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Econometrics
Volume 5
Issue 3
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Econometrics, Volume 5, Issue 3 (September 2017) – 16 articles

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478 KiB  
Article
Autoregressive Lag—Order Selection Using Conditional Saddlepoint Approximations
by Ronald W. Butler and Marc S. Paolella
Econometrics 2017, 5(3), 43; https://doi.org/10.3390/econometrics5030043 - 19 Sep 2017
Cited by 3 | Viewed by 7726
Abstract
A new method for determining the lag order of the autoregressive polynomial in regression models with autocorrelated normal disturbances is proposed. It is based on a sequential testing procedure using conditional saddlepoint approximations and permits the desire for parsimony to be explicitly incorporated, [...] Read more.
A new method for determining the lag order of the autoregressive polynomial in regression models with autocorrelated normal disturbances is proposed. It is based on a sequential testing procedure using conditional saddlepoint approximations and permits the desire for parsimony to be explicitly incorporated, unlike penalty-based model selection methods. Extensive simulation results indicate that the new method is usually competitive with, and often better than, common model selection methods. Full article
(This article belongs to the Special Issue Celebrated Econometricians: Peter Phillips)
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407 KiB  
Editorial
Announcement of the 2017 Econometrics Young Researcher Award
by Econometrics Editorial Office
Econometrics 2017, 5(3), 42; https://doi.org/10.3390/econometrics5030042 - 13 Sep 2017
Viewed by 6742
Abstract
With the goal of encouraging and motivating young researchers in the field of econometrics, last year the journal Econometrics accepted applications and nominations for the 2017 Young Researcher Award.[...] Full article
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1105 KiB  
Article
Unit Roots in Economic and Financial Time Series: A Re-Evaluation at the Decision-Based Significance Levels
by Jae H. Kim and In Choi
Econometrics 2017, 5(3), 41; https://doi.org/10.3390/econometrics5030041 - 8 Sep 2017
Cited by 20 | Viewed by 13969
Abstract
This paper re-evaluates key past results of unit root tests, emphasizing that the use of a conventional level of significance is not in general optimal due to the test having low power. The decision-based significance levels for popular unit root tests, chosen using [...] Read more.
This paper re-evaluates key past results of unit root tests, emphasizing that the use of a conventional level of significance is not in general optimal due to the test having low power. The decision-based significance levels for popular unit root tests, chosen using the line of enlightened judgement under a symmetric loss function, are found to be much higher than conventional ones. We also propose simple calibration rules for the decision-based significance levels for a range of unit root tests. At the decision-based significance levels, many time series in Nelson and Plosser’s (1982) (extended) data set are judged to be trend-stationary, including real income variables, employment variables and money stock. We also find that nearly all real exchange rates covered in Elliott and Pesavento’s (2006) study are stationary; and that most of the real interest rates covered in Rapach and Weber’s (2004) study are stationary. In addition, using a specific loss function, the U.S. nominal interest rate is found to be stationary under economically sensible values of relative loss and prior belief for the null hypothesis. Full article
(This article belongs to the Special Issue Celebrated Econometricians: Peter Phillips)
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1204 KiB  
Article
Evaluating Ingenious Instruments for Fundamental Determinants of Long-Run Economic Growth and Development
by P. Dorian Owen
Econometrics 2017, 5(3), 38; https://doi.org/10.3390/econometrics5030038 - 5 Sep 2017
Cited by 10 | Viewed by 10659
Abstract
Empirical studies of the determinants of cross-country differences in long-run development are characterized by the ingenious nature of the instruments used. However, scepticism remains about their ability to provide a valid basis for causal inference. This paper examines whether explicit consideration of the [...] Read more.
Empirical studies of the determinants of cross-country differences in long-run development are characterized by the ingenious nature of the instruments used. However, scepticism remains about their ability to provide a valid basis for causal inference. This paper examines whether explicit consideration of the statistical adequacy of the underlying reduced form, which provides an embedding framework for the structural equations, can usefully complement economic theory as a basis for assessing instrument choice in the fundamental determinants literature. Diagnostic testing of the reduced forms in influential studies reveals evidence of model misspecification, with parameter non-constancy and spatial dependence of the residuals being almost ubiquitous. This feature, surprisingly not previously identified, potentially undermines the inferences drawn about the structural parameters, such as the quantitative and statistical significance of different fundamental determinants. Full article
(This article belongs to the Special Issue Recent Developments in Macro-Econometric Modeling: Theory and Applications)
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966 KiB  
Article
Short-Term Expectation Formation Versus Long-Term Equilibrium Conditions: The Danish Housing Market
by Andreas Hetland and Simon Hetland
Econometrics 2017, 5(3), 40; https://doi.org/10.3390/econometrics5030040 - 4 Sep 2017
Cited by 2 | Viewed by 8305
Abstract
The primary contribution of this paper is to establish that the long-swings behavior observed in the market price of Danish housing since the 1970s can be understood by studying the interplay between short-term expectation formation and long-run equilibrium conditions. We introduce an asset [...] Read more.
The primary contribution of this paper is to establish that the long-swings behavior observed in the market price of Danish housing since the 1970s can be understood by studying the interplay between short-term expectation formation and long-run equilibrium conditions. We introduce an asset market model for housing based on uncertainty rather than risk, which under mild assumptions allows for other forms of forecasting behavior than rational expectations. We test the theory via an I(2) cointegrated VAR model and find that the long-run equilibrium for the housing price corresponds closely to the predictions from the theoretical framework. Additionally, we corroborate previous findings that housing markets are well characterized by short-term momentum forecasting behavior. Our conclusions have wider relevance, since housing prices play a role in the wider Danish economy, and other developed economies, through wealth effects. Full article
(This article belongs to the Special Issue Recent Developments in Cointegration)
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511 KiB  
Article
Evaluating Forecasts, Narratives and Policy Using a Test of Invariance
by Jennifer L. Castle, David F. Hendry and Andrew B. Martinez
Econometrics 2017, 5(3), 39; https://doi.org/10.3390/econometrics5030039 - 1 Sep 2017
Cited by 19 | Viewed by 9248
Abstract
Economic policy agencies produce forecasts with accompanying narratives, and base policy changes on the resulting anticipated developments in the target variables. Systematic forecast failure, defined as large, persistent deviations of the outturns from the numerical forecasts, can make the associated narrative false, which [...] Read more.
Economic policy agencies produce forecasts with accompanying narratives, and base policy changes on the resulting anticipated developments in the target variables. Systematic forecast failure, defined as large, persistent deviations of the outturns from the numerical forecasts, can make the associated narrative false, which would in turn question the validity of the entailed policy implementation. We establish when systematic forecast failure entails failure of the accompanying narrative, which we call forediction failure, and when that in turn implies policy invalidity. Most policy regime changes involve location shifts, which can induce forediction failure unless the policy variable is super exogenous in the policy model. We propose a step-indicator saturation test to check in advance for invariance to policy changes. Systematic forecast failure, or a lack of invariance, previously justified by narratives reveals such stories to be economic fiction. Full article
(This article belongs to the Special Issue Celebrated Econometricians: Katarina Juselius and Søren Johansen)
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847 KiB  
Article
The Turkish Spatial Wage Curve
by Haci Mevlut Karatas
Econometrics 2017, 5(3), 37; https://doi.org/10.3390/econometrics5030037 - 29 Aug 2017
Cited by 1 | Viewed by 7818
Abstract
The wage curve for Turkey revisited considering the spatial spillovers of the regional unemployment rates using individual level data for a period of 2004–2013 at the 26 NUTS-2 level by employing FE-2SLS models. The unemployment elasticity of real wages is −0.07 without excluding [...] Read more.
The wage curve for Turkey revisited considering the spatial spillovers of the regional unemployment rates using individual level data for a period of 2004–2013 at the 26 NUTS-2 level by employing FE-2SLS models. The unemployment elasticity of real wages is −0.07 without excluding any group of workers unlike previous studies. There is strong evidence on spatial effects of unemployment rate of contiguous regions on wage level, which is larger, in absolute value, than the effect of own-regional unemployment rate, −0.087 and −0.056, respectively. Male workers are slightly more responsive to the own-region unemployment rate than female workers. However, female workers are more responsive to the neighboring regions’ unemployment rate. Furthermore, using group-specific unemployment rates in the estimation of the wage curve for various groups, we find that unemployment elasticity of pay for female workers has become smaller and lost its significance, whereas unemployment elasticity for male workers has changed slightly. However, introducing group-specific unemployment rate results in losing significance in estimates for female workers. The findings in this paper suggest that individual wages are more responsive to the unemployment rates of the proximate regions than that of an individual’s own region. Also, the wage curve estimates are sensitive to the group-specific unemployment rates. Full article
(This article belongs to the Special Issue Recent developments in Spatial Econometrics, associated with the 10th Annual Conference of the Spatial Econometrics Association, Rome 13-15 June 2016)
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284 KiB  
Article
Cointegration between Trends and Their Estimators in State Space Models and Cointegrated Vector Autoregressive Models
by Søren Johansen and Morten Nyboe Tabor
Econometrics 2017, 5(3), 36; https://doi.org/10.3390/econometrics5030036 - 22 Aug 2017
Cited by 6 | Viewed by 7891
Abstract
A state space model with an unobserved multivariate random walk and a linear observation equation is studied. The purpose is to find out when the extracted trend cointegrates with its estimator, in the sense that a linear combination is asymptotically stationary. It is [...] Read more.
A state space model with an unobserved multivariate random walk and a linear observation equation is studied. The purpose is to find out when the extracted trend cointegrates with its estimator, in the sense that a linear combination is asymptotically stationary. It is found that this result holds for the linear combination of the trend that appears in the observation equation. If identifying restrictions are imposed on either the trend or its coefficients in the linear observation equation, it is shown that there is cointegration between the identified trend and its estimator, if and only if the estimators of the coefficients in the observation equations are consistent at a faster rate than the square root of sample size. The same results are found if the observations from the state space model are analysed using a cointegrated vector autoregressive model. The findings are illustrated by a small simulation study. Full article
(This article belongs to the Special Issue Recent Developments in Cointegration)
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453 KiB  
Article
Building News Measures from Textual Data and an Application to Volatility Forecasting
by Massimiliano Caporin and Francesco Poli
Econometrics 2017, 5(3), 35; https://doi.org/10.3390/econometrics5030035 - 19 Aug 2017
Cited by 29 | Viewed by 10964
Abstract
We retrieve news stories and earnings announcements of the S&P 100 constituents from two professional news providers, along with ten macroeconomic indicators. We also gather data from Google Trends about these firms’ assets as an index of retail investors’ attention. Thus, we create [...] Read more.
We retrieve news stories and earnings announcements of the S&P 100 constituents from two professional news providers, along with ten macroeconomic indicators. We also gather data from Google Trends about these firms’ assets as an index of retail investors’ attention. Thus, we create an extensive and innovative database that contains precise information with which to analyze the link between news and asset price dynamics. We detect the sentiment of news stories using a dictionary of sentiment-related words and negations and propose a set of more than five thousand information-based variables that provide natural proxies for the information used by heterogeneous market players. We first shed light on the impact of information measures on daily realized volatility and select them by penalized regression. Then, we perform a forecasting exercise and show that the model augmented with news-related variables provides superior forecasts. Full article
(This article belongs to the Special Issue Big Data in Economics and Finance)
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585 KiB  
Article
Bayesian Treatments for Panel Data Stochastic Frontier Models with Time Varying Heterogeneity
by Junrong Liu, Robin C. Sickles and E. G. Tsionas
Econometrics 2017, 5(3), 33; https://doi.org/10.3390/econometrics5030033 - 28 Jul 2017
Cited by 8 | Viewed by 7849
Abstract
This paper considers a linear panel data model with time varying heterogeneity. Bayesian inference techniques organized around Markov chain Monte Carlo (MCMC) are applied to implement new estimators that combine smoothness priors on unobserved heterogeneity and priors on the factor structure of unobserved [...] Read more.
This paper considers a linear panel data model with time varying heterogeneity. Bayesian inference techniques organized around Markov chain Monte Carlo (MCMC) are applied to implement new estimators that combine smoothness priors on unobserved heterogeneity and priors on the factor structure of unobserved effects. The latter have been addressed in a non-Bayesian framework by Bai (2009) and Kneip et al. (2012), among others. Monte Carlo experiments are used to examine the finite-sample performance of our estimators. An empirical study of efficiency trends in the largest banks operating in the U.S. from 1990 to 2009 illustrates our new estimators. The study concludes that scale economies in intermediation services have been largely exploited by these large U.S. banks. Full article
(This article belongs to the Special Issue Recent Developments in Panel Data Methods)
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162 KiB  
Editorial
Recent Developments in Copula Models
by Jean-David Fermanian
Econometrics 2017, 5(3), 34; https://doi.org/10.3390/econometrics5030034 - 24 Jul 2017
Cited by 11 | Viewed by 8928
Abstract
Copula models have become very popular and well studied among the scientific community.[...] Full article
(This article belongs to the Special Issue Recent Developments in Copula Models)
181 KiB  
Reply
On the Interpretation of Instrumental Variables in the Presence of Specification Errors: A Reply
by P.A.V.B. Swamy, Stephen G. Hall, George S. Tavlas and Peter Von zur Muehlen
Econometrics 2017, 5(3), 32; https://doi.org/10.3390/econometrics5030032 - 19 Jul 2017
Viewed by 5985
Abstract
We appreciate the effort and thoughtfulness of Raunig’s (2017) attempted critique of Swamy et al. (2015).[...] Full article
191 KiB  
Comment
On The Interpretation of Instrumental Variables in the Presence of Specification Errors: A Causal Comment
by Burkhard Raunig
Econometrics 2017, 5(3), 31; https://doi.org/10.3390/econometrics5030031 - 18 Jul 2017
Cited by 1 | Viewed by 6199
Abstract
Swamy et al. (2015) argue that valid instruments cannot exist when a structural model is misspecified. This note shows that this is not true in general. In simple examples valid instruments can exist and can help to estimate parameters of interest. Full article
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379 KiB  
Article
Using a Theory-Consistent CVAR Scenario to Test an Exchange Rate Model Based on Imperfect Knowledge
by Katarina Juselius
Econometrics 2017, 5(3), 30; https://doi.org/10.3390/econometrics5030030 - 7 Jul 2017
Cited by 11 | Viewed by 7045
Abstract
A theory-consistent CVAR scenario describes a set of testable regularieties one should expect to see in the data if the basic assumptions of the theoretical model are empirically valid. Using this method, the paper demonstrates that all basic assumptions about the shock structure [...] Read more.
A theory-consistent CVAR scenario describes a set of testable regularieties one should expect to see in the data if the basic assumptions of the theoretical model are empirically valid. Using this method, the paper demonstrates that all basic assumptions about the shock structure and steady-state behavior of an an imperfect knowledge based model for exchange rate determination can be formulated as testable hypotheses on common stochastic trends and cointegration. This model obtaines remarkable support for almost every testable hypothesis and is able to adequately account for the long persistent swings in the real exchange rate. Full article
(This article belongs to the Special Issue Recent Developments in Cointegration)
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1418 KiB  
Article
Modeling Real Exchange Rate Persistence in Chile
by Leonardo Salazar
Econometrics 2017, 5(3), 29; https://doi.org/10.3390/econometrics5030029 - 7 Jul 2017
Cited by 4 | Viewed by 8906
Abstract
The long and persistent swings in the real exchange rate have for a long time puzzled economists. Recent models built on imperfect knowledge economics seem to provide a theoretical explanation for this persistence. Empirical results, based on a cointegrated vector autoregressive (CVAR) model, [...] Read more.
The long and persistent swings in the real exchange rate have for a long time puzzled economists. Recent models built on imperfect knowledge economics seem to provide a theoretical explanation for this persistence. Empirical results, based on a cointegrated vector autoregressive (CVAR) model, provide evidence of error-increasing behavior in prices and interest rates, which is consistent with the persistence observed in the data. The movements in the real exchange rate are compensated by movements in the interest rate spread, which restores the equilibrium in the product market when the real exchange rate moves away from its long-run benchmark value. Fluctuations in the copper price also explain the deviations of the real exchange rate from its long-run equilibrium value. Full article
(This article belongs to the Special Issue Recent Developments in Cointegration)
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251 KiB  
Article
Likelihood Ratio Tests of Restrictions on Common Trends Loading Matrices in I(2) VAR Systems
by H. Peter Boswijk and Paolo Paruolo
Econometrics 2017, 5(3), 28; https://doi.org/10.3390/econometrics5030028 - 29 Jun 2017
Cited by 6 | Viewed by 7307
Abstract
Likelihood ratio tests of over-identifying restrictions on the common trends loading matrices in I(2) VAR systems are discussed. It is shown how hypotheses on the common trends loading matrices can be translated into hypotheses on the cointegration parameters. Algorithms for (constrained) maximum likelihood [...] Read more.
Likelihood ratio tests of over-identifying restrictions on the common trends loading matrices in I(2) VAR systems are discussed. It is shown how hypotheses on the common trends loading matrices can be translated into hypotheses on the cointegration parameters. Algorithms for (constrained) maximum likelihood estimation are presented, and asymptotic properties sketched. The techniques are illustrated using the analysis of the PPP and UIP between Switzerland and the US. Full article
(This article belongs to the Special Issue Recent Developments in Cointegration)
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