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151
The nature of precautionary wealth
 Journal of Monetary Economics
, 1997
"... This paper uses the Panel Study of Income Dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with predictably greater income uncertainty. However, the apparent pattern of precautionary wealth is not consistent with a standard parameterization of ..."
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Cited by 145 (12 self)
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This paper uses the Panel Study of Income Dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with predictably greater income uncertainty. However, the apparent pattern of precautionary wealth is not consistent with a standard parameterization of the life cycle model in which consumers are patient enough to begin saving for retirement early in life: wealth is estimated to be far less sensitive to uncertainty than implied by that model. Instead, our results suggest that over most of their working lifetime, consumers behave in accordance with the "bufferstock" models of saving described in Carroll (1992, 1997) or Deaton (1991), in which consumers hold wealth principally to insulate consumption against nearterm fluctuations in income. JEL Classification: D91, E21
2004), “Income variance dynamics and heterogeneity
 Econometrica
"... Recent theoretical work has shown the importance of measuring microeconomic uncertainty for models of both general and partial equilibrium under imperfect insurance. In this paper the assumption of i.i.d. income innovations used in previous empirical studies is removed and the focus of the analysis ..."
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Cited by 106 (14 self)
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Recent theoretical work has shown the importance of measuring microeconomic uncertainty for models of both general and partial equilibrium under imperfect insurance. In this paper the assumption of i.i.d. income innovations used in previous empirical studies is removed and the focus of the analysis is placed on models for the conditional variance of income shocks, which is related to the measure of risk emphasized by the theory. We first discriminate amongst various models of earnings determination that separate income shocks into idiosyncratic transitory and permanent components. We allow for education and timespecific differences in the stochastic process for earnings and for measurement error. The conditional variance of the income shocks is modelled as a parsimonious ARCH process with both observable and unobserved heterogeneity. The empirical analysis is conducted on data drawn from the 1967–1992 Panel Study of Income Dynamics. We find strong evidence of sizeable ARCH effects as well as evidence of unobserved heterogeneity in the variances.
An Analysis of Sample Attrition in Panel Data. The Michigan Panel Study on Income Dynamics
 Journal of Human Resources
, 1998
"... experienced approximately 50 percent sample loss from cumulative attrition from its initial 1968 membership. We study the effect of this attrition on the unconditional distributions of several socioeconomic variables and on the estimates of several sets of regression coefficients. We provide a stati ..."
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Cited by 89 (7 self)
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experienced approximately 50 percent sample loss from cumulative attrition from its initial 1968 membership. We study the effect of this attrition on the unconditional distributions of several socioeconomic variables and on the estimates of several sets of regression coefficients. We provide a statistical framework for conducting tests for attrition bias that draws a sharp distinction between selection on unobservables and on observables and that shows that weighted least squares can generate consistent parameter estimates when selection is based on observables, even when they are endogenous. Our empirical analysis shows that attrition is highly selective and is concentrated among lower socioeconomic status individuals. We also show that attrition is concentrated among those with more unstable earnings, marriage, and migration histories. Nevertheless, we find that these variables explain very little of the attrition in the sample, and that the selection that occurs is moderated by regressiontothemean effects
How often to sample a continuoustime process in the presence of market microstructure noise
 Review of Financial Studies
, 2005
"... In theory, the sum of squares of log returns sampled at high frequency estimates their variance. When market microstructure noise is present but unaccounted for, however, we show that the optimal sampling frequency is finite and derives its closedform expression. But even with optimal sampling, usi ..."
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Cited by 86 (13 self)
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In theory, the sum of squares of log returns sampled at high frequency estimates their variance. When market microstructure noise is present but unaccounted for, however, we show that the optimal sampling frequency is finite and derives its closedform expression. But even with optimal sampling, using say 5min returns when transactions are recorded every second, a vast amount of data is discarded, in contradiction to basic statistical principles. We demonstrate that modeling the noise and using all the data is a better solution, even if one misspecifies the noise distribution. So the answer is: sample as often as possible. Over the past few years, price data sampled at very high frequency have become increasingly available in the form of the Olsen dataset of currency exchange rates or the TAQ database of NYSE stocks. If such data were not affected by market microstructure noise, the realized volatility of the process (i.e., the average sum of squares of logreturns sampled at high frequency) would estimate the returns ’ variance, as is well known. In fact, sampling as often as possible would theoretically produce in the limit a perfect estimate of that variance. We start by asking whether it remains optimal to sample the price process at very high frequency in the presence of market microstructure noise, consistently with the basic statistical principle that, ceteris paribus, more data are preferred to less. We first show that, if noise is present but unaccounted for, then the optimal sampling frequency is finite, and we We are grateful for comments and suggestions from the editor, Maureen O’Hara, and two anonymous
Inattentive consumers
 Journal of Monetary Economics
, 2006
"... This paper studies the consumption decisions of agents who face costs of acquiring, absorbing and processing information. These consumers rationally choose to only sporadically update their information and recompute their optimal consumption plans. In between updating dates, they remain inattentive ..."
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Cited by 85 (6 self)
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This paper studies the consumption decisions of agents who face costs of acquiring, absorbing and processing information. These consumers rationally choose to only sporadically update their information and recompute their optimal consumption plans. In between updating dates, they remain inattentive. This behavior implies that news disperses slowly throughout the population, so events have a gradual and delayed effect on aggregate consumption. The model predicts that aggregate consumption adjusts slowly to shocks, and is able to explain the excess sensitivity and excess smoothness puzzles. In addition, individual consumption is sensitive to ordinary and unexpected past news, but it is not sensitive to extraordinary or predictable events. The model further predicts that some people rationally choose to not plan, live handtomouth, and save less, while other people sporadically update their plans. The longer are these plans, the more they save. Evidence using U.S. aggregate and microeconomic data generally supports these predictions.
Asset Pricing with Idiosyncratic Risk and Overlapping Generations
, 2001
"... Constantinides and Due (1996) show that for idiosyncratic risk to matter for asset pricing the shocks must (i) be highly persistent and (ii) become more volatile during economic contractions. We show that data from the Panel Study on Income Dynamics (PSID) are consistent with these requirements. Our ..."
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Cited by 80 (7 self)
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Constantinides and Due (1996) show that for idiosyncratic risk to matter for asset pricing the shocks must (i) be highly persistent and (ii) become more volatile during economic contractions. We show that data from the Panel Study on Income Dynamics (PSID) are consistent with these requirements. Our results are based on econometric methods which incorporate macroeconomic information going beyond the time horizon of the PSID, dating back to 1910. We go on to argue that lifecycle effects are fundamental for how idiosyncratic risk affects asset pricing. We use a stationary overlappinggenerations model to show that lifecycle effects can either mitigate or accentuate the equity premium, the critical ingredient being whether agents accumulate or deccumulate risky assets as they age. Our model predicts the latter and is able to account for both the average equity premium and the Sharpe ratio observed on the U.S. stock market.
Using expectations data to study subjective income expectations
 Journal of the American Statistical Association
, 1997
"... We have collected data on the oneyearahead income expectations of members of American households in our Survey of Economic Expectations (SEE), a module of a national continuous telephone survey conducted at the University of Wisconsin. The incomeexpectations questions take this form: "What do you ..."
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Cited by 77 (11 self)
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We have collected data on the oneyearahead income expectations of members of American households in our Survey of Economic Expectations (SEE), a module of a national continuous telephone survey conducted at the University of Wisconsin. The incomeexpectations questions take this form: "What do you think is the percent chance (or what are the chances out of 100) that your total household income, before taxes, will be less than Y over the next 12 months? " We use the responses to a sequence of such questions posed for different income thresholds Y to estimate each respondent's subjective probability distribution for next year's household income. We use the estimates to study the crosssectional variation in income expectations one year into the future
Learning your Earning: Are Labor Income Shocks Really Very Persistent?
 ECONOMETRICA
, 2004
"... In this paper we examine the risk situation facing individuals in the labor market. The current consensus in the literature is that the labor income process has a large random walk component. We argue two points. First, the estimates of persistence from income data appear to be upward biased due to ..."
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Cited by 68 (4 self)
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In this paper we examine the risk situation facing individuals in the labor market. The current consensus in the literature is that the labor income process has a large random walk component. We argue two points. First, the estimates of persistence from income data appear to be upward biased due to the omission of heterogeneity in income profiles across the population that would be implied, for example, by a human capital model with heterogeneity. When we allow for differences in profiles, the estimated persistence falls from 0.99 to about 0.8. Moreover, the main evidence against pro…le heterogeneity in the existing literature — that the autocorrelations of income changes are small and typically negative — is also replicated by the pro…le heterogeneity model we estimate, casting doubt on the previous interpretation of this evidence. Second, we embed this process in a lifecycle model to examine how it alters individuals’ consumptionsaving decision. We assume that — as seems plausible — individuals do not know their profiles exactly at the beginning of life, but learn in a Bayesian way with successive income observations. We find that learning is very slow and affects consumption decision throughout the lifecycle. The model generates substantial rise
Household Risk Management and Optimal Mortgage Choice," Quarterly Journal of Economics, forthcoming
, 2003
"... A typical household has a home mortgage as its most significant financial contract. The form of this contract is correspondingly important. This paper studies the choice between a fixedrate (FRM) and an adjustablerate (ARM) mortgage. In an environment with uncertain inflation, a nominal FRM has ri ..."
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Cited by 65 (5 self)
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A typical household has a home mortgage as its most significant financial contract. The form of this contract is correspondingly important. This paper studies the choice between a fixedrate (FRM) and an adjustablerate (ARM) mortgage. In an environment with uncertain inflation, a nominal FRM has risky real capital value whereas an ARM has a stable real capital value. However an ARM can increase the shortterm variability of required real interest payments. This is a disadvantage of the ARM for a household that faces borrowing constraints and has only a small buffer stock of financial assets. The paper uses numerical methods to solve a lifecycle model with risky labor income and borrowing constraints, under alternative assumptions about available mortgage contracts. While an ARM is generally an attractive form of mortgage, a household with a large mortgage, risky labor income, high risk aversion, a high cost of default, and a low probability of moving is less likely to prefer an ARM. The paper also considers an inflationindexed FRM, which removes the wealth risk of the nominal FRM without incurring the income risk of the ARM, and is therefore a superior vehicle for household risk management. The welfare gain from mortgage