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on Econometric Time Series |
| By: | Elena Pesavento |
| Abstract: | Numerous tests for integration and cointegration have been proposed in the literature. Since Elliott, Rothemberg and Stock (1996) the search for tests with better power has moved in the direction of finding tests with some optimality properties both in univariate and multivariate models. Although the optimal tests constructed so far have asymptotic power that is indistinguishable from the power envelope, it is well known that they can have severe size distortions in finite samples. This paper proposes a simple and powerful test that can be used to test for unit root or for no cointegration when the cointegration vector is known. Although this test is not optimal in the sense of Elliott and Jansson (2003), it has better finite sample size properties while having asymptotic power curves that are indistinguishable from the power curves of optimal tests. Similarly to Hansen (1995), Elliott and Jansson (2003), Zivot (2000), and Elliott, Jansson and Pesavento (2005) the proposed test achieves higher power by using additional information contained in covariates correlated with the variable being tested. The test is constructed by applying Hansen's test to variables that are detrended under the alternative in a regression augmented with leads and lags of the stationary covariates. Using local to unity parametrization, the asymptotic distribution of the test under the null and the local alternative is analytically computed. |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:emo:wp2003:0606&r=ets |
| By: | Hiroaki Chigira; Taku Yamamoto |
| Abstract: | This paper is concerned with the estimation of the autoregressive parameter of dynamic panel data models. We propose a bias-corrected GMM estimator whose bias is smaller than that of many existing GMM estimators. And we propose a small sample corrected estimator of the variance in order to reduce the size distortion of the Wald test. These estimators are easy to calculate and do not require preliminary estimates. The Monte Carlo experiments indicate that in terms of both bias and size distortion, the bias corrected estimator out performs Blundell and Bond's (1998) system estimator even when using Windmeijer's (2005) correction of the estimated variance of the system estimator. |
| Keywords: | Generalized method of moments, bias correction, panel data |
| JEL: | C12 C23 |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:hst:hstdps:d06-177&r=ets |
| By: | In Choi; Timothy K. Chue |
| Abstract: | We develop subsampling-based tests of stock-return predictability and apply them to U.S. data. These tests allow for multiple predictor variables with local-to-unit roots. By contrast, previous methods that model the predictor variables as nearly integrated are only applicable to univariate predictive regressions. Simulation results demonstrate that our subsampling-based tests have desirable size and power properties. Using stock-market valuation ratios and the risk-free rate as predictors, our univariate tests show that the evidence of predictability is more concentrated in the 1926-1994 subperiod. In bivariate tests, we find support for predictability in the full sample period 1926-2004 and the 1952-2004 subperiod as well. For the subperiod 1952-2004, we also consider a number of consumption-based variables as predictors for stock returns and find that they tend to perform better than the dividend-price ratio. Among the variables we consider, the predictive power of the consumption-wealth ratio proposed by Lettau and Ludvigson (2001a, 2001b) seems to be the most robust. Among variables based on habit persistence, Campbell and Cochrane's (1999) nonlinear specication tends to outperform a more traditional, linear specification. |
| Keywords: | Subsampling, local-to-unit roots, predictive regression, stock-return predictability, consumption-based models |
| Date: | 2006–07 |
| URL: | http://d.repec.org/n?u=RePEc:hst:hstdps:d06-178&r=ets |
| By: | Thomas Flavin; Ekaterini Panopoulou |
| Abstract: | We examine if the benefits of international portfolio diversification are robust to time-varying asset return volatility. Since diversified portfolios are subject to common cross-country shocks, we focus on the transmission mechanism of such shocks in the presence of regime-switching volatility. We find little evidence of increased market interdependence in turbulent periods. Furthermore, for the vast majority of time, we show that risk reduction is delivered for the US investor who holds foreign equity. |
| Keywords: | Market comovement; International portfolio diversification; Financial market crises; Regime switching. |
| Date: | 2006–08–02 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp167&r=ets |
| By: | George Kapetanios (Queen Mary, University of London); M. Hashem Pesaran (Cambridge University, Trinity College Cambridge and IZA Bonn); Takashi Yamagata (Cambridge University) |
| Abstract: | The presence of cross-sectionally correlated error terms invalidates much inferential theory of panel data models. Recently work by Pesaran (2006) has suggested a method which makes use of cross-sectional averages to provide valid inference for stationary panel regressions with multifactor error structure. This paper extends this work and examines the important case where the unobserved common factors follow unit root processes and could be cointegrated. It is found that the presence of unit roots does not affect most theoretical results which continue to hold irrespective of the integration and the cointegration properties of the unobserved factors. This finding is further supported for small samples via an extensive Monte Carlo study. In particular, the results of the Monte Carlo study suggest that the crosssectional average based method is robust to a wide variety of data generation processes and has lower biases than all of the alternative estimation methods considered in the paper. |
| Keywords: | cross section dependence, large panels, unit roots, principal components, common correlated effects |
| JEL: | C12 C13 C33 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izadps:dp2243&r=ets |
| By: | Niels Framroze Møller (Department of Economics, University of Copenhagen) |
| Abstract: | This paper attempts to clarify the connection between simple economic theory models and the approach of the Cointegrated Vector-Auto-Regressive model (CVAR). By considering (stylized) examples of simple static equilibrium models, it is illustrated in detail, how the theoretical model and its structure and assumptions can be translated into a CVAR. We also see how the CVAR allows for explicit hypotheses about transitory dynamics, that could be relevant for assessing price rigidity, and hence, "the length of the short run" - a controversial issue in traditional macroeconomics. Moreover, it is demonstrated how other controversial hypotheses such as Rational Expectations can be formulated directly as restrictions on the CVAR-parameters. A simple example of a "Neoclassical synthetic" AS-AD model is also formulated. Finally, the partial- general equilibrium distinction is related to the CVAR as well. Further fundamental extensions and advances to more sophisticated theory models, such as those related to dynamics and expectations (in the structural relations) are left for future papers. |
| Keywords: | cointegrated VAR; static theory models; AS-AD; price rigidities; rational expectations; general equilibrium |
| JEL: | C32 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:kud:kuiedp:0615&r=ets |
| By: | Ralph D. Snyder; Anne B. Koehler |
| Abstract: | It is a common practice to complement a forecasting method such as simple exponential smoothing with a monitoring scheme to detect those situations where forecasts have failed to adapt to structural change. It will be suggested in this paper that the equations for simple exponential smoothing can be augmented by a common monitoring statistic to provide a method that automatically adapts to structural change without human intervention. It is shown that the resulting equations conform to those of damped trend corrected exponential smoothing. In a similar manner, exponential smoothing with drift, when augmented by the same monitoring statistic, produces equations that split the trend into long term and short term components. |
| Keywords: | Forecasting, exponential smoothing, tracking signals. |
| JEL: | C32 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:msh:ebswps:2006-16&r=ets |
| By: | Robert Dixon; David Shepherd |
| Abstract: | In this paper we examine the volatility of aggregate output and employment in Australia with the aid of a frequency filtering method (the Butterworth filter) that allows each time series to be decomposed into trend, cycle and noise components. This analysis is compared with more traditional methods based simply on the examination of first differences in the logs of the raw data using cointegration-VAR modelling. We show that the application of univariate AR and bivariate VECM methods to the data results in a detrended series which is dominated by noise rather than cyclical variation and gives break points which are not robust to alternative decomposition methods. Also, our conclusions challenge accepted wisdom in relation to output volatility in Australia which holds that there was a once and for all sustained reduction in output volatility in or around 1984. We do not find any convincing evidence for a sustained reduction in the cyclical volatility of the GDP (or employment) series at that time, but we do find evidence of a sustained reduction in the cyclical volatility of the GDP (and employment) series in 1993/4. We also find that there is a clear association between output volatility and employment volatility. We discuss the key features of the business cycle we have identified as well as some of the policy implications of our results. |
| Keywords: | Business cycles, volatility, inflation targeting, Australia |
| JEL: | E32 E37 E52 C22 C32 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:mlb:wpaper:968&r=ets |