Pok-sang Lam

The equity premium and the risk-free rate : Matching the moments

This paper investigates the ability of a representative agent model with time separable utility to explain the mean vector and the covariance matrix of the risk free interest rate and the return to leveraged equity in the stock market. The paper generalizes the standard calibration methodology by accounting for the uncertainty in both the sample moments to be explained and the estimated parameters to which the model is calibrated. We develop a testing framework to evaluate the models ability to match the moments of the data. We study two forms of the model, both of which treat leverage in a manner consistent with the data. In the first, dividends explicitly represent the flow that accrues to the owner of the equity, and they are discounted by the marginal rate of intertemporal substitution defined over consumption. The second form of the model introduces bonds and treats equities as the residual claim to the total endowment stream. We find that the first moments of the data can be matched for a wide range of preference parameter values. But for both models the implied first and second moments taken together are always statistically significantly different from the data at standard levels. This last result contrasts sharply with other recent treatments of leverage in the literature.

The Hamilton model with a general autoregressive component: estimation and comparison with other models of economic time series : Estimation and comparison with other models of economic time series

Abstract This paper generalizes the Hamilton model to the important case in which the autoregressive component need not contain a unit root. Using U.S. quarterly real GNP data, the model is estimated and the results are compared to those of Hamilton. Some Monte Carlo evidence for the model is presented, and its in-sample forecasting performance is discussed and compared to the original Hamilton model, the ARIMA model, and the deterministic-time-trend model.

Variance-Ratio Tests: Small-Sample Properties With an Application to International Output Data

Two aspects of statistical inference using variance-ratio statistics are studied, (1) the accuracy of asymptotic approximations in small samples and (2) the size distortion arising from searching over many horizons in deciding whether to reject a model. A joint test combining variance-ratio statistics at various horizons is proposed, and a Monte Carlo procedure for conducting exact inference is provided. The real output data of nine countries are used to discuss these issues.

Permanent Income, Liquidity, and Adjustments of Automobile Stocks: Evidence from Panel Data

A recent article by Bernanke [1984] tests the rational expectations-permanent income hypothesis using panel data on automobile expenditures. He finds no evidence refuting the hypothesis. This paper incorporates a threshold adjustment process into Bernankes model. Estimations based on a subset of the data used by Bernanke reveal evidence that resale market imperfections and credit market constraints have important effects on automobile expenditures.

Irreversibility and consumer durables expenditures

Abstract This paper examines the implications of resale market imperfection on consumer durables expenditures. The consumer optimization problem under resale market imperfection is formulated and solved numerically by dynamic programming algorithm. The obtained decision rules of consumers reveal the slow upward and downward adjustments of durables stock. The simulated aggregate durables expenditures with resale market imperfection exhibit substantial serial correlations similar to those found in actual durables expenditures time series. The substantial serial correlations are found to be related to the pattern of the decision rules under resale market imperfections.

The consumption function under exponential utility: An extension

Abstract A recent article by Cantor derived a closed-form solution for the consumer optimization problem with exponential utility and normal income shocks. This paper derives solutions without imposing the normality assumption, and investigates the effect of risk in this more general setting.