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on Econometrics |
| By: | Gary Koop; Simon M. Potter; Rodney W. Strachan |
| Abstract: | This paper discusses the consumption-wealth relationship. Following the recent influential work of Lettau and Ludvigson [e.g. Lettau and Ludvigson (2001), (2004)], we use data on consumption, assets and labor income and a vector error correction framework. Key findings of their work are that consumption does respond to permanent changes in wealth in the expected manner, but that most changes in wealth are transitory and have no effect on consumption. We investigate the robustness of these results to model uncertainty and argue for the use of Bayesian model averaging. We find that there is model uncertainty with regards to the number of cointegrating vectors, the form of deterministic components, lag length and whether the cointegrating residuals affect consumption and income directly. Whether this uncertainty has important empirical implications depends on the researcher's attitude towards the economic theory used by Lettau and Ludvigson. If we work with their model, our findings are very similar to theirs. However, if we work with a broader set of models and let the data speak, we obtain somewhat different results. In the latter case, we find that the exact magnitude of the role of permanent shocks is hard to estimate precisely. Thus, although some support exists for the view that their role is small, we cannot rule out the possibility that they have a substantive role to play. |
| Keywords: | wealth effect; vector error correction model; Bayesian model averaging; cointegration; variance decomposition. |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:05/3&r=ecm |
| By: | Takamitsu Kurita (Dept of Economics, University of Oxford); Bent Nielsen (Dept of Economics, University of Oxford) |
| Abstract: | This paper addresses the question of whether a conventional approach to cointegration is applicaple to the case where changes are allowed in the parameters for the short term dynamics. We reparametrise a vector autoregressive model such that the short-run parameters exhibiting changes at known points are explicitly given. We then show that the likelihood ratio test statistic for cointegration rank is based on reduced rank regression and has the usual asymptotic distribution. An empirical illustration using US gasoline prices is presented. |
| Date: | 2005–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:econwp:0501&r=ecm |
| By: | Juan Carlos Escanciano Reyero (School of Economics and Business Administration, University of Navarra) |
| Abstract: | In this article we study a general class of goodness-of-fit tests for the conditional mean of a linear or nonlinear time series model. Among the properties of the proposed tests are that they are suitable when the conditioning set is infinite-dimensional; are consistent against a broad class of alternatives including Pitman's local alternatives converging at the parametric rate ; and do not need to choose a lag order depending on the sample size or to smooth the data. It turns out that the asymptotic null distributions of the tests depend on the data generating process, so a new bootstrap procedure is proposed and theoretically justified. The proposed bootstrap tests are robust to higher order dependence, in particular to conditional heteroskedasticity of unknown form. A simulation study compares the finite sample performance of the proposed and competing tests and shows that our tests can play a valuable role in time series modeling. Finally, an application to an economic price series highlights the merits of our approach. |
| JEL: | C12 |
| Date: | 2005–02 |
| URL: | http://d.repec.org/n?u=RePEc:una:unccee:wp0205&r=ecm |
| By: | Xue-Zhong He (School of Finance and Economics, University of Technology, Sydney); Youwei Li (Department of Econometrics and Operations Research, Tilburg University) |
| Abstract: | Long-range dependence in volatility is one of the most prominent examples of applications in financial market research involving universal power laws. Its characterization has recently spurred attempts at theoretical explanation of the underlying mechanism. This paper contributes to this recent development by analyzing a simple market fraction asset pricing model with two types of traders?fundamentalists who trade on the price deviation from estimated fundamental value and trend followers who follow a trend which is updated through a geometric learning process. Our analysis shows that the heterogeneity, trend chasing through learning, and the interplay of noisy processes and a stable deterministic equilibrium can be the source of power-law distributed fluctuations. Statistical analysis based on Monte Carlo simulations are conducted to characterize the long memory. Realistic estimates of the power-law decay indices and the (FI)GARCH parameters are found. |
| Keywords: | asset pricing; fundamentalists and trend followers; market fraction; stability; learning; long memory |
| JEL: | C15 D84 G12 |
| Date: | 2005–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:148&r=ecm |
| By: | Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Shenhuai Gao (School of Economics and Political Science, University of Sydney) |
| Abstract: | This paper introduces an easy to follow method for continuous time model estimation. It serves as an introduction on how to convert a state space model from continuous time to discrete time, how to decompose a hybrid stochastic model into a trend model plus a noise model, how to estimate the trend model by simulation, and how to calculate standard errors from estimation of the noise model. It also discusses the numerical difficulties involved in discrete time models that bring about the unit roots illusion in econometrics. |
| Keywords: | Continuous time model; Estimation; Trend and noise decomposition; Unit roots illusion |
| JEL: | C13 C22 C32 C51 |
| Date: | 2004–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:wpaper:138&r=ecm |
| By: | Antonio E. Noriega (School of Economics, Universidad de Guanajuato); Daniel Ventosa-Santaularia (School of Economics, Universidad de Guanajuato) |
| Abstract: | We study the phenomenon of spurious regression between two random variables, when the generating mechanism of individual series is assumed to follow a stationary process around a trend with (possibly) multiple breaks in the level and slope of trend. We develop the relevant asymptotic theory and show that the phenomenon of spurious regression occurs independently of the structure assumed for the errors. In contrast to previous findings, the presence of a spurious relationship will be less severe when breaks are present in the generating mechanism of individual series. This is true whether the regression model includes a linear trend or not. Simulations confirm our asymptotic results, and reveal that in finite samples, the phenomenon of spurious regression is sensitive to the presence of a linear trend in the regression model, and to the relative location of breaks within the sample. |
| Keywords: | Stationarity, Structural breaks, Spurious regression |
| JEL: | C22 |
| URL: | http://d.repec.org/n?u=RePEc:gua:wpaper:em200501&r=ecm |