Week 3 - Comparative Stats

Question 1

If labour income uncertainty rises, explain the mechanics of what happens to savings and wealth

Answer 1

Labour income uncertainty rises - save more, wealth goes up, avg income stays same., higher wealth lowers share wealth in stocks - less risk (background risk)

Question 2

If expected growth of labour income rises, explain mechanics?

Answer 2

Expected growth of labour income rises - more impatient can consume more

Question 3

If lower expected replacement rate of labour income during retirement

Answer 3

save more, wealth goes up, avg income stays same., higher wealth lowers share wealth in stocks - less risk (background risk)

Question 4

If higher uncertainty in the economy manifested with higher conditional expected variance in stock returns, explain what happens?

Answer 4

pushes you away from the stock market if the stock market is riskier

Question 5

What happens to saving and portfolio choice when variance of labour income higher during recessions?

Answer 5

face more risks on the downside, move further away from stock market

Question 6

In static model, the more risk averse you are you invest in?

Answer 6

The more risk averse, invest in riskless assets (static model)

Question 7

Fed Model says invest in stocks when ..

Answer 7

Fed Model: invest in stocks when dividend yield is higher than long term Treasury yield

Question 8

Fed Model invest in stocks when dividend yield is higher than long term treasury yield - problem with this?

Answer 8

dividend yield is a real number - nominal yield for treasury - look at inflation - real vs nominal