This is a summary of the few papers and projects that I have written as a Ph.D. student at the University of Chicago. A comment about the paper follows the abstract.
Housing as a Measure for the Long-Run Risk, 2007 - PDF - Job Market Paper
I evaluate the effects of long-run consumption growth risk and housing consumption risk on asset prices. Current asset values are affected by the risk-return tradeoff in the long-run. Housing plays an important role in the economy. As an asset, it is particularly sensitive to long-run risk-return trade off; as a consumption component, it accounts for one fifth of the total expenditures in non durable goods and services. The investment horizon for housing is usually distant in the future. Investors fear shocks that can affect the value of their house for a long period of time. Such shocks affect substantially the services obtained from the house and its price as an asset as well. I use a non-separable utility function with non-housing consumption and consumption of housing services, which generates an intertemporal composition risk, besides the traditional consumption growth risk. The composition risk has effects for the valuation of cash flow growth fluctuations far into the future due to the persistence of consumption growth. I provide a closed form solution for the valuation function despite the non-separability. This allows me to quantify the price of risk in the long-run with inputs from vector autoregressions. I evaluate the different exposure to long-run risk of a cross section of portfolios of securities, and characterize the price of risk for different investment horizons. The model also explains the spread of the returns to different portfolios sorted in book to market and housing returns, at different investment horizons.
GMM Estimation of an Asset Pricing Model with Habit Persistence (with Hugo Garduño), 2005- PDF - PS
In this paper we estimate and test for the first time the theoretical model presented in Campbell and Cochrane (1999). This has been the most succesful paper recently in Asset Pricing. And we do it in three different market settings. First we estimate assuming complete markets with aggregate data from the NIPA accounts. Second, we assume that the non-stockholders are not marginal, hence do not matter in pricing (limited participation). Finally we drop the assumption of complete insurance and we estimate the model with incomplete markets. We estimate these two last settings with household level data on consumption and asset holding from the Consumer Expenditure Survey (CEX) database. We find evidence that a complete markets model is better able to explain average returns, whereas a model that includes limited participation of agents in the stock market and incomplete consumption insurance among individuals is better able to explain the equity premium and does so with a lower value of the RRA coefficient than a model with complete markets.
We presented this work in the XIII Foro de Finanzas organized by the Bank of Spain in Madrid in November, 2005. The paper was awarded with the Prize for the best paper of the XIII Forum by the Spanish Association of Finance (AEFIN). We want to thank all the participants and all the members of the Association for such a honor an for the comments received during the days of the conference. It was a great experience to share our work with renowned faculty members of the most outstanding spanish and european universities, and we are especially grateful to José Marín, Gonzalo Rubio, Manuel Moreno, Belén Nieto, Mikel Tapia, Roberto Blanco, Juan Ayuso, and Javier Gil-Bazo. We also presented our work in seminar series at The University of Chicago, Universitat Pompeu Fabra (Barcelona) and ITAM (México D.F.). We are indebted to Monika Piazzesi for her enthusiasm and extraordinary comments and remarks. We are also thankful to Lars Hansen, Fernando Álvarez, John Cochrane, and Georges Constantinides. An earlier version of this paper was presented in the annual Conference of the Latin American and Caribbean Law and Economics Assocation (ALACDE) in April 2005 at the University of California, Berkeley. We also thank the participants in the ALACDE Conference for their useful comments.
Habits meet Limited Participation (Advisor, John Cochrane), 2004- PDF
Abstract - Many studies have been written after the Equity Premium Puzzle was stated in Mehra and Prescott (1985). In this paper I merge two main branches that try to enhance the model's ability to replicate the empirical data. First, I use the utility specification in Campbell and Cochrane (1999) with external habits to obtain time varying Sharpe ratio. Second, I use the CEX database to implement limited participation, because I assume that not all the agents are marginal in the model. Using these two characteristics I estimate the model parametrically by GMM and I fnd that the relative risk aversion coeffcient is lower as we tighten the definition of stock holder. The estimated parameters are sensible and close to those calibrated by Campbell and Cochrane to replicate the U.S. economy.
This was my second year paper. I estimated the habits model in a very basic setup of complete markets with the 25 Fama-French portfolios sorted in size and book-to-market. I used for the first time the CEX database, with the correspondent work of "cleaning". I applied several filters to eliminate suspicious observations and I seasonally adjusted. Then I computed the marginal rate of substitution for the representative agent of the different groups of stockholders, according to their level of financial wealth.
Fiscal Federalism and Endogenous Growth, 2005 - PDF
Abstract - This paper develops a theory of the impact of decentralization on regional growth rate. First, introduces the example of devolution of power in Spain during the last two decades, analyzing particular facts about per capita GDP. It also analyzes the current situation after the last legal reform in 2002. It then develops a model of endogenous growth, which results from the fact that regions accumulate governing skills if they are decentralized, and manage their tax policy optimally. The paper shows that the effects of decentralization are twofold, (1) the region will manage to set the optimal tax scheme to maximize its growth rate, and (2), it will foster accumulation of governing skills, leading to an optimal saddle path of long run growth. Centralized regions will not be able to optimize their growth rate and their accumulation of know-how will not respond to the solution of their dynamic program but to an exogenous value set by the central government.
This is an earlier version, please do not cite or circulate. The results are heuristic and I have to compute the balance growth path seriously. It is work in progress, do not take seriously.
PAPERS ON GAME THEORY AND NETWORKS
Networks and International Trade, 2003 - PDF
Abstract - The question I address in this paper is how tight a country can make bilateral trade relationships before they break up. Recent real world sitations between U.S. and trade partners have shown that within a bilateral trade, one partner is able to raise trade barriers without breaking up the link; but there exists a limit where the partner reacts and forces him to cease the hostility. This paper applies the literature about social networks and network formation to the recent situations of internationa trade. I work upon the benchmark in Johnson and Gilles (1999) slightly modified to be more suitable to the reality of international trade. I use their concepts of pairwise stability and effciency. I look at the countries as nodes belonging to the network where the links among them are bilateral trade agreements. It is observed that countries in such networks have some margin to increase barriers to trade, still keeping the network stable. The analysis focus in how they manage to do so and how big this margin can be before other partners decide to break unilaterally the link.
This was a proposal for a project, is not an actual paper. There are a few nice and simple conclussions derived from network analysis. Is interesting to look at the potential of the network analysis to different fields, like International Trade, Conflict, Multilateral Bargaining, and basically any field involving multilateral strategic relations.