Essays On Public Policy And Financial Economics From A Macroeconomics Perspective

ABSTRACT: This dissertation consists of three essays. The first two essays (i.e., Chapter 2 and Chapter 3) examine the effects of raising the retirement age on the life cycle behaviors of individuals and its implication on the social security budget. The third essay (i.e., Chapter 4) is an empirical study, which tests the hypothesis of investors' overreactions when trading neglected stocks. The first essay examines the impact of raising the retirement age on the saving and working behaviors of older individuals, and the associated impact on the social security budget. Its results indicate that the reform would result in a 50% reduction in the social security budget deficit. In terms of behavioral responses, we find that: (1) individuals respond to the reform by saving more progressively during the period prior to retirement (i.e., from their early 40s to age 62), while supplying more working hours during the retirement period (i.e., ages 62 and older). The intensity of the saving and working hour responses critically depend on the assumption of the efficiency indexes of the elderly- the lower (higher) the efficiency index, the more intense the saving (working hours) response; (2) there is an upward shift in the working hour profile of individuals as a result of raising the retirement age. Once again, the distance of the shift increases with values of the elderly efficiency index; (3) we find a decrease in the participation rate of elderly individuals age 62-80 in versions where the estimated efficiency index of the elderly is relatively low. The second essay focuses on examining the life-cycle behavior responses of individuals with different skill levels to the raising of the retirement age reform. We find that individuals with different educational attainment respond differently to the reform. Specifically, individuals with lower-than-average education respond to the policy change with a significant upward shift in the working hour profile, a higher participation rate, and an aggressive retirement saving motive. On the other hand, individuals with higher-than-average education mainly deal with the policy change by a higher saving rate and/or a lower rate of decumulating their assets in the retirement period. More importantly, the participation rate in the retirement period among these individuals is actually lower than before the policy change. Secondly, our findings suggest that disadvantaged individuals (e.g., those with a low education level) are the ones who are heavily affected by the policy reform in terms of a bigger consumption reduction, a more intense labor supply response, and a higher contribution to the social security budget. Finally, we find a small increase in the average labor productivity associated with the policy change. However, by educational attainment, we find evidence which suggests a decrease in labor productivity among individuals with below-average educational attainment (i.e., those with a high school degree or lesser), and an increase in labor productivity among those with above-average educational attainment (i.e., those with a college degree or higher). The third essay is an empirical study, which tests the hypothesis of investors' overreaction when trading stocks with limited information, such as neglected stocks. Specifically, we design a fundamental scoring method (called NSCORE) and apply it to the neglected stock universe. We also apply this method to the most-watched stock universe (called WSCORE). Our results show that the annualized returns of a monthly-rebalancing investment strategy which buys the top 100 NSCORE and sells the bottom 100 NSCORE is 26.31% for the period from the beginning of 1985 to the end of 2009. By contrast, when applying the same screening method to the most-watched stocks universe during the same time period, the annualized returns of the same investment strategy dropped to about half. This evidence clearly demonstrates the effectiveness of using financial statement data to identify winners and losers among neglected stocks as a result of investors' overreaction. We also find that the returns difference between top and bottom neglected stocks tends to persist for a long time. Specifically, the return difference between the top 100 NSCORE and the bottom 100 NSCORE can last up to 36 months (3 years). On the other hand, the returns difference among most watched-stocks tends to generally disappear after 12 months (1 year). Our comprehensive sensitivity tests confirm that our findings are not subject to well-known anomalies such as the size, book-to-market, and illiquidity effects.