Discussion Papers

Papers from 1998 onwards are available on-line as .PDF files. 

10 Most Recent Papers

16/08 Ali al-Nowaihi, Sanjit Dhami

Adobe Acrobat (PDF) 16/08 The Ellsberg paradox: A challenge to quantum decision theory?*

We set up a simple quantum decision model of the Ellsberg paradox. We …find that the matching probabilities that our model predict are in good agreement with those empirically measured by Dimmock et al. (2015). Our derivation is parameter free. It only depends on quantum probability theory in conjunction with the heuristic of insufficient reason. We suggest that much of what is normally attributed to probability weighting might actually be due to quantum probability.

16/07 Tewodros Makonnen Gebrewolde, James Rockey

Adobe Acrobat (PDF) 16/07 The Effectiveness of Industrial Policy in Developing Countries: Causal Evidence from Ethiopian manufacturing Firms

Prioritizing the growth of particular sectors or regions is often part of LDC growth strategies. We study a prototypical example of such policies in Ethiopia, exploiting geographic and sectoral variation in the form and scale of the policy for identification. Using product-level data on Ethiopian manufacturing firms we show that the policy was unsuccessful: There was no improvement in productivity, productive assets, or employment. The policy failed due to its negative effects on productivity of the entry of new firms and existing firms diversifying. Moreover, subsidised loans and tax-breaks led to an increase in capital but not in machinery.

16/06 Daniel Ladley, Guanqing Liu, James Rockey

Adobe Acrobat (PDF) 16/06 Margin Trading: Hedonic Returns and Real Losses

Margin trading is popular with retail investors around the world. This is a puzzle, since, as we show, it has a negative expected return. Our explanation is that whilst lowering mean returns, the collateral requirement imposed by margin calls induces positive skew in the distribution of returns. Investments in assets with symmetric returns now offer limited losses and a small chance of a large gain, like lottery tickets and other gambles. Results from a unique dataset of retail futures traders show that actual losses are substantial. Traders’ behaviour is demonstrated to be best understood as motivated by hedonic returns.

16/05 Sergio Currarini, Jesse Matheson, Fernando Vega Redondo

Adobe Acrobat (PDF) 16/05 A Simple Model of Homophily in Social Networks

Biases in meeting opportunities have been recently shown to play a key role for the emergence of homophily in social networks (see Currarini, Jackson and Pin 2009). The aim of this paper is to provide a simple microfoundation of these biases in a model where the size and type-composition of the meeting pools are shaped by agents' socialization decisions. In particular, agents either inbreed (direct search only to similar types) or outbreed (direct search to population at large). When outbreeding is costly, this is shown to induce stark equilibrium behavior of a threshold type: agents \inbreed" (i.e. mostly meet their own type) if, and only if, their group is above certain size. We show that this threshold equilibrium generates patterns of in-group and cross-group ties that are consistent with empirical evidence of homophily in two paradigmatic instances: high school friendships and interethnic marriages.

16/04 Subir Bose, Arup Daripa

Adobe Acrobat (PDF) 16/04 Eliciting Ambiguous Beliefs Under α-Maxmin Preference

We study the problem of elicitation of subjective beliefs of an agent when the beliefs are ambiguous (the set of beliefs is a non-singleton set) and the agent’s preference exhibits ambiguity aversion; in particular, as represented by α-maxmin preferences. We construct a direct revelation mechanism such that truthful reporting of beliefs is the agent’s unique best response. The mechanism uses knowledge of the preference parameter a and we construct a mechanism that truthfully elicits α. Finally, using the two as ingredients, we construct a grand mechanism that elicits ambiguous beliefs and a concurrently.

16/03 Matteo Foschi

Adobe Acrobat (PDF) 16/03 Contracting with Type-Dependent Naïveté

I analyse the optimal contracting behaviour of an employer who faces workers with different, incorrect beliefs about their own productivity. While the literature has focused mostly on the exploitative (when the principal knows agents’ types, Eliaz and Spiegler, 2006) and speculative (when the principal has priors on gents’ types, Eliaz and Spiegler, 2008) aspects of contracts, I introduce the assumption that workers’ naïveté depends on their actual productivity level. The employer uses this information to form posteriors on agents’ productivity and design more efficient contracts. In particular, I highlight the employer’s trade-off between exploiting strongly naïve workers and designing efficient contracts for the most widespread type of worker, according to her posteriors.

16/02 P. A. V. B. Swamy, S. G. Hall, G. S. Tavlas, I. Chang, H. D. Gibson, W. H. Greene, J. S. Mehta

Adobe Acrobat (PDF) 16/02 A Method for Measuring Treatment Effects on the Treated without Randomization

This paper contributes to the literature on the estimation of causal effects by providing an analytical formula for individual specific treatment effects and an empirical methodology that allows us to estimate these effects. We derive the formula from a general model with minimal restrictions, unknown functional form and true unobserved variables such that it is a credible model of the underlying real world relationship. Subsequently, we manipulate the model in order to put it in an estimable form. In contrast to other empirical methodologies, which derive average treatment effects, we derive an analytical formula that provides estimates of treatment effects on each treated individual. We also provide an empirical example that illustrates our methodology.

16/01 Subir Bose, Daniel Ladley, Xin Li

Adobe Acrobat (PDF) 16/01 The Role of Hormones in Financial Markets

Steroid hormones, such as testosterone, have been shown to a effect risk preferences in humans with high levels leading to excessive risk-taking. Hormone levels, in turn, are affected by trading outcomes as well as by gender - males are more sensitive to stimuli than females. We investigate the effects of hormones on market behavior and trader performance. An increase in the proportion of female traders does not necessarily make markets less volatile; however, it reduces the occurrence of market crashes. Male traders on average under-perform females, although the best performing individuals are more likely to be male.

15/25 Heather D. Gibson, Stephen G. Hall, George S. Tavlas

Adobe Acrobat (PDF) 15/25 How the Euro-Area Sovereign-Debt Crisis Led to a Collapse in Bank Equity Prices

We quantify the linkages among banks’ equity performance and indicators of sovereign stress by using panel GMM to estimate a three-equation system that examines the impact of sovereign stress, as reflected in both sovereign spreads and sovereign ratings, on bank share prices. We use data for a panel of five euro-area stressed countries. Our findings indicate that a long-run recursive relationship between sovereigns and banks operated during the euro-area crisis. Specifically, for the five crisis countries considered shocks to sovereign spreads fed-through to sovereign ratings, which affected commercial banks’ equity-prices. Our results also point to the importance of using levels of equity prices -- rather than rates of return -- in measuring banks’ performance. The use of levels allows us to derive the determinants of long-run equity prices.

15/24 Heather D. Gibson, Stephen G. Hall, George S. Tavlas

Adobe Acrobat (PDF) 15/24 The Effectiveness of the ECB’s Asset Purchase Programs of 2009 to 2012

We examine the impact of the ECB’s Securities Market Program (SMP) and the ECB’s two Covered Bond Purchase Programs (CBPPs) on sovereign bond spreads and covered-bond prices, respectively, for five euro-area stressed countries -- Greece, Ireland, Italy, Portugal, and Spain. Our data are monthly and cover the period from 2004M01 through 2014M07. In contrast to previous studies, we use actual, confidential, intervention data. Our results indicate that the respective asset purchase programs reduced sovereign spreads and raised covered bond prices. The quantitative effects of the programs were modest in magnitude, but nevertheless significant. We also provide a simple theoretical model that explains why official asset purchases can reduce a country’s default-risk spreads.

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