Previous work on discrete time portfolio selection models encompassed (a) transaction's costs, and (b) uncertainty about cash flows during the first (and only) period. This paper extends these models by considering uncertainty about asset yields in the second period and the optimal strategy for portfolio selection over a two-period horizon. Among the implications are i) the optimal initial portfolio is, in general, diversified and contains more short-term assets than the myopic investor's portfolio, and ii) the shape of the mean-variance locus ensures diversification for all (two-moment) types of investors, except certain forms of risk lovers. Other partial derivatives are investigated.
Working paper 6 is based largely on chapter 3 of Supel's University of Minnesota Ph.D. dissertation, "A two-period balance sheet model for banks."
Prediction interval tests are applied to the reduced forms of two quarterly models of the U.S. (the "old" FRB-MIT model and the Michigan model). The results illustrate the range of tests one can perform on an estimated simultaneous equation model. In particular, the tests determine whether ex post forecast errors can be attributed to structural deficiencies of the models. The paper examines confidence regions and other aspects of forecast distributions-comparisons between mean forecasts and nonstochastic forecasts, comparisons between, forecast variances from multiperiod endogenous simulations and those from one period simulations, and comparisons between forecast variances and residual variances.
A statistical definition of the natural unemployment rate hypothesis is advanced and tested. A particular illustrative structural macroeconomic model satisfying the definition is set forth and estimated. The model has "classical" policy implications, implying a number of neutrality propositions asserting the invariance of the conditional means of real variables with respect to the feedback rule for the money supply. The aim is to test how emphatically the data reject a model incorporating rather severe "classical" hypotheses.
In "Liquidity Preference as Behavior Towards Risk," Tobin suggests that risk aversion and expected utility maximization can provide a rigorous foundation for an equilibrium demand for money. In Tobin's model, money plays a risk reducing role in individual portfolios. This note considers whether a general equilibrium stochastic model can produce equilibrium yield distributions that allow money to play that role if money does not appear directly as an argument in the utility or production functions of the economy. The model examined, a stochastic production variant of Samuelson's model of overlapping generations, cannot produce such yield distributions.