nep-ecm New Economics Papers
on Econometrics
Issue of 2005‒07‒03
fourteen papers chosen by
Sune Karlsson
Orebro University

  3. Implications of Dynamic Factor Models for VAR Analysis By James H. Stock; Mark W. Watson
  4. Estimating quadratic variation when quoted prices jump by a constant increment By Jermey Large
  5. Limit theorems for multipower variation in the presence of jumps By Ole E. Barndorff-Nielsen; Neil Shephard; Matthias Winkel
  6. Variation, jumps, market frictions and high frequency data in financial econometrics By Ole E. Barndorff-Nielsen; Neil Shephard
  7. Limit theorems for bipower variation in financial econometrics By Ole E. Barndorff-Nielsen; Sven Erik Graversen; Jean Jacod; Neil Shephard
  9. A Bivariate Markov Regime Switching GARCH Approach to Estimate Time Varying Minimum Variance Hedge Ratios By Hsiang-Tai Lee; Jonathan Yoder
  10. New Panel Unit Root Tests under Cross Section Dependence for Practitioners By Donggyu Sul
  11. Dynamic Discrete Choice Modeling: Monte Carlo Analysis By Robert L. Hicks; Kurt Schnier
  12. Functional Limit Theorems for Occupation Time Fluctuations of Branching Systems in the Case of Long-Range Dependence By T. Bojdecki; Luis G. Gorostiza; A. Talarczyk
  13. A Weighted Weak Law of Large Numbers for Free Random Variables By Raluca Balan; George Stoica
  14. Minimum LM Unit Root Test with One Structural Break By Junsoo Lee; Mark C. Strazicich

  1. By: Libero Monteforte (Bank of Italy, Economic Research Department)
    Abstract: The euro area represents a case-study of great institutional relevance for the econometric problem of aggregation bias. The available data can be used to analyze the area either with aggregate or with country-specific models. The choice should be the result of a statistical comparison between the two options, with respect to the specific model. In this paper we suggest a representation of the aggregation error based on unobservable components and explicitly conceived for aggregations over a small number of economies. In the empirical application two alternative models are estimated: the first specifies the main euro countries while the other refers to the whole area. We then evaluate the aggregation error either from the viewpoint of a comparison of the two models with standard methods, or looking at the components of the representation suggested here. Both categories of results indicate non-negligible aggregation errors for the euro area.
    Keywords: aggregation bias, euro-area modeling
    JEL: C52 F47
    Date: 2004–12
  2. By: Amparo Baillo; Isabel Molina
    Abstract: This work deals with estimating the vector of means of characteristics of small areas. In this context, a unit level multivariate model with correlated sampling errors is considered. An approximation is obtained for the mean squared and cross product errors of the empirical best linear unbiased predictors of the means. This approach has been implemented on a Monte Carlo study using economic data observed for a sample of Australian farms.
  3. By: James H. Stock; Mark W. Watson
    Abstract: This paper considers VAR models incorporating many time series that interact through a few dynamic factors. Several econometric issues are addressed including estimation of the number of dynamic factors and tests for the factor restrictions imposed on the VAR. Structural VAR identification based on timing restrictions, long run restrictions, and restrictions on factor loadings are discussed and practical computational methods suggested. Empirical analysis using U.S. data suggest several (7) dynamic factors, rejection of the exact dynamic factor model but support for an approximate factor model, and sensible results for a SVAR that identifies money policy shocks using timing restrictions.
    JEL: C32 E17
    Date: 2005–07
  4. By: Jermey Large
    Abstract: Financial assets' quoted prices normally change through frequent revisions, or jumps. For markets where quotes are almost always revised by the minimum price tick, this paper proposes a new estimator of Quadratic Variation which is robust to microstructure effects. It compares the number of alternations, where quotes are revised back to their previous price, to the number of other jumps. Many markets exhibit a lack of autocorrelation in their quotes' alternation pattern. Under quite general 'no leverage' assumptions, whenever this is so the proposed statistic is consistent as the intensity of jumps increases without bound. After an empirical implementation, some useful corollaries of this are given.
    Date: 2005
  5. By: Ole E. Barndorff-Nielsen; Neil Shephard; Matthias Winkel
    Abstract: In this paper we provide a systematic study of the robustness of probability limits and central limit theory for realised multipower variation when we add finite activity and infinite activity jump processes to an underlying Brownian semimartingale.
    Date: 2005
  6. By: Ole E. Barndorff-Nielsen; Neil Shephard
    Abstract: We will review the econometrics of non-parametric estimation of the components of the variation of asset prices. This very active literature has been stimulated by the recent advent of complete records of transaction prices, quote data and order books. In our view the interaction of the new data sources with new econometric methodology is leading to a paradigm shift in one of the most important areas in econometrics: volatility measurement, modelling and forecasting. We will describe this new paradigm which draws together econometrics with arbitrage free financial economics theory. Perhaps the two most influential papers in this area have been Andersen, Bollerslev, Diebold and Labys(2001) and Barndorff-Nielsen and Shephard(2002), but many other papers have made important contributions. This work is likely to have deep impacts on the econometrics of asset allocation and risk management. One of our observations will be that inferences based on these methods, computed from observed market prices and so under the physical measure, are also valid as inferences under all equivalent measures. This puts this subject also at the heart of the econometrics of derivative pricing. One of the most challenging problems in this context is dealing with various forms of market frictions, which obscure the efficient price from the econometrician. Here we will characterise four types of statistical models of frictions and discuss how econometricians have been attempting to overcome them.
    Date: 2005
  7. By: Ole E. Barndorff-Nielsen; Sven Erik Graversen; Jean Jacod; Neil Shephard
    Abstract: In this paper we provide an asymptotic analysis of generalised bipower measures of the variation of price processes in financial economics. These measures encompass the usual quadratic variation, power variation and bipower variations which have been highlighted in recent years in financial econometrics. The analysis is carried out under some rather general Brownian semimartingale assumptions, which allow for standard leverage effects.
    Date: 2005
  8. By: J. Carlos Escanciano (School of Economics and Business Administration, University of Navarra)
    Abstract: This paper proposes a consistent test for the goodness-of-fit of parametric regression models which overcomes two important problems of the existing tests, namely, the poor empirical power and size performance of the tests due to the curse of dimensionality and the choice of subjective parameters like bandwidths, kernels or integrating measures. We overcome these problems by using a residual marked empirical process based on projections (RMPP). We study the asymptotic null distribution of the test statistic and we show that our test is able to detect local alternatives converging to the null at the parametric rate. It turns out that the asymptotic null distribution of the test statistic depends on the data generating process, so a bootstrap procedure is considered. Our bootstrap test is robust to higher order dependence, in particular to conditional heteroskedasticity. For completeness, we propose a new minimum distance estimator constructed through the same RMPP as in the testing procedure. Therefore, the new estimator inherits all the good properties of the new test. We establish the consistency and asymptotic normality of the new minimum distance estimator. Finally, we present some Monte Carlo evidence that our testing procedure can play a valuable role in econometric regression modeling.
    JEL: C12 C14 C52
    Date: 2005–05
  9. By: Hsiang-Tai Lee (Washington State University); Jonathan Yoder (Washington State University)
    Abstract: This paper develops a new bivariate Markov regime switching BEKK-GARCH (RS-BEKK-GARCH) model. The model is a state-dependent bivariate BEKK- GARCH model, and an extension of Gray’s univariate generalized regime- switching (GRS) model to the bivariate case. To solve the path- dependency problem inherent in the bivariate regime switching BEKK-GARCH model, we propose a recombining method for the covariance term in the conditional variance-covariance matrix. The model is applied to estimate time-varying minimum variance hedge ratios for corn and nickel spot and futures prices. Out-of-sample point estimates of hedging portfolio variance show that compared to the state-independent BEKK-GARCH model, the RS-BEKK-GARCH model improves out-of-sample hedging effectiveness for both corn and nickel data. We perform White’s (2000) data-snooping reality check to test for predictive superiority of RS-BEKK-GARCH over the benchmark model, and find that the difference in variance reduction between BEKK-GARCH and RS-BEKK-GARCH is not statistically significant for either data set at conventional confidence levels.
    Keywords: bivariate GARCH, require switching, hedging
    JEL: D81 C53
    Date: 2005–06–28
  10. By: Donggyu Sul (University of Auckland)
    Abstract: This paper studies the principle of common recursive mean adjustment and proposes a new detrending method in dynamic panel models. By utilizing recursive mean adjustment, this paper provides three unit root tests: a recursive mean adjusted (RMA) unit root test, a covariate RMA and a pooled RMA-feasible generalized least squares tests. The first two tests are designed for testing the cross sectional average of panel time series data to examine if the common factors in a panel are stationary or not. The third test is designed to test if the idiosyncratic errors are stationary or not. The proposed panel unit root test under cross section dependence is precise and powerful especially when T is larger than N
    Keywords: recursive detrending, panel unit root tests, cross section dependence
    JEL: C33
    Date: 2005–06–29
  11. By: Robert L. Hicks (Department of Economics, College of William and Mary); Kurt Schnier (Department of Environmental and Natural Reseource Economics, University of Rhode Island)
    Abstract: Recent work on spatial models of commercial fishing has provided insights into how spatial regulatory policies (i.e. Marine Protected Areas) are likely to alter the fishing location choices of commercial fishermen and the efficiency of these policies. The applied studies have spanned a diverse range of fisheries, from sedentary to highly migratory species. This literature has largely ignored the inter-temporal aspects of commercial fishing site choice at the cruise level. Therefore, these models depict fishermen as if they are ignoring how a location choice on the first day of a cruise may have potentially important consequences for the rest of the cruise. For many fisheries, particularly highly migratory ones, fishermen might choose a dynamically optimal cruise trajectory rather than myopic day-by-day strategies. An econometric model that ignores the inter-temporal aspects of location choice will likely lead to erroneous conclusions regarding a vesselÕs response to spatial regulatory policies. A dynamic discrete choice model is developed herein that utilizes the same information conventionally used in static models but is entrenched in the principals of dynamic optimization (BellmanÕs principle). Using Monte Carlo analysis, we evaluate the relative performance of this estimator as compared to the conventional static model for a variety of conditions that mimic different fishery types.
    Keywords: Dynamic Discrete Site Choice, Monte Carlo Simulation, Commercial Fishing
    JEL: C15 C35 Q20 Q58
    Date: 2005–06–01
  12. By: T. Bojdecki (Institute of Mathematics, University of Warsaw); Luis G. Gorostiza (Departamento de Mathematicas, Centro de Investigacion y de Estudios Avanzados, LRSP); A. Talarczyk (Institute of Mathematics, University of Warsaw)
    Keywords: Functional central limit theorem; Occupation time uctuation; Branching particle system; Distribution-valued Gaussian process; Fractional Brownian motion; Sub-fractional Brownian motion; Long-range dependence
    JEL: C10 C40
    Date: 2004–07–05
  13. By: Raluca Balan (University of Ottawa, LRSP); George Stoica (University of New Brunswick)
    Abstract: We examine various conditions under which a weighted weak law of large numbers holds, in the context of noncommutative probability theory.
    Keywords: Weak law of large numbers, Noncommutative probability theory
    JEL: C10 C40
    Date: 2004–08–01
  14. By: Junsoo Lee; Mark C. Strazicich (Appalachian State University)
    Abstract: In this paper, we propose a minimum LM unit root test that endogenously determines a structural break in intercept and trend. Critical values are provided, and size and power properties are compared to the endogenous one-break unit root test of Zivot and Andrews (1992). Nunes, Newbold, and Kuan (1997) and Lee and Strazicich (2001) previously demonstrated that the Zivot and Andrews test exhibits size distortions in the presence of a break under the null. In contrast, the one-break minimum LM unit root test exhibits no size distortions in the presence of a break under the null. As such, rejection of the null unambiguously implies a trend stationary process.
    Date: 2004

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