{"title":"The nexus of overnight trend and asset prices in China","authors":"Jiaqi Guo , Xing Han , Kai Li , Youwei Li","doi":"10.1016/j.jedc.2024.104997","DOIUrl":"10.1016/j.jedc.2024.104997","url":null,"abstract":"<div><div>Leveraging the systematic variations in investor clientele within a day, we validate an adapted version of the Hong and Stein (1999) model that addresses the consequences of slow information diffusion in China. The model predicts that overnight returns, rather than total returns, strongly forecast future returns, as informed overnight clientele underreact to value-relevant signals. Empirically, we establish a consistent overnight trend phenomenon: Firms with a strong overnight trend reliably outperform those with a weak overnight trend in the subsequent month. The phenomenon is more pronounced among stocks with higher levels of information asymmetry, valuation uncertainty, and relative mispricing. Furthermore, the overnight trend predicts positively firm fundamentals in the cross section.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"170 ","pages":"Article 104997"},"PeriodicalIF":1.9,"publicationDate":"2024-11-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142744501","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Optimal investment-withdrawal strategy for variable annuities under a performance fee structure","authors":"Runhuan Feng , Xiaochen Jing , Kenneth Tsz Hin Ng","doi":"10.1016/j.jedc.2024.105003","DOIUrl":"10.1016/j.jedc.2024.105003","url":null,"abstract":"<div><div>Variable Annuities (VAs) provide policyholders with market participation while offering additional protection from insurers. In this article, we develop a mathematical model to explore the impact of different fee structures on VAs with a ratchet feature and derive analytical solutions to the associated optimal investment-withdrawal problem. We focus on a performance fee structure, highlighting its advantages over the traditional constant fee structure from both the insurer's and policyholder's perspectives. Our findings show that policyholders adopt more conservative investment strategies under the performance fee, leading to increased expected profits and reduced tail risks for risk-neutral insurers. From a mathematical standpoint, we contribute by proving the well-posedness of the associated free-boundary value problems (FBPs) and establishing verification theorems for the underlying control problems. These results involve non-standard analysis and estimations due to the ratchet feature and the guaranteed protections embedded in the contract.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"170 ","pages":"Article 105003"},"PeriodicalIF":1.9,"publicationDate":"2024-11-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142702476","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"The hockey stick Phillips curve and the effective lower bound","authors":"Gregor Boehl , Philipp Lieberknecht","doi":"10.1016/j.jedc.2024.105002","DOIUrl":"10.1016/j.jedc.2024.105002","url":null,"abstract":"<div><div>We show that the interplay between a binding effective lower bound (ELB) on nominal interest rates and the costs of external financing weakens the disinflationary effect of financial shocks. In normal times, the real costs of production factors dominate in firms' marginal costs and are therefore key for inflation dynamics. In contrast, financing costs normally play a subordinate role as higher credit spreads are balanced-out by lower nominal rates. At the ELB, however, higher spreads following financial shocks can offset the effect of lower production factor costs on firms' price setting. The relationship between inflation and output hence features a hockey stick shape: the Phillips curve is flat at the ELB, but conventionally upward-sloping during normal times. This mechanism also weakens the power of forward guidance at the ELB, since such policy reduces spreads and financing costs.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"170 ","pages":"Article 105002"},"PeriodicalIF":1.9,"publicationDate":"2024-11-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142702475","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Optimal monetary policy mix at the zero lower bound","authors":"Dario Bonciani , Joonseok Oh","doi":"10.1016/j.jedc.2024.105001","DOIUrl":"10.1016/j.jedc.2024.105001","url":null,"abstract":"<div><div>We study the optimal mix of forward guidance and quantitative easing at the ZLB. The welfare loss function depends on inflation, output, and consumption heterogeneity (which we label as <em>inequality</em>) between different households. When solely focusing on inflation and output, the central bank excessively expands its balance sheet, thereby increasing inequality. Forward guidance is more effective at stabilising inflation, and quantitative easing at stabilising output. The two tools are, therefore, complementary. Since neither instrument can fully neutralise adverse demand shocks, the optimal policy combines both, resulting in a shorter ZLB duration and milder balance-sheet expansion than if the central bank relied on one policy instrument alone.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"170 ","pages":"Article 105001"},"PeriodicalIF":1.9,"publicationDate":"2024-11-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142720798","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Modeling inflation expectations in forward-looking interest rate and money growth rules","authors":"Zhengyang Chen , Victor J. Valcarcel","doi":"10.1016/j.jedc.2024.104999","DOIUrl":"10.1016/j.jedc.2024.104999","url":null,"abstract":"<div><div>We propose a novel approach that directly embeds rational expectations (RE) into a low-dimensional structural vector autoregression (SVAR) without the need for any mapping to a dynamic stochastic general equilibrium (DSGE) model. Beginning from a fully specified “<em>consensus</em>” structural model, we establish an instrumental variable procedure internal to the SVAR to obtain RE-consistent structural responses to identified monetary policy shocks. Our <em>RE-SVAR</em> framework facilitates a comparison across two alternative monetary policy indicators that accommodate long horizons in the formation of inflation expectations in the policy rule. We construct clouds of responses of inflation and economic activity to monetary policy shocks. We find large regions of puzzling responses to innovations in the federal funds rate. This suggests that indicator often requires being augmented with more information in standard VAR settings. A money growth rule characterization—with Divisia M4 as a policy indicator—exhibits comparatively larger regions of sensible responses within a low-dimensional textbook model of the economy.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"170 ","pages":"Article 104999"},"PeriodicalIF":1.9,"publicationDate":"2024-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"142744409","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Social learning and expectational stability","authors":"George Evans , Bruce McGough","doi":"10.1016/j.jedc.2024.104990","DOIUrl":"10.1016/j.jedc.2024.104990","url":null,"abstract":"<div><div>Stability features of social learning (SL) dynamics are examined. We show SL can be formulated as a stochastic recursive algorithm, making it possible to analyze asymptotics using the familiar differential-equation approach. For a simple univariate model, this approach reduces to the E-stability principle, though in prominent instability cases divergence is <em>exceedingly</em> slow compared to adaptive learning (AL). We locate differing fitness criteria as the source of the slower evolution rates of SL compared to AL. Modified AL and SL learning dynamics models are developed and used to illustrate the different implications of policy change in a standard New Keynesian model. We anticipate that the central question going forward will be how best to combine the two approaches when modeling adaptation to structural change.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"172 ","pages":"Article 104990"},"PeriodicalIF":1.9,"publicationDate":"2024-11-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143386653","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Least squares learning? Evidence from the laboratory","authors":"Te Bao , Yun Dai , John Duffy","doi":"10.1016/j.jedc.2024.104980","DOIUrl":"10.1016/j.jedc.2024.104980","url":null,"abstract":"<div><div>We report on an experiment testing the empirical relevance of least squares (LS) learning, a common way of modelling how individuals learn a rational expectations equilibrium (REE). Subjects are endowed with the correct perceived law of motion (PLM) for a price level variable they are seeking to forecast, but do not know the true parameterization of that PLM. Instead, they must choose and can adjust the parameters of this PLM over 50 periods. Consistent with the E-stability of the REE in the model studied, 97.8% of subjects achieve weak convergence to the REE in terms of their price level predictions. However, the number of participants that can be characterized as least squares learners via the adjustments they make to the parameterization of the PLM over time depends on properties of the data generating process of the dependent and independent variables. Participants learn the REE faster, and behave more like least squares learners when there is greater variance in the independent variable of the model. We consider several alternatives to least squares learning and find evidence that many subjects employ a simple satisficing approach.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"172 ","pages":"Article 104980"},"PeriodicalIF":1.9,"publicationDate":"2024-11-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143386651","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Reinforcement learning and rational expectations equilibrium in limit order markets","authors":"Xuan Zhou , Shen Lin , Xue-Zhong He","doi":"10.1016/j.jedc.2024.104991","DOIUrl":"10.1016/j.jedc.2024.104991","url":null,"abstract":"<div><div>This paper shows that simple payoff-based reinforcement learning can help to achieve rational expectations equilibrium in limit order markets. In equilibrium, speculators mainly supply liquidity, while liquidity consumption increases in the private values of no-speculators with intrinsic motives for trade. Driven by information acquisition of the non-speculators, liquidity consumption is hump-shaped in fundamental volatility for the speculators but U-shaped for the non-speculators. In contrast, liquidity supply decreases in fundamental volatility for the speculators but is hump-shaped for the non-speculators. Unlike the informed traders who trade on asset fundamentals, the uninformed traders trade more on order book and trading information.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"172 ","pages":"Article 104991"},"PeriodicalIF":1.9,"publicationDate":"2024-11-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143386575","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
{"title":"Social learning for the masses","authors":"James Bullard","doi":"10.1016/j.jedc.2024.104983","DOIUrl":"10.1016/j.jedc.2024.104983","url":null,"abstract":"<div><div>I consider a plausible role for social learning as implemented in the work of Jasmina Arifovic in a complex macroeconomic environment. The model is DSGE with considerable heterogeneity, enough to approach Gini coefficients for income, wealth, and consumption in the U.S. data. The economy has an ambient stochastic structure, and I consider transition dynamics following exceptionally large shocks like the global financial crisis or the global pandemic. These shocks are large enough to plausibly perturb the economy out of the rational expectations equilibrium associated with more ordinary shocks. How is equilibrium re-established? I argue that a social learning construct may be more appropriate in this environment, as opposed to the econometric learning constructs often used to analyze departures from rational expectations in the literature. I also argue that a “DNA” feature of social learning may have led to relatively fast convergence to rational expectations observed following these large shocks in the U.S. data.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"172 ","pages":"Article 104983"},"PeriodicalIF":1.9,"publicationDate":"2024-11-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143386655","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Mikhail Anufriev , Fabio Lamantia , Davide Radi , Tomas Tichy
{"title":"Leaning against the wind in the New Keynesian model with heterogeneous expectations","authors":"Mikhail Anufriev , Fabio Lamantia , Davide Radi , Tomas Tichy","doi":"10.1016/j.jedc.2024.104993","DOIUrl":"10.1016/j.jedc.2024.104993","url":null,"abstract":"<div><div>In this paper, we explore the efficiency of the Leaning Against the Wind (LAW) policy within the New Keynesian framework with heterogeneous expectations. To do this, we add a financial sector to the model, linking it with the real sector via the financial accelerator channel. We find that the range of parameters in the Taylor rule that enable the stability of the targeted equilibrium is reduced with the financial accelerator. However, expanding the Taylor rule via the LAW policy fails to counteract this effect and may even exacerbate it if the policy reacts to any mispricing. If applied conditionally on high mispricing, the LAW policy leads to co-existing stable targeted and non-targeted equilibria. Our simulations suggest that while the LAW policy can reduce the amplitude of endogenous fluctuations, it is inefficient in dealing with exogenous shocks and results in larger average deviations from the target.</div></div>","PeriodicalId":48314,"journal":{"name":"Journal of Economic Dynamics & Control","volume":"172 ","pages":"Article 104993"},"PeriodicalIF":1.9,"publicationDate":"2024-11-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"143386652","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":3,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"OA","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}