nep-ets New Economics Papers
on Econometric Time Series
Issue of 2005‒02‒01
six papers chosen by
Yong Yin
SUNY at Buffalo

  1. Practical Volatility and Correlation Modeling for Financial Market Risk Management By Torben G. Andersen; Tim Bollerslev; Peter F. Christoffersen; Francis X. Diebold
  2. New Simple Tests for Panel Cointegration By Westerlund, Joakim
  3. Pooled Unit Root Tests in Panels with a Common Factor By Westerlund, Joakim
  4. Panel Cointegration Tests of the Fisher Hypothesis By Westerlund, Joakim
  5. Testing for Error Correction in Panel Data By Westerlund, Joakim
  6. Testing for Panel Cointegration with Multiple Structural Breaks By Westerlund, Joakim

  1. By: Torben G. Andersen; Tim Bollerslev; Peter F. Christoffersen; Francis X. Diebold
    Abstract: What do academics have to offer market risk management practitioners in financial institutions? Current industry practice largely follows one of two extremely restrictive approaches: historical simulation or RiskMetrics. In contrast, we favor flexible methods based on recent developments in financial econometrics, which are likely to produce more accurate assessments of market risk. Clearly, the demands of real-world risk management in financial institutions %uF818 in particular, real-time risk tracking in very high-dimensional situations %uF818 impose strict limits on model complexity. Hence we stress parsimonious models that are easily estimated, and we discuss a variety of practical approaches for high-dimensional covariance matrix modeling, along with what we see as some of the pitfalls and problems in current practice. In so doing we hope to encourage further dialog between the academic and practitioner communities, hopefully stimulating the development of improved market risk management technologies that draw on the best of both worlds.
    JEL: G1
    Date: 2005–01
  2. By: Westerlund, Joakim (Department of Economics, Lund University)
    Abstract: We propose two new simple residual-based panel data tests for the null of no cointegration. The tests are simple because they do not require any correction for the temporal dependencies of the data. Yet they are able to accommodate individual specific short-run dynamics, individual specific intercept and trend terms, as well as individual specific slope parameters. A third test that is modified to accommodate for cross-sectionally dependent data is also proposed. We derive the limiting distributions of the tests and show that they are free of nuisance parameters. Our Monte Carlo results suggest that the asymptotic results are borne out well even in very small samples.
    Keywords: Panel Cointegration; Residual-Based Tests; Cross-Sectional Dependence; Monte Carlo Simulation.
    JEL: C12 C31 C33
    Date: 2005–01–26
  3. By: Westerlund, Joakim (Department of Economics, Lund University)
    Abstract: This paper proposes new pooled panel unit root tests that are appropriate when the data exhibit cross-sectional dependence that is generated by a single common factor. Using sequential limit arguments, we show that the tests have a limiting normal distribution that is free of nuisance parameters and that they are unbiased against heterogenous local alternatives. Our Monte Carlo results indicate that the tests perform well in comparison to other popular tests that also presumes a common factor structure for the cross-sectional dependence.
    Keywords: Pooled Unit Root Tests; Panel Data; Common Factor; Cross-Sectional Dependence; Monte Carlo Simulation.
    JEL: C12 C31 C33
    Date: 2005–01–26
  4. By: Westerlund, Joakim (Department of Economics, Lund University)
    Abstract: Recent empirical studies suggest that the Fisher hypothesis, stating that inflation and nominal interest rates should cointegrate with a unit parameter on inflation, does not hold, a finding at odds with many theoretical models. This paper argues that these results can be explained in part by the low power inherent in univariate cointegration tests and that the use of panel data should generate more powerful tests. In doing so, we propose two new panel cointegration tests, which are shown by simulation to be more powerful than other existing tests. Applying these tests to a panel of monthly data covering the period 1980:1 to 1999:12 on 14 OECD countries, we find evidence supportive of the Fisher hypothesis.
    Keywords: Fisher Hypothesis; Residual-Based Panel Cointegration Test; Monte Carlo Simulation.
    JEL: C12 C15 C32 C33 E40
    Date: 2005–01–26
  5. By: Westerlund, Joakim (Department of Economics, Lund University)
    Abstract: This paper proposes four new tests for the null hypothesis of no cointegration in panel data that are based on the error correction parameter in a conditional error correction model. The limit distribution of the test statistics are derived and critical values are provided. Our Monte Carlo results suggest that the tests have reasonable size properties and good power relative to other popular residual-based cointegration tests. These differences arises because latter imposes a possibly invalid common factor restriction. In our empirical application, we present evidence suggesting that international health care expenditures and GDP are cointegrated once the possibility of an invalid common factor restriction has been accounted for.
    Keywords: Panel Cointegration Test; Monte Carlo Simulation; Common Factor Restriction; International Health Care Expenditures.
    JEL: C12 C32 C33 O30
    Date: 2005–01–26
  6. By: Westerlund, Joakim (Department of Economics, Lund University)
    Abstract: This paper proposes an LM test for the null hypothesis of cointegration that allows for the possibility of multiple structural breaks in both the level and trend of a cointegrated panel regression. The test is general enough to allow for endogenous regressors, serial correlation and an unknown number of breaks that may be located at different dates for different individuals. We derive the limiting distribution of the test and conduct a small Monte Carlo study to investigate its finite sample properties. In our empirical application to the Feldstein-Horioka Puzzle, we find evidence of cointegration between saving and investment once a level break is accommodated.
    Keywords: Panel Cointegration; Residual-Based Cointegration Test; Structural Break; Monte Carlo Simulation; Feldstein-Horioka Puzzle.
    JEL: C12 C32 C33 F21
    Date: 2005–01–26

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