Working papers results

We use frequency domain techniques to estimate a medium-scale DSGE model on different frequency bands. We show that goodness of t, forecasting performance and parameter estimates vary substantially with the frequency bands over which the model is estimated. Estimates obtained using subsets of frequencies are characterized by signicantly different parameters, an indication that the model cannot match all frequencies with one set of parameters. In particular, we find that: i) the low frequency properties of the data strongly affect parameter estimates obtained in the time domain; ii) the importance of economic frictions in the model changes when different subsets of frequencies are used in estimation.
This is particularly true for the investment cost friction and habit persistence: when low
frequencies are present in the estimation, the investment cost friction and habit persistence are estimated to be higher than when low frequencies are absent.

This paper proposes a framework to evaluate the impact of longevity-linked securities on the risk-return trade-off for traditional portfolios. Generalized unexpected raise in life expectancy is a source of aggregate risk in the insurance sector balance sheets. Longevity-linked securities are a natural instrument to reallocate these risks by making them tradable in the financial market. This paper extends the strategic asset allocation model of (Campbell Viceira 2005) to include a longevity-linked investment in addition to equity and fixed income securities and describe the resulting term structure of risk-return trade-offs. The model highlights an unexpected predictability pattern of the survival probability estimates and gives an empirical valuation of the market price of longevity risk based on the LeeCarter(1992) mortality model and on the time series of prices for standardized annuities publicly offered by US insurance companies.

We evaluate the impact of timing on decision outcomes, when both the timing and the relevant decision are chosen under uncertainty. Sports betting provides the testing ground, as we exploit an original dataset containing more than one million online bets on games of the Italian Major Soccer League. We find that individuals perform systematically better when they place their bets farther away from the game day. The better performance of early bettors holds controlling for (time-invariant) unobservable ability, learning during the season, and timing of the odds. We attribute this result to the increase of noisy information on game day, which hampers the capacity of late (non-professional) bettors to use very simple prediction methods, such as team rankings or last game results. We also find that more successful bettors tend to bet in advance, focus on a smaller set of events, and prefer games associated with smaller betting odds.

This paper addresses the problem of sequentially allocating timesensitive goods, or one-period leases on a durable good, among agents who compete through time and learn about the common component of the value of the allocation through experience. I show that efficiency is unattainable, and I identify simple variations of sequential second-price or English auctions that implement the second best and the revenuemaximizing auction. When the units are divisible, I also identify the corresponding auctions that allow for double sourcing.

We establish an Ergodic Theorem for lower probabilities, a generalization of standard probabilities widely used in applications. As an application, we provide a version for lower probabilities of the Strong Law of Large Numbers.

We thoroughly study the non-standard optimal exercise policy associated with relevant capital investment options and with the prepayment option of widespread collateralized-borrowing contracts like the gold loan. Option exercise is optimally postponed not only when moneyness is insufficient but also when it is excessive. We contribute an important extension of the classical optimal exercise properties for American options. Early exercise of an American call with a negative underlying payout rate can occur if the option is moderately in the money. We fully characterize the existence, the monotonicity, the continuity, the limits and the symptotic behavior at maturity of the double free boundary that separates the exercise region from the double continuation region. We fifind that the fifinite-maturity non-standard policy conspicuously differs from the infifinite-maturity one.

We study a Mean-Risk model derived from a behavioral theory of Disappointment with multiple reference points. One distinguishing feature of the risk measure is that it is based on mutual deviations of outcomes, not deviations from a specific target. We prove necessary and sufficient conditions for strict first and second order stochastic dominance, and show that the model is, in addition, a Convex Risk Measure. The model allows for richer, and behaviorally more plausible, risk preference patterns than competing models with equal degrees of freedom, including Expected Utility (EU), Mean-Variance (MV), Mean-Gini (MG), and models based on non-additive probability weighting, such a Dual Theory (DT). For example, in asset allocation, the decision-maker can abstain from diversifying in a risky asset unless it meets a threshold performance, and gradually invest beyond this threshold, which appears more acceptable than the extreme solutions provided by either EU and MV (always diversify) or DT and MG (always plunge). In asset trading, the model allows no-trade intervals, like DT and MG, in some, but not all, situations. An illustrative application to portfolio selection is presented. The model can provide an improved criterion for Mean-Risk analysis by injecting a new level of behavioral realism and flexibility, while maintaining key normative properties.

Gender stereotypes are well established also among women. Yet, a recent literature suggests that earning from other women experience about the effects of maternal employment on children outcomes may increase female labor force participation. To further explore this channel, we design a randomized survey experiment, in which 1500 Italian women aged 20 to 40 are exposed to two informational treatments on the positive consequences of formal childcare on children future educational attainments. Surprisingly, we find that women reduce their intended labor supply.
However, this result hides strong heterogenous effects: high educated non-mothers are persuaded by the informational treatments to increase their intended use of formal child care (and to pay more); whereas low educated non-mothers to reduce their intended labor supply. These findings are consistent with women responding to monetary incentive and/or having different preferences for maternal care. These heterogenous responses across women send a warning signal about the true effectiveness - in terms of take up rates - of often advocated public policies regarding formal child care.

We performed a new test of transitivity based on individual measurements of the main intransitive choice models in decision under uncertainty. Our test is tailor-made and, therefore, more likely to detect violations of transitivity than previous tests. In spite of this, we observed only few intransitivities and we could not reject the hypothesis that these were due to random error. A possible explanation for the poor predictive performance of the intransitive choice models is that they only allow for interactions between acts, but exclude within-act interactions by retaining the assumption that preferences are separable overstates of nature. Prospect theory, which relaxes separability but retains transitivity, predicted choices significantly better than the nontransitive choice models. We conclude that descriptively realistic models need to allow for within-act interactions, but may retain transitivity.

Subject classifications: Utility/preference: Estimation. Decision analysis: Risk.

Area of review: Decision Analysis.

This work addresses the early phases of the elicitation of multiattribute value functions proposing a practical method for assessing interactions and monotonicity. We exploit the link between multiattribute value functions and the theory of high dimensional model representations. The resulting elicitation method does not state any a-priori assumption
on an individual's preference structure. We test the approach via an experiment in a riskless context in which subjects are asked to evaluate mobile phone packages that differ on three attributes.