Benoît Carmichael

Anticipated Monetary Policy in a Cash-in-Advance Economy

This paper analyzes the effects of perfectly foreseen monetary policy within the framework of a standard cash-in-advance economy. Anticipated monetary policy is shown to have real effects by influencing inflationary expectations. In a cash-in-advance economy, an increase in the anticipated rate of inflation reduces the return to labor supply and induces a substitution away from time spent in the labor market. The paper analyzes the implication of this substitution for the time paths of output, prices, interest rates (real and nominal), and stock market prices.

Adjustment costs and factor demands in Canadian manufacturing industries

The question of whether regional disparities in Canada could arise as a result of nonconstant returns to scale and non-identical production functions is examined. This is accomplished by estimating and comparing the decision rules for factor demands across Canadian regions. The decision rules are based on a flexible and dynamic production technology which allows for the presence of internal adjustment costs, do not impose constant returns to scale or require hours and workers to have the same output elasticities. The model is estimated for four separate Canadian regions (Ontario, Quebec, the Western and Eastern provinces) on annual data ranging from 1965 to 1985.

Expected returns and economic risk in Canadian financial markets

This article estimates a linear factor model that links asset return fluctuations to: time-varying expected returns, to economic factors innovations and to a residual idiosyncratic risk. It considers bond returns together with returns on a number of portfolio of assets, grouped by sectors, traded on the Toronto Stock Exchange. The first part of the article identifies the number of latent variables necessary to explain the behaviour of these asset returns and concludes that two latent variables are needed. The second stage uses proxies for the underlying economic factors (state variables) and exploits the restrictions of the model to estimate conditional betas.

Unifying Portfolio Diversification Measures Using Rao's Quadratic Entropy

This paper extends the use of Rao(1982b)’s Quadratic Entropy (RQE) to modern portfolio theory. It argues that the RQE of a portfolio is a valid, flexible and unifying approach to measuring portfolio diversification. The paper demonstrates that portfolio’s RQE can encompass most existing measures, such as the portfolio variance, the diversification ratio, the normalized portfolio variance, the diversification return or excess growth rates, the Gini-Simpson indices, the return gaps, Markowitz’s utility function and Bouchaud’s general free utility. The paper also shows that assets selected under RQE can protect portfolios from mass destruction (systemic risk) and an empirical illustration suggests that this protection is substantial.

Health Insurance, Liquidity and Growth

Within the context of an endogenous growth model, it is shown that in the presence of health risks which influence household income, the introduction of a private insurance company increases the long-term economic growth rate. The introduction of such an institution has two effects on savings: a level effect and a composition effect. Although the presence of this risk-reducing institution induces a decrease in the level of total savings, as suggested in earlier papers, the rate of illiquid savings, which contribute to growth, increases. Copyright 2000 by The editors of the Scandinavian Journal of Economics.

Finite-sample inferences about mean-standard deviation bounds for stochastic discount factors

Abstract Using Bayesian methods of inference, we develop a procedure for evaluating the finite-sample uncertainty about the estimated Hansen-Jagannathan bounds for the mean and standard deviation of stochastic discount factors.

Bayesian Estimation of Stochastic Discount Factors

This article provides a Bayesian method of estimating the marginal posterior distributions for stochastic discount factors associated with observed asset returns. These estimates can be used to provide measures of fit for asset pricing models and to identify broad features of the characteristics that should be explained. These measures of fit can be used to supplement model evaluation exercises based on L. P. Hansen-R. Jagannathan bounds.

Rao’s quadratic entropy and maximum diversification indexation

This paper proposes a new formulation of the maximum diversification indexation strategy based on Rao’s Quadratic Entropy. It clarifies the investment problem underlying this diversification strategy, identifies the source of its out-of-sample performance, and suggests new dimensions along which this performance can be improved. We show that these potential improvements are quantitatively important and are robust to portfolio turnover, portfolio risk, estimation window, and covariance matrix estimation.

Real Estate and Consumption Growth as Common Risk Factors in Asset Pricing Models

Using a linear multifactor pricing model, we study the influence of equity market, the consumption growth and the return on real estate wealth on asset returns. The real estate risk factor is proxied alternatively by the National Association of Real Estate Investment Trusts (NAREIT) index, unlevered NAREIT index and National Council of Real Estate Investment Fiduciaries property index. Estimates are based on CRSPs monthly decile portfolio returns from January 1972 to December 2013 (including the Vintage REIT era and the New REIT era). Generalized method of moment results show that the real estate factor is particularly useful to explain the cross‐sectional variation of returns in the last two decades generally associated with the so‐called real estate bubble.

Political Risk in Latin American Stock Markets: A Rational Expectations Approach

Emerging equities markets (EEM) are becoming the focus of much attention. There are two reasons for this. First, governments and international development agencies assign an increasing importance to the securitized markets to finance development and promote capital transfers. Second, they are an interesting target to internationally-minded portfolio managers seeking new opportunities to enhance the performance of their portfolios.