Equilibrium Stock Research Articles

Capital Investment, Equity Returns, and Aggregate Dynamics in Oligopolistic Production Economies

Abstract We analyze effects of tacit collusion in a dynamic general equilibrium model of oligopolistic sectors with capital investment and real frictions. Through their effects on equilibrium- and off- equilibrium stock prices, fundamental shocks affect incentives for defection from tacit collusion, amplifying the interaction between the real economy and financial markets as well as firms‘ risk exposure. The model implies ambiguous relationship between industry concentration and equity returns depending on operating leverage, which helps reconcile conflicting evidence in the literature. We find quantitative and empirical support for novel theoretical predictions regarding the effects of concentration on returns and investment. (JEL G12, G31, D43)

Contrarians, Extrapolators, and Stock Market Momentum and Reversal

We document considerable cross-investor variation in survey expectations about aggregate stock market returns. Although most investors are extrapolators who expect higher returns after a good market performance, some are contrarians who expect lower returns after a good performance. More notably, compared with extrapolators, contrarians have less persistent expectations that are corrected more quickly. We then develop a dynamic equilibrium model accounting for these differences in expectations and find that the equilibrium stock price exhibits short-term momentum and long-term reversal as in the data. Furthermore, we test the key predictions of our model linking the observable differences in extrapolators’ and contrarians’ expectations to aggregate stock market momentum and future stock performance and find supportive evidence for our model mechanism. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4960 .

Data‐limited fishery assessment methods shed light on the exploitation history and population dynamics of Endangered Species Act‐listed Yelloweye Rockfish in Puget Sound, Washington

AbstractObjectiveThe distinct population segment (DPS) of Yelloweye Rockfish Sebastes ruberrimus inhabiting the Puget Sound/Georgia Basin was listed under the Endangered Species Act (ESA) in 2010, and a formal recovery plan for the DPS was published by National Oceanic and Atmospheric Administration Fisheries in 2017. In this recovery plan, the biological criteria for delisting or downlisting were specified as certain levels of spawning potential ratio (SPR), a commonly used metric of equilibrium stock status for commercially exploited fishes. Although this metric can be estimated from length compositions, the combination of length data with a catch history (which was not previously available for this DPS) improves our understanding of population dynamics over time and allows us to estimate a different measure of stock status, relative (to unfished) spawning stock biomass (SSB), rather than only SPR.MethodsTo estimate relative SSB and reconstruct the historical dynamics of this DPS, we reconstructed the catch history from fisheries records, collated length data from historical and contemporary hook‐and‐line surveys, and fitted a data‐limited version of a statistical catch‐at‐age model.ResultDespite a high level of uncertainty, we estimated that Yelloweye Rockfish in Puget Sound are above 25% of unfished biomass (a reference point detailed in the recovery criteria) under the assumption of deterministic recruitment, presenting the first direct estimates of Yelloweye Rockfish population status in Puget Sound.ConclusionHowever, as informed by recent genetic studies, the DPS boundaries of ESA‐listed Yelloweye Rockfish extend from South Puget Sound to Queen Charlotte Strait in British Columbia. The Canadian portion of this population is managed separately and is currently estimated to be at 32% of unfished biomass (95% quantiles = 15%–68%). Thus, the disjunction between the biological boundaries of the population and the jurisdictional boundaries between Canada and the United States presents an additional source of uncertainty in assessing recovery that must be addressed to achieve DPS‐wide recovery goals.

Multinational corporations’ capital allocation decisions across asymmetric risk locations: intertemporal equilibrium and optimal transitional adjustment paths

Abstract Multinational corporations operate across locations with different risk profiles. We examine how multinational corporations address the optimal allocation of capital across multiple locations and analyse the transition path to the intertemporal equilibrium. Our model considers returns, risks and adjustment costs to reflect the dynamics of allocating capital assets across locations over time, as well as the mix of assets across locations in equilibrium. Variational calculus is employed to show that the model confirms standard expectations that where a location’s rates of return on assets increase, or adjustment costs decrease, equilibrium capital allocation and transitional capital flows to that location will increase. Symmetrically, rising (falling) risk increases (decreases) the proportion of the capital asset holdings of a location. The crucial insight is that for the transitional dynamics to intertemporal equilibrium, the optimal relative capital flow response to changes in risk can generate relative portfolio allocations that may initially move in the opposite direction to that implied by the stock equilibrium. Specifically, an increase in risk for the high-risk location may initially result in an increase in the relative capital asset flow to the high-risk location relative to the low-risk location. Empirical research must account for the possibility of non-monotonicity in asset allocation flows to avoid misspecification. Moreover, policy makers will have to anticipate possible pressure for reversal resulting from short-term worsening capital flows. These reflections are mirrored in recent research calls for separating structural and transition effects of institutional change on the investment decisions by multinational corporations.

Demand uncertainty reduction among competing retailers

While the existing literature has studied the impact of demand uncertainty extensively within various monopoly settings, there is little research on its impact among competitive retailers. In this paper, we study the effects of demand uncertainty reduction in a setting with two newsvendor retailers competing on product availability. We parameterize the uncertainty level via a mean‐preserving spread and investigate the behavior of both retailers' equilibrium stocks and their expected profits in response to demand uncertainty reduction. We find that as one retailer's demand uncertainty decreases, it might move its order quantity away from the demand mean, which contrasts with the “pull‐to‐center” effect in the monopoly setting. Moreover, we show that as a retailer's demand uncertainty decreases, its own equilibrium profit increases while that of its competitor decreases.

Equilibrium investment with random risk aversion.

We solve the problem of an investor who maximizes utility but faces random preferences. We propose a problem formulation based on expected certainty equivalents. We tackle the time-consistency issues arising from that formulation by applying the equilibrium theory approach. To this end, we provide the proper definitions and prove a rigorous verification theorem. We complete the calculations for the cases of power and exponential utility. For power utility, we illustrate in a numerical example that the equilibrium stock proportion is independent of wealth, but decreasing in time, which we also supplement by a theoretical discussion. For exponential utility, the usual constant absolute risk aversion is replaced by itsexpectation.

Equilibrium Stock Returns and Transaction Costs

Equilibrium Stock Returns and Transaction Costs

Stock-Based Compensation and Insider Trading with Liquidity Signal

We study a stock-based executive (CEO) compensation contract for the case where the insider receives a signal about the demand of liquidity traders in the stock market. The singleperiod model of Kyle (1985) is adopted for deriving the stock market equilibrium. Based on the equilibrium stock price, the optimal linear contract for executive compensation is obtained by applying a standard principal-agent model. Surprisingly, it is found that the firm’s liquidation value is not used in the optimal executive compensation contract in both our model and the benchmark model (where there is no signal about liquidity). We also make comparative statics for the equilibrium stock price and the optimal executive compensation contract with respect to exogenous parameters.

Biological characteristics of silver sillago (Sillago sihama Forsskal) in Bombana Water, South East Sulawesi

Silver Sillago is a demersal fish belong to family Sillaginidae. Sampling site held in district Bombana and conducted since April-November 2018. This research aimed to analyse some aspects regarding of its species. Some aspects are concerned in this observation, e.g., length-weight, sex composition, fecundity rate, length at first capture and length at first maturity, growth, mortality rate and utility rate. These sample were obtained from fisher using trawl. Number sample were observed 5242 specimens with fork length (FL) between 6.16-28.9 cm and average of fork length around 18.13 cm. Growth pattern this species in this area is isometric, while growth of length equal with its weight. Length at first captured is 17.96 cm in fork length measurement. Also, length at first maturity is 22.66 cm. This condition show that this species cannot sustain and maintain stock equilibrium in this area due to they were captured in immature. Peak Season for spawning period of Silver sillago in this area being predicted in August. Natural Mortality (M) is 1.35, Mortality by capture is 1.45, total mortality is 2.80 while utility rate is 0.52.

Information Inertia

ABSTRACTWe show that aversion to risk and ambiguity leads to information inertia when investors process public news about assets. Optimal portfolios do not always depend on news that is worse than expected; hence, the equilibrium stock price does not reflect this bad news. This informational inefficiency is more severe when there is more risk and ambiguity but disappears when investors are risk‐neutral or the news is about idiosyncratic risk. Information inertia leads to news momentum (e.g., after earnings announcements) and is consistent with low household trading activity. An ambiguity premium helps explain the macro and earnings announcement premium.

Cooperative and non-cooperative behaviour in the exploitation of a common renewable resource with environmental stochasticity

Classical fisheries biology aims to optimise fisheries-level outcomes, such as yield or profit, by controlling the fishing effort. This can be adjusted to allow for the effects of environmental stochasticity, or noise, in the population dynamics. However, when multiple fishing entities, which could represent countries, commercial organisations, or individual vessels, can autonomously determine their own fishing effort, the the optimal action for one fishing entity depends on the actions of others. Coupled with noise in the population dynamics, and with decisions about fishing effort made repeatedly, this becomes an iterated stochastic game. We tackle this problem using the tools of stochastic optimisation, first for the monopolist’s problem and then for the duopolist’s problem. In each case, we derive optimal policies that specify the best level of fishing effort for a given stock biomass. Under these optimal policies, we can calculate the equilibrium stock biomass, the expected long-term return from fishing and the probability of stock collapse. We also show that there is a threshold stock biomass below which it is optimal to stop fishing until the stock recovers. We then develop an agent-based model to test the effectiveness of simple strategies for responding to deviations by an opponent from a cooperative fishing level. Our results show that the economic value of the fishery to a monopolist, or to a consortium of fishing agents, is robust to a certain level of noise. However, without the means of making agreements about fishing effort, even low levels of noise make sustained cooperation between autonomous fishing agents difficult.

Different Extrapolators and Stock Market Momentum and Reversal

We document considerable cross-sectional variation in survey expectations about aggregate stock market returns. While most investors are extrapolators who expect higher returns after a good performance, some are contrarians. More notably, compared to extrapolators, contrarians have less persistent expectations that are corrected more quickly. Accordingly, we develop a dynamic equilibrium model accounting for these differences and find that the equilibrium stock price exhibits short-term momentum and long-term reversal as in the data. We also test key predictions of the model that link short-term momentum to differences among extrapolators and contrarians and find supportive evidence for our mechanism.

The learning premium

We find equilibrium stock prices and interest rates in a representative-agent model where dividend growth is uncertain, but gradually revealed by dividends themselves, while asset prices reflect current information and the potential impact of future knowledge. In addition to the usual premium for risk, stock returns include a learning premium, which reflects the expected change in prices from new information. In the long run, the learning premium vanishes, as prices and interest rates converge to their counterparts in the standard setting with known dividend growth. If both relative risk aversion and elasticity of intertemporal substitution are above one, the model reproduces the increase in price-dividend ratios observed in the past century, and implies that—in the long run—price-dividend ratios may increase a further forty percent above current levels.

Optimal joint dynamic pricing, advertising and inventory control model for perishable items with psychic stock effect

In this study, a joint pricing, advertising and inventory control problem will be investigated for a firm selling perishable products with psychic stock effect. The proposed problem is analyzed in the deterministic multi-period setting in which demand at each period depends on not only the amount of inventory displayed and advertising goodwill affected by the firm’s current and past advertising efforts but also selling price and freshness index. The objective is to determine the optimal pricing, advertising, and psychic stock strategies maximizing the discount total profit over the infinite planning horizon. Our theoretical results prove that the firm would adopt a static pricing strategy, and then demonstrate that the optimal paths of the advertising goodwill and psychic stock can be determined uniquely. We also show that the convergence of the advertising goodwill towards its equilibrium is from above or below, depending on the relative location of the initial stock of advertising goodwill with respect to the unique equilibrium stock of advertising goodwill. Moreover, a set of structural properties is developed to explore the relationships among the optimal decisions. Finally, the concluding remarks and suggestions will be provided for future studies.

Modelo bioeconómico de esquila única en el manejo de la fibra de vicuña

La vicuña (Vicugna vicugna) es un camélido sudamericano que se distribuye a lo largo de Cordillera de los Andes, con una mayor concentración de la población en el altiplano Perú - Bolivia, norte de Chile y Argentina. El objetivo de la investigación fue determinar los valores del máximo técnico (edad máxima de esquila), óptimo técnico (edad de mayor producción de fibra) y óptimo económico (periodicidad de esquila) para la esquila de la fibra de vicuña en función al modelo bioeconomico basado en la información del Centro Nacional de Conservación de Camélidos Sudamericanos sede Cala-Cala, en la provincia San Antonio de Putina, región Puno, Perú. El modelo bioeconómico corresponde a la esquila única a precio constante bajo cinco escenarios para tasas de descuento (niveles de rentabilidad) desde el 9% al 30%, en ello, se determinan los valores del máximo técnico, óptimo técnico y óptimo económico. Los resultados mostraron que el valor del máximo técnico para vicuñas hembras corresponde a 15.8 años, en tanto que para vicuñas machos alcanza 17.76 años, lo anterior evidencia que las vicuñas machos viven más que las vicuñas hembras, ello se explica a factores ambientales en el caso de las vicuñas hembras. Asimismo, se observa que, en un escenario donde la unidad productora de fibra de vicuña enfrenta diversos costos de oportunidad (niveles de rentabilidad), se observa que la presión sobre la especie será más exigente en la medida que la tasa de descuento sea más alta, variando la periodicidad de esquila óptima desde 2.6 a 1.25 años correspondiente a una tasa de descuento de 9% y 30%, respectivamente.

Institutional investors and information acquisition: Implications for asset prices and informational efficiency

We study the joint portfolio and information choice problem of institutional investors who are concerned about their performance relative to a benchmark. Benchmarking influences information choices through two distinct economic mechanisms. First, benchmarking reduces the number of shares in investors' portfolios that are sensitive to private information. Second, benchmarking limits investors' willingness to speculate. Both effects imply a decline in the value of private information. Hence, in equilibrium, investors acquire less information and informational efficiency declines. As a result, return volatility increases and benchmarking can cause a decline in equilibrium stock prices. Moreover, less-benchmarked institutional investors outperform more-benchmarked ones.

Fund Flows, Liquidity, and Asset Prices

This paper tests whether mutual funds on aggregate matter for the equilibrium stock returns due to (i) uncertain fund flows, which directly affect fund size and managers' income; and (ii) time-varying liquidity costs of assets. I find the aggregate shocks to fund flows enter the pricing kernel in equilibrium and price 100 liquidity, fund flow beta, size, book-to-market, profitability, and investment portfolio returns net of liquidity costs. The risk prices for the aggregate flow shocks are similar across the separate portfolios and different model specifications, supporting the prediction that one pricing kernel of mutual funds prices a range of cross-sections.

Groundwater management: Waiting for a drought*

AbstractIn this article we present a stylized model for optimal management of an unconfined groundwater resource when the threat of drought exists. The drought is modeled as a stochastic event that hits at an uncertain date and two benchmark management policies are investigated: (a) A policy of optimal dynamic management ignoring the threat of drought; and (b) an economically optimal policy that accounts for the threat of a drought. We show that the optimal predrought steady‐state equilibrium stock size of groundwater under policy b is larger than that under policy (a) Furthermore, we show that an increase in the probability of a drought gives rise to two counteracting effects: One in the direction of a larger predrought steady‐state equilibrium stock size (a recovery effect) and one in the direction of a lower predrought steady‐state equilibrium stock (an extinction effect). We find that the recovery effect dominates the extinction effect.Recommendations for Resource Managers:We analyze two groundwater extraction policies that can be used when a threat of drought exists: (a) Dynamic optimal management ignoring the threat of drought; and (b) dynamic optimal management taking the threat of drought into account. We show that the predrought steady‐state equilibrium stock size of water should be larger under the policy (b) than under policy (a). This conclusion has three implications for resource managers: Current groundwater management should take future extraction possibilities into account. A resource manager ought to take the threat of drought into account in groundwater management. A buffer stock of water should be built‐up before the drought to be drawn upon during the event.

The Value of Connections: Network Effects on Stock Market Participation

We introduce an equilibrium model of the stock market participation rate with a social network. We study how information sharing through a network affects the decision to enter the stock market and how social connectivity interacts with individual income and financial literacy to create heterogeneity in stock market participation levels. We analyze how the equilibrium participation level depends on the intensity of social interactions, and provide an algorithm for finding the equilibrium stock market participation level. We test the predictions from the model using Facebook county-level connectivity data. We find the model with social networks outperforms standard models without networks in predicting heterogeneity of equilibrium stock market participation over the income distribution, explaining non-participation among wealthy agents.

Matrix-Based Sensitivity Assessment of Soil Organic Carbon Storage: A Case Study from the ORCHIDEE-MICT Model.

Modeling of global soil organic carbon (SOC) is accompanied by large uncertainties. The heavy computational requirement limits our flexibility in disentangling uncertainty sources especially in high latitudes. We build a structured sensitivity analyzing framework through reorganizing the Organizing Carbon and Hydrology in Dynamic Ecosystems (ORCHIDEE)‐aMeliorated Interactions between Carbon and Temperature (MICT) model with vertically discretized SOC into one matrix equation, which brings flexibility in comprehensive sensitivity assessment. Through Sobol's method enabled by the matrix, we systematically rank 34 relevant parameters according to variance explained by each parameter and find a strong control of carbon input and turnover time on long‐term SOC storages. From further analyses for each soil layer and regional assessment, we find that the active layer depth plays a critical role in the vertical distribution of SOC and SOC equilibrium stocks in northern high latitudes (>50°N). However, the impact of active layer depth on SOC is highly interactive and nonlinear, varying across soil layers and grid cells. The stronger impact of active layer depth on SOC comes from regions with shallow active layer depth (e.g., the northernmost part of America, Asia, and some Greenland regions). The model is sensitive to the parameter that controls vertical mixing (cryoturbation rate) but only when the vertical carbon input from vegetation is limited since the effect of vertical mixing is relatively small. And the current model structure may still lack mechanisms that effectively bury nonrecalcitrant SOC. We envision a future with more comprehensive model intercomparisons and assessments with an ensemble of land carbon models adopting the matrix‐based sensitivity framework.