Abstract | PDF (551 kilobytes)

Strong procyclical fluctuations in the durable production are the most prominent feature of the response to monetary shocks. This paper investigates the role of preferences in matching this feature of the data in a two-sector sticky price model with flexibly priced durables. The reaction of durables depends crucially on whether preferences are separable between labor and nondurable consumption. When preferences are separable, the model exhibits perverse behavior. Flexibly priced durables contract during periods of economic expansion. However, non-separable preferences substantially improve the ability of the model to generate sectoral comovment. This result hinges upon the fact that the non-separable preferences may indicate the complementarity between nondurable consumption and labor supply, which is absent in the separable preferences.

Abstract | PDF (665 kilobytes)

The previous studies have mainly focused on measuring the contribution of IT investment to the industry's productivity growth, but failed to investigate its effect on the supply price. If IT investment leads to a lower in the supply price, the industry will likely expand its global market share through the price competition. Also, it is required to confirm the attainment of optimal level of IT capital stock in order to maximize the investment efficiency. In this study, first, we compute the price elasticities with respect to IT capital investment by industries by estimating a supply relationship derived from the cost function. Then we test for the dynamic optimal condition for IT capital stock obtained by minimizing the present value of costs subject to the production function as specified in dynamic equilibrium model. An investment in IT capital would bring an increase in supply price in the labor intensive industries, while enabling the price cuts in the capital intensive industries. Overall, the IT investment might result in the supply price reductions in the Korean manufacturing industries, but insignificantly in the effectiveness. The dynamic optimal condition is rejected for feasible range of variable discount rates.

Abstract | PDF (376 kilobytes)

Predictive regressions are subject to finite sample bias. We propose a new twostep procedure to make correct inference for predictive regressions. Simulation results show that our procedure performs better than the existing two-step procedure in eliminating the bias and size distortion of the conventional $t$-test. We apply this procedure and find that dividend yield has lost predictive power for return since the early 1990s.

Abstract | PDF (2207 kilobytes)

As a coherent risk measure, CVaR or expected shortfall (ES) is limited in terms of applying equal weights to the extreme loss beyond Value-at-Risk regardless of investors' risk aversion. Acerbi (2002, 2004) introduced spectral risk measures (SRMs) that reflect investors' subjective risk aversion. In this study, portfolios are composed of three different Korean financial assets: the KOSPI index, won-dollar exchange rates, and the government bond. The asset allocations derived from ES and SRMs with various risk aversion coefficients are compared. The SRMs model converges to the ES model by imposing equal weights to the loss beyond VaR. The results show that when investors are more risk averse, the weights for high-risk stocks decrease and the weights for low-risk government bonds increase. The efficient frontiers of ES and SRMs show that the risk taken depends on the degree of risk aversion, and that investors select the lower risk portfolio when they are more risk averse. The efficient frontier of ES is one of the various efficient frontiers of SRMs, which implies that asset allocation based solely on ES is not appropriate for very risk-averse investors or conservatively managed portfolios.