KATSUTOSHI WAKAI

Home Address:   Box 206434   New Haven, CT 06520-6434   Tel: (203) 436-2760   Fax: (203) 436-2760 Office Address:   Department of Economics   Yale University   Box 208268   New Haven, CT 06520-8268   Fax: (203) 432-6249 Birth Date: February 5, 1967 Citizenship: Japan

Fields of Concentration

Financial Economics Microeconomic Theory Econometrics Behavioral Economics

Desired Teaching:

Financial Economics Microeconomic Theory Econometrics Behavioral Finance

Comprehensive Examinations Completed:

May 1998 (Oral): Financial Economics, Econometrics May 1997 (Written): Microeconomic and Macroeconomic Theory

Dissertation Title:

Linking Behavioral Economics, Axiomatic Decision Theory and General Equilibrium Theory

Committee:

Professor Stephen Morris Professor Benjamin Polak Professor John Geanakoplos

Expected Completion Date:

Summer 2002

Degrees:

M. Phil., Yale University, 1999 M.A., Yale University, 1998 B.A., Saitama University, Japan, 1991

Fellowships, Honors and Awards:

Yale University Fellowship, 1998-2000 Yale Dissertation Fellowship, Spring 2001

Teaching Experience:

Teaching Assistant: Microeconomics (for master students), Fall 1998

Research Experience:

Quantitative Analyst: (1991-1996) at J.P. Morgan (Tokyo: 4/91-7/92, 3/93-12/93, London: 1/94-3/95, New York: 8/92-2/93, 4/95-6/96)      1) Maintained and improved a multi-factor model of Japanese equity markets      2) Implemented an evaluation model of Japanese convertible bonds      3) Constructed a simulation based evaluation model for international asset allocation Research Assistant: (1989-1991) for Professor Seiritsu Ogura at Saitama University. Co-authored paper using a simultaneous equation system to study Japanese higher education markets (see below).

Papers:

"A Model of Consumption Smoothing with an Application to Asset Pricing," manuscript, Yale University, October 2001. [Job-market paper] "Momentum and Reversal under the Consumption CAPM: A Psychological Approach," in progress. "Conditions for Dynamic Consistency and No Speculation under Multiple Priors," manuscript, Yale University, February 2001. "Aggregation of Agents with Multiple Priors and Homogeneous Equilibrium Behavior," manuscript, Yale University, September 2000. "Testing for Market Efficiency: How Much Can We Test? Correction of the Data-snooping Bias in the Estimation of Stochastic Discount Factors," manuscript, Yale University, May 1999. "An Econometric Model of the Japanese Market for Higher Education under Quantitative Restrictions: Why Do We Still Have Intense Competition for College Entrance?" JCER Economic Journal, No.21, May 1991 (with Seiritsu Ogura).

References:

Professor Stephen Morris Department of Economics Yale University Box 208281 New Haven, CT 06520-8281 Tel: (203) 432-6903 Fax: (203) 432-6167 E-mail: stephen.morris@yale.edu Professor John Geanakoplos Department of Economics Yale University Box 208281 New Haven, CT 06520-8281 Tel: (203) 432-3397 Fax: (203) 432-6167 E-mail: john.geanakoplos@yale.edu Professor Benjamin Polak Department of Economics Yale University Box 208268 New Haven, CT 06520-8268 Tel: (203) 432-9926 Fax: (203) 432-5779 E-mail: benjamin.polak@yale.edu Professor Itzhak Gilboa The Eitan Berglas School of Economics Tel-Aviv University 69978 ISRAEL Tel: (+972)-3-640-6423 Fax: (+972)-3-640-9908 E-mail: igilboa@post.tau.ac.il

Dissertation Abstract:

My dissertation links behavioral economics, axiomatic decision theory and general equilibrium theory to analyze issues in financial economics. The behavioral issues I investigate are time-variability aversion, momentum and reversal effects, and uncertainty aversion. The analysis develops new theories and combines them with estimation and calibration. Chapter 1 develops a new behavioral notion, time-variability aversion, and then applies this idea to a consumption-saving problem to derive implications for asset pricing. Conventionally, risk aversion is regarded as dislike of variations in payoffs of random variables within a period. By contrast, time-variability is variation in payoffs over time. In principle, an agent could be averse to such variation even in the absence of risk. For example, Loewenstein & Prelec (1993) show that, in experiments, agents prefer smooth allocations over time even under certainty, and their preferences for smoothing cannot be explained by a time-separable discounted utility representation. I define time-variability aversion to mean that an agent is averse to mean-preserving spreads of utility over time. To capture this idea, I provide a representation, adapting a method developed in a different context by Gilboa & Schmeidler (1989). In this representation, risk aversion is captured by the concavity of a von Neumann-Morgenstern utility function. Time-variation aversion is captured by the agent selecting a sequence of (normalized) discount factors (from a given set) that minimizes the present discounted value of a given payoff stream. I provide an axiomatization for this representation. More formally, the assignment of discount factors is determined recursively. At each time t, the agent compares present consumption with the discounted present value of future consumption from t+1 onward and then selects the time-t discount factor to minimize the weighted sum of these two values. These recursive preferences are non-time-separable and dynamically consistent by construction (but they differ in form and implication from those used by Epstein & Zin (1989)). Intuitively, this representation exhibits time-variability aversion by allocating a high discount factor when tomorrow’s consumption is low (and vice versa). The derived utility representation is applied to a representative-agent economy. Euler equations show that the marginal rate of substitution is underweighted in good states and overweighted in bad states. This intertemporal substitution mechanism effectively boosts relative risk aversion over tomorrow’s consumptions (which also explains the equity premium and risk-free rate puzzles). I also run empirical tests using UK data. The estimates from Euler equations show that the discount factor is lower when consumption growth is positive and higher when consumption growth is negative. Thus, estimated discount factors vary in a manner consistent with time-variability aversion. Chapter 2 investigates two stylized facts in finance. The first is the momentum effect, which is the positive return to buying winning stocks and selling losing stocks in the short run. The second is the reversal effect, which is the negative return to buying winners and selling losers in the long run (reversing the momentum effect). To study these effects, I introduce psychological biases into the  Consumption CAPM, which changes the expected returns, the betas (sensitivity to risk-premium), and the distribution of residuals. Solving the representative agent model with stationary growth, I derive the relative momentum and reversal effects among asset returns and show the following: (1) a mean-reverting bias in endowment shocks generates positive auto-correlation in risk premia and betas; (2) a mean-reverting bias in idiosyncratic dividend shocks generates negative auto-correlation in betas and positive auto-correlation in residuals; (3) a trending bias reverses the direction of all these effects. In addition, under a low level of relative risk aversion, my initial simulation results show that the bias used in Barberis, Shleifer and Vishny (1998) (short-term mean-reverting and long-term trending bias) can explain the momentum and reversal effects in a general equilibrium framework. Chapter 3 examines risk-sharing among agents who are uncertainty averse, which causes them to behave as though they had multiple priors. Formally, I consider a general equilibrium model of dynamically complete markets where the aggregate endowment follows an i.i.d. process. I first consider the case where each agent has the same set of multiple priors, i.e., each agent faces the same uncertainty. I show that if all agents have CARA utility, then full insurance is achieved, that is, all agents’ consumptions are comonotonic (increasing together) with the aggregate endowment and their marginal rates of substitution are equalized. Given CARA utility, agents ‘select’ the same ‘effective’ prior so the model reduces to the standard common single-prior case. I then consider the case where agents have heterogeneous multiple prior sets. In this case, I provide conditions such that agents’ effective priors (and equilibrium consumptions) will be comonotonic and their marginal rates of substitution (weighted by these priors) will be equalized. One set of sufficient conditions is for each agent’s multiple prior set to be symmetric (or to be defined by a convex capacity) around the center of the simplex. Under this condition, I also show that the more uncertainty averse the agent is, the less volatile the agent’s consumption over states.