The Center for Global Economy and Business offers a small number of limited research grants to Stern faculty for projects related the interests of its research groups. In the Spring of 2012, the Center completed its second grant cycle. All full-time faculty were invited to apply for grants. In April, ten research grants were awarded to ten Stern faculty members.
The following Stern faculty received Spring 2012 Center research grants (sum in parentheses):
- Viral Acharya, Finance ($5,000)
- John Asker, Economics ($8,500)
- Allan Collard-Wexler, Economics ($6,000)
- Xavier Gabaix, Finance ($7,500)
- Alessandro Gavazza, Economics ($7,500)
- Robin Lee, Economics ($9,500)
- Renee Rottner, Management ($11,000)
- Robert Salomon, Management ($1,700)
- Stijn van Nieuwerburgh, Finance ($7,500)
- Laura Veldkamp, Economics ($7,500)
Resulting Papers and Materials
- Viral Acharya
We build an equilibrium model of commodity markets in which speculators are capital constrained, and commodity producers have hedging demands for commodity futures. Increases in producers' hedging demand or speculators' capital constraints increase hedging costs via price pressure on futures, which affect producers' equilibrium hedging and supply decision inducing a link between a financial friction in the futures market and commodity spot prices. Consistent with the model, measures of producers' propensity to hedge forecasts futures returns and spot prices in oil and gas market data from 1979-2010. The component of the commodity futures risk premium associated with producer hedging demand rises when speculative activity reduces. We conclude that limits to financial arbitrage generate limits to hedging by producers, and affect equilibrium supply and commodity prices.
- Xavier Gabaix
- A Sparsity-Based Model of Bounded Rationality, with Application to Basic Consumer and Equilibrium Theory
This paper defines and analyzes a “sparse max” operator, which generalizes the traditional max operator used everywhere in economics. The agent builds (as economists do) a simplified model of the world which is sparse, considering only the variables of first-order importance. His stylized model and his resulting choices both derive from constrained optimization. Still, the sparse max remains tractable to compute. Moreover, the induced outcomes reflect basic psychological forces governing limited attention.
With the sparse max, we can behaviorally enrich a variety of economic models. Here we study two pillars of economics: basic theory of consumer demand (choosing a consumption bundle subject to a budget constraint) and competitive equilibrium. We obtain a behavioral version of Marshallian and Hicksian demand, the Slutsky matrix, the Edgeworth box, Roy’s identity etc., and competitive equilibrium. The Slutsky matrix is no longer symmetric — non-salient prices are associated with anomalously small demand elasticities. In the Edgeworth box, the offer curve is “extra-dimensional:” it is a two-dimensional surface rather than a one-dimensional curve. As a result, different aggregate price levels correspond to materially distinct competitive equilibria, in a similar spirit to a Phillips curve. This framework provides a way to assess which parts of basic microeconomics are robust, and which are not, to the assumption of perfect maximization.
- Laura Veldkamp
For decades, macroeconomists have searched for shocks that are plausible drivers of business cycles. A recent advance in this quest has been to explore uncertainty shocks. Researchers use a variety of forecast and volatility data to justify heteroskedastic shocks in a model, which can then generate realistic cyclical fluctuations. But the relevant measure of uncertainty in most models is the conditional variance of a forecast. When agents form such forecasts with state, parameter and model uncertainty, neither fore- cast dispersion nor innovation volatilities measure uncertainty. We use observable data to select and estimate a forecasting model and then ask the model to inform us about what uncertainty shocks look like and why they arise.