Mountain Scene

Research & Projects

Thomas Coleman

Harris School of Public Policy, University of Chicago

Selected papers and research projects

My author page at SSRN:

Below are some of my projects, publications, and working papers covering various topics:

John Snow Project

I am undertaking an examination of two of Snow's publications on the 1854 London cholera outbreak. I view Snow's study of cholera as a roadmap or template for current social science researchers in combining theory and evidence to demonstrate a causal effect. Although I discuss the well-known Broad Street outbreak and Snow's mapping, I focus more attention on the South London "Grand Experiment" which provides early (possibly the earliest) examples of using tools such as difference-in-differences and quasi-randomized experiments. I will be posting Snow's original data and extending his analysis using modern statistical tools and techniques.

Recent Talks, Presentations, Papers

"Lower Bounds for COVID-19 Mortality Based on Towns in Northern Italy": Working paper at MedRxiv and short summary note. Using data from 612 towns in northern Italy hard-hit by the coronavirus in spring 2020, we can estimate lower bounds for the Infection Fatality Rate. Mortality for men 65-74 is 2.1%, 3.6-times higher than younger men and 2.6-times higher than women.

Thoughts on Financial Crises and Coronavirus (or as pdf) Financial markets have been roiled with bad news about the spread of coronavirus. Many are concerned that this is a repeat of ╬ęthe 2008 global crisis, but the causes are fundamentally different - unlike the 2008 crisis this is not a banking liquidity crisis.

John Snow and Cholera - presentation to the Spatial Study Group and University of Chicago and the City of Chicago Public Health Department.

Three Popular Narratives on Inequality and Why They are Wrong Presented in Xi Song's "Social Stratification" class at University of Pennsylvania. ( Notes and references )

"The rich (top 1%) have captured most of the income. The middle class is disappearing. The rich get richer and the poor get poorer."
Three narratives about American growth and inequality. We hear them again and again. And yet they are all wrong. Or at least only half-right. Inequality has increased, but less than commonly thought. The rich have got richer, but so have the poor. And the middle class, when properly measured, have done OK over the past 20 or 30 or 40 years.
The answers matter - appropriate policy requires understanding the causes and sources of inequality and growth, and understanding the causes requires knowing the facts. I critically examine the evidence on inequality and some of the likely causes.

Economic Research

"Causality in the Time of Cholera: John Snow as a Prototype for Causal Inference" and see John Snow Project. The story of John Snow's 1855 treatise on cholera is a rollicking good tale - full of heroism, death, and statistics. Snow's data and analysis provide a template for how to convincingly demonstrate a causal effect. I consider the Broad Street outbreak and the south London "Grand Experiment" as pedagogical examples of using non-experimental data to support a causal effect. I discuss extensions to Snow's analysis using modern techniques and tools: difference-in-differences regression and count (Poisson) regression for error analysis in quasi-randomized control experiments.

"Probability, Expected Utility, and the Ellsberg Paradox" on SSRN, updated May 2011 (pdf, 16p). The Ellsberg paradox is often cited as evidence for unknowable "ambiguity" versus computable "risk", and a refutation of expected utility maximization and "subjective" or "belief-type" probabilities. I have concluded the paradox is not convincing. The results can be explained by differences in distributions that show up in repeated "games." The distributions behind Ellsberg's thought experiments are different and economic agents should be expected to respond to these differences.

Avalanche Risk and Our Behavioral Response to Safety Improvements - March 2018. Combining my interest in skiing with teaching microeconomics and studying risk management, I examine the behavioral response to improvements in avalanche safety equipment. When safety technology improves, individuals may take on more risk. This may sound perverse, and people invoke theories about risk compensation and risk homeostasis to explain why. But I argue that standard microeconomics provides a more useful approach, by considering not only the avalanche risk but also the rewards of skiing and being in the mountains.

Employment and Unemployment Flows - July/August 2010, based on the dynamic models of labor force states discussed below. Unemployment in the U.S. rose dramatically from 2007 to 2011 going from about 6.8 million people in May 2007 to over 14.6 million in June 2010. This is often spoken of as "losing 7.8 million jobs," but the reality is that something closer to 4-to-6 million jobs were lost each month, with a comparable (but just slightly lower) number found each month. Employment and unemployment are dynamic with large monthly flows, and to understand them we need to look at these flows. The BLS recently started publishing flow data. This note examines those flows, with some interesting conclusions.
Complete paper at SSRN with detailed figures and tables (pdf)

"Unemployment Behavior: Evidence from the CPS Work Experience Survey", T. Coleman, The Journal of Human Resources, vol. 24, no. 1 (winter 1989): 1-38. (Large scanned pdf - 9MB) This describes the general statistical process generating retrospective data for "weeks unemployed during the year" and then assumes a specific, tractable, stochastic process for empirical application. The conclusion is that entry rates into unemployment and differences across people are important, more important than spell exit rates for explaining levels of unemployment and weeks during the year.

"A Dynamic Model of Labor Supply Under Uncertainty 1985", T. Coleman, Research Paper No. 272, State University of New York at Stony Brook, July 1985 (on SSRN, pdf, 190k). Lays out the model as in 1981 paper but also discusses estimation and identification in some detail. Simplifies to a stationary environment with a single wage and then fits gross flow data. Includes empirical results showing interesting differences across demographic groups in fitted parameters and resulting behavior.

"A Dynamic Model of Labor Supply Under Uncertainty 1981" T. Coleman and J. Heckman 1981 (pdf, 220k). Lays out the theory of a three-state model of labor supply (job, unemployed, and out of the labor force) in full detail - stationary and non-stationary, discrete and continuous time.  Proves existence and uniqueness of the value function.  Not much on estimation or identification.

Risk Management

Quantitative Risk Management (Wiley) and A Practical Guide to Risk Management (RF of the CFA) are books that deliver a synthesis of common-sense management together with the cutting-edge tools of modern theory. Most provocatively they challenge the conventional wisdom that "risk management" is or ever should be delegated to a separate department. Good managers have always known that managing risk is central to a financial firm and must be the responsibility of anyone who contributes to the profit of the firm. Quantitative Risk Management was published by Wiley (2012). A Practical Guide to Risk Management was published by the Research Foundation of the CFA Institute (2011). See summary page for a little more detail.

"A Guide to Duration, DV01, and Yield Curve Risk Transformations" Yield curve risk and sensitivities (DV01s) can be measured with respect to different variables: forward rates, par rates, zero yields, or others. This paper describes a simple method for transforming sensitivities between alternate representations and provides examples. The benefit of this transformation method is that it only requires calculating the risk of a small set of alternate instrument and does not require re-calculating the original portfolio risk. The paper is also available in a digitally enhanced version in .cdf/.nbp format with dynamic interactivity enabled (requires free Wolfram Player).

"How Precision of the Sharpe Ratio Improves with Monthly Data" I provide small-sample and large-sample formulae for the distribution of the Sharpe, highlighting the distinction between using annual data versus annualized monthly data. When using more than two years of monthly data the large-sample generally provides a good approximation, simplifying the calculation of confidence intervals.

"Financial Risk Measurement and Joint Extreme Events: The Normal, Student-t, and Mixture of Normals" The normal distribution often does a poor job of representing the tails for financial returns or P&L in the univariate case. What receives less attention is that for a joint normal distribution events in the tails look as if they are independent: Extreme events will not occur together, whatever the correlation (except for the boundary cases of ┬▒1).

Finance, Asset Valuation, and Modeling

"Swap Valuation with Dual Curves - Approximations" For the case of single-curve (libor) valuation it is well-known that receiving fixed on a swap is equivalent to long a fixed coupon bond and short a floating bond. In the past few years, however, markets have moved to dual-curve valuation - cash flows are projected with the libor curve but discounted off the OIS (Fed Funds) curve. The usual valuation approximations no longer apply. I develop an alternative approximation for valuation and risk (DV01) that is useful in practice and provides valuable insights into single-curve versus dual-curve valuation and risk.

"A Primer on Credit Default Swaps (CDS)" - 21 October 2008 (revised October 2010). What is a CDS? How does a CDS behave in response to changes in the markets? How does one value a CDS? What is the risk? This primer aims to answer these questions for plain-vanilla single-name CDS, showing that a CDS is equivalent to a leveraged floating-rate corporate bond (a floating rate note or FRN).

"Convexity Adjustment for Constant Maturity Swaps" Derivatives Quarterly, Winter 1995 (pdf, 60k).  Both CMS (Constant Maturity Swap) and LIBOR-in-arrears swaps have payments that are linear with respect to an index while the offsetting hedges are convex. The linearity of the payment (relative to the convex hedges) imposes a cost that requires a "convexity adjustment" applied to the linear payment.  This note lays out a practical method for calculating the value of the convexity adjustment.

"Adjusting Constant Maturity Swaps for Convexity" Derivatives Week, August 28, 1995 (pdf, 20k).  Outlines the "convexity adjustment" applied to constant maturity swaps.

"A Practical Guide To Bonds And Swaps" February 1998, updated 2005 (pdf, 52p., 180k) This manual provides a practical introduction to the fixed income capital markets. It is intended to provide the practical, institutional aspects of the markets together with the fundamental concepts used in today's capital markets. In line with their ubiquity throughout the markets, derivatives (swaps and options) are introduced early.

"Fitting Forward Rates To Market Data" 1998. This paper has two purposes. First, to outline a general framework or methodology for fitting the forward curve to market data. Second, to report on and compare results from fitting forward curves using three particular functional forms: piece-wise constant forward rates, piece-wise linear zero rates, and piece-wise linear forward rates. The third is particularly interesting because it retains much of the simplicity and ease of use from the first two while solving a problem (large jumps in the instantaneous forward rates) exhibited by them. Results are reported for US dollar swap curves for October 1994 and June 1997.

"Accurately Estimating and Building the Yield Curve" 1999 (34 slides, pdf, 90k) Presentation for Risk Magazine Yield Curve Course, October 1999. Using methodology from "Fitting Forward Rates to Market Data," discusses the general approach to fitting the yield curve, mathematics of yield and forward curves, a simple example, use of and criteria for curves, choice of input data, and various functional forms.

"Convexity And Correlation Effects in Swap Pricing; 1997 (30 slides, pdf, 100k) Presentation for Risk Magazine Swap Course, September 1997. Discusses some simple approaches to modeling products that incorporate correlation, such as yield curve spread options. Focus on using the simplest model which solves the problem and on hedging and managing risks.


"Managing a Sovereign Wealth Fund: A View from Practitioners", co-authored with D. Darcet and M. du Jeu, in Economics of Sovereign Wealth Funds: Issues for Policymakers, ed. U. S. Das, A. Mazarei, H. van der Hoorn, published by the IMF.

"Compensating Fund Managers for Risk-Adjusted Performance," Thomas S. Coleman and Laurence B. Siegel, Journal of Alternative Investments, volume 2, number 3, winter 1999 (pdf, 40k).  Explores a risk-adjusted performance fee structure for hedge funds that addresses incentive compatibility and helps reduce asymmetry, while at the same time being feasible and easy to implement.

"Estimating The Correlation Of Non-Contemporaneous Time-Series" on SSRN, December 2007 draft (pdf, 280k), or abridged version. Examines the problem of estimating the correlation of non-contemporaneous time-series observations such as daily returns for the FTSE and S&P500 stock indexes.

"Effective degrees of freedom during the radiation era," Thomas S. Coleman and Matts Roos, Physical Review D 68 027702 (2003), e-print at  This paper updates the curves of the effective degrees of freedom for the energy density g*(T) and for the entropy density g*S(T) during the era of radiation domination in the Universe. We find that a plain count of effective degrees of freedom sets an upper limit to the temperature of the quark-hadron transition at TQCD< 235 MeV for the energy density and TQCD< 245 MeV for the entropy density.