Andrew Abel

Education

PhD, Massachusetts Institute of Technology, 1978; AB, Princeton University, 1974

Career and Recent Professional Awards; Teaching Awards

Fellow, Econometric Society, 1991; John Kenneth Galbraith Award, Harvard University, 1984; MBA Core Curriculum Cluster Award, 199697

Academic Positions Held

Wharton: 1986present (named Ronald A. Rosenfeld Professor, 2003; Robert Morris Professor of Banking, 19892003; Ronald O. Perelman Professor of Finance, 198889; Amoco Term Professor of Finance, 198688). Previous appointments: Harvard University; University of Chicago. Visiting appointments: Tel Aviv University; The Hebrew University of Jerusalem

Other Positions

Research Associate, National Bureau of Economic Research, 1983; Member, LongTerm Modeling Group, Congressional Budget Office, 2001; Member Panel of Economic Advisers, Congressional Budget Office, 20012005; Member, Technical Panel on Assumptions and Methods, Social Security Advisory Board, 1999; Visiting Scholar, Federal Reserve Bank of Philadelphia, 198992, 1996; Economic Consultant, Bank of Portugal, 1976

Andrew B Abel (2017), Crowding Out in Ricardian Economies , Journal of Monetary Economics, forthcoming.

Abstract: The crowdingout coefficient is the ratio of the reduction in privatelyissued bonds to the increase in government bonds that are issued to finance a tax cut. If (1) Ricardian equivalence holds, and (2) households do not simultaneously borrow risklessly and have positive gross positions in other riskless assets, the crowdingout coefficient equals the fraction of the aggregate tax cut that accrues to households that borrow. In the conventional case in which all households receive equal tax cuts, the crowdingout coefficient equals the fraction of households that borrow. In the United States, about 75% of households borrow, so the crowdingout coefficient is predicted to be 0.75, which differs from econometric estimates that are around 0.5. I explore extensions of the model, such as a departure from Ricardian Equivalence or the introduction of crosssectional variation in taxes, that might account for this difference.

Andrew B Abel (2017), Optimal Debt and Profitability in the Tradeoff Theory , Journal of Finance, forthcoming.

Abstract: I develop a dynamic model of leverage with tax deductible interest and an endogenous cost of default. The interest rate includes a premium to compensate lenders for expected losses in default. A borrowing constraint is generated by lenders’ unwillingness to lend an amount that would trigger immediate default. When the borrowing constraint is not binding, the tradeoff theory of debt holds: optimal debt equates the marginal tax shield and the marginal expected cost of default. Contrary to conventional interpretation, but consistent with empirical findings, increases in current or future profitability reduce the optimal leverage ratio when the tradeoff theory holds.

Andrew B Abel (2017), The Effects of q and Cash Flow on Investment in the Presence of Measurement Error , Journal of Financial Economics, forthcoming.

Abstract: I analyze investment, q, and cash flow in a tractable stochastic model in which marginal q and average q are identically equal. I introduce classical measurement error and derive closedform expressions for the coefficients in regressions of investment on q and cash flow. The cashflow coefficient is positive and larger for faster growing firms, yet there are no financial frictions in the model. I develop the concepts of bivariate attenuation and weight shifting to interpret the estimated coefficients on q and cash flow in the presence of measurement error.

Andrew B Abel, Ben S. Bernanke, Dean Croushore, Macroeconomics, 9th edition (2017)

Andrew B Abel (Working), Investment with Leverage.

Abstract: I examine the capital investment and leverage decisions of a firm. Optimal leverage depends on the interest tax shield and the cost of exposure to default, subject to an endogenous borrowing constraint. When the borrowing constraint is not binding, the tradeoff theory is operative; in that case, the market leverage ratio is a declining function of profitability, consistent with empirical findings. Bond financing increases q and investment, but given q, optimal investment and optimal leverage are independent. A novel expression for marginal q includes the expected present value of interest tax shields.

Andrew B Abel, Janice C. Eberly, Stavros Panageas (2013), Optimal Inattention to the Stock Market with Information Costs and Transactions Costs , Econometrica, 81 (4), pp. 14551481.

Abstract: Recurrent intervals of inattention to the stock market are optimal if consumers incur a utility cost to observe asset values. When consumers observe the value of their wealth, they decide whether to transfer funds between a transactions account from which consumption must be financed and an investment portfolio of equity and riskless bonds. Transfers of funds are subject to a transactions cost that reduces wealth and consists of two components: one is proportional to the amount of assets transferred, and the other is a fixed resource cost. Because it is costly to transfer funds, the consumer may choose not to transfer any funds on a particular observation date. In general, the optimal adjustment rule—including the size and direction of transfers, and the time of the next observation—is statedependent. Surprisingly, unless the fixed resource cost of transferring funds is large, the consumer’s optimal behavior eventually evolves to a situation with a purely timedependent rule with a constant interval of time between observations. This interval of time can be substantial even for tiny observation costs. When this situation is attained, the standard consumption Euler equation holds between observation dates if the consumer is sufficiently risk averse.

Andrew B Abel and Janice C. Eberly (2012), Investment, Valuation, and Growth Options, Quarterly Journal of Finance, 32. 10.1142/S2010139212500012

Abstract: We develop a model in which the opportunity for a firm to upgrade its technology to the frontier (at a cost) leads to growth options in the firm's value; that is, a firm's value is the sum of value generated by its current technology plus the value of the option to upgrade. Variation in the technological frontier leads to variation in firm value that is unrelated to current cash flow and investment, though variation in firm value anticipates future upgrades and investment. We simulate this model and show that, consistent with the empirical literature, in situations in which growth options are important, regressions of investment on Tobin's Q and cash flow yield small positive coefficients on Q and larger coefficients on cash flow. We also show that growth options increase the volatility of firm value relative to the volatility of cash flow.

Andrew B Abel and Janice C. Eberly (2011), How Q and Cash Flow Affect Investment with Frictions: An Analytic Explanation , The Review of Economic Studies, 78 (4), 11791200.

Andrew B Abel, “Equity Premia with Benchmark Levels of Consumption: ClosedForm Results”. In Handbook of the Equity Risk Premium, edited by Rajnish Mehra, (2008), pp. 117157

Andrew B Abel, Janice C. Eberly, Stavros Panageas (2007), Optimal Inattention to the Stock Market, American Economic Review, 97, 2 (May 2007), 244249.

Abstract: In this article the authors address the problems regarding consumption and portfolios faced by inattentive investors in relation to transaction costs. The authors sough to expand this economic model to address significant events that will gain the attention of consumers and allow for recalibration of investments on a case by case basis. The late and sporadic response to economic news by investors is discussed. The authors recommend that investors check their portfolios regularly and to operate a transaction account without risk in the intervening period.

Past Courses

FNCE101 MONETARY ECON & GLOB ECO

FNCE 101 is an intermediatelevel course in macroeconomics and the global economy, including topics in monetary and international economics. The goal is to provide a unified framework for understanding macroeconomic events and policy, which govern the global economic environment of business. The course analyzes the determinants and behavior of employment, production, demand and profits; inflation, interest rates, asset prices, and wages; exchange rates and international flows of goods and assets; including the interaction of the real economy with monetary policy and the financial system. The analysis is applied to current events, both in the US and abroad. ,HONORS FNCE 101 is only offered in the Fall semester. Registration for this class is through an application process. Please go to: https:fnce.wharton.upenn.edu/programscourseapplications, This course presents the analysis of macroeconomic theory with a current events perspective. The material in the class concentrates on lecture notes, which are the primary learning source, and readings from a course packet of articles drawn from journals, magazines, newspapers, and other economic publications. The material covered will include: (1) Economic Statistics, GDP, Price Indices,Productivity and the nature of the business cycle, (2) The government budget and Social Security, (3) Monetary policy, The Fed and other Central Banks,(4) Interest rates indexed bonds and ther term structure (5) Aggregate Demand and the determination of income and interest rate, (6) Money and Inflation the Velocity Approach, (7) Reaction of Financial Markets to economic data,(8) Inflation, inflationary expectations and the Phillips Curve,(9) Supplyside shocks and macrodynamics, (10) International Balance of Payments, the current account and capital flows, (11) Determination of Exchange Rates, exchange rate systems, purchasing power and interest rate parity.

FNCE613 MACROECN & GLOBAL ECONOM

This course is required for all students except those who, having prior training in macroeconomics, money and banking, and stabilization policy at an intermediate or advanced level, can obtain a waiver by passing an examination. The purpose of FNCE 613 is to train the student to think systematically about the current state of the economy and macroeconomic policy, and to be able to evaluate the economic environment within which business and financial decisions are made. The course emphasizes the use of economic theory to understand the workings of financial markets and the operation and impact of government policies. Specifically, the course studies the determinants of the level of national income, employment, investment, interest rates, the supply of money, inflation, exchange rates, and the formulation and operation of stabilization policies.

FNCE899 INDEPENDENT STUDY

Independent Study Projects require extensive independent work and a considerable amount of writing. ISP in Finance are intended to give students the opportunity to study a particular topic in Finance in greater depth than is covered in the curriculum. The application for ISP's should outline a plan of study that requires at least as much work as a typical course in the Finance Department that meets twice a week. At a minimum, we need a description of the methodology you intend to employ, a bibliography and description of the data that you will use as well as a list of interim deliverables and dates to ensure that you complete the project within the semester. Applications for FNCE 899 ISP's will not be accepted after the THIRD WEEK OF THE SEMESTER. You must submit your Finance ISP request using the Finance Department's ISP form located at https://fnce.wharton.upenn.edu under the Course ISP section

FNCE924 INTERTEMPORAL MACRO FIN

This is a doctoral level course on macroeconomics, with special emphasis on intertemporal choice under uncertainty and topics related to finance. Topics include: optimal consumption and saving, the stochastic growth model, qtheory of investment, (incomplete) risk sharing and asset pricing. The course will cover and apply techniques, including dynamic programming, to solve dynamic optimization problems under uncertainty. Numerical solution methods are also discussed.

Knowledge @ Wharton

• Why Tinkering Too Much with Your Portfolio Won’t Pay Off, Knowledge @ Wharton 08/02/2013
• So You Want to Live to 100? More of Us Will, and Here Is What Life Might Look Like, Knowledge @ Wharton 12/09/2009
• New Fed Head Bernanke: Inflation Is Key, Knowledge @ Wharton 11/21/2005
• Is Social Security in Trouble? Depends on Whom You Ask, Knowledge @ Wharton 01/26/2005
• Who Cares About the Deficit, and Why?, Knowledge @ Wharton 02/25/2004
• What’s in Store for the Capital Markets and the Economy?, Knowledge @ Wharton 09/26/2001
• Ten Years From Now, Will Retiring Baby Boomers Cause a Stock Market Meltdown?, Knowledge @ Wharton 06/06/2001