Showing papers in "Studies in Nonlinear Dynamics and Econometrics in 2020"
TL;DR: In this article, a nonlinear quadratic model (NLQ) is proposed to evaluate the response of central banks to the Great Recession in moving from conventional to unconventional monetary policy.
Abstract: After the financial market meltdown and the Great Recession of the years 2007–9, the financial market-macro link has become an important issue in monetary policy modeling. We develop a dynamic model that contains a nonlinear Phillips curve, a dynamic output equation, and a nonlinear credit flow equation – capturing the importance of credit cycles, risk premia, and credit spreads. Our Nonlinear Quadratic Model (NLQ) model has three dynamic state equations and a quadratic objective function. It can be used to evaluate the response of central banks to the Great Recession in moving from conventional to unconventional monetary policy. We solve the model with a new numerical procedure using estimated parameters for the euro area. We conduct simulations to explore the (de)stabilizing effects of the nonlinearities in the model. We demonstrate that credit flows, risk premia, and credit spreads play an important role as an amplification mechanism and in affecting the transmission of monetary policy. We thereby highlight the importance of the natural rate of interest as an anchor for a central bank target and the weight it places on the credit flows for the effectiveness of unconventional monetary policy. Our model is similar in structure compared to larger scale macro-econometric models which many central banks employ.
19 citations
TL;DR: The authors examined the relationship between income inequality and economic growth in a broad panel of countries over the period from 1965 to 2014 and found a threshold effect of inequality on economic growth, and this threshold is higher for developing economies than for developed economies.
Abstract: This paper examines the relationship between income inequality and economic growth in a broad panel of countries over the period from 1965 to 2014. We utilize an improved dataset for inequality with reduced measurement errors, which fosters cross-country comparability. In addition, we investigate whether accounting for heterogeneity across countries alters the estimated effect of inequality on growth, and whether the inequality-growth nexus varies with the level of income inequality. Our estimates show that after accounting for heterogeneity, the nonlinear growth effect of income inequality remains statistically and economically significant. We find a threshold effect of inequality on economic growth, and this threshold is higher for developing economies than for developed economies.
19 citations
TL;DR: This paper developed a flexible endogenously switching model with three latent regimes, which create separate processes for interest rate hikes and cuts and overlap at a no-change outcome, generating three different types of status quo decisions.
Abstract: The decisions to reduce, leave unchanged, or increase a choice variable (such as policy interest rates) are often characterized by abundant status quo outcomes that can be generated by different processes. The decreases and increases may also be driven by distinct decision-making paths. Neither conventional nor zero-inflated models for ordinal responses adequately address these issues. This paper develops a flexible endogenously switching model with three latent regimes, which create separate processes for interest rate hikes and cuts and overlap at a no-change outcome, generating three different types of status quo decisions. The model is not only favored by statistical tests but also produces economically more meaningful inference with respect to the existing models, which deliver biased estimates in the simulations.
11 citations
TL;DR: In this article, the authors investigated how the Federal Reserve and other monetary policy makers reacted in the aftermath of the financial crisis by making use of both conditional and unconditional interest rate quantiles regressions and data on shadow short rate of interest.
Abstract: This paper investigates how the Federal Reserve (Fed) and the Bank of England, Bank of Japan and the European Central Bank reacted in the aftermath of the financial crisis by making use of both conditional and unconditional interest rate quantiles regressions and data on shadow short rate of interest and a measure of uncertainty. Firstly, the unconditional quantile regression offers some support for increased reaction by the Fed as the ZLB is approached. Secondly, the decreased reaction of the Fed and other monetary policy makers towards uncertainty particularly at lower conditional quantiles of interest rates lends support to expansionary mechanism in place during this time. Hence uncertainty is key to policy reaction, and more so during episodes of crisis.
10 citations
TL;DR: This work comprehensively investigates AIC and BIC in a count time series context, and considers diverse scenarios of model selection, like the identification of serial (in)dependence, overdispersion, zero inflation or a trend, the order selection within a given model family as well as the model selection also across model families.
Abstract: Model fitting for count time series is of great relevance for many economic applications. Here, we focus on the step of model selection, where information criteria like AIC and BIC are commonly used in practice. Previous studies about their model selection abilities concentrated on real-valued time series, but here, we comprehensively investigate AIC and BIC in a count time series context. In our simulations, we consider diverse scenarios of model selection, like the identification of serial (in)dependence, overdispersion, zero inflation or a trend, the order selection within a given model family as well as the model selection also across model families. We apply our findings to economic count time series about monthly numbers of strikes in the US, and about monthly numbers of corporate insolvencies in the districts of Rhineland-Palatinate.
9 citations
TL;DR: In this paper, the authors developed new threshold cointegration tests with SETAR and MTAR adjustment allowing for the presence of structural breaks in the equilibrium equation and proposed a simple procedure to simultaneously estimate the previously unknown breakpoint and test the null hypothesis of no co-integration.
Abstract: In this paper, we develop new threshold cointegration tests with SETAR and MTAR adjustment allowing for the presence of structural breaks in the equilibrium equation. We propose a simple procedure to simultaneously estimate the previously unknown breakpoint and test the null hypothesis of no cointegration. Thereby, we extend the well-known residual-based cointegration test with regime shift introduced by Gregory and Hansen (1996a) to include forms of nonlinear adjustment. We derive the asymptotic distribution of the test statistics and demonstrate the finite-sample performance of the tests in a series of Monte Carlo experiments. We find a substantial decrease of power of the conventional threshold cointegration tests caused by a shift in the slope coefficient of the equilibrium equation. The proposed tests perform superior in these situations. An application to the ‘rockets and feathers’ hypothesis of price adjustment in the US gasoline market provides empirical support for this methodology.
9 citations
TL;DR: In this paper, the authors build a small open economy RBC model with financial frictions to analyze expansionary fiscal consolidations in emerging market economies and calibrate the model to India, which they view as a proto-typical EME.
Abstract: We build a small open economy RBC model with financial frictions to analyze expansionary fiscal consolidations in emerging market economies (EMEs). We calibrate the model to India, which we view as a proto-typical EME. When factor income tax rates are low, a contractionary fiscal shock has an expansionary effect on output. The economy's debt/GDP ratio falls, and tax revenues rise. When factor income tax rates are high, a contractionary fiscal shock has an expansionary effect on output if government spending is valued sufficiently highly relative to private consumption by households in utility. We identify the mechanisms behind these results, and their implications for actual economies undertaking fiscal reforms.
8 citations
TL;DR: This paper shows that the trimmed Whittle estimation of the SVAR is superior to filtering (or differencing) undesired, low-frequency fluctuations that may arise in macroeconomic data and finds the response of hours positive and similar using both long and short-run identification restrictions, thus providing a solution to a wide debate in the business cycle literature.
Abstract: This paper shows that the trimmed Whittle estimation of the SVAR is superior to filtering (or differencing) undesired, low-frequency fluctuations that may arise in macroeconomic data. Pre-filtering destroys the low-frequency range of the spectrum, thus biasing the estimated parameters and the responses of the variables to shocks. The proposed method, by contrast, accounts for the undesired fluctuations while overcoming these drawbacks. Furthermore, the method remains reliable even when the observed low-frequency variability has been incorrectly considered as external to the SVAR. An empirical application that examines the effect of technology shocks on hours worked is provided to illustrate the results. We find the response of hours positive and similar using both long and short-run identification restrictions, thus providing a solution to a wide debate in the business cycle literature.
8 citations
TL;DR: The authors proposed a model selection criterion to detect purely causal from purely noncausal models in the framework of quantile autoregressions (QAR), and presented asymptotics for the i.i.d. case with regularly varying distributed innovations in QAR.
Abstract: Abstract We propose a model selection criterion to detect purely causal from purely noncausal models in the framework of quantile autoregressions (QAR). We also present asymptotics for the i.i.d. case with regularly varying distributed innovations in QAR. This new modelling perspective is appealing for investigating the presence of bubbles in economic and financial time series, and is an alternative to approximate maximum likelihood methods. We illustrate our analysis using hyperinflation episodes of Latin American countries.
6 citations
TL;DR: The relationship between the first two moments of the inflation stochastic process and its uncertainty, and between inflation uncertainty and real output growth have been the subject of much research, with some studies justifying this causality and some reaching the opposite conclusion as mentioned in this paper.
Abstract: Since the publication of Friedman’s (1977) Nobel lecture, the relationships between the mean function of the inflation stochastic process and its uncertainty, and between inflation uncertainty (IU) and real output growth have been the subject of much research, with some studies justifying this causality and some reaching the opposite conclusion or finding an inverse correlation between mean inflation and inflation volatility with causation in either direction. We conduct a systematic econometric study of the relationships between the first two moments of the inflation stochastic process and between IU and output growth using state-of-the-art approaches and propose a time-varying inflation uncertainty measure based on stochastic volatility to consider unpredictable shocks. Further, we extend the literature by providing a new econometric specification of this relationship using two semi-parametric approaches: the frequency evolutionary co-spectral approach and continuous wavelet methodology. We theoretically justify their use through an extension of Ballʼs (1992) model. These frequency approaches have two advantages: they provide the analyses for different frequency horizons and do not impose restriction on the data. While the literature focused on the US data, our study explores these relationships for five major developed and emerging countries/regions (the US, the UK, the euro area, South Africa, and China) over the past five decades to investigate the robustness of our inferences and sources of inconsistencies among prior studies. This selection of countries permits investigation of the inflation versus inflation uncertainty relationship under different hypotheses, including explicit versus implicit inflation targets, conventional versus unconventional monetary policy, independent versus dependent central banks, and calm versus crisis periods. Our findings show a significant relationship between inflation and inflation uncertainty, which varies over time and frequency, and offer an improved comprehension of this ambiguous relationship. The relationship is positive in the short and medium terms during stable periods, confirming the Friedman–Ball theory, and negative during crisis periods. Additionally, our analysis identifies the phases of leading and lagging inflation uncertainty. Our general approach nests within it the earlier approaches, permitting explanation of the prior appearances of ambiguity in the relationship and identifies the conditions associated with the various outcomes.
6 citations
TL;DR: In this article, the authors examine whether threshold models allow to better understand the dynamic relationship between spot and futures prices for crude oil and natural gas, and show that the futures curve delivers relatively accurate forecasts for energy commodity prices.
Abstract: This study examines whether threshold models allow to better understand the dynamic relationship between spot and futures prices for crude oil and natural gas. Our findings are threefold. First, we show that the futures curve delivers relatively accurate forecasts for energy commodity prices. Second, we provide evidence that the relationship between spot and futures prices is regime dependent but accounting for this property does not improve the quality of out-of-sample forecasts. Third, we demonstrate that using information on the dynamics of financial variables (exchange rates, stock and uncertainty indices, interest rates or industrial and precious metal prices) does not contribute to the quality of futures-based forecasts. This suggests that the predictive content of these variables is already contained in futures prices.
TL;DR: In this article, the authors analyzed the relative contribution of the main sources hysteresis (non-convex adjustment costs, uncertainty, and the flexibility of working time arrangements) to the width of the employment band of inaction.
Abstract: It is widely recognized that aggregate employment dynamics is characterized by hysteresis. In the presence of hysteresis the long run level of employment instead of being unique, and history-independent depends on the adjustment path that is taken, which includes the monetary and fiscal measures. It is thus important to study the presence of hysteresis in the macrodynamics of employment to understand whether the recession followed 2007’s financial crisis will have permanent effects, and prospectively to conduct fiscal and monetary policies. The main contribution of this paper is to analyse the relative contribution of the main sources hysteresis (non-convex adjustment costs, uncertainty, and the flexibility of working time arrangements) to the width of the employment band of inaction. For that purpose, a switching employment equation was estimated from a computational implementation of the linear play model of hysteresis. From our results we found significant hysteresis effects in the aggregate employment dynamics caused by the presence of non-convex adjustment costs as uncertainty. We also found that the flexibility firms may have to adjust labour input by varying the number of hours of work per employee helps to mitigate the effect of uncertainty upon the band of inaction.
TL;DR: In this article, the authors studied capital mobility in commodity-exporting economies and showed that constraints on capital mobility depend upon the level of savings compared to the amount of investments, and the results of threshold regressions speak in favour of their hypothesis.
Abstract: This paper studies capital mobility in commodity-exporting economies. These countries substantially depend on world commodity prices and have rather high level of savings on average, so it is naturally to assume that they demonstrate special patterns of capital mobility. Our main hypothesis is that constraints on capital mobility in this group of countries depend upon the level of savings compared to the level of investments. In particular, with high savings that follow higher world demand and higher commodity prices, financing country’s desirable level of investment is not a big deal. At the same time, in the case of negative terms of trade shocks these commodity-exporting economies may experience lower savings and higher country risk-premium. This may lead to restrictions on borrowing capital in the global market, resulting in a high correlation between investments and savings. The results of threshold regressions speak in favour of our hypothesis.
TL;DR: In this paper, the authors consider the tempered stable distribution, which has the attractive stability under aggregation property missed in other popular alternatives like Student's t-distribution and General Error Distribution (GED).
Abstract: Markov regime-switching (MRS) autoregressive model is a widely used approach to model the economic and financial data with potential structural breaks. The innovation series of such MRS-type models are usually assumed to follow a Normal distribution, which cannot accommodate fat-tailed properties commonly present in empirical data. Many theoretical studies suggest that this issue can lead to inconsistent estimates. In this paper, we consider the tempered stable distribution, which has the attractive stability under aggregation property missed in other popular alternatives like Student’s t-distribution and General Error Distribution (GED). Through systematically designed simulation studies with the MRS autoregressive models, our results demonstrate that the model with tempered stable distribution uniformly outperforms those with Student’s t-distribution and GED. Our empirical study on the implied volatility of the S&P 500 options (VIX) also leads to the same conclusions. Therefore, we argue that the tempered stable distribution could be widely used for modelling economic and financial data in general contexts with an MRS-type specification.
TL;DR: This paper applied semi-parametric long-memory estimators to the historical monthly series of U.S. inflation, and analyzed their empirical forecasting performance over 1, 6, 12, and 24 months using in-sample and out-of-sample procedures.
Abstract: We report the results of applying semi-parametric long-memory estimators to the historical monthly series of U.S. inflation, and analyze their empirical forecasting performance over 1, 6, 12, and 24 months using in-sample and out-of-sample procedures. For comparison purposes, we also apply two parametric estimators, the naive AR(1) and the ARFIMA(1, d, 1) models. We evaluate the forecasting accuracy of the competing methods using the mean square error (MSE) and mean absolute error (MAE) criteria. We evaluate the statistical significance of forecasting accuracy of competing forecasts using the Diebold-Mariano (1995) test. Overall, our results preforms slightly better than the Lahiani and Scaillet (2009) threshold estimator based on the MSE and MAE criteria. This improvement in performance does not prove significant enough to cause a rejection of the null hypothesis of equality of predictive accuracy. The Boubaker (2017) estimator, on the other hand, significantly outperforms the time-invariant estimators over longer horizons. Over shorter horizons, however, the Boubaker (2017) estimator does not exhibit a significantly better predictive performance than the time-invariant long-memory estimators with the exception of the naive AR(1) model.
TL;DR: In this paper, the role of different sources of uncertainty on agricultural futures markets momentum trading and volatility is discussed. And the results point in favor of a time-dependent uncertainty effect on expectations of daily momentum traders in agricultural futures market.
Abstract: This paper sheds light on the role of different sources of uncertainty on agricultural futures markets momentum trading and volatility. Momentum trading is proxied by two technical analysis indicators – the moving average convergence divergence and the relative strength index – while we also consider two different concepts of uncertainty – the CBOE volatility index of the S&P500 and daily news about the stance of economic policy in the US. To capture different effects on the transmission mechanism of uncertainty shocks, we implement a Bayesian VAR approach, which accounts for time-variation in the coefficients and the variance covariance structure of the model’s innovations. The results point in favor of a time-dependent uncertainty effect on expectations of daily momentum traders in agricultural futures markets. The corresponding trades in these periods push futures prices upwards and downwards and result in an increased volatility. Direct effects of both uncertainty sources on the volatility of agricultural futures markets confirm this view.
TL;DR: The authors examines how different uncertainty measures affect the unemployment level, inflow, and outflow in the U.S. across all states of the business cycle across all types of uncertainty measures.
Abstract: This paper examines how different uncertainty measures affect the unemployment level, inflow, and outflow in the U.S. across all states of the business cycle. We employ linear and nonlinear causali ...
TL;DR: In this article, the authors reexamine the effects of the variability of money growth on output, raised by Mascaro and Meltzer (1983), in the era of the increasing use of alternative payments, such as credit cards.
Abstract: We reexamine the effects of the variability of money growth on output, raised by Mascaro and Meltzer (1983), in the era of the increasing use of alternative payments, such as credit cards. Using a bivariate VARMA, GARCH-in-Mean, asymmetric BEKK model, we find that the volatility of the credit card-augmented Divisia M4 monetary aggregate has a statistically significant negative impact on output from 2006:7 to 2019:3. However, there is no effect of the traditional Divisia M4 growth volatility on real economic activity. We conclude that the balance sheet targeting monetary policies after the financial crisis in 2007–2009 should pay more attention on the broad credit card-augmented Divisia M4 aggregate to address economic and financial stability.
TL;DR: Two Lagrange multiplier tests are applied to several stock index data, and find that the stochastic unit root model is rejected, whereas the random coefficient autoregressive model is not, indicating that it is important to check the validity of the stoChastic unitRoot model prior to applying it to financial time series data.
Abstract: The random coefficient autoregressive model has been utilized for modeling financial time series because it possesses features that are often observed in financial time series. When the mean of the random autoregressive coefficient is one, it is called the stochastic unit root model. This paper proposes two Lagrange multiplier tests for the null hypothesis of random coefficient autoregressive and stochastic unit root models against a more general model. We apply our Lagrange multiplier tests to several stock index data, and find that the stochastic unit root model is rejected, whereas the random coefficient autoregressive model is not. This result indicates that it is important to check the validity of the stochastic unit root model prior to applying it to financial time series data, which may be better modeled by the random coefficient autoregressive model with the mean being not equal to one.
TL;DR: In this paper, the effect of factor substitutability in the neoclassical growth model with variable elasticity of substitution was studied and the results showed that the economy with the higher initial elasticity will feature a higher steady-state income and capital per capita irrespective of whether the production technology is VES, Sobelow or Sigmoidal.
Abstract: Abstract We study the effect of factor substitutability in the neoclassical growth model with variable elasticity of substitution. We consider two otherwise identical economies differing uniquely in their initial factor substitutability with Variable-Elasticity-of-Substitution (VES), Sobelow or Sigmoidal technologies. If the initial capital per capita is below its steady-state value, the economy with the higher initial elasticity of substitution will feature a higher steady-state income and capital per capita irrespective of whether the production technology is VES, Sobelow or Sigmoidal. Numerical results are provided to compare the effect of a higher elasticity of substitution in the Constant-Elasticity-of-Substitution (CES) model versus the models with variable-elasticity-of-substitution technology.
TL;DR: In this paper, the effect of trade openness on inflation is investigated by applying an endogenous switching regression model to a sample of 64 countries, and the effect is shown to be negligible in the IT economies.
Abstract:
By applying an endogenous switching regression model to a sample of 64 countries, this article explores whether the effect of trade openness on inflation is influenced by the adoption of inflation targeting (IT). The outcome indicates that, while there exists a significant and negative impact of trade openness on inflation in the non-IT countries with flexible exchange rate system, the effect is negligible in the IT economies. In addition, the above differential inflation effect of trade openness across IT and non-IT regimes is only present in the developing subsample with flexible exchange rate system, but not the developed counterpart. Moreover, apart from trade openness, financial openness reinforces inflation in those developing countries not adopting IT, whereas no such significant effect is found in developing countries adopting IT. Instead of inflation, further results show that trade openness lowers inflation volatility both in developing and developed countries not adopting IT, yet the impact is smaller in developed country group. However, no such statistically significant link is found in developing and developed countries that adopt IT.
TL;DR: In this paper, a spectral variance decomposition method based on the Maximal Overlap Discrete Wavelet Transform (MAXOWT) is proposed for unit root test for a system of equations.
Abstract: In this paper, we suggest a unit root test for a system of equations using a spectral variance decomposition method based on the Maximal Overlap Discrete Wavelet Transform. We obtain the limiting d ...
TL;DR: In this paper, a parametric two-step procedure for assessing the stability of cross-sectional dependency measures in the presence of potential breaks in the marginal distributions is proposed based on the sup-LR tests in which restricted and unrestricted likelihood functions are compared with each other.
Abstract: This paper proposes parametric two-step procedures for assessing the stability of cross-sectional dependency measures in the presence of potential breaks in the marginal distributions. The procedures are based on formerly proposed sup-LR tests in which restricted and unrestricted likelihood functions are compared with each other. First, we show theoretically that standard asymptotics do not hold in this situation. We propose a suitable bootstrap scheme and derive test statistics in different commonly used settings. The properties of the test statistics and precision of the associated changepoint estimator are analyzed and compared with existing non-parametric methods in various Monte Carlo simulations. These studies reveal advantages in test power for higher-dimensional data and an almost uniform superiority of the sup-LR test in terms of precision of the change-point estimator. We then apply this method to equity returns of European banks during the financial crisis of 2008.
TL;DR: In this article, the authors analyze Australian electricity price returns and find that they exhibit multifractal structures and specify volatility dynamics as a Markov-switching multifractal (MSM) process.
Abstract: We analyze Australian electricity price returns and find that they exhibit multifractal structures. Consequently, we let the return mean equation follow a long memory smooth transition autoregressive (STAR) process and specify volatility dynamics as a Markov-switching multifractal (MSM) process. We compare the out-of-sample volatility forecasting performance of the STAR-MSM model with that of other STAR mean processes, combined with various conventional GARCH-type volatility equations (for example, STAR-GARCH(1,1)). We find that the STAR-MSM model competes with conventional STAR-GARCH specifications with respect to volatility forecasting, but does not (systematically) outperform them.
TL;DR: The proposed approach is applied to the real effective exchange rates of 10 selected countries of the organization of economic co-operation and development (OECD) and the paper observe some interesting findings which demonstrate the usefulness of the model.
Abstract:
This paper proposes a Bayesian unit root test for testing a non-stationary random walk of nonlinear exponential smooth transition autoregressive process. It investigates the performance of Bayes estimators and Bayesian unit root test due to its superiority in estimation and power properties than reported in existing literature. The proposed approach is applied to the real effective exchange rates of 10 selected countries of the organization of economic co-operation and development (OECD) and the paper observe some interesting findings which demonstrate the usefulness of the model.
TL;DR: In this paper, the authors examined the presence of a long-run equilibrium in the monthly Indian exchange rate (Rs/USD) using a current account monetary model (or flexible price monetary model) while accounting for different nonlinearities over the period January 1993 to January 2014 (pre-inflation targeting period).
Abstract: Abstract The Indian exchange rate system has evolved from a pegged system to the current managed float. The study examines the presence of a long-run equilibrium in the monthly Indian exchange rate (Rs/USD) using a current account monetary model (or flexible price monetary model) while accounting for different nonlinearities over the period January 1993 to January 2014 (pre-inflation targeting period). The nonlinear adjustment to disequilibria is modelled using a nonlinear error correction model (NLECM). The nonlinear current account monetarism (CAM) model includes nonlinear transformations of long-run dynamics in the ECM to account for different nonlinearities: multiple equilibria (cubic polynomial function), nonlinear mean reversion (rational polynomial function), and smooth and gradual regime switches (exponential smooth transition autoregressive (ESTAR) function). The NLECM-ESTAR model outperforms other alternatives based on model and forecast performance measures, implying the existence of nonlinear mean reversion and smooth transition across different periods of overvaluation and undervaluation of the exchange rate. This implies the presence of asymmetric adjustment to the movements from the long-run equilibrium, but the nature of such transitions is smooth and not abrupt. The paper also establishes the uniqueness of the long-run equilibrium. A comparison to the sticky price monetary model could not be made due to stationary exchange rate disequilibrium.
TL;DR: In this paper, the authors examined price discrimination's effect on equilibrium points in Cournot duopoly games by assuming that each firm charges K prices and adjusts its strategies based on bounded rationality.
Abstract:
In a homogenous product market, customers’ different demand elasticities may lead to different prices. This study examined price discrimination’s effect on equilibrium points in Cournot duopoly games by assuming that each firm charges K prices and adjusts its strategies based on bounded rationality. In consideration of price discrimination, two discrete dynamic game systems with 2K variables were introduced for players with homogenous or heterogenous expectations. The stability of the Nash equilibrium point was found to be independent of price discrimination. Given price discrimination, the stability of boundary stationary points for the system with homogenous players is different from that for the system with heterogenous players. Numerical simulations verified the critical point for the system with homogenous players from being stable to its bifurcation.
TL;DR: A new volatility process in which parameters vary over time according to an artificial neural network (ANN) is proposed, which proves the process’s stationarity as well as the global identification of the parameters.
Abstract: Abstract We propose a new volatility process in which parameters vary over time according to an artificial neural network (ANN). We prove the process’s stationarity as well as the global identification of the parameters. Since ANNs require economic series as input variables, we develop a shrinkage approach to select which explanatory variables are relevant to forecast volatility. Empirically, the proposed model favorably compares with other flexible processes in terms of in-sample fit on six financial returns. It also delivers accurate short-term volatility predictions in terms of root mean squared errors and the predictive likelihood criterion. For long-term forecasts, it can be competitive with the Markov-switching generalized autoregressive conditional heteroskedastic (MS-GARCH) model if appropriate exogenous variables are used. Since our new type of time-varying parameter (TVP) process is based on a universal approximator, the approach can readily revisit and potentially improve many standard TVP applications.
TL;DR: In this article, the authors quantitatively analyse the interest rate-setting behavior of German commercial banks during the period 2003-2014, using nonlinear transition cointegration approaches, and reveal principles applied by commercial banks in (re-)gaining margins in the aftermath of the financial crisis.
Abstract: We quantitatively analyse the interest rate-setting behaviour of German commercial banks during the period 2003–2014, using nonlinear (smooth transition) cointegration approaches. Our empirical results reveal principles applied by commercial banks in (re-)gaining margins in the aftermath of the financial crisis. We substantiate our findings using economic arguments from a bank management perspective. As our study contributes to a better understanding of the pass-through mechanism from market to commercial banks’ customer interest rates, the results will also be relevant to meaningful assessments of the effectiveness of monetary policy measures.
TL;DR: A new identification scheme and efficient Bayesian methods for estimating the resulting SVARMA models are developed and it is found that the identification scheme is preferred by the data, particularly as the size of the system is increased and that noise shocks generally play a negligible role.
Abstract: This paper is about identifying structural shocks in noisy-news models using structural vector autoregressive moving average (SVARMA) models. We develop a new identification scheme and efficient Bayesian methods for estimating the resulting SVARMA. We discuss how our identification scheme differs from the one which is used in existing theoretical and empirical models. Our main contributions lie in the development of methods for choosing between identification schemes. We estimate specifications with up to 20 variables using US macroeconomic data. We find that our identification scheme is preferred by the data, particularly as the size of the system is increased and that noise shocks generally play a negligible role. However, small models may overstate the importance of noise shocks.