Haim Shalit

CONSUMER'S SURPLUS, PRICE INSTABILITY, AND CONSUMER WELFARE

This paper evaluates the benefits to consumers from price stabilization in terms of the convexity-concavity properties of the consumers indirect utility function. It is shown that in the case where only a single commodity price is stabilized, the consumers preference for price instability depends upon four parameters: the income elasticity of demand for the commodity, the price elasticity of demand, the share of the budget spent on the commodity, and the coefficient of relative risk aversion. All of these parameters enter in an intuitive way and the analysis includes the conventional consumers surplus approach as a special case. The analysis is extended to consider the benefits of stabilizing an arbitrary number of commodity prices. Finally, some issues related to the choice of numeraire and certainty price in this context are discussed.

Estimating stock market volatility using asymmetric GARCH models

A comprehensive empirical analysis of the mean return and conditional variance of Tel Aviv Stock Exchange (TASE) indices is performed using various GARCH models. The prediction performance of these conditional changing variance models is compared to newer asymmetric GJR and APARCH models. We also quantify the day-of-the-week effect and the leverage effect and test for asymmetric volatility. Our results show that the asymmetric GARCH model with fat-tailed densities improves overall estimation for measuring conditional variance. The EGARCH model using a skewed Student-t distribution is the most successful for forecasting TASE indices.

On the optimal allocation of pesticides with increasing resistance: The case of alfalfa weevil

Abstract The problem of pesticide application under increasing pesticide resistance is explored. A theoretical model is developed to determine optimal pesticide use. This allocation is compared to the laissez-faire solution and to the centralized solution with incomplete information about pesticide resistance. The methodology is then applied in a case study on the Egyptian alfalfa weevil in California.

Farmland Accumulation and Prices

A model of farmland accumulation is developed to study factors influencing U.S. farmland values. This model stresses the manner in which credit is allocated for land purchases. To secure necessary loans for additional land to expand farm size, the farmer provides as collateral his net accumulated wealth. Thus, land acquisitions are made to increase profits and to provide leverage for further land expansion. Besides income and consumption, the level of accumulated debt is one of the main determinants of farmland prices. Derived demand for farmland is developed, and the pricing equation for farmland is estimated as part of a structural equation model.

An Asset Allocation Puzzle: Comment

The purpose of this note is to look at the rationale behind popular advice on portfolio allocation among cash, bonds, and stocks. We argue that the typical investment advice is not inconsistent with the behavior of risk-averse expected-utility maximizers. We propose an additional solution to the asset allocation puzzle posed by Niko Canner et al. (1997), who argue that popular advice contradicts financial theory because it is inconsistent with the capital asset pricing model (CAPM) mutual-fund separation theorem. The CAPM asserts that investors should hold the same selection of risky assets, while popular advice is that investors should hold a proportion of bonds to stocks that increases with risk aversion. Using mean-variance (MV) analysis and the CAPM, Canner et al. show that recommended portfolios are far from optimal and that losses from the apparent failure of optimization are not substantial. However, they failed to explain the popular advice within an economic model. We offer a rational model based on stochastic dominance to demonstrate that all popular financial advice portfolios belong to the efficient set for all risk-averse investors. Using the historical annual real returns on bonds and stocks in Canner et al., we cannot ascertain that investment advisors indeed offer bad advice. Rather, we maintain that acting as agents for numerous clients, advisors recommend portfolios that are not inefficient for all risk-averse investors. I. Overview

The Estimation of Systematic Risk under Differentiated Risk Aversion: A Mean-Extended Gini Approach

This paper examines a mean-Gini model of systematic risk estimation that resolves some econometric problems with mean-variance beta estimation and allows for heterogeneous risk aversion across investors. Using the mean-extended Gini (MEG) model, we estimate systematic risks for different degrees of risk aversion. MEG betas are shown to be instrumental variable estimators that provide econometric solutions to biases generated by the estimation of mean-variance (MV) betas. When security returns are not normally distributed, MEG betas are proved to differ from MV betas. We design an econometric test that assesses whether these differences are significant. As an application using daily returns, we estimate MEG and MV betas for U.S. securities.

Portfolio Risk Management Using the Lorenz Curve

This article presents a methodology for using the Lorenz curve in financial economics. Most of the recent quantitative risk measures that abide by the rules of second-degree stochastic dominance, such as Gini’s mean difference and conditional value at risk, are associated with the Lorenz curve. With financial data, the Lorenz curve is easy to calculate, because it requires sorting asset returns in ascending order. A financial analyst can derive the statistics necessary to carry out a study of risk analysis and establish a set of efficient and most-preferred portfolios for all risk-averse investors.

Using OLS to Test for Normality

The OLS estimator is a weighted average of the slopes delineated by adjacent observations. These weights depend only on the independent variable. Equal weights are obtained if and only if the independent variable is normally distributed. This feature is used to develop a new test for normality which is compared to standard tests and provides better power for testing normality.

Finding Better Securities while Holding Portfolios: Is Stochastic Dominance the Answer?

Investment managers always look for securities to improve their portfolio performance and a common mechanism is the mean-variance (MV) model. As an alternative, Shalit proposes using marginal conditional stochastic dominance (MCSD), which ensures that all risk-averse investors benefit from the selection process by establishing the relative preference among stocks conditional on holding a specific portfolio. He describes the basic MCSD rules and applies them to large portfolios. The resulting preferred stocks are compared to the selection obtained using the mean-variance criterion and the CAPM.

Applied welfare analysis for consumers with commodity income

SummaryThe paper analyzes the relevance and validity of the economic surplus concept for consumers receiving their income in commodities. For these consumers, such as farmers in developing countries, it is shown that the measure of welfare gains or losses via the area under the Marshallian demand and supply curves may lead to a considerable error. The paper provides boundaries for the error of approximation as a function of the share of the product in the consumers budget and the income elasticity of demand.