Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society

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Journal of Economic Theory and Econometrics
Journal of the Korean Econometric Society

Volume 24, Issue 1 (March 2013)

Cover pages
Abstract | PDF (366 kilobytes)

No abstract is available for this article.

State-Space Model and Present Value Model: An Application to the Korean Stock Market, Pages 1–15

Kwang Hun Choi, Cheolbeom Park

Abstract | PDF (433 kilobytes)

We have applied the state-space model to the Korean stock market under restrictions imposed by the present-value relation. Our main findings are (i) expected stock returns vary over time and have persistent and predictable component, (ii) expected dividend growth rates do not contain persistent and predictable component, (iii) expected stock returns play relatively more important role in explaining variations in the price-dividend ratio, (iv) shocks to expected stock returns are also more crucial in understanding unexpected stock return shocks, and (v) the state-space model does not appear to perform better than the predictive regression in terms of the ability in forecasting stock returns or dividend growth rates.

On the Effects of the Compensation Rule on the Free Agent Decision and the Salary Level, Pages 16–36

Choong Ryul Yang, Gyu Ho Wang

Abstract | PDF (2864 kilobytes)

The reserve clause requires the players to have a salary contract with the same team for a fixed periods of time. The free agency system allows the players to move to the other teams after the fixed periods of time specified in the reserve clause. We consider the effects of the compensation rule on the free agency decision and salary level under the reserve clause and the free agency system. For this, we analyze a two-period model consisting of 5 stages. The main results are as follows. If a player receives a salary comparable to his productivity in the period before he can apply for FA, he has no incentive for applying for FA. With a large gap between the minimum salary and his productivity, he applies for FA. In this case, the incumbent club strategically pays an salary higher than the minimum one (expected FA premium) in order to take advantage of compensation rule which obligates the new club holding the FA player to pay the incumbent club several times of the previous salary. The stronger is the compensation rule, the less incentive the players has to apply for FA, and less salary they receive.

Speculation under Bounded Rationality, Pages 37–53

In Ho Lee

Abstract | PDF (114 kilobytes)

I construct a model of a speculation for an economy with boundedly rational agents. Speculation is defined as a trade for gains from price change while investment is defined as a trade for consumption. In a model without boundedly rational agents, the equilibrium price exactly reflects the underlying value of the good traded whether the agents trade for price gain or for their own consumption. However a model of speculation with boundedly rational agents produces fundamentally different equilibrium from that of investment. The price rises higher than the fundamental value of the asset. Moreover the price may rise even higher than the level which equals the expectation of boundedly rational agents since the extra premium can be justified by the higher rate of price rise. In particular the paper shows that rational agents are responsible for the amplification of the price bubble since the price rises higher than the expectation of boundedly rational agents alone. Hence price bubble in the asset market occurs due to the cooperation of rational agents once there exists uncertainty as to the existence of boundedly rational agents.

Standard Auctions with Security Bids, Pages 54–71

Jinwoo Kim

Abstract | PDF (162 kilobytes)

Peter DeMarzo, Ilan Kremer and Andrzej Skrzypacz (2005) study auctions where bidders compete in securities. As the main results, they show that: a steeper security generates a higher revenue for the seller; the revenue ranking between the first-price and second-price auction depends on the steepness of security; and the first-price auction combined with call option achieves the highest revenue among a general set of auction mechanisms. As pointed out by Che and Kim (2010), using steeper securities can cause the adverse selection problem and reduce the seller's revenue, in case a bidder who expects a higher return must incur a higher investment cost. While the analysis of Che and Kim (2010) focuses on the second-price auction, this paper analyzes the first-price auction to show that it is plagued by the same problem and in fact more vulnerable than the second-price auction to the adverse selection problem, which may lead to a reversal of the DKS's revenue ranking between the two auctions.


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