Stock Market Mean Reversion and the Optimal Equity Allocation of a Long-Lived Investor

This paper solves numerically the intertemporal consumption and portfolio choice problem of an infinitely-lived investor who faces a time-varying equity premium. The solutions we obtain are very similar to the approximate analytical solutions of Campbell and Viceira (1999), except at the upper extreme of the state space where both the numerical consumption and portfolio rules flatten out. We also consider a constrained version of the problem in which the investor faces borrowing and short-sales restrictions. These constraints bind when the equity premium moves away from its mean in either direction, and are particularly severe for risk-tolerant investors. The constraints have substantial effects on optimal consumption, but much more modest effects on optimal portfolio choice in the region of the state space where they are not binding.Economic

Investing Retirement Wealth: A Life-Cycle Model

If household portfolios are constrained by borrowing and short-sales restrictions asset markets, then alternative retirement savings systems may affect household welfare by relaxing these constraints. This paper uses a calibrated partial-equilibrium model of optimal life-cycle portfolio choice to explore the empirical relevance of these issues. In a benchmark case, we find ex-ante welfare gains equivalent to a 3.7% increase in consumption from the investment of half of retirement wealth in the equity market. The main channel through which these gains are realized is that the higher average return on equities permits a lower Social Security tax rate on younger households, which helps households smooth their consumption over the life cycle. There is a smaller welfare gain of 0.5% of consumption when Social Security tax rates are held constant. We also find that realistic heterogeneity of risk aversion and labor income risk can strongly affect optimal portfolio choice over the life cycle, which provides one argument for a privatized Social Security system with an element of personal portfolio choice.

Robustness and dynamic sentiment

Errors in survey expectations display waves of pessimism and optimism and significant sluggishness. This paper develops a novel theoretical framework of time-varying beliefs capturing these empirical characteristics. The dynamic beliefs arise endogenously due to agents’ attitude toward alternative models. Decision-maker’s distorted beliefs generate countercyclical risk aversion, procyclical portfolio weights, countercyclical equilibrium asset returns, and excess volatility. A calibrated version of our model is shown to match salient features in equity markets.Errors in survey expectations display waves of pessimism and optimism and significant sluggishness. This paper develops a novel theoretical framework of time-varying beliefs capturing these empirical facts. In our model, the dynamic beliefs arise endogenously due to agents’ attitude toward alternative models. Decision-maker’s distorted beliefs generate countercyclical risk aversion, procyclical portfolio weights, countercyclical equilibrium asset returns, and excess volatility. A calibrated version of our model is shown to match salient features in equity markets.https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3798445First author draf

The CO2 Human Emissions (CHE) Project: First steps towards a European operational capacity to monitor anthropogenic CO2 emissions

The Paris Agreement of the United Nations Framework Convention on Climate Change is a binding international treaty signed by 196 nations to limit their greenhouse gas emissions through ever-reducing Nationally Determined Contributions and a system of 5-yearly Global Stocktakes in an Enhanced Transparency Framework. To support this process, the European Commission initiated the design and development of a new Copernicus service element that will use Earth observations mainly to monitor anthropogenic carbon dioxide (CO2) emissions. The CO2 Human Emissions (CHE) project has been successfully coordinating efforts of its 22 consortium partners, to advance the development of a European CO2 monitoring and verification support (CO2MVS) capacity for anthropogenic CO2 emissions. Several project achievements are presented and discussed here as examples. The CHE project has developed an enhanced capability to produce global, regional and local CO2 simulations, with a focus on the representation of anthropogenic sources. The project has achieved advances towards a CO2 global inversion capability at high resolution to connect atmospheric concentrations to surface emissions. CHE has also demonstrated the use of Earth observations (satellite and ground-based) as well as proxy data for human activity to constrain uncertainties and to enhance the timeliness of CO2 monitoring. High-resolution global simulations (at 9 km) covering the whole of 2015 (labelled CHE nature runs) fed regional and local simulations over Europe (at 5 km and 1 km resolution) and supported the generation of synthetic satellite observations simulating the contribution of a future dedicated Copernicus CO2 Monitoring Mission (CO2M