nep-tra New Economics Papers
on Transition Economics
Issue of 2010‒01‒16
24 papers chosen by
J. David Brown
Heriot-Watt University

  1. Growth in Post-Soviet Russia: A Tale of Two Transitions? By Daniel Berkowitz; David DeJong
  2. Collective Agreements, Wages and Restructuring in Transition By Iga Magda; David Marsden; Simone Moriconi
  3. The Natural Resource Curse and Economic Transition By Michael Alexeev, Robert Conrad
  4. Cluster-based industrialization in China: Financing and performance By Long, Cheryl; Zhang, Xiaobo
  5. How Russia Affects the Neighborhood: Trade, Financial, and Remittance Channels By Nadeem Ilahi; Fahad Alturki; Jaime Espinosa-Bowen
  6. Models of BRICs' Economic Development and Challenges for EU Competitiveness By Peter Havlik; Waltraut Urban; Jayati Ghosh; Marcos P. Ribeiro
  7. Effects of Fiscal Policy Shocks in the European Transition Economies By Mirdala, Rajmund
  8. When Eastern Labour Markets Enter Western Europe. CEECs Labour Market Institutions upon Euro Zone Accession By Joanna Tyrowicz
  9. The Origins of Czech Credit Guarantees Programs and the Value of Guarantee Fund Portfolio on Czech Stock Exchanges By Janda, Karel
  10. Income, Aspirations and the Hedonic Treadmill in a Poor Society By John Knight; Ramani Gunatilaka
  11. Inflation dynamics and the New Keynesian Phillips curve in EU-4 By Borek Vasicek
  12. The Estimation of Complete Almost Ideal Demand System from Czech Household Budget Survey Data By Karel Janda; Jakub Mikolášek; Martin Netuka
  13. State in Transition and Corruption. A Comparative Analysis By Matei, Ani; Popa, Florin
  14. Product Market Regulation in Russia By Paul Conway; Tatiana Lysenko; Geoff Barnard
  15. Macroeconomic Dynamics in Macedonia and Slovakia: Structural Estimation and Comparison By Melecky, Martin
  16. The effects of taxes and benefits on income distribution in the enlarged EU By Paulus A; Čok M; Figari F; Hegedüs P; Kump N; Lelkes O; Levy H; Lietz C; Lüpsik S; Mantovani D; Morawski L; Sutherland H; Szivos P; Võrk A
  17. Characteristics of the Reforming Process in the Romanian Public Administration System By Andrei, Tudorel; Matei, Ani; Tusa, Erika; Nedelcu, Monica
  18. The Roles of Formal Schooling in Workers' Job Self-selection and Income in Village-based Industrial Clusters: The Cases of Two Clusters in Northern Vietnam. By Vu Hoang Nam; Dao Ngoc Tien; Phan Thi Van
  19. An empirical analysis on the impact of the development of the financial system upon the economic growth. The case of Romania and of the other states members of the European Union By Corduneanu , Carmen; Milos, Laura Raisa
  20. Exports, Productivity, and Credit Constraints: A Firm-Level Empirical Investigation of China By Zhiyuan Li; Miaojie Yu
  21. The new macroeconometric model of the Polish economy By Katarzyna Budnik; Michal Greszta; Michal Hulej; Marcin Kolasa; Karol Murawski; Michal Rot; Bartosz Rybaczyk; Magdalena Tarnicka
  22. A Trading Conditioning Model in Stock Market By Leilei Shi; Yiwen Wang; Ding Chen; Liyan Han; Yan Piao; Chengling Gou
  23. Bubble Diagnosis and Prediction of the 2005-2007 and 2008-2009 Chinese stock market bubbles By D. Sornette; Zhi-Qiang Jiang; Wei-Xing Zhou; Ryan Woodard; Ken Bastiaensen; Peter Cauwels
  24. Approaching a problem of the long-run real equilibrium exchange rate of Polish zloty while entering the ERM-2 and Euro zone By Przystupa, Jan

  1. By: Daniel Berkowitz; David DeJong
    Abstract: In the early stages of post-Soviet Russia’s economic transition, small-scale entrepreneurial activity appeared to be a strong engine of growth. Moreover, striking regional variations in initial conditions and adopted policy reforms appeared useful in accounting statistically for observed regional variations in entrepreneurial activity. Here, we investigate whether these relationships have persisted as Russia’s transition has continued to evolve, and find that they have not. We then document that the emergence of bank-issued credit, virtually non-existent outside of Moscow prior to 2000, has been an important engine of growth since 2000. Thus to date, Russia’s post-Soviet development appears as a tale of two distinct transition paths.
    Date: 2009–12
  2. By: Iga Magda; David Marsden; Simone Moriconi
    Abstract: Using a large matched employer-employee dataset, the authors investigate the relationship between collectiveagreements, wages and restructuring in transition in three former centrally planned economies (Czech Republic,Hungary and Poland). They adopt a natural experiment approach and capture the restructuring process triggeredby the launch of transition by means of cohort effects among firms founded before or at different stages of thisprocess which enable them to control for the heterogeneity of firms in different cohorts. They find that the wagepremium associated with different levels of collective agreements depends on restructuring and its timing in thetransition. In early-middle transition firms, industry level agreements protect low skilled wages; whereas in latetransition ones, firm level agreements increase medium and especially high skilled wages. Some cross countrydifferences emerge in the structure of the wage premium as a result of country specific features of restructuring.
    Keywords: Collective agreements, wages, transition economy, restructuring
    JEL: J31 J51 P2
    Date: 2009–11
  3. By: Michael Alexeev, Robert Conrad (Indiana University, Terry Sanford School of Public Policy and Department of Economics, Duke University)
    Abstract: Using cross-country regressions, we examine the relationship between “point-source” resource abundance and economic growth, quality of institutions, investment in human and physical capital, and social welfare (life expectancy and infant mortality). Contrary to most literature, we find little evidence of natural resource curse outside of the economies in transition. In the economies in transition, there is some evidence that natural resource wealth is associated with higher infant mortality. This negative effect, however, exists only relative to other resource rich countries. Compared to other economies in transition, natural resource abundant transitional economies are not worse off with respect to our indicators..
    Date: 2009–09
  4. By: Long, Cheryl; Zhang, Xiaobo
    Keywords: Clustering, Industrialization, Finance, export, productivity, Development strategies,
    Date: 2009
  5. By: Nadeem Ilahi; Fahad Alturki; Jaime Espinosa-Bowen
    Abstract: We test the extent to which growth in the 11 CIS countries (excluding Russia) was associated with developments in Russia, overall, as well as through the trade, financial and remittance channels over the last decade or so. The results point to the continued existence of economic links between the CIS countries and Russia, though these links may have altered since the 1998 crisis. Russia appears to influence regional growth mainly through the remittance channel and somewhat less so through the financial channel. There is a shrinking role of the trade (exports to Russia) channel. Russian growth shocks are associated with sizable effects on Belarus, Kazakhstan, Kyrgyz Republic, Tajikistan, and, to some extent, Georgia.
    Date: 2009–12–18
  6. By: Peter Havlik (The Vienna Institute for International Economic Studies, wiiw); Waltraut Urban (The Vienna Institute for International Economic Studies, wiiw); Jayati Ghosh; Marcos P. Ribeiro
    Abstract: The term BRICs puts under a common label the four largest fast growing emerging countries: Brazil, Russia, India and China. The BRICs show many common features, such as big land size, large population, fast economic growth etc., but important differences as well, due to their different models of economic development and resources endowments. In this report, we discuss the different models of economic development of the individual BRIC countries, with a special focus on their external relations (trade, FDI) and on likely future developments. Brazil is a domestically oriented service economy; Russia's economic development is heavily dependent on energy and raw material resources; the Indian economy is essentially service-led, supported by exports; and China's economic development is driven by manufacturing exports and investment. Finally, we explore the resulting future challenges and opportunities for EU competitiveness.
    Keywords: economic development, Brazil, Russia, India, China, the European Union, competitiveness, Foreign Direct Investment, Industry, International Trade and Competitiveness, Macroeconomic Analysis, Forecasts and Policy, Services
    JEL: O21 O53 O54 O57
    Date: 2009–12
  7. By: Mirdala, Rajmund
    Abstract: EU member countries are currently exposed to negative implications of the economic and financial crisis. In connection with this problem arises the question of an anti-cyclic role of an economic policy or more precisely the (regulatory) role of the government in the economy that seems to be the centre of discussions in the academic as well as economic policy sphere. The problem of a permanent deficiency of the general government budget stresses many “old” as well as “new” EU member countries. It significantly reduces an expansionary potential of the national fiscal policies. Because the economic crisis seems to be a very difficult problem due to its specific and complex features, it is necessary for the EU member countries to coordinate the process of the national stimulatory actions approving that would help the countries to avoid an undesired reallocation of resources outside the EU single market as well as the negative common competitive effects. In the paper we analyze the effects of fiscal policy shocks in the Czech republic, Hungary, Poland, the Slovak republic, Bulgaria and Romania in the period 2000-2008. Our objective is to estimate the effects of discretionary changes in fiscal policy (associated with an increase in government expenditures) as well as the role of automatic stabilizers (associated with an increase in tax revenues). To meet the objective we estimate vector autoregression (VAR) model. To check the robustness of the results we implement an identification scheme based on two approaches. The first, recursive approach, is based on the Cholesky decomposition of innovations that allows us to identify structural shocks hitting the model. The second approach, structural VAR approach, is based on applying long-run restrictions to the reduced-form VAR model. From both identified true models we compute impulse-response functions to estimate the responses of real output, inflation and short term interest rates to the government expenditure and tax revenue shocks.
    Keywords: fiscal policy; government expenditure; tax revenue; unrestricted VAR; Cholesky decomposition; SVAR; structural shocks; impulse-response function
    JEL: C32 E62
    Date: 2009–10
  8. By: Joanna Tyrowicz (National Bank of Poland, Economic Institute; University of Warsaw, Faculty of Economics)
    Abstract: This paper reviews the literature on the labour market institutions in European Union Member States in the context of monetary integration. Traditionally, labour markets are a key concept in the optimal currency area theory, playing the role of the only accommodation mechanism of asymmetric shocks after the monetary unification. There are several theoretical frameworks linking the institutional design of the labour market to the potential effectiveness of monetary policy in the context of currency areas. Many empirical studies addressed these issues too, yielding important policy implications for labour market reforms in the process of monetary unification. However, there seem to be "white spots” in this patchwork, which may actually be particularly useful from the perspective of CEECs upon the accession to the euro zone. We suggest these research directions encompassing labour supply and theoretical frameworks of labour market flexibility benchmarking in the context of monetary integration.
    Keywords: labour market institutions, monetary integration, labour market reform, CEECs, EMU
    Date: 2009–07
  9. By: Janda, Karel
    Abstract: This paper provides an overview of the credit provision in the Czech Republic at the beginning of the transition period. We show the economic forces leading to the creation of specialized government credit guarantee institution. While we provide a brief overview of different credit support institutions, we concentrate on credit guarantees in Czech agriculture, food industry and forestry. Besides the description of credit support activities, we also pay attention to financial sources of credit guarantee institution. Important financial source was its stock endowment which originated in the Czech privatization scheme. We provide an estimation of the value of this initial endowment according to two stock markets operating in the Czech Republic.
    Keywords: Subsidies; Guarantees; Rural Development; Stock Market; Portfolio
    JEL: G11 R51 Q14
    Date: 2009–12–17
  10. By: John Knight; Ramani Gunatilaka
    Abstract: A specially designed household survey for rural China is used to analyse the determinants of aspirations for income, proxied by reported minimum income need, and the determinants of subjective well-being, both satisfaction with life and satisfaction with income. It is found that aspiration income is a positive function of actual income and reference income, and that subjective well-being is raised by actual income but lowered by aspiration income. These findings suggests the existence of a partial hedonic treadmill, and can help to explain why subjective well-being in China appears not to have risen despite rapid economic growth.
    Keywords: Adaptation, Aspirations, China, Easterlin Paradox, Happiness, Hedonic treadmill, Subjective well-being
    JEL: D60 O12 O15
    Date: 2009
  11. By: Borek Vasicek (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: The paper seeks to shed light on inflation dynamics of four new EU member states: the Czech Republic, Hungary, Poland and Slovakia. To this end, the New Keynesian Phillips curve augmented for open economies is estimated and additional statistical tests applied. We find the following. (1) The claim of New Keynesians that the real marginal cost is the main inflation-forcing variable is fragile. (2) Inflation seems to be driven by external factors. (3) Although inflation holds a forward- looking component, the backward-looking component is substantial. An intuitive explanation for higher inflation persistence may be rather adaptive than rational price setting of local firms.
    Keywords: Inflation dynamics, New Keynesian Phillips curve, CEEC, GMM estimation
    JEL: C32 E31
    Date: 2009–12
  12. By: Karel Janda (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic; University of Economics, Prague; Transgas-RWE Chair in Economics); Jakub Mikolášek (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Martin Netuka (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: The aim of this paper is to provide a reliable set of income, own-price, and cross-price elasticities of demand for the consumer goods, foods and alcohol beverages based on Almost Ideal Demand System model applied to the most relevant Czech data set of Household Budget Statistics. While we concentrate on the last stage of our complete demand system which is concerned with the demand for beverages, the estimates obtained in the first (all consumption goods) and second (food) stages of our model may be used for consumer demand analysis with respect to any consumption group considered in our model.
    Keywords: Almost Ideal Demand System, consumption, the Czech Republic, elasticity, price, spirits, tax, wine, beer
    JEL: D12 L66 Q18
    Date: 2009–12
  13. By: Matei, Ani; Popa, Florin
    Abstract: The late 1980’s have witnessed numerous changes in the political, economical and social structure of Eastern Europe. The fall of the Berlin Wall represented the beginning of national movements that targeted the collapse of all totalitarian political regimes in this part of the continent. The transformations that followed involved all areas of activity of the social life. In such a context of institutional remodeling, of redefining social values, the phenomenon of corruption was not only present, but had a great enough influence over the transition process. The influence of corruption manifested itself in most cases in an ambiguous legal framework, in a sum of normative acts (often contradictory ones), in a great legal instability, in a lack of reaction of the responsible institutions, etc. In the economy the effects of this phenomenon materialized in the drop of foreign investments, in the drop of the GDP per capita, in bad public investments, and so on. The comparative analysis of the present study targets mostly the way in which the administrative reform policies, the legal measures passed by the Parliament were put into action, the institutional reform, and all the measures that can determine the success or failure of an efficient anticorruption policy. Also, the process of accession is of great influence in the fight against corruption. Through the analysis of all elements taken into account and previously stated, the present study aims at distinguishing efficient methods in the fight against corruption, methods that are specific to a state in transition, but also to create a model of practices for the states in transition. The effectiveness of these measures is highlighted, among others, through the public perception of corruption, the level of economic development (GDP/capita, level of foreign investments, and so on).
    Keywords: corruption; administrative reform policies
    JEL: H70 D73
    Date: 2009–05–14
  14. By: Paul Conway; Tatiana Lysenko; Geoff Barnard
    Abstract: This paper uses the OECD’s indicators of product market regulation (PMR) to assess the extent to which the regulatory environment in Russia supports competition and to draw attention to the areas where further reform efforts would pay dividends. The indicators show that, despite improvements in some areas, many aspects of Russia’s regulatory framework are still restrictive, which provides considerable scope for reaping gains from bringing regulation into line with international best practice. In particular, the scores suggest that Russia’s economic performance would greatly benefit from a reduction in the role of the state enterprise sector in markets that are inherently competitive and reinvigorated efforts to liberalise foreign trade and direct investment regimes. In some network sectors, recent regulatory changes have significantly improved the scope for competition. However, ongoing work needs to focus on separating competitive and monopoly market segments and eliminating barriers to entry. In addition, the authorities need to develop the capacity and strengthen the hands of the sectoral regulators. Introducing an overarching competition policy would also help bring the issue of competition to centre stage and spread a competition ethos through different levels of government.<P>La réglementation des marchés de produits en Russie<BR>Cette étude utilise les indicateurs de réglementation des marchés de produits (RMP) afin d'évaluer le degré auquel l'environnement réglementaire en Russie est favorable à la concurrence et d'identifier les domaines où des réformes supplémentaires seraient bénéfiques pour l'économie Russe. Les indicateurs révèlent que, malgré des améliorations dans certains domaines, plusieurs aspects de l'approche réglementaire restent restrictifs, ce qui laisse beaucoup de marge pour récolter des bénéfices économiques d'un alignement de la réglementation avec les meilleures pratiques internationales. En particulier, les valeurs des indicateurs suggèrent que la performance économique de la Russie bénéficierait de façon importante d'une réduction du rôle du secteur des entreprises publiques dans les marchés qui sont par nature concurrentiels et d'un renforcement des efforts pour libéraliser les régimes du commerce extérieur et de l'investissement direct étranger. Dans certaines industries de réseau, des changements réglementaires récents ont favorisé la concurrence. Cependant, un travail soutenu sera nécessaire afin de séparer les segments du marché qui sont par nature concurrentiels de ceux qui sont monopolistiques et d'éliminer les obstacles à la concurrence. Les autorités devraient aussi développer les capacités et renforcer les pouvoirs des régulateurs sectoriels. La création d'une politique globale de concurrence aiderait à mettre la question de concurrence au devant de la scène et de transmettre un esprit de la concurrence à travers les différents niveaux du gouvernement.
    Keywords: competition, corruption, foreign direct investment, growth, Russia, state ownership, trade, transition, concurrence, corruption, croissance, échanges, investissement direct étranger, propriété de l’État, réglementation des marchés de produits, Russie, transition
    JEL: F13 H1 H82 H83 K20 K21 L31 L32 L33 L4 L5 P2 P3
    Date: 2009–12–15
  15. By: Melecky, Martin
    Abstract: This paper estimates the structural model of Linde et al. (2008) using data for Macedonia and Slovakia. A comparison of the estimated model parameters suggest that, in Slovakia, the output gap is less sensitive to real interest rate movements and prices experience greater inertia. The estimated monetary policy reaction functions present Macedonia and Slovakia as inflation targeters, with Macedonia as the more conservative one, despite its officially applied exchange rate targeting regime. The differences in estimated parameters imply differing transmission mechanisms for Macedonia and Slovakia. Consequently, the variance of domestic variables in Slovakia is most influenced by monetary policy shocks, while there is no single dominating shock explaining the volatility of Macedonia’s macroeconomic variables. The exchange rate shock, the monetary policy shock and the demand shock are jointly important in determining the volatility of Macedonia’s variables. The model simulations indicate that Macedonia experiences lower output gap and inflation volatility than Slovakia. This comes, nevertheless, at the cost of higher interest rate and real exchange rate volatility in Macedonia, which could be an indication of more volatile financial markets.
    Keywords: Structural Open-Economy Model; Bayesian Estimation; Eastern European Transition Economies.
    JEL: E32 E50 F41
    Date: 2010–01
  16. By: Paulus A; Čok M; Figari F; Hegedüs P; Kump N; Lelkes O; Levy H; Lietz C; Lüpsik S; Mantovani D; Morawski L; Sutherland H; Szivos P; Võrk A
    Abstract: Tax and benefit systems in the enlarged EU vary significantly in size and structure. We examine how taxes and benefits shape income distributions in 19 EU countries, focusing on the differences between Western European countries (EU15) and Eastern European countries (Estonia, Hungary, Poland, Slovenia). We use EUROMOD, the European tax-benefit microsimulation model, which simulates taxes and benefits for representative samples of household micro-data and through a common framework which allows the analysis of cross-country differences on a comparable basis. The analysis concentrates on the distribution and composition of incomes, and the effect of taxes and benefits on poverty and inequality
    JEL: C81 D31 P50
    Date: 2009–12–18
  17. By: Andrei, Tudorel; Matei, Ani; Tusa, Erika; Nedelcu, Monica
    Abstract: This paper aims to analyze, starting from the case of Romania, the degree to which public administration reform contributes to the reduction of corruption. In this paper, which has its own methodology, the level of corruption is estimated and a series of factors that can contribute to its reduction in a certain time interval are determined. The analysis of the public administration reform process was realized by using a representative survey conducted in May 2007 at the public administration level. A two-phase sampling technique was used to build the sample, which included 971 civil servants from central and local public administration. The reforming process of the central and local public administration Romania is analyzed with regard to the civil service reform, the decentralization process and fight against corruption in the public administration. Eight statistical variables were defined in order to analyze these aspects. Most of the variables used in this study reveal significant differences at the level of the four types of public administration institutions. Nevertheless, the analysis shows that the intensification of the reform process at civil service level leads to the reduction of the level of corruption
    Keywords: administrative reform;corruption;performance;transparency;pressure of political system;decentralization
    JEL: D73 G38 H53
    Date: 2009–02
  18. By: Vu Hoang Nam (Faculty of International Economics, Foreign Trade University, Vietnam); Dao Ngoc Tien (Faculty of Economics and International Business, Foreign Trade University, Vietnam); Phan Thi Van (Faculty of Economics and International Business, Foreign Trade University, Vietnam)
    Abstract: While village industries are known to play an important role in the development of rural areas in developing countries, little is known about village industries in transition economies. Also, little attention has been paid to the question of how human capital contributes to the choice of jobs and income of workers in these village industries. This paper inquires into the determinants of the workers' choice of jobs and income in two village-based industrial clusters in Northern Vietnam. We found that formal schooling plays an important role in the self-selection of jobs and income of workers in all of the villages.
    Keywords: Vietnam; Industrial cluster
    JEL: O14 O53
    Date: 2010
  19. By: Corduneanu , Carmen; Milos, Laura Raisa
    Abstract: This paper outlines the existing connection between the development of the financial system and the economic growth of an economy. Along the time, many authors have tried to bring empirical prove that this connection exists on the long term, and it is very strong especially for the developing countries being explained through the channel of investment and productivity. Beside giving the theoretical arguments for this connection, the authors make an empirical analysis using pool data regressions, taking into consideration the old member states and the new member states of the European Union, with a special focus on the Romanian case.
    Keywords: G10; G20
    JEL: G10 G20
    Date: 2009–05
  20. By: Zhiyuan Li; Miaojie Yu
    Abstract: Recent Melitz-type (2003) intra-industry heterogonous trade models argue that a firmfs productivity has significant effects on the firmfs exports. This paper examines how a firmfs credit constraints as well as its productivity affect its export decisions. We imbed the firmfs credit constraints into a Melitz-type general-equilibrium model by endogenizing the probability of the success of firm-specific projects. We show that, all else equal, it is easier for firms to enter the export market if (1) the probability of the success of their project is higher and consequently they have easier access to external finance from financial intermediaries; or (2) they have alternative sources, other than from financial intermediaries, to obtain funds. We test these theoretical hypotheses using firm-level data from Chinese manufacturing industries and find strong evidence supporting the predictions of the model.
    Keywords: Credit Constraints, Heterogeneous Firms, Productivity, Trade
    JEL: F1 F3 D9 G2
    Date: 2009–12
  21. By: Katarzyna Budnik (National Bank of Poland, Economic Institute); Michal Greszta (National Bank of Poland, Economic Institute; University of Warsaw, Faculty of Economics); Michal Hulej (National Bank of Poland, Economic Institute); Marcin Kolasa (National Bank of Poland, Economic Institute; Warsaw School of Economics); Karol Murawski (National Bank of Poland, Economic Institute); Michal Rot (National Bank of Poland, Economic Institute); Bartosz Rybaczyk (National Bank of Poland, Economic Institute); Magdalena Tarnicka (National Bank of Poland, Economic Institute)
    Abstract: This paper presents the structural macroeconometric model of the Polish economy, NECMOD, which was developed foremost to facilitate implementation of the monetary policy in Poland through a regular delivery of inflation and GDP projections. The model encompasses all major channels of the monetary policy transmission mechanism and is able to deliver a comprehensive account of factors underlying the main economic developments. With its complex labour market structure, explicit incorporation of inflation expectations, distortionary fiscal policy and heterogeneity of the capital stock, NECMOD is able to describe propagation of a range of macroeconomic shocks. As a forecasting and simulation tool, the model is specifically designed to reflect the dynamic nature of a converging economy.
    Date: 2009
  22. By: Leilei Shi (Complex System Research Group, Department of Modern Physics University of Science and Technology of China); Yiwen Wang (Department of Finance, Beijing University of Aeronautics and Astronautics); Ding Chen (Harvest Fund Management Co. Ltd); Liyan Han (Department of Finance, Beijing University of Aeronautics and Astronautics); Yan Piao (Department of Physics, Beijing University of Aeronautics and Astronautics); Chengling Gou (Department of Physics, Beijing University of Aeronautics and Astronautics)
    Abstract: We develop a theoretical trading conditioning model subject to price volatility and return in terms of market psychological behavior, based on a volume-price probability wave distribution in which we use transaction volume probability to describe price volatility uncertainty and intensity. Applying the model to high frequent data test in China stock market, we have main findings as follows: 1) there are, in general, significant positive correlations between the rate of mean return and that of change in both trading conditioning intensity and the amount of transaction; 2) they lack significance in spite of positive correlations in two time intervals right before and just after bubble crashes; and 3) there exists, particularly, significant negative correlation between the rate of mean return and that of change in trading conditioning intensity when SEE Composite Index is rising during bull market. The model and findings can help to well explain disposition effect and excessive trading, to time bubble crash, and to understand other anomalies in stock market.
    Date: 2010–01
  23. By: D. Sornette; Zhi-Qiang Jiang; Wei-Xing Zhou; Ryan Woodard; Ken Bastiaensen; Peter Cauwels
    Abstract: By combining (i) the economic theory of rational expectation bubbles, (ii) behavioral finance on imitation and herding of investors and traders and (iii) the mathematical and statistical physics of bifurcations and phase transitions, the log-periodic power law (LPPL) model has been developed as a flexible tool to detect bubbles. The LPPL model considers the faster-than-exponential (power law with finite-time singularity) increase in asset prices decorated by accelerating oscillations as the main diagnostic of bubbles. It embodies a positive feedback loop of higher return anticipations competing with negative feedback spirals of crash expectations. We use the LPPL model in one of its incarnations to analyze two bubbles and subsequent market crashes in two important indexes in the Chinese stock markets between May 2005 and July 2009. Both the Shanghai Stock Exchange Composite index (US ticker symbol SSEC) and Shenzhen Stock Exchange Component index (SZSC) exhibited such behavior in two distinct time periods: 1) from mid-2005, bursting in October 2007 and 2) from November 2008, bursting in the beginning of August 2009. We successfully predicted time windows for both crashes in advance (Sornette, 2007; Bastiaensen et al., 2009) with the same methods used to successfully predict the peak in mid-2006 of the US housing bubble (Zhou and Sornette, 2006b) and the peak in July 2008 of the global oil bubble (Sornette et al., 2009). Themore recent bubble in the Chinese indexes was detected and its end or change of regime was predicted independently by two groups with similar results, showing that the model has been well-documented and can be replicated by industrial practitioners. Here we present more detailed analysis of the individual Chinese index predictions and of the methods used to make and test them. We complement the detection of log-periodic behavior with Lomb spectral analysis of detrended residuals and (H, q)- derivative of logarithmic indexes for both bubbles. We perform unit-root tests on the residuals from the log-periodic power law model to confirm the Ornstein-Uhlenbeck property of bounded residuals, in agreement with the consistent model of ‘explosive’ financial bubbles (Lin et al., 2009).
    Keywords: stock market crash, financial bubble, Chinese markets, rational expectation bubble, log-periodic power law
    JEL: O16
    Date: 2009–10–25
  24. By: Przystupa, Jan
    Abstract: Taking into account a large number of types of nominal and real exchange rates, while estimating the real equilibrium exchange rate, one should always remember that there is no a single, universal equilibrium exchange rate. A point value or a path of that exchange rate depends on the adopted definitions and assumptions as well as on the method and purpose of the analysis. However, a value added of each estimation of the equilibrium exchange rate is an answer, whether the economic policy causes upset or stabilisation of the economy. Moreover, in the period of discussion on the exchange rate of accession to ERM-2, showing an interval of the exchange rate where all values of the exchange rate ensure at least suboptimal behaviour of the economy may help to make a decision on the date of accession to ERM-2 that will minimise costs of retention of the exchange rate within a definite currency band. For Poland, estimated by the NATREX method the long-run real equilibrium exchange rate ensures the internal equilibrium with annual growth rates of GDP amounting to 4.1%, comprised of growth of consumption by 4% p.a., investment by 8.7%, volume of exports by 8.5% and volume of imports by 8.1% p.a. Estimating on the ground of real exchange rates an approximate value of nominal exchange rates, one can state that the long-term equilibrium in the economy is ensured with the exchange rate of 3.80-3.90 zlotys for 1 euro. The current exchange rate will probably approach the equilibrium exchange rate at the turn of 2010 and 2011, and it will remain near that level over 5-6 quarters. This means that in that period cost of retention of the PLN exchange rate within a narrow band of fluctuations is relatively the least. The next period where the current exchange rate should approach the optimal exchange rate is 2014. Then, also in the medium term, the exchange rate of zloty should be comprised within the interval of 3.80-3.90 (assuming the stable exchange rate of USD/EUR=1.40)
    Keywords: equilibrium exchange rate; NATREX
    JEL: E52 F31
    Date: 2009–10–04

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