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Working Paper
Deliverability and regional pricing in U.S. natural gas markets
During the 1980s and early '90s, interstate natural gas markets in the United States made a transition away from the regulation that characterized the previous three decades. With abundant supplies and plentiful pipeline capacity, a new order emerged in which freer markets and arbitrage closely linked natural gas price movements throughout the country. After the mid-1990s, however, U.S. natural gas markets tightened and some pipelines were pushed to capacity. We look for the pricing effects of limited arbitrage through causality testing between prices at nodes on the U.S. natural gas ...
Working Paper
How important is the currency denomination of exports in open-economy models?
The authors show that standard alternative assumptions about the currency in which firms price export goods are virtually inconsequential for the properties of aggregate variables, other than the terms of trade, in a quantitative open-economy model. This result is in contrast to a large literature that emphasizes the importance of the currency denomination of exports for the properties of open-economy models.
Working Paper
Teams of rivals: endogenous markups in a Ricardian world
We show that an ostensibly disparate set of stylized facts regarding firm pricing behavior can arise in a Ricardian model with Bertrand competition. Generalizing the Bernard, Eaton, Jenson, and Kortum (2003) model allows firms' markups over marginal cost to fall under trade liberalization, but increase with FDI, matching empirical studies in international trade. We are able to mesh this dichotomy with the existence of pricing-to-market and imperfect pass-through, as well as to capture stylized facts regarding the frequency and synchronization of price adjustment across markets. The result is ...
Working Paper
A model of international cities: implications for real exchange rates
We develop a model of cities each inhabited by two agents, one specializing in manufacturing, the other in retail distribution. The distribution sector represents the physical transformation of all internationally traded goods from the factory gate to the final consumer. Using a panel of micro-prices at the city level, we decompose the cross-sectional variance of long-run LOP deviations into the fraction due to distribution costs, trade costs and a residual. For the median good, trade costs account for 50 percent of the variance, distribution costs account for 10 percent with 40 percent of ...
Working Paper
Reconciling Full-Cost and Marginal-Cost Pricing
Despite the clear prescription from economic theory that a firm should set price based only on variable costs, firms routinely factor fixed costs into pricing decisions. We show that full-cost pricing (FCP) can help firms uncover their optimal price from economic theory. FCP marks up variable cost with the contribution margin per unit, which in equilibrium includes the fixed cost. This requires some knowledge of the firm's equilibrium return, though this is arguably easier a lower informational burden than knowing one's demand curve, which is required for optimal economic pricing. We ...
Working Paper
Can standard preferences explain the prices of out-of-the-money S&P 500 put options?
The 1987 stock market crash occurred with minimal impact on observable economic variables (e.g., consumption), yet dramatically and permanently changed the shape of the implied volatility curve for equity index options. Here, we propose a general equilibrium model that captures many salient features of the U.S. equity and options markets before, during, and after the crash. The representative agent is endowed with Epstein-Zin preferences and the aggregate dividend and consumption processes are driven by a persistent stochastic growth variable that can jump. In reaction to a market crash, the ...
Report
Empirical evaluation of asset pricing models: arbitrage and pricing errors over contingent claims
In a 1997 paper, Hansen and Jagannathan develop two pricing error measures for asset pricing models. The first measure is the maximum pricing error on given test assets, and the second measure is the maximum pricing error over all possible contingent claims. We develop a simulation-based Bayesian inference of the pricing error measures. Although linear time-varying and multifactor models are widely reported to have small pricing errors on standard test assets, we demonstrate that these models can have large pricing errors over contingent claims because their stochastic discount factors are ...
Working Paper
The Rise of AI Pricing: Trends, Driving Forces, and Implications for Firm Performance
We document key stylized facts about the time-series trends and cross-sectional distributions of AI pricing and study its implications for firm performance, both on average and conditional on monetary policy shocks. We use the universe of online job posting data from Lightcast to measure the adoption of AI pricing. We infer that a firm is adopting AI pricing if it posts a job opening that requires AI-related skills and contains the keyword “pricing.” At the aggregate level, the share of AI-pricing jobs in all pricing jobs has increased by more than tenfold since 2010. The increase in ...
Working Paper
Inflation and real activity with firm-level productivity shocks
In the last ten years there has been an explosion of empirical work examining price setting behavior at the micro level. The work has in turn challenged existing macro models that attempt to explain monetary nonneutrality, because these models are generally at odds with much of the micro price data. In response, economists have developed a second generation of sticky-price models that are state dependent and that include both fixed costs of price adjustment and idiosyncratic shocks. Nonetheless, some ambiguity remains about the extent of monetary nonneutrality that can be attributed to costly ...
Working Paper
Residential mortgage default: the roles of house price volatility, euphoria and the borrower's put option
House price volatility; lender and borrow perception of price trends, loan and property features; and the borrower?s put option are integrated in a model of residential mortgage default. These dimensions of the default problem have, to our knowledge, not previously been considered altogether within the same investigation framework. We rely on a sample of individual mortgage loans for twenty counties in Florida, over the period 2001 through 2008, third quarter, with housing price performance obtained from repeat sales analysis of individual transactions. The results from the analysis strongly ...