Kai Guo

Papers

• Exchange Rates and Asset Prices in An Open Economy with Rare Disasters, October 2007

  Abstract: By introducing rare but severe disasters into an otherwise standard open-economy general equilibrium model and allowing the disaster probability to be both time-varying and mean-reverting, several macroeconomics, finance and international finance puzzles can be explained in a single model. The puzzles include the equity premium puzzle, the risk-free rate puzzle, the forward discount puzzle, the excess volatility puzzle and the volatility mismatch puzzle. A mean-reverting disaster probability also generates return predictability and the leverage effect in the stock market. The model, when calibrated with plausible parameter values, can replicate many salient features in the stock price and exchange rate data. The model maintains good tractability by having a representative agent, time-additive and isoelastic preferences and complete markets. Closed-form solutions can be obtained under certain conditions. Finally, the asset pricing implications of rare disasters under the Epstein-Zin-Weil preferences are studied. Besides explaining several above puzzles, a novel implication is that higher returns in the Home stock market relative to the Foreign stock market are associated with a Home currency depreciation, a stock market version of the uncovered interest parity condition which is consistent with empirical findings.

  　

  　

• Composition and Growth Effects of the Current Account: A Synthesized Portfolio View (joint with Keyu Jin), September 2007, Revision Requested from Journal of International Economics

  Abstract: This paper analyzes a useful accounting framework that breaks down the current account to two components: a composition effect and a growth effect. We show that a severe omitted variable bias arising from the failure to account for both factors in the past has led to the erroneous conclusion that current account dynamics are driven by portfolio growth. In contrast to previous conclusions that the portfolio share of net foreign assets to total assets is constant, both our theoretical and empirical results support a highly persistent process or a unit root process, with some countries displaying a trend. Finally, we reestablish the composition effect as the quantitatively dominant driving force of current account dynamics, at least in the past data.

• On the Asset-Price-Consistent Welfare Cost of Consumption Risks, (preliminary), April 2008

  Abstract: Several leading asset-pricing models are studied to gauge the welfare cost of consumption risks. Models that can generate a sizable equity premium all imply that the welfare cost of consumption risks is huge. When measured in terms of growth rate instead of levels of consumption, a simple rule of thumb emerges--eliminating all consumption risks is equivalent to increasing the economic growth rate by a half of the model-generated equity premium. This simple rule works quite well for all models studied in this paper, although the policy implications differ from model to model.

PUBLISHED PAPERS:

• "Causes of Privatization in China: Testing Several Hypotheses", The Economics of Transition, 2005, Vol. 13(2): 211-238 (Lead Paper, with Yang Yao).

  Abstract: We test five hypotheses regarding the causes of privatization in China by using firm-level panel data collected in 11 cities in the period 1995–2001. We have found that privatization is positively linked with hardened firm budgets and the extent of market liberalization, but is constrained by excessive debts and worker redundancy. Firm efficiency and state-owned enterprises' financial liabilities imposed on local governments are not factors of influence. These findings match the broad flow of events in China and highlight the role of market building in bringing about efficient institutional changes.

  　

• Reform Strategies of China’s Banking System,
  China Economic Quarterly, 2002, Vol.2(1): 77-88.
  (With Gang Yi, In Chinese)