Affective decision-making (ADM) is a refutable and predictive theory of individual choice under risk and uncertainty. It generalizes expected utility theory by positing the existence of two cognitive processes – the “rational” and the “emotional” process. Observed choice is the result of their simultaneous interaction. We present a model of affective choice in insurance markets, where risk perc...

We extend the vector autoregression (VAR) based expectations hypothesis test of term structure, considered in Bekaert & Hodrick (2001) using recent developments in bootstrap literature. Modifications include the use of wild bootstrap to allow for conditional heteroskedasticity in the VAR residuals without imposing strict parameterization, endogeneous model selection procedure in the bootstrap r...

In the study of decision making under risk, preferences are assumed to be continuous. We present a model of discontinuous preferences over certain and uncertain outcomes. Using existing parameter estimates for certain and uncertain utility, five important decision theory phenomena are discussed: the certainty effect, experimentally observed probability weighting, the uncertainty effect, extreme...

Why does the current wave of globalization create more public concern/opposition than previous rounds of trade liberalization? This paper identifies a key difference between globalization and trade liberalization that could be responsible for it. It is shown that while both globalization and trade liberalization create inter-sector income distribution, the former also creates intra-sector incom...

We introduce both idiosyncratic and aggregate shocks in an endogenous growth model with endogenous partial insurance to the idiosyncratic shock. Aggregate uncertainty introduces an additional channel that can play an important role in determining the effects of private information on expected growth and asset prices. We show the impact of aggregate and idiosyncratic shocks on expected growth an...

Separating Uncertainty from Heterogeneity in Life Cycle Earnings This paper develops and applies a method for decomposing cross section variability of earnings into components that are forecastable at the time students decide to go to college (heterogeneity) and components that are unforecastable. About 60% of variability in returns to schooling is forecastable. This has important implications ...

this paper examines the impact of 2005 presidential election of iran on the tehran stock exchange volatility as a political shock. it uses garch family (fiegarch, egarch, and garch) and markov regime switching (mrs) models as the analytical frameworks for the main the stock daily prices index. our findings confirm statistical validity of arima – fiegarch-x and ar(1) mrs as appropriate specifica...

Stochastic uncertainty can cause coordination problems that may hinder mutually beneficial cooperation. We propose a mechanism of ex-post voluntary transfers designed to circumvent these and ask whether it increase efficiency. To test this transfer mechanism, we implement controlled laboratory experiment based on repeated Ultimatum Game with stochastic endowment. Contrary our hypothesis, find a...

The observed patterns of equity portfolio allocation around the world are at odds with predictions from a capital asset pricing model (CAPM). What has come to be called the “home-bias” phenomenon is that investors tend to hold a disproportionately large share of their equity portfolio in home country stocks as compared with predictions of the CAPM. This paper provides an explanation of the home...

This paper considers the role of monetary policy in mitigating the effects of financial crises. I suppose that the economy occasionally but infrequently experiences crises, where financial variables directly affect the broader real economy. I analyze the formulation of monetary policy under such financial uncertainty, where policymakers recognize the possibility of financial crises, which leads...