country Evidence

This paper uses comparable micro-data from over 15 OECD countries to study the causal relationship between education and health outcomes. We combine three surveys (SHARE, HRS and ELSA) that include nationally representative samples of people aged 50 and over in these countries. We use variation in the timing of educational reforms across these countries as an instrument for the effect of education on health. Using instrumental variables Probit models (IV-Probit), we find causal evidence that more years of education lead to better health for a limited number of health markers. We find lower probabilities of reporting poor health, of having limitations in functional status (ADLs and iADLs) and of having been diagnosed with diabetes. These effects are larger than those from a Probit that does not control for the endogeneity of education. We cannot find evidence of a causal effect of education on other health conditions. Interestingly, the relationship between education and cancer is positive in both Probit and IV-Probit models, which we interpret as evidence that education fosters early detection.

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13-24 Boivin, Jean; Giannoni, Marc P.; Stevanovic, Dalibor - Dynamic Effects of Credit Shocks in a Data-Rich Environment

We examine the dynamic effects of credit shocks using a large data set of U.S. economic and financial indicators in a structural factor model. The identified credit shocks, interpreted as unexpected deteriorations of credit market conditions, immediately increase credit spreads, decrease rates on Treasury securities, and cause large and persistent downturns in the activity of many economic sectors. Such shocks are found to have important effects on real activity measures, aggregate prices, leading indicators, and credit spreads. Our identification procedure does not require any timing restrictions between the financial and macroeconomic factors, and yields interpretable estimated factors.

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13-23 Dauphin, Anyck - The Role of Polygyny in the Intrahousehold Efficiency of Agricultural Production in West Africa

Polygyny is an institution with deep roots in West Africa. Many papers have attempted to explain the rationality and persistence of this phenomenon through time. Less effort has been devoted to studying the effect of polygyny on household economic behavior. This question is policy relevant given the pressure underway to eliminate polygyny. This paper provides new empirical evidence on whether polygyny leads to an improvement or a worsening of intrahousehold efficiency for three countries with high levels of polygyny: Benin, Burkina Faso and Senegal. The evidence we obtain is mixed. In Benin, polygyny does not seem to have an impact on intrahousehold efficiency, while it appears, in the longer run, to improve it in Burkina Faso, but to decrease it in Senegal.

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13-22 Dionne, Georges; Maalaoui Chun, Olfa - Default and Liquidity Regimes in the Bond Market during the 2002-2012 Period

Using a real-time random regime shift technique, we identify and discuss two different regimes in the dynamics of credit spreads during 2002-2012: a liquidity regime and a default regime. Both regimes contribute to the patterns observed in credit spreads. The liquidity regime seems to explain the predictive power of credit risk on the 2007-2009 NBER recession, whereas the default regime drives the persistence of credit spreads over the same recession. Our results complement the recent dynamic structural models as well as monetary and credit supply effects models by empirically supporting two important patterns in credit spreads: the persistence and the predictive ability toward economic downturns.

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13-21 Deffains, Bruno; Fluet, Claude - The Role of Social Image Concerns in the Design of Legal Regimes

We consider situations where legal liability yields insufficient incentives for socially efficient behavior, e.g., individuals who cause harm are not always sued or are unable to pay fully for harm done. Some individuals nevertheless behave efficiently because of intrinsic prosocial concerns. Others have no such concerns but would like people to believe that they do. We show that fault-based liability is generally more effective than strict liability in harnessing social image concerns. This extends to the case where courts can make mistakes. The rules of proof then affect the inferences drawn from court decisions and therefore the stigma attached to an adverse judgment. If fault is a rare event, plaintiffs or prosecutors should bear the burden of proving the defendant’s fault; otherwise there are cases where defendants should prove compliance with the legal standard of behavior. Under either assignment of the burden of proof, incentives to comply are maximized by a standard of proof stronger than a mere preponderance of evidence.

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13-20 Beugnot, Julie; Fortin, Bernard; Lacroix, Guy; Villeval, Marie Claire - Social Networks and Peer Effects at Work

This paper extends the standard work effort model by allowing workers to interact through networks. We investigate experimentally whether peer performances and peer contextual effects influence individual performances. Two types of network are considered. Participants in Recursive networks are paired with participants who played previously in isolation. In Simultaneous networks, participants interact in real-time along an undirected line. Mean peer effects are identified in both cases. Individual performances increase with peer performances in the recursive network. In the simultaneous network, endogenous peer effects vary according to gender: they are large for men but not statistically different from zero for women.

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13-19 Michel, Jean-Sébastien - Stock Market Overreaction to Management Earnings Forecasts

I hypothesize that the stock market overreacts to management earnings forecasts. I find that negative management forecast surprises lead to a -5.9% abnormal return around the forecast and a 1.9% correction in the 2-month period after earnings are announced. Positive surprises work in the opposite direction, with a 1.9% abnormal return and a
 -1.7% correction. The level of the stock market overreaction varies depending on forecast and firm characteristics, but the marginal impact remains the same: a 1% change in the stock market reaction around the forecast is associated with a 0.4% correction. These findings are consistent with the idea that investors overweight their recent experience in situation of increased uncertainty, leading to stock market overreaction.

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13-18 Fesselmeyer, Eric; Mirman, Leonard J.; Santugini, Marc - Strategic Interactions in a One-Sector Growth Model

We study the effect of dynamic and investment externalities in a one-sector growth model. In our model, two agents interact strategically in the utilization of capital for consumption, savings, and investment in technical progress. We consider two types of investment choices: complements and substitutes. For each case, we derive the equilibrium and provide the corresponding stationary distribution. We then compare the equilibrium with the social planner’s solution.

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13-17 Garon, Jean-Denis; Masse, Alix; Michaud, Pierre-Carl - Health Club Attendance, Expectations and Self-Control

Using a unique dataset on health club attendance from Quebec, we look at the relationship between actual and expected attendance and how these relate to measures of self-control. We find that a large majority of contract choices appear inconsistent if we do not take into account the commitment value of long-term contracts for attendees with self-control problems: 41% of members would be better off paying the fee for a single visit each time they go to the gym rather than signing a long-term contract. We then find that almost all members have made the right decision once we use subjectives expectations on the number of visits per week at the time of contract choice. We estimate that the median total cost is $229 for those making a mistake. Next, we study how actual attendance following contract choice is related to measures of self-control. We find that reports of self-control problems at baseline are associated with low future attendance and that attendance decreases faster, in particular after New Year, for those expressing such problems. Quite interestingly, those expressing self-control problems do not expect at baseline to attend less often. We show that these results are consistent with a model where agents underestimate the severity of their self-control problems and estimate this degree of underestimation.

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13-16 Côté-Sergent, Aurélie; Michaud, Pierre-Carl - L'aide aux personnes âgées avec incapacités et la consommation de médicaments au Québec

Nous utilisons des données d’enquête sur les personnes avec incapacités, jumelées avec les données de la Régie de l’assurance maladie du Québec (RAMQ) sur les dépenses en médicaments, afin de documenter le rôle joué par l’aide formelle et informelle dans la prescription et la consommation de médicaments. Nous nous intéressons d’une part à l’association entre l’aide et la dépense pharmaceutique annuelle totale, et d’autre part à celle entre l’aide et le nombre de prescriptions, nouvelles et renouvelées. L’hypothèse testée est que l’aide au patient peut faciliter l’adhérence au traitement, ce qui peut augmenter la consommation de médicaments. De plus, les médecins peuvent se sentir plus à l’aise de prescrire des médicaments s’ils déterminent que le patient peut être aidé. Nous trouvons une relation positive forte et relativement robuste entre l’aide, en particulier celle provenant des CLSC et de la famille, et la prescription et la consommation de médicaments. Cette relation est intrigante et soulève un nombre de questions intéressantes pour la recherche future.

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13-15 Duclos, Jean-Yves; Housseini, Bouba - Life Quantity, Life Quality and Longevity : an Intertemporal Social Evaluation Framework

The evaluation of development processes and of public policies often involves comparisons of social states in which populations differ in size and longevity. This requires social evaluation principles to be sensitive to both the number and the length of lives. This paper explores the use of axiomatic and welfarist principles to assess social welfare in that framework. It attempts to overcome some of the limits of existing methods in the literature, in particular by avoiding a temporal repugnant conclusion, by neither penalizing nor favoring life fragmentation, and by satisfying critical-level temporal consistency. It does this by characterizing a critical-level lifetime utility function that values life periodically. To address some of the controversies on discounting utilities across time, two alternative versions of the function are developed, one with discounting and one without.

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13-14 Bibi, Sami; Duclos, Jean-Yves; Araar, Abdelkrim - Mobility, Taxation and Welfare

Income mobility is often thought to equalize permanent incomes and thereby to improve social welfare. The welfare analysis of mobility often fails, however, to account for the cost of the variability of periodic incomes around permanent incomes. This paper assesses the net welfare benefit of mobility by assuming both an aversion to inequality in permanent incomes and an aversion to variability in periodic incomes. The paper further investigates the combined (and comparative) impact of mobility and the tax system (another presumed income equalizer) on the dynamics of income across time and on the inequality of income across individuals. Using panel data, we find that Canada’s tax system limits significantly the redistributive impact of mobility while also lowering considerably the cost of income variability. The permanent income equalizing effect of taxes can reach up to 23 percent of mean income at the higher values of inequality aversion that we use. Globally, the net social welfare effect of both mobility and taxation is (almost always) positive and substantial, often amounting to around 30 percent of mean income. For all choices of parameter values, the tax effect exceeds substantially the net effect of mobility on inequality and social welfare.

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13-13 Ardia, David; Hoogerheide, Lennart F. - Cross-Sectional Distribution of GARCH Coefficients across S&P 500 Constituents : Time-Variation over the Period 2000-2012

We investigate the time-variation of the cross-sectional distribution of asymmetric GARCH model parameters over the S&P 500 constituents for the period 2000-2012. We find the following results. First, the unconditional variances in the GARCH model obviously show major time-variation, with a high level after the dot-com bubble and the highest peak in the latest financial crisis. Second, in these more volatile periods it is especially the persistence of deviations of volatility from is unconditional mean that increases. Particularly in the latest financial crisis, the estimated models tend to Integrated GARCH models, which can cope with an abrupt regime-shift from low to high volatility levels. Third, the leverage effect tends to be somewhat higher in periods with higher volatility. Our findings are mostly robust across sectors, except for the technology sector, which exhibits a substantially higher volatility after the dot-com bubble. Further, the financial sector shows the highest volatility during the latest financial crisis. Finally, in an analysis of different market capitalizations, we find that small cap stocks have a higher volatility than large cap stocks where the discrepancy between small and large cap stocks increased during the latest financial crisis. Small cap stocks also have a larger conditional kurtosis and a higher leverage effect than mid cap and large cap stocks.

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13-12 Ardia, David; Hoogerheide, Lennart F. - Worldwide Equity Risk Prediction

Various GARCH models are applied to daily returns of more than 1200 constituents of major stock indices worldwide. The value-at-risk forecast performance is investigated for different markets and industries, considering the test for correct conditional coverage using the false discovery rate (FDR) methodology. For most of the markets and industries we find the same two conclusions. First, an asymmetric GARCH specification is essential when forecasting the 95% value-at-risk. Second, for both the 95% and 99% value-at-risk it is crucial that the innovations’ distribution is fat-tailed (e.g., Student-t or – even better – a non-parametric kernel density estimate).

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13-11 Meucci, Attilio; Ardia, David; Keel, Simon - Fully Flexible Views in Multivariate Normal Markets

The Entropy Pooling approach in Meucci (2008) is a versatile, general framework to process market views in portfolio construction and generalized stress-tests in risk management. Here we present an efficient algorithm to implement Entropy Pooling with fully general views in multivariate normal markets.

Then we discuss two applications. First, we use normal Entropy Pooling to estimate a market distribution consistent with the CAPM equilibrium, which improves on the “implied returns” a-la-Black and Litterman (1990) and can be used as the starting point for portfolio construction. Second, we use normal Entropy Pooling to process ranking signals for alpha-generation.

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13-10 Maisonnave, Hélène; Mabugu, Ramos; Chitiga, Margaret; Robichaud, Véronique - Analysing Job Creation Effects of Scaling Up Infrastructure Spending in South Africa

In a first for South Africa, we draw on literature on infrastructure productivity to model dynamic economywide employment impacts of infrastructure investment funded with different fiscal tools. According to the South African investment plan, the policy will affect the stock of infrastructure as well as the stock of capital of some private and public sectors. Increased government deficit financed infrastructure spending improves GDP and reduces unemployment. However, in the long term, the policy reduces investment and it is not sustainable for South Africa to let its deficit grow unabated. Increased investment spending financed by tax increases has contrasting implications on unemployment. In the long run, unemployment decreases for all types of workers under one of the scenarios. In the short run, only elementary occupation workers benefit from a decrease in unemployment; for the rest, unemployment rises. Findings have immediate policy implications in various policy modelling areas.

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13-09 Fortin, Pierre - The Macroeconomics of Downward Nominal Wage Rigidity : a Review of the Issues and New Evidence for Canada

Inflation definitely has costs, but they remain difficult to quantify for rates below 10-15 per cent. Aiming for a low rate of inflation, as Canada has done in the last 20 years, carries with it various risks, such as debt deflation, reduced flexibility of interest rates, and downwardly rigid nominal wages. In this paper, I focus on the latter problem. As James Tobin pointed out in 1972, economy-wide downward nominal wage rigidity generates a long-run negative relation between inflation and unemployment, implying that permanently low inflation can be bought only at the cost of permanently high unemployment. In contrast, the classical assumption of full wage flexibility implies that low inflation carries no permanent unemployment costs. The literature has produced compelling evidence that firm and worker resistance to nominal wage cuts is fierce, extensive and persistent in advanced economies, including Canada. But the macroeconomic significance of this phenomenon is still disputed. After presenting the details of the competing classical and Tobin views on wage flexibility or rigidity, I review the theoretical and empirical objections to the macroeconomic relevance of downward nominal wage rigidity that can be found in the literature. I then present new macroeconomic evidence on the matter based on Canadian macrodata for the 56-year period 1956-2011. This evidence suggests that the real world is more Tobin-like than classical, implying that the permanent unemployment costs of aiming for a low rate of inflation such as the current 2-per-cent target could be significant. According to the results I obtain, sticking to this target would keep the national unemployment rate between 1.0 and 2.7 percentage points in excess of the asymptotic minimum rate that would be attainable at a somewhat higher inflation rate.

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13-08 Cockburn, John; Maisonnave, Hélène; Robichaud, Véronique; Tiberti, Luca - Fiscal Space and Public Spending on Children in Burkina Faso

Despite high growth rates in recent decades, Burkina Faso is still a poor country. The government acknowledges the need for a stronger commitment to reach the Millennium Development Goals (MDGs), particularly regarding the reduction of poverty. At the same time, the Burkinabe budget deficit has grown in recent years in response to various crises which have hit the country. There are strong pressures to rapidly reduce this budget deficit, but there are active concerns about how this will be achieved. The country thus faces difficult choices: how to ensure better living conditions for children, attain the millennium goals and ensure they have a better future in the present budgetary context?

To answer this question, three policy interventions were identified: (i) an increase in education spending, (ii) a school fees subsidy and (iii) a cash transfer to households with children under the age of five. The same total amount is injected into the economy in each of the three cases, facilitating comparison between the three scenarios. The discussions also made it possible to identify the three financing mechanisms that appear most realistic: (i) a reduction in subsidies, (ii) an increase in the indirect tax collection rate and (iii) an extension of the timeframe to reduce the public deficit to ten years rather than five.

The results indicate that increased public education spending helps raise school participation and pass rates, thus increasing the supply and education level of skilled workers, leading to a reduced incidence and depth of both monetary and caloric poverty.

School fees subsidies have more differentiated effects on education: they promote children’s entry into school to a greater degree, but are less effective at inducing them to pursue their studies. Finally, the supply of skilled workers increases slightly, but their average level of education is lower than in the reference scenario. This type of intervention has a beneficial impact on poverty, greater than under increased public education spending.

Cash transfers have a limited impact on educational behaviour, and thus on the supply of skilled workers, but substantially reduce the incidence and depth of poverty.

The results are qualitatively similar under each financing approach. In sum, if the objective is to achieve improved education and economic performance, the best intervention appears to be to focus on increased public education spending. However, if reducing child poverty is prioritized, it is cash transfers to families that appear more suitable. Regardless of the intervention considered, the most suitable financing mechanism appears to be a temporary increase in the public deficit, because it is accompanied by a smaller negative effect on the quality of life of the most destitute.

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13-07 Mnasri, Mohamed; Dionne, Georges; Gueyie, Jean-Pierre - How Do Firms Hedge Risks ? Empirical Evidence from U.S. Oil and Gas Producers

Using a unique, hand-collected data set on hedging activities of 150 US oil and gas producers, we study the determinants of hedging strategy choice. We also examine the economic effects of hedging strategy on firms’ risk, value and performance. We model hedging strategy choice as a multi-state process and use several dynamic discrete choice frameworks with random effects to mitigate the unobserved individual heterogeneity problem and the state dependence phenomena. We find strong evidence that hedging strategy is influenced by investment opportunities, oil and gas market conditions, financial constraints, the correlation between internal funds and investment expenditures, and oil and gas production specificities (i.e., production uncertainty, production cost variability, production flexibility). Finally, we present novel evidence of the real implications of hedging strategy on firms’ stock return and volatility sensitivity to oil and gas price fluctuations, along with their accounting and operational performance.

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13-06 Antoniadou, Elena; Mirman, Leonard J.; Santugini, Marc - The Income Effect under Uncertainty: a Slutsky-Like Decomposition with Risk Aversion

We study the effect of changing income on optimal decisions in the multidimensional expected utility framework with strongly separable preferences. Using the Kihlstrom and Mirman (1974) (KM) utility representation, we show that the effect of changing income can be decomposed into a modified income effect linked to the classical income effect and an effect representing attitudes to risk, modified by income.

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13-05 Michel, Jean-Sébastien; Pandes, J. Ari - Why Do Analysts Disagree ?

This paper finds that about one-quarter of analyst forecast dispersion and one-half of the dispersion-return relationship between 1985 and 2012 are explained by analyst overconfidence. In particular, the firm’s analyst overconfidence mean and analyst overconfidence dispersion are the two most significant determinants of analyst forecast dispersion. Together, these two variables capture 77% of the explained variation in analyst forecast dispersion when all known determinants are considered. With respect to the dispersion-return relationship, the analyst forecast dispersion predicted by analyst overconfidence leads to a monthly hedging portfolio profit of 0.35% compared to a profit of 0.37% for the analyst forecast dispersion not predicted by analyst overconfidence.

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13-04 Delprat, G.; Leroux, M.-L.; Michaud, P.-C. - Evidence on Individual Preferences for Longevity Risk

The standard model of intertemporal choice assumes risk neutrality toward the length of life: due to additivity, agents are not sensitive to a mean preserving spread in the length of life. Using a survey fielded in the RAND American Life Panel (ALP), this paper provides empirical evidence on possible deviation from risk neutrality with respect to longevity in the U.S. population. The questions we ask allow to find the distribution as well as to quantify the degree of risk aversion with respect to the length of life in the population. We find evidence that roughly 75% of respondents were not neutral with respect to longevity risk. Higher income households are more likely to be risk averse. We do not find evidence that the degree of risk aversion varies with age or education.

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13-03 Tiberti, L.; Maisonnave, H.; Chitiga, M.; Mabugu, R.; Robichaud, V.; Ngandu, S. - The Economy-wide Impacts of the South African Child Support Grant : a Micro-Simulation-Comutable General Equilibrium Analysis

We examine the economy-wide impact of the child support grant (CSG) on the South African economy using a bottom-up/top-down approach. This allows us to estimate the potential effects on households’ welfare and on the economy following a change in the CSG. Three simulations are presented, in simulation 1 the value of the CSG is increased by 20%; in simulation 2 the number of beneficiaries among the eligible children is increased by two million and simulation 3 combines these two. A positive link between the CSG and the probability of participating in the labour market is found. The positive impacts on the labour market, together with the increase in the transfers received by households, results in an increase in their income. Poverty decreases in comparison with the base year for the whole population and for children. Finally, we can conclude that simulation 1 is the most cost effective of the policies.

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13-02 Dionne, Georges - Risk Management : History, Definition and Critique

The study of risk management began after World War II. Risk management has long been associated with the use of market insurance to protect individuals and companies from various losses associated with accidents. Other forms of risk management, alternatives to market insurance, surfaced during the 1950s when market insurance was perceived as very costly and incomplete for protection against pure risk. The use of derivatives as risk management instruments arose during the 1970s, and expanded rapidly during the 1980s, as companies intensified their financial risk management. International risk regulation began in the 1980s, and financial firms developed internal risk management models and capital calculation formulas to hedge against unanticipated risks and reduce regulatory capital. Concomitantly, governance of risk management became essential, integrated risk management was introduced and the chief risk officer positions were created. Nonetheless, these regulations, governance rules and risk management methods failed to prevent the financial crisis that began in 2007.

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13-01 Dionne, Georges - Gestion des risques : histoire, définition et critique

L’étude de la gestion des risques a débuté après la Deuxième Guerre mondiale. La gestion des risques a pendant longtemps été associée à l’utilisation de l’assurance de marché pour protéger les individus et les entreprises contre différentes pertes associées à des accidents. Des formes de gestion des risques purs, alternatives à l’assurance de marché, ont pris forme durant les années 1950 lorsque l’assurance de marché a été perçue très coûteuse et incomplète. L’utilisation des produits dérivés, comme instruments de gestion de risques financiers, a débuté durant les années 1970 et s’est développée très rapidement durant les années 1980. C’est aussi durant les années 1980 que les entreprises ont accéléré la gestion financière des risques. La réglementation internationale des risques a débuté durant les années 1990 et les entreprises financières ont développé des modèles de gestion des risques internes et des formules de calcul du capital pour se protéger contre les risques non-anticipés et pour réduire le capital réglementaire. C’est également durant ces années que la gouvernance de la gestion des risques est devenue essentielle, que la gestion des risques intégrée a été introduite et que les premiers postes de gestionnaire des risques ont été créés. Mais toutes ces règlementations, règles de gouvernance et méthodes de gestion des risques n’ont pas été suffisantes pour empêcher la crise financière de 2007.

Centre interuniversitaire sur le risque, les politiques économiques et l'emploi
ESG UQAM, Université du Québec à Montréal, C.P. 8888, Succ. Centre-Ville, Montréal (Québec) CANADA H3C 3P8
Madame Hélène Diatta  | Téléphone : 514 987-6181 | Télécopieur : 514 987-4707 | Courriel : diatta.helene@uqam.ca
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