G. S. Maddala

Bio: G. S. Maddala is an academic researcher. The author has contributed to research in topics: Applied economics & Econometric model. The author has an hindex of 1, co-authored 1 publications receiving 3 citations.

Econometrics and Economic Theory in the 20th Century: Econometric Issues Related to Errors in Variables in Financial Models

Abstract: Introduction Ragnar Frisch worked with errors-in-variables (EIV) models. Later researchers in econometrics moved the field in the direction of errors in equations. That situation was partially rectified in the early 1970s by the contributions of Goldberger (1972) and Griliches (1974) and later surveys by Griliches (1985) and Chamberlain and Goldberger (1990), but EIV models still occupy a back seat in econometrics. When I was revising my Introduction to Econometrics (Maddala, 1992), reviewers unanimously suggested that I drop the chapter on “Errors in Variables” (it is “never used”) and add more interesting and useful topics like unit roots and cointegration. Empirical researchers, however, have to face the problems of errors in variables all the time. This essay discusses that problem in the context of financial models in which proxies are used for unobservables almost all the time. In the following sections we shall discuss this problem with reference to the following topics: tests of the capital-asset pricing model tests of the arbitrage pricing theory, using observed macroeconomic variables as proxies for unobserved factors measuring market responses to corporate pronouncements (dividends, stock splits, etc.), also known as testing signaling models portfolio performance measures

The Cross-Sectional Determinants of Returns: Evidence from Emerging Markets' Stocks

Abstract: This article looks at the cross section of stock returns for the particular case of emerging markets. For each of the 21 emerging markets, I investigate the role of a set of a priori specified factors in the cross section of returns and subsequently assess whether the important factors are common. I use data on emerging markets' individual stocks from the Emerging Markets Data Base (IFC). My results indicate that the most important pricing factors are common to the emerging markets in my sample and that these factors are similar to those identified for mature markets. Among the top six factors are technical factors and price level attributes. The pay-offs to these factors are not correlated, suggesting that even if investors across markets elect similar factors to price assets, premia are local.

A comparative computational and behavioral analysis of real estate performance: Anchoring on the post-financial crisis

Abstract: Purpose The purpose of this paper is to investigate changes in the commercial real estate market dynamics as a function of and conditional to the shifts in market state-space environment that can influence agent responses. Design/methodology/approach The analytical design uses a comparative computational experiment to address the performance of property assets in the current market based on comparison with prior structural patterns. The latent variables developed across market sectors are used to test agent behavior contingent on the perspectives of capital asset pricing conditionals (CAPM) and a behavioral momentum/herd construct. The state-space momentum analysis can assist the comparative analysis of current levels and shifts in property asset performance given the issues that have arisen with the financial crisis of 2007-2009. Findings An analytic approach is employed framed by a situation-dependent model. This frame considers risk profiles characterizing the perspectives and preferences guiding a delineated market state. This perspective is concerned with the possibility of shifts in market momentum and representativeness conditioning investor expectations. It is observed that the current market (post-crisis) has changed significantly from the prior operations (despite the diversity observed in prior market states). The dynamics of initial findings required an additional test anchored to the performance of the general capital market and the real economy across time. This context supports the use of a modified CAPM model allowing the consideration of opportunity cost in a space-time dynamic anchored with the consideration of equity, debt, riskless asset and liquidity options as they varied for the representative agents operating per market state. Research limitations/implications This paper integrates neoclassical and behavioral economic constructs. Combines asset pricing with prospect theory and allows the calculation of endogenous time-preferences, risk attitudes and formulation and testing of hyperbolic discounting functions. Practical implications The research shows that market structure and agent behavior since the financial crisis has changed from the investment and valuation perspectives operating as observed and measured from 1970 up to 2007. In contradiction to the long-term findings of Reinhart and Rogoff (2008), but in compliance with common perspectives and decision heuristics often employed by investors, this time things have changed! Discounting and expected rates of return are dynamic and are hyperbolic and not constant. Returns and investment for property assets are situational (market state-space specific) and offer a distinct asset class, not appropriately estimated by many of the traditional financial models. Social implications Assist in supporting insights to measure in errors and equations that result in inefficient resource allocation and beta discounting that supports the financial crisis created by assets subject to long-term decision needs (delta function). Originality/value The paper offers a combination and comparison of neoclassic asset pricing using a modified CAPM (two-pass) approach within the structural frame of Kahneman and Tversky’s (1979) prospect theory. This technique allows the consideration of the effects of present bias, beta-delta functions and the operation of the Allais Paradox in market states that are characterized by gains and losses and thus risk aversion and risk seeking behavior. This ability for differentiation allows for the development of endogenous time-preferences and hyperbolic discounting factors characteristic of commercial property investment.

Parameter Heterogeneity in the Market-Accounting Relation

Abstract: In this paper firm parameter heterogeneity in cross section regression analysis in capital market research (CMR) is investigated. Using panel data for 30 large US firms over the period 1955 to 2004, a well-specified common form of dynamic model for each firm is identified. Average parameter estimates from these models are compared to average parameter estimates from 50 annual cross section models having the same functional form. The dynamic parameters are mostly stable over time but variation in individual firm parameters is apparent. Analysis shows that even well-specified annual cross section models using large samples of data cannot guarantee valid and reliable estimates of the parameters of interest. Firm-level dynamic analysis is necessary to avoid this problem. We show how a fixed effects panel analysis of the sample data can be used to approximate the average data generating process of the firms in the sample. Although the impact of accounting variables is slight, compared to the autoregressive component in market value, it is systematic. There is weak evidence of cointegration between market and accounting data in most firms in the sample. Consequently, it is possible to construct the cross section analogue of the dynamic error correction model. Book value of net assets is used to illustrate the role of accounting variables. Other variables could be used, but single variable, multiplicative noise models perform best when judged by joint explanatory power and forecast ability criteria.