Jonathan Treussard

The Theory of Life-Cycle Saving and Investing

How much should a family save for retirement and for the kids’ college education? How much insurance should they buy? How should they allocate their portfolio across different assets? What should a company choose as the default asset allocation for a mandatory retirement saving plan? We believe that the life-cycle model developed by economists over the last fifty years provides guidance for making such decisions. The theory teaches us to view financial assets as vehicles for transferring resources across different times and outcomes over the life cycle, and that perspective allows households and planners to think about their decisions in a logical and rigorous way. This paper lays out and illustrates the basic analytical framework from the theory in nonmathematical terms, with the aim of providing guidance to financial service providers, consumers, and policymakers.

Repeated Career Options: A Contingent Claims Approach

This article studies the behavior of an individual who can repeatedly alternate between two occupations. Such a career option is analogous to an exotic derivative security: an American reset option. Despite infinite opportunities to change occupations, an individual faced with mobility costs is shown to always allow time to go by between occupation changes. In addition, for economically motivated calibrations, the average number of occupation changes declines steadily over time. These results mirror the behavior of real-world individuals, who change occupations more often in the early stages of their professional lives. Finally, it is proved analytically that the individual is unambiguously more reluctant to change occupations when she does not have the assurance that she may return to her initial occupation at a later date. The model demonstrates that the flexibility of repeated career options adds much value over their once-in-a-lifetime counterparts.

Financial Frictions and Risky Corporate Debt

We offer clarifications on Cooley and Quadrini (2001) regarding financial frictions and risky corporate debt pricing. Even in a frictionless world, the promised rate on corporate debt is not identical across firms and across capital structures and it is not equal to the risk-free rate. Frictions are unnecessary for credit spreads to arise. Only if the macroeconomy is in actuality risk free or risk neutral do interest rates on corporate debt reflect default probabilities. To the extent that the firms entire financial structure is traded, a bias in credit spreads introduces an exploitable arbitrage opportunity. Re-establishing no-arbitrage, firm dynamics move in the opposite direction to Cooley and Quadrinis.

Lumps and Clusters in Duopolistic Investment Games: An Early Exercise Premium Approach

This paper investigates strategic investment policies in a duopolistic continuous-time real options game. Our contribution is twofold, economic and methodological. The former is the recognition that, under fixed costs of investment and time-to-build, a firms exercise of its capital-replacement option leads to a significant temporary reallocation of the firms revenues to its competitor. The latter is the introduction of the early exercise premium representation as a valuable device for the characterization of optimal exercise policies in real options games. Assuming exogenous firm roles, we find that (i) as the leader installs its newly purchased capital, the followers optimal investment policy displays a markedly convex and monotonically decreasing pattern over time, which finds its justification in the temporary transfer of the leaders consumer demand to its competitor, and (ii) once the leader has completed its investment process, the followers trigger boundary -- i.e., the level of market demand that renders capital replacement optimal -- is time-independent. Moreover, we demonstrate that the followers willingness to delay investment is enhanced by a longer time-to-build and a more volatile market demand, while it is weakened by a higher quality improvement upon replacement and by a higher expected growth in market demand. Finally, we study the probability that the follower mimics the leaders decision within the leaders time-to-build window. We conclude that, while a higher quality advancement upon investment and a higher growth rate in market demand make it more likely for the follower to exercise its investment option promptly, a higher market uncertainty and a longer time-to-build alter the probability of an investment cluster non-monotonically.

A Study of Inaction in Investment Games Via the Early Exercise Premium Representation

This paper examines strategic investment in the context of a duopolistic continuous- time real options game. Our contribution is twofold, economic and methodological. The former is the recognition that, under ?xed costs of investment and time-to-build, the ?rm pays a fraction of the implicit strike price to its competitor in the form of transferred foregone consumer demand. The latter is the introduction of the early exercise premium representation as a valuable device for the characterization of optimal exercise policies in real options games. We ?nd that positive capital depreciation, technology improvement, and harm e¤ects to the low-technology producer are not su¢ cient to generate equilibria characterized by action.