The Bitcoin Premium: A Persistent Puzzle
The B.E. Journal of Macroeconomics, 2024, vol. 24, no. 1
Abstract: On average, stocks have a much higher rate of return than bonds; this has led to research on the equity premium puzzle. Similarly, Bitcoin outperforms stocks; I call this the Bitcoin premium puzzle. I show that standard macroeconomic models predict a low or negative Bitcoin premium. Though Bitcoin is extremely volatile, the model is rejected even when the coefficient of relative risk aversion is above 10. The Bitcoin premium declined after a structural break in late 2013. However, the puzzle is persistent; there has been no downward trend in the premium since.
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Social Contact in a Pandemic: Rationality vs. Heuristics
Research in Economics, March 2023, vol. 77, issue 1
Abstract: During the Covid pandemic, people weighed the benefits of social contact against the risks to their health. Ideally, people would respond based on the true infection rate; this is the rational model. However, there was high uncertainty, so perhaps people relied upon the heuristic model instead. I estimate revealed preferences for health and social contact at the county level and find evidence in favor of the heuristic model. This is important since many models of optimal policy assume that people respond to the true infection rate.
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Disaggregation and the Equity Premium Puzzle
Journal of Empirical Finance, Sep. 2020, vol. 58
Abstract: Standard macroeconomic models cannot explain why stocks so greatly outperform bonds. However, this result depends on the use of aggregate consumption data. If markets are incomplete, then a representative agent might not exist and it is necessary to use consumption data at the household rather than aggregate level. In the household data, the equity premium puzzle is solved when the coefficient of relative risk aversion is as low as 2.7-3.8. I demonstrate that this result is robust in a very general framework and prove that many of the tests used in the literature are biased.
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A Real Business Cycle Model with Money as a Sunspot Variable
Journal of Economics and Business, May-June 2020, vol. 109
Abstract: A well-known criticism of the RBC model is that it cannot match the data on money. Due to the perfect flexibility of prices and the absence of frictions, any exogenous increase in the money supply will be fully offset by wage and price increases, implying that money is neutral even in the short run. However, beliefs that money is non-neutral could become a self-fulfilling prophesy. By using money as a sunspot variable in an RBC model, I successfully replicate many of the correlations in the data, even though money does not directly affect the economy’s fundamentals. This shows that models with flexible prices are not necessarily incompatible with the monetary data and offers support for the use of sunspot variables in macroeconomics.
A non-technical summary I wrote for the Lindau Blog
Full textThere is a typo in the published version. Equation (46) should be the following.
Rationality with Preference Discovery Costs
Theory and Decision, Aug. 2018, vol. 85, no. 2, 231-251.
Abstract: Economic theory assumes that preferences are rational. However, experiments have found small violations of transitivity. This paper develops a model of rationality with preference discovery costs. Introspection is costly. Thus, agents may find it optimal to use less than full effort, even though this raises the risk of making a poor choice. This model could potentially explain the intransitivities observed in the data while retaining rationality and optimization.
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Observed Altruism in Dental Students: An Experiment Using the Ultimatum Game
(with Crutchfield, Jarvis, and Olson). Journal of Dental Education, Nov. 2017, vol. 81 no. 11, 1301-1308.
This interdisciplinary collaboration was selected as one of the "10 Most Notable Articles of 2017" by the Journal of Dental Education. The editor writes, "This creative use of research methods from outside dental education sheds light on a common question: does dental students’ altruism decrease over their education? The study used a computer game that asked dental students in all four years to choose how much of their limited resources to give to recipients based on factors such as socioeconomic status. In the results, students showed higher levels of altruism than the general population, and their altruism was highest in the fourth year. The latter finding—contrary to previous studies—suggests that the often-found decline in altruism may be due not to student characteristics but to factors in the educational environment."
Abstract: The conventional wisdom in dental and medical education is that dental and medical students experience “ethical
erosion” over the duration of dental and medical school. There is some evidence for this claim, but in the case of dental education
the evidence consists entirely of survey research, which does not measure behavior. The aim of this study was to measure
the altruistic behavior of dental students in order to fill the significant gap in knowledge of how students are disposed to behave,
rather than how they are disposed to think. To test the altruistic behavior of dental students, the authors conducted a field experiment
using the Ultimatum Game, a two-player game used in economics to observe social behavior. In the game, the “proposer” is
given a pot of resources, typically money, to split with the “responder.” The proposer proposes a split of the pot to the responder.
If the responder accepts the proposed split, both participants keep the amounts offered. If the proposal is rejected, then neither
participant receives anything. In this study, the students played the proposer, and the responder was a fictional individual although
the students believed they were playing the computerized game with a real person. In fall 2015, dental students from each of the
four years at one university played the game. All 160 students were invited to participate, and 136 did so, for a response rate of
85%. The results showed that the students exhibited greater levels of altruism than the general population typically does. The
students’ altruism was at its highest in year four and was associated with the socioeconomic status of responder. This result raises
the possibility that if a decreasing ability to behave altruistically is observed during dental school, it may not be due to a general
disposition of students, but rather some factor specific to the educational environment.
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Disaggregation Reverses the Risk-Free Rate Puzzle
Working paper
Abstract: In the macro data, it appears that people are buying too many bonds. They help agents smooth consumption, but the rate of return is very low and aggregate consumption is already very smooth. However, consumption at the household level is far more volatile. This makes bonds more appealing. Instead of solving the puzzle, the main result is reversed: households are not buying enough bonds. Under some specifications, the unconditional Euler equation is not rejected, but in those cases the forecast errors are inconsistent with rational expectations.
Shopping Taxes, Not Lockdowns
Revise and resubmit, Oxford Economic Papers
Abstract: To contain Covid, a large reduction in contact was necessary. The lockdowns in the US were insufficient. In addition, lockdowns lead to a misallocation of economic resources. Instead, I propose a tax on in-person shopping. Each customer would pay $X per shopping trip. The optimal shopping tax is higher in urban counties than in rural ones. This is because there is more social contact in cities. The tax is highest at the start, and it begins to fall once the virus is under control. In the urban county, the tax starts at $140 and eventually drops to $90. In the rural county, the tax is $60 in the beginning and is no longer necessary after about 380 days.
Endogenous Preferences and Green Bond Pricing
Working paper with Liu and Tran.
Abstract:Using a macro model based on endogenous preference theory, our paper explores how news media, particularly coverage of climate change, affects investors' preferences for green and brown bonds over time. Empirical analysis of U.S. municipal bonds shows that green bond premium increase by 24 basis points during the period of elevated climate change news. While investors have strong demand for green bonds with different time to maturities, they seem to have stronger preference for bonds tied to specific environmental projects. Our study provides a nuanced understanding of the time-varying nature of green bond premiums due to evolving investor preferences and climate change discourse
