Essays on Economic Policy: Income Inequality and Health Insurance
Year of Dissertation:
This dissertation contains economic analyses of two critical social issues facing the United States at the dawn of the 21st century: income inequality and the affordability of health insurance. The chapter on income inequality uses the Solow Model of economic growth to model the evolution of inequality over time. In steady state, differences in household saving rates generate differences in household capital income. Households that save more accumulate more capital and have higher steady-state income. Tax policy affects the distribution of income through its influence on household saving rates. Increasing the tax rate on labor income causes a greater percentage decrease in the steady-state saving rates of relatively low savers, thus increasing pre-tax income inequality. Conversely, increasing the tax rate on capital income reduces pre-tax income inequality because it causes a greater percentage decrease in the steady-state saving rates of relatively high savers. Empirical tests of the model using data from the March Current Population Survey and NBER's TAXSIM model suggest that higher taxes on wage income are associated with higher levels of income inequality. A high degree of correlation among the average marginal tax rates prevents us from drawing inferences about the effect that taxation of capital income has on inequality. The chapter on health insurance examines states' efforts to make health insurance more accessible and affordable to small employers by restricting insurers' ability to set premium rates on the basis of health status and other factors which predict a group's future medical needs. The chapter presents evidence that rating restrictions reduce health insurance coverage rates and increase market concentration in the insurance industry. From the perspective of a public policymaker however, such reforms may still be desirable if they increase the ability of less healthy individuals to obtain and afford health insurance coverage.
The trading Efficiency on Options Market: Essays on stock options market
Year of Dissertation:
THE TRADING EFFICIENCY ON OPTIONS MARKET: ESSAYS ON STOCK OPTIONS MARKET By Yan Feng Advisor: Professor Christos Giannikos F. Black (1975) in his seminal paper "Fact and Fantasy in the use of options" mentioned a number of fantasies that widely spread in the options markets. Since Black's (1975) paper was published, there were significant changes and innovations in the options markets. The purpose of this paper is to address some of the pricing and trading aspects in the options markets. The first paper studies the impact of option liquidity on the level of implied volatility function for equity and stock index options. Option liquidity is measured by percentage bid-ask spread, option trading volume and open interest. The study finds a significant negative effect of percentage bid-ask spread on implied volatility level, as well as positive effect of trading volume and open interest on implied volatility level. After adjusting for the underlying asset's total risk, the option percentage spread still has significant negative effect on the level of option excessive volatility. Among several firm specific variables, beta coefficient and systematic risk proportion have significant effects on the slope of excessive implied volatility function. The Fama-MacBeth regressions are used to test the hypotheses for eight moneyness categories separately. This paper explains the implied volatility function from the viewpoint of option market efficiency, and proves that the illiquidity premium documented in stock and bond market is also significant in stock options market. In The second paper, risk-neutral Skewness derived from stock options market is used to test the information role of options price in predicting stock returns after earnings announcements. The result shows that risk-neutral skewness before earnings announcement day contains information about stock returns during earnings announcement period. Less negative options risk-neutral skewness and the positive change of skewness predict higher abnormal return after earnings announcement. In addition, it is the individual risk-neural skewness and idiosyncratic risk that play more important role in predicting the abnormal return.
Essays on Globalization, Skills and Development
Year of Dissertation:
This dissertation examines how globalization, defined as increase in trade or Foreign Direct Investment (FDI), influences development in terms of economic growth and labor market effects. It also studies the role of human capital in affecting economic development both directly and interacting with globalization variables. The dissertation consists of four chapters: one macroeconomic study that revisits the impacts of globalization and education on economic growth (Chapter 1) and three micro-level case studies on Vietnam's labor market. One micro paper explores the impacts of FDI on wages (Chapter 2), another investigates the impacts of FDI on internal migration (Chapter 3), and the final study explores the effects of export liberalization on Vietnam's skill premium (Chapter 4). The dissertation's findings broadly support the view that globalization can be an "engine of growth", but its mechanisms are complex. One insight from the macro study is a positive impact of trade and FDI on capital formation on average in developing countries. The micro studies for the case of Vietnam suggest that the labor market is another channel through which globalization may bring growth where it spurs employment, raises wages and brings about interregional labor migration. The macro study also reveals a strong and positive direct impact of education on economic growth, which in turn is consistent with the results of the micro studies. The dissertation provides evidence that globalization and skill variables interact in ways that vary depending on different channels and specific episodes of trade liberalization. For instance, whereas foreign firms generally pay higher foreign wage premiums for better educated workers, they also play a role in raising wages of less skilled women relative to alternative jobs in the informal wage sector. In the aftermath of the U.S.-Vietnam Bilateral Trade Agreement, Vietnam's provinces which are more exposed to the increase in export opportunities experienced a larger wage growth for unskilled workers and a decline of the skill premium relative to the other provinces. However, as Vietnam's economy-wide skill premium increased during the period studied, the latter effect appeared to have mitigated but did not outweigh the other effects which raised the skill premium.
ESTIMATION OF AN EMPIRICAL FAVAR MODEL AND DSGE MODEL FOR EVALUATING EFFECTS OF GOVERNMENT SPENDING IN JAPAN
Year of Dissertation:
This paper studies the effects of government spending on the economy through estimation of an empirical Factor Augmented Vector Autoregression (FAVAR) model and a theoretical DSGE model. We first conducted FAVAR using data for 107 time series from Japan, and found that an increase in government investment and consumption leads to an increase in private consumption and real wages. We then constructed a New Keynesian (NK) general equilibrium model with real and nominal rigidities, including Edgeworth complementarity/substitutability between private and government consumption and productive public capital. The model extends the Bouakez and Rebei (2007) model in three dimensions: constructing an NK model, including intertemporal investment adjustment cost and variable capital utilization as real rigidities, and introducing public capital stocks as an externality to the production function of intermediate goods firms. Our model succeeds in explaining private consumption and real wages increase in response to government expenditure shocks. We estimate key parameters of the model using Bayesian inference and show that private and government consumption are Edgeworth complements and marginal productivity of public capital is productive in Japan.
A R&D Based Real Business Cycle Model
Ka Wai Terence Fung
Year of Dissertation:
The New Keynesian Real Business Cycle model with staggered price adjustment is augmented with a R&D producing sector. Two sources of economic shocks are separately considered, namely random paricipation (perturbances to value of alternative investment opportunities in another sector) and financial intermediation (shocks to the cost of raising capital in the financial intermediation market). We find that, when comparing to the baseline model, both random participation and financial intermediation models can explain pro-cyclical R&D spending. Additionally the investment oversensitivity problem is corrected. However, only the financial intermediation model is consistent with the observed finding that the volatility of R&D is larger than that of investment and output.
FISCAL DECENTRALIZATION: DOES THE SOURCE OF REVENUE MATTER?
Year of Dissertation:
Abstract Fiscal Decentralization: does the Source of Revenue Matter? Evidence from Rural India Pallavi Jain Govil Adviser: Professor Timothy J. Goodspeed Is the pattern of expenditures of village governments related to their sources of revenue? Do village governments use own-source revenues more efficiently than transfer grants to provide public services to their constituents? This paper begins with the premise that local governments are more participative, more acceptable, and more accountable and hence, deliver better. I use a policy change introduced in 1997 in province of Madhya Pradesh in India, whereby the power to collect royalty and lease rents on minor mineral mines and fishing tanks was transferred to village governments, as a natural experiment and examine whether expenditure patterns of villages that received such resources differ from those that did not. I find that village governments choose to spend their fiscal resources differently depending on where the money comes from, even if these resources are completely `untied' and could be spent entirely at the discretion of the village governments. I also compare the social outcomes in villages that gained such additional resources to those that didn't, and thus remained more dependent on transfer grants from the state and central government for their development needs. Using village level data, I find evidence to support the hypothesis that fiscal decentralization through assignment of taxation powers is more effective in achieving desired outcomes as compared to a transfer of an equal amount of resources by way of grants.
Essays in Labor Economics and Econometrics: Applications of The Copula Method
Year of Dissertation:
This dissertation mainly consists of three essays of original research. One element that these essays have in common is a copula method that generates joint distributions in flexible ways. Therefore, Chapter 1 describes the copula method as an introduction. Two essays, Chapter 2 and Chapter 3, are empirical research in the field of labor economics, in which the copula method is applied to construct econometrics models. One essay, Chapter 4, uses copulas in order to develop a new econometric technique. Chapter 2 empirically investigates the difference in wage structures of permanent workers and temporary workers in the Netherlands. The findings are that starting wages of permanent workers are slightly lower than starting wages of temporary workers and that wages of permanent workers grow more rapidly than wages of temporary workers. These findings derive from an econometric model that is built on a distributional assumption using the copula method that relaxes the traditional model. Chapter 3 empirically investigates the structure of adjustment costs of factors of production with a plant-level panel dataset from the Indonesian manufacturing sector. The copula method is applied in order to estimate the adjustment costs of labor and capital simultaneously and to differentiate the distribution assumption from a more standard approach used in previous studies. The estimates provide evidence of nonconvex and asymmetric adjustment costs of both labor and capital. Chapter 4 proposes a new approach to estimating sample selection models that combines Generalized Tukey Lambda (GTL) distributions with the copula method. The GTL distribution is a versatile univariate distribution that permits a wide rangeof skewness and thick- or thin-tailed behavior in the data that it represents. The versatility arising from inserting GTL marginal distributions into copula-constructed bivariate distributions reduces the dependence of estimated parameters on distributional assumptions in applied research. A thorough Monte Carlo study illustrates that our proposed estimator performs well under various data generating processes. Six applications illustrate the value of the proposed GTL-copula estimator.
ESSAYS ON CENTRAL BANK INTERVENTIONS IN ADVANCED AND EMERGING MARKET ECONOMIES AN APPLICATION TO JAPAN AND TURKEY
Year of Dissertation:
Despite the move to floating exchange rates after the breakdown of the Bretton Woods system in 1973, Foreign Exchange Intervention (FXI) remains a commonly used tool for influencing exchange rates in most developed economies as well as emerging markets. The objective of this study is threefold which can be seen in my separate essays. The first objective is to survey the literature on FXI. In my first essay I provide sections on the theoretical channels through which FXI might affect exchange rates, and critically analyze empirical literature on the effectiveness and motivation of intervention in both advanced and emerging markets. The second objective is to perform a comprehensive empirical study on the FXI in Japan as an example of an advanced economy. In my second essay, I test whether model specification, frequency, and size of intervention produce different impacts of the effectiveness of FXI. I find that model specification yields varying impacts of the effectiveness of FXI. In particular, it is misleading to generalize results obtained from the simple GARCH model because the effectiveness of FXI is highly dependent on the employed model. The explicit distinction between the impact of the frequency and size of intervention provides an accurate measure of the effect of each factor on the exchange rate. This is in contrast to current studies of the Japanese FXI that only rely on the different patterns intervention in testing its effectiveness. I conclude that the frequency of intervention is more important in affecting the level of the exchange rate while the size of intervention is more influential in affecting its volatility. In my third essay, I estimate the reaction function of the Japanese FXI accounting for different measures of volatility. I find that deviations from medium term, long term and implicit exchange rate targets as well as the volatility of the exchange rate during periods of yen appreciation are considered the key factors motivating JMA to intervene. The third objective is to test the effectiveness of FXI in Turkey; an emerging economy adopting Inflation Targeting (IT) regime. In my fourth essay, using a multi-variate GARCH model, I find that there is always a room for direct FXI to coexist within an IT regime, and to influence the domestic currency to improve competitiveness in the tradable goods markets as long as current inflation rates are within their target bounds. This is in contrast to the previous argument that limits the role of FXI to reducing the volatility instead of defending a particular exchange rate under an IT regime. Using the same model, I find spillover effects of FXI in the sense that change in the TRY/USD as a result of CBT intervention in the FX market leads to change in the TRY/EUR.
MODELING THE DEPENDENCE BETWEEN STOCK INDEX AND EXCHANGE RETURNS WITH COPULA-EXTREME VALUE THEORY BASED SEMIPARAMETRIC APPROACHES AND THEIR APPLICATIONS IN RISK MANAGEMENT
Year of Dissertation:
Measuring Value-at-Risk (VaR) is an important function in financial risk management. One of the most popular methods of computing VaR is the Monte Carlo simulation, which focuses on utilizing an appropriate approach to estimate the dependence between returns of financial assets. However, the existence of fat-tailed, skewed distributions and non-linear relationships of financial asset returns makes conventional Pearson product-moment coefficient approach incongruous. To overcome this difficulty, the current research applies the extreme value theory (EVT) in order to model the tails of the return distributions and copula functions to build the joint distribution of returns. More specifically, in the copula-EVT-based methodologies, the marginal distributions of asset returns are modeled using a semiparameter approach in which the distribution center is modeled by a nonparameter empirical distribution and the distribution tails are modeled by the generalized Pareto distribution (GPD) with parameters; furthermore, three copula functions---Gaussian, Gumbel, and Clayton---are applied to model the general, upper-tail, and lower-tail dependencies. To test the advantages of these approaches, six Asian countries were selected based on their different stock index and foreign exchange return distribution shapes, and backtestings were conducted to examine the Monte Carlo VaRs simulated from the correlation coefficients estimated by the Pearson product-moment coefficient, the Gaussian copula, the Gaussian copula-EVT, the Gumbel copula, the Gumbel copula EVT, the Clayton copula, and the Clayton copula- EVT. The results suggest that the Clayton copula-EVT has the best performance regardless of the shapes of the return distributions.
ESSAYS ON THE MUNICIPAL BOND MARKET
Year of Dissertation:
This dissertation focuses on the municipal bond market. Chapter 1 first introduces the classification of municipal bonds, then summarizes the literature that talk about the determinants of municipal bond yields, and finally classifies the determinants into three classes: the economic status of the state where the bond is issued, the demographic characteristics of the state, and the financial status of the state or the local government where the bond is issued. Chapter 2 introduces two nonparametric econometric techniques, including nonparametric regressions and gradient boosting. Compared with traditional ordinary least square methods, these two techniques can help us capture both nonlinearity and potential random interactions among key determinants in the analysis of municipal bond yields. Chapter 3 performs a comprehensive analysis on the determinants of general obligation municipal bond yields and examines the impact of the recent financial crisis on the underlying relations. A systematic comparison of the relations before and after the 2008 financial crisis shows that the economic and financial health of local governments has become markedly more diverse since the crisis began. The relation between the municipal bond yields and the economic and financial health of the local governments has also become stronger because of the larger differentiation among the local governments and hence larger signal to noise ratio, as well as closer scrutiny by market participants on the economic fundamentals of municipal governments. Chapter 3 also provides a new prediction framework and shows that accommodating nonlinearities and random interaction effects can significantly enhance the predictive performance on the municipal bond yields.