Multivariate return decomposition: theory and impli

36th NES Research Conference, November 26–27, 2015

STANISLAV ANATOLYEV and Nikolay Gospodinov (Federal Reserve Bank of Atlanta) Multivariate return decomposition: theory and implications Abstract: In this paper, we propose a model based on multivariate decomposition of multiplicative—absolute values and signs—components of several returns. In the m-variate case, the marginals for the m absolute values and the binary marginals for the m directions are linked through a 2m-dimensional copula. The approach is detailed in the case of a bivariate decomposition. We outline the construction of the likelihood function and the computation of different conditional measures. The finite-sample properties of the maximum likelihood estimator are assessed by simulation. An application to predicting bond returns illustrates the usefulness of the proposed method. IGOR BYKADOROV (Sobolev Institute of Mathematics SB RAS, NRU Higher

School of Economics, NRU Novosibirsk State University, and Department of Management of University Ca’ Foscari Venezia), Andrea Ellero (Department of Management of University Ca’ Foscari Venezia), Stefania Funari (Department of Management of University Ca’ Foscari Venezia), Sergey Kokovin (Sobolev Institute of Mathematics SB RAS, NRU Novosibirsk State University, and NRU Higher School of Economics) and Pavel Molchanov (National Research University Higher School of Economics)

Painful Birth of Trade Under Variable Markups Abstract: Increasing trade cost typically deteriorates welfare but under almostprohibitive cost, a pair of countries may benefit from terminating mutual trade, especially if not maintaining other trade relations. So, under decreasing trade cost, the first step into trade necessarily brings a welfare loss (due to distortion under free entry).

DOUGLAS CAMBELL: Trade Shocks, Labor, and Inequality Abstract: Both trade and inequality in the US, Europe, and other major economies have increased markedly since 1980, as the working class in rich countries has experienced relatively slow income growth while the Chinese middle class has prospered. Personal computing was also effectively born at this time, which coincided with large cuts in top marginal tax rates. In this study, we test between these theories -- trade, taxes, or technology -- using two different methodologies. First, we study the impact of rising trade integration on inequality using the Current Population Survey's (CPS) Merged Outgoing Rotation Group (MORG) over the period 1979 to 2008, which allows us to follow individual workers for a period of one year. We test whether sectors with greater initial exposure to international trade, or faster TFP growth, experienced greater increases in inequality and more severe declines in unit labor costs when US relative prices were high and imports surged relative to exports. Secondly, using aggregate data for 18 countries internationally from the period 1900 to 2010 (and 28 countries from 1970) we test whether trade shocks and marginal tax rates are generally correlated with rising inequality. We find little role for trade or technology, but we do find that the level of top marginal tax rates appears to impact \emph{changes} in the top 1\% share of income, implying that top income shares are a function of history.

VALERY CHARNAVOKI Retail Sales, Inventories and Imports after Large Devaluations Abstract: This paper presents a general equilibrium model of a small open economy with monopolistically competitive importers, inventories and durable goods. Following large devaluations, this model generates a short-term fall of imports and a gradual increase in their retail prices. Besides, the model allows to explain a short-run spike in retail sales, observed during several recent large devaluation episodes, for example, in Russia, 2014 or Belarus, 2011. 1

36th NES Research Conference, November 26–27, 2015

IRINA DENISOVA Preferences for redistribution in post-communist countries Abstract: Public attitudes towards inequality and demand for redistribution affect, and in many cases, shape social policy. There is large literature on determinants of demand for redistribution, both theoretical and empirical. In empirical papers on demand for redistribution post-communist countries are usually considered as a homogeneous group. New data on post-communist countries made available recently allows digging into the group to identify the within variation, and the determinants of the variation. The paper is to add to the literature on income redistribution by looking for the individual and institutional determinants of demand for redistribution in transitional economies based on the second round of Life in Transition Surveys by EBRD and the WB, 2010. In addition to what could be of regional interest, we study the role of democratic and governance institutions in shaping public preferences to redistribution which is a novel motive as previous studies focused mainly on the role of inequality. The study of individual determinants of both direct and indirect demand for redistribution confirms not only the self-interest motives but also social preferences especially pronounced among people with tertiary education and in high income groups. We find that better democracy and governance institutions stimulate demand for direct income redistribution and stimulate redistribution of public money towards education, healthcare, environment and public infrastructure, while weaker democratic and governance institutions increases demand for allocation of public money to assisting to the poor, housing and pensions.

OZGUR EVREN Caution, Reduction and Ambiguity Aversion Abstract: I study the relation between the risk and ambiguity attitudes in Uzi Segal's recursive utility model. I show that according to this model, the decision maker satisfies the negative certainty independence axiom over risky

prospects if and only if she is ambiguity averse for any specification of her second order beliefs. That is, the cautious expected utility model for risk preferences corresponds to a global form of ambiguity aversion. In particular, the recursive cautious expected utility model is more robust than the recursive anticipated utility model for the purposes of modeling ambiguity averse behavior. It also follows that the expected utility hypothesis for risk preferences is equivalent to a global form of ambiguity neutrality. In fact, I show that in a suitably designed class of experiments, any non-expected utility model produces either the Ellsberg-type behavior or its opposite.

Bill B. Francis, Delroy M. Hunter, and PATRICK J. KELLY Does Investability Facilitate the Transmission of Local Information in Emerging Markets? Abstract: We examine whether there are differences in the price response to local public news between firms with access to foreign capital (investables) and those without (non-investables). To the extent that there are differences, we find that investables are more responsive to local public news in the form of monetary policy shocks than are non-investables. This is not driven by whether firms’ product markets are more or less dependent on local economic conditions. These findings are consistent with the notion that foreigners help improve the efficiency of stock prices, even with respect to local information.

STANISLAV KHRAPOV: Option Pricing via Risk-Neutral Density Forecasting Abstract: We propose a novel approach to option pricing. It exploits strong predictability in option-implied risk-neutral densities. To illustrate the idea we use a mixture of log-normal and a generalized beta as the candidates for the distribution of underlying stock price under the risk-neutral measure. Using the closed-form solutions for option prices we extract risk-neutral 2

36th NES Research Conference, November 26–27, 2015

densities and forecast them one week ahead. This forecast allows to compute one week ahead option prices and compare them to the observables. In the empirical exercise we show that the option pricing performance is on par with state-of-the-art stochastic volatility models..

SERGEY KOKOVIN (Novosibirsk State University and NRU-Higher School of Economics), Mathieu Parenti (CORE-UCLouvain (Belgium) and NRU-Higher School of Economics), Jacques-François Thisse (COREUCLouvain (Belgium), NRU-Higher School of Economics (Russia) and CEPR), and Evgeny Zhelobodko (Novosibirsk State University and NRUHigher School of Economics): Endogenizing monopolistic competition Abstract: We show that a market involving a handful of large-scale firms and a myriad of small-scale businesses may give rise to different types of market structure, ranging from monopoly or oligopoly to monopolistic competition through new types of market structure. In particular, we find condition under which the free entry and exit of small firms incentivizes the big firms to sell their varieties at the monopolistically competitive prices, as if they were to behave like multi-divisionalized firms. The structure of preferences is the main driving factor for a specific market structure to emerge as an equilibrium outcome.

OLGA KUZMINA and Natalya Vochkova: Foreign Market Entry and Leverage: Evidence from Import Tariff Changes Abstract: We investigate how foreign market entry through exporting affects capital structure of firms. To identify the causal effect of interest we use variation in foreign countries importing tariffs that are plausibly exogenous to domestic firms. We find that reaching additional markets increases firms' leverage, suggesting that diversification through exporting is an important channel in reducing firm cash flow volatility that allows firm to take more debt. The results of the paper highlight the importance of examining operating strategies as integral determinants of corporate financing policies.

ANDREY MARKEVICH and Ekaterina Zhuravskaya: Economic Effects of the Abolition of Serfdom: Evidence from the Russian Empire Abstract: We document a very large increase in agricultural productivity, peasants’ living standards, and industrial development in the 19th century Imperial Russia as a result of the abolition of serfdom in 1861. A counterfactual exercise shows that if serfdom were to be abolished in 1820, by 1913 Russia would have been twice as rich compared to what it actually was. We construct a novel province-level panel dataset of development outcomes and conduct a difference-in-differences analysis relying on cross-sectional variation in the shares of serfs and over-time variation in emancipation controlling for region-specific trends. We disentangle the effects of two stages of the abolition of serfdom, i.e., the emancipation and the subsequent land reform, and show that, in contrast to a large positive effect of the emancipation, land reform contributed negatively to agricultural productivity. Despite being not fully conclusive, the evidence is consistent with the change in incentives being the main mechanism of the positive emancipation effect and the increase in the power of the peasant commune being the main channel of the negative effect of the land reform. We also show that different organizational forms of serfdom were associated with different levels of nutrition of serfs and productivity.

ANNA OBIZHAEVA: Beliefs Aggregation and Return Predictability Abstract: We study return predictability using a dynamic model of speculative trading among relatively overconfident oligopolistic traders who agree to disagree about the precision of their private information. The return process depends on both parameter values used by traders and empirically correct parameter values. Although traders apply Bayes Law consistently, equilibrium returns are predictable based on current and past dividends and prices. For some parameter values, excess returns exhibit realistic patterns of short-run 3

36th NES Research Conference, November 26–27, 2015

momentum and long-run mean-reversion. We clarify the concepts of rational expectations and market efficiency in a realistic setting with market power and differences in beliefs.

ANDREI SAVOCHKIN and Stefania Minardi (HEC Paris) Subjective Contingencies and Limited Bayesian Updating Abstract: We depart from Savage's (1954) common state space assumption and introduce a model that allows the agent to have a different view of the uncertainty that she is facing. In the revealed preference paradigm, our theory allows the analyst to uniquely identify the decision maker's subjective state base on the basis of her choices. The identification comes from a novel source — the analysis of how her preferences change to incorporate information that some event has occurred. The representation that we derive from axioms covers both ex ante and conditional preferences, and involves a particular procedure of non-Bayesian updating, which resembles the standard Bayesian rule but is limited by the agent's perception of contingencies. We also study the types of inference errors that the agent makes because of her coarse perception of uncertainty.

KONSTANTIN STYRIN: Solving dynamic macro models with dispersed information in continuous time Abstract: In environments where economic agents receive heterogeneous information signals about the state of the economy and where their actions feature strategic complementarity, they have to solve what is called the infinite regress problem. What matters for an individual agent is not only what other agents know but also what they believe this agent knows, what they believe what this agent believes they know, etc. These models, which are normally stated in discrete time, are notoriously difficult to solve in general. I show that working in continuous time instead often yields a tractable analytical solution. Each agent makes a rational conjecture about the low of motion of the imperfectly unobserved aggregate state and employs the continuous-time

version of the Kalman filter to compute a posterior based on his/her information. It turns out that agents need to track a certain (infinite) linear combination of his/her higher-order beliefs rather than each of them separately. This makes the dimensionality of the state space finite and the solution feasible. I consider the cases of private and public signals, both exogenous and endogenous.

Gabriel J. Felbermayr (Ifo Institute for Economic Research at the University of Munich) and ALEXANDER TARASOV (National Research University Higher School of Economics) Trade and the Spatial Distribution of Transport Infrastructure Abstract: The distribution of transport infrastructure across space is the outcome of deliberate government planning that reflects a desire to unlock the welfare gains from regional economic integration. Yet, despite being one of the oldest government activities, the economic forces shaping the endogenous emergence of infrastructure have not been rigorously studied. This paper provides a stylized analytical framework of open economies in which planners decide non-cooperatively on transport infrastructure investments across continuous space. Allowing for inter- and international trade, the resulting equilibrium investment schedule features underinvestment that turns out particularly severe in border regions and that is amplified by the presence of discrete border costs. In European data, the mechanism explains about a quarter of the border effect identified in a conventionally specified gravity regression. The framework sheds light on the welfare costs of second best investment schedules, on the effects of intercontinental trade or of privatized infrastructure provision.

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36th NES Research Conference, November 26–27, 2015

ALEXANDER TSYPLAKOV: Quasifiltering for time-series modeling Abstract: In the paper a method for constructing newvarieties of time-series models is proposed. The idea is to start from an unobserved components model in a state-space form and use it as an inspiration for development of another time-series model, in which time-varying underlying variables are directly observed. The goal is to replace a state-space model with an intractable likelihood function by another model, for which the likelihood function can be written in a closed form. If state transition equation of the parent statespace model is linear Gaussian, then the resulting model would belong to the class of score driven model (aka GAS, DCS).

Olga Kuzmina and NATALYA VOLCHKOVA Credit constraints of exporters: evidence from Russia Abstract: This paper examines the differences in credit parameters faced by domestic and exporting firms. Literature so far provides controversial results on credit constraints of exporters relative to nonexporters. On one hand, Feenstra et al. (2014) argue that higher risks faced by exporters compared to nonexporting firms may lead to higher costs of external financing for the former. They provide a theoretical model and test it empirically on a sample of Chinese firms. On the other hand, empirical studies of Belgian firms by Muuls (2012), of Italian firms by Minetti and Zhu (2010), of Japanese firms by Amiti and Weinstein (2012) and others indicate a positive association between lower costs of financing and export status of firms. To provide more evidence on the issue we collect a unique dataset in a large-scale survey of exporting and non-exporting Russian firms to test the differences in credit parameters between two groups of firms. Unlike previous literature, we analyses the differences between two groups controlling for a number of observable characteristics of individual credit lines. Our results are consistent with lower interest rates for credits obtained by exporting firms compare to non-exporting. We also show that higher currency

diversification in firm’s revenues is associated with lower interests rates while higher share of foreign currencies in firm’s costs is associated with higher interest rates.

Denis Davydov and SHLOMO WEBER A simple axiomatiozation of the family of diversity indices Abstract: A vast number of quantitative measures for dissimilarity assessment are commonly used for different spheres and applications ranging from biology through economic wealth or regional inequality to social and ethnic conicts, cultural variability of countries etc. Noting that many of these measures have relatively similar properties, we offer a new axiomatic foundation for a wide class of indices similar that can be derived from a simple set of axioms.

EVGENY YAKOVLEV and David Card The Causal Effect of Serving in Army on Health: Evidence from Regression Kink Design and Russian Data Abstract: The paper estimates the causal effect of serving in the Russian Army on health. We explore a kink in the date-of-birth profile of the risk of conscription that happened as a result of the demilitarization process initiated by Mikhail Gorbachev. We find that serving in the Russian Army significantly increases rates of alcohol consumption and smoking; it also results in a higher chance of getting hepatitis and tuberculosis, related to alcohol consumption and smoking chronic diseases and general health issues.

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36th NES Research Conference, November 26–27, 2015

ALEXANDER YARKIN (HSE) and Dmity Veselov (HSE) The Great Divergence revisited: industrialization, inequality and political conflict in the unified growth model Abstract: What was the impact of inequality in capital and land distribution on the pace of industrialization and growth in historical perspective? How has inequality affected the intensity of political conflict that accompanied industrialization? We build a two-sector unified growth model, in which the political conflict between the supporters and opponents of modern sector development determines the pace of industrialization. The model shows how the variation in the distribution of land and capital can help to explain differences in the timing of take-off and the pace of industrialization worldwide and the intensity of political conflict during the industrialization process. Namely, higher within-group inequality in capital holdings may be growth enhancing, while the effect of between-group inequality in capital depends on the stage of industrialization. Moreover, the model captures the hump-shaped path of conflict intensity observed throughout the industrialization phase. We present several historical narratives that support these results.

HOSNY ZOABI Women’s Liberation as a Financial Innovation Abstract: Over the course of the second half of the 19th century, states in the US, which were entirely dominated by men, gave married women property rights. Before this ”women’s liberation”, married women were subject to the laws of coverture. Coverture had detailed laws as to which spouse had ownership and control over various aspects of property both before and after marriage. This paper develops a general equilibrium model with endogenous determination of women’s rights in which these laws affect portfolio choices, leading to inefficient allocations. We show how technological advancement eventually leads to men granting rights, and in turn how these rights affect development. We show how key implications of the model are consistent with cross-state empirical evidence in the US. Specifically, the dynamics of non-agricultural employment after rights are granted fit exactly with the model’s prediction.

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