Showing papers on "Cointegration published in 2009"

Maximum likelihood estimation and inference on cointegration — with applications to the demand for money

Abstract: The estimation and testing of long-run relations in economic modeling are addressed. Starting with a vector autoregressive (VAR) model, the hypothesis of cointegration is formulated as the hypothesis of reduced rank of the long-run impact matrix. This is given in a simple parametric form that allows the application of the method of maximum likelihood and likelihood ratio tests. In this way, one can derive estimates and test statistics for the hypothesis of a given number of cointegration vectors, as well as estimates and tests for linear hypotheses about the cointegration vectors and their weights. The asymptotic inferences concerning the number of cointegrating vectors involve nonstandard distributions. Inference concerning linear restrictions on the cointegration vectors and their weights can be performed using the usual chi squared methods. In the case of linear restrictions on beta, a Wald test procedure is suggested. The proposed methods are illustrated by money demand data from the Danish and Finnish economies.

PRACTITIONERS CORNER: Tests for Cointegration in Models with Regime and Trend Shifts

Abstract: Recently A. W. Gregory and B. E. Hansen (1996) proposed a number of residual-based tests for cointegration models with the possibility of a structural break. They considered three models: level shift, level shift with trend, and regime shift (both level shift and slope coefficients can change). The authors introduce a more general model that permits a trend shift as well as a regime shift and they provide the critical values appropriate for testing this hypothesis. Copyright 1996 by Blackwell Publishing Ltd

Handbook of Financial Time Series

Abstract: Recent Developments in GARCH Modeling- An Introduction to Univariate GARCH Models- Stationarity, Mixing, Distributional Properties and Moments of GARCH(p, q)#x2013 Processes- ARCH(#x221E ) Models and Long Memory Properties- A Tour in the Asymptotic Theory of GARCH Estimation- Practical Issues in the Analysis of Univariate GARCH Models- Semiparametric and Nonparametric ARCH Modeling- Varying Coefficient GARCH Models- Extreme Value Theory for GARCH Processes- Multivariate GARCH Models- Recent Developments in Stochastic Volatility Modeling- Stochastic Volatility: Origins and Overview- Probabilistic Properties of Stochastic Volatility Models- Moment#x2013 Based Estimation of Stochastic Volatility Models- Parameter Estimation and Practical Aspects of Modeling Stochastic Volatility- Stochastic Volatility Models with Long Memory- Extremes of Stochastic Volatility Models- Multivariate Stochastic Volatility- Topics in Continuous Time Processes- An Overview of Asset-Price Models- Ornstein-Uhlenbeck Processes and Extensions- Jump-Type Levy Processes- Levy-Driven Continuous-Time ARMA Processes- Continuous Time Approximations to GARCH and Stochastic Volatility Models- Maximum Likelihood and Gaussian Estimation of Continuous Time Models in Finance- Parametric Inference for Discretely Sampled Stochastic Differential Equations- Realized Volatility- Estimating Volatility in the Presence of Market Microstructure Noise: A Review of the Theory and Practical Considerations- Option Pricing- An Overview of Interest Rate Theory- Extremes of Continuous-Time Processes- Topics in Cointegration and Unit Roots- Cointegration: Overview and Development- Time Series with Roots on or Near the Unit Circle- Fractional Cointegration- Special Topics - Risk- Different Kinds of Risk- Value-at-Risk Models- Copula-Based Models for Financial Time Series- Credit Risk Modeling- Special Topics - Time Series Methods- Evaluating Volatility and Correlation Forecasts- Structural Breaks in Financial Time Series- An Introduction to Regime Switching Time Series Models- Model Selection- Nonparametric Modeling in Financial Time Series- Modelling Financial High Frequency Data Using Point Processes- Special Topics - Simulation Based Methods- Resampling and Subsampling for Financial Time Series- Markov Chain Monte Carlo- Particle Filtering

Gls-based unit root tests with multiple structural breaks under both the null and the alternative hypotheses

Abstract: Perron (1989, Econometrica 57, 1361–1401) introduced unit root tests valid when a break at a known date in the trend function of a time series is present. In particular, they allow a break under both the null and alternative hypotheses and are invariant to the magnitude of the shift in level and/or slope. The subsequent literature devised procedures valid in the case of an unknown break date. However, in doing so most research, in particular the commonly used test of Zivot and Andrews (1992, Journal of Business & Economic Statistics 10, 251–270), assumed that if a break occurs it does so only under the alternative hypothesis of stationarity. This is undesirable for several reasons. Kim and Perron (2009, Journal of Econometrics 148, 1–13) developed a methodology that allows a break at an unknown time under both the null and alternative hypotheses. When a break is present, the limit distribution of the test is the same as in the case of a known break date, allowing increased power while maintaining the correct size. We extend their work in several directions: (1) we allow for an arbitrary number of changes in both the level and slope of the trend function; (2) we adopt the quasi–generalized least squares detrending method advocated by Elliott, Rothenberg, and Stock (1996, Econometrica 64, 813–836) that permits tests that have local asymptotic power functions close to the local asymptotic Gaussian power envelope; (3) we consider a variety of tests, in particular the class of M-tests introduced in Stock (1999, Cointegration, Causality, and Forecasting: A Festschrift for Clive W.J. Granger) and analyzed in Ng and Perron (2001, Econometrica 69, 1519–1554).

On the Robustness of Robustness Checks of the Environmental Kuznets Curve Hypothesis

Abstract: Since its first inception in the debate on the relationship between environment and growth in 1992, the Environmental Kuznets Curve hypothesis (EKC hereafter) has been subject of continuous and intense scrutiny. The most recent line of investigation criticizes the EKC hypothesis on more fundamental grounds, in that it stresses the lack of sufficient statistical testing of the empirical relationship and questions the very existence of the notion of EKC. Attention is in particular drawn on the stationarity properties of the series involved—per capita emissions or concentrations and per capita GDP—and, in case of presence of unit roots, on the cointegration property that must be present for the EKC to be a well-defined concept. Only at that point can the researcher ask whether the long-run relationship exhibits an inverted-U pattern. On the basis of panel integration and cointegration tests for sulfur, Stern (2004) and Perman and Stern (1999, 2003) have presented evidence and forcefully stated that the EKC hypothesis does not exist. In this paper we ask whether similar strong conclusions can be arrived at when carrying out tests of system fractional integration and cointegration. As an example we use the controversial case of carbon dioxide emissions. The results show that more EKCs come back into life relative to traditional integration/cointegration tests. However, we confirm that the EKC hypothesis remains a fragile concept.

The Relationship between Oil, Exchange Rates, and Commodity Prices

Abstract: Exchange rates have long been thought to have an important impact on the export and import of goods and services, and, thus, exchange rates are expected to influence the price of those products that are traded. At the same time, energy impacts commodity production in some very important ways. The use of chemical and petroleum derived inputs has increased in agriculture over time; the prices of these critical inputs, then, would be expected to alter supply, and, therefore, the prices of commodities using these inputs. Also, agricultural commodities have been increasingly used to produce energy, thereby leading to an expectation of a linkage between energy and commodity markets. In this paper, we examine the price relationship through time of the primary agricultural commodities, exchange rates, and oil prices. Using overlapping time periods, we examine the cointegration relationship between prices to determine changes in the strength of the linkage between markets through time. In general, we find that commodity prices are linked to oil for corn, cotton, and soybeans, but not for wheat, and that exchange rates do play a role in the linkage of prices over time.

Tourism, trade and growth: the case of Cyprus

Abstract: Although the relationship between international trade and economic growth has found a wide application area in the literature over the years, this can not be said about tourism and growth or trade and tourism This study employs the bounds test for cointegration and Granger causality tests to investigate a long-run equilibrium relationship between tourism, trade and real income growth, and the direction of causality among themselves for Cyprus Results reveal that tourism, trade and real income growth are cointegrated; thus, a long-run equilibrium relationship can be inferred between these three variables On the other hand, Granger causality test results suggest that real income growth stimulates growth in international trade (both exports and imports) and international tourist arrivals to the island Furthermore, growth in international trade (both exports and imports) also stimulates an increase in international tourist arrivals to Cyprus And finally, real import growth stimulate growth in real export

Can macroeconomic variables explain long-term stock market movements? A comparison of the US and Japan

Abstract: Within the framework of a standard discounted value model, we examine whether a number of macroeconomic variables influence stock prices in the US and Japan. A cointegration analysis is applied in order to model the long-term relationship between industrial production, the consumer price index, money supply, long-term interest rates and stock prices in the US and Japan. For the US, we find the data are consistent with a single cointegrating vector, where stock prices are positively related to industrial production and negatively related to both the consumer price index and the long-term interest rate. We also find an insignificant (although positive) relationship between the US stock prices and the money supply. However, for the Japanese data, we find two cointegrating vectors. We find for one vector that stock prices are influenced positively by industrial production and negatively by the money supply. For the second cointegrating vector, we find industrial production to be negatively influenced by the c...

Structural time series models and the Kalman filter: A concise review

Abstract: The continued increase in availability of economic data in recent years and, more importantly, the possibility to construct larger frequency time series, have fostered the use (and development) of statistical and econometric techniques to treat them more accurately. This paper presents an exposition of structural time series models by which a time series can be decomposed as the sum of a trend, seasonal and irregular components. In addition to a detailled analysis of univariate speci cations we also address the SUTSE multivariate case and the issue of cointegration. Finally, the recursive estimation and smoothing by means of the Kalman lter algorithm is described taking into account its different stages, from initialisation to parameter's estimation.

Cointegration and Consumption Risks in Asset Returns

Abstract: We argue that the cointegrating relation between dividends and consumption, a measure of long-run consumption risks, is a key determinant of risk premia at all investment horizons. As the investment horizon increases, transitory risks disappear, and the asset’s beta is dominated by long-run consumption risks. We show that the return betas, derived from the cointegration-based VAR (EC-VAR) model, successfully account for the cross-sectional variation in equity returns at both short and long horizons; however, this is not the case when the cointegrating restriction is ignored. Our evidence highlights the importance of cointegration-based long-run consumption risks for financial markets. (JEL G1, G12) How does the riskiness of equity returns change with investment horizon? We show that at long horizons, risks are dominated by long-run consumption risks in dividends, while at short horizons, additional price risks may also matter. The cointegrating relation between dividends and consumption (i.e., the longrun consumption beta of dividends) provides a measure of long-run risks in dividends. This cointegrating relation has important conceptual and empirical implications for measuring risks in asset returns at all horizons. Empirically, we document that consumption betas determined by the cointegrationbased vector-autoregression (EC-VAR) can account for the cross section of mean equity returns at both short and long horizons. This, however, is not the case when the cointegration restriction between consumption and dividends is ignored. Hence, our evidence highlights the economic importance of long-run

Impact of Oil Price Shock and Exchange Rate Volatility on Economic Growth in Nigeria: An Empirical Investigation

Abstract: This paper seeks to assess the impact of oil price shock and real exchange rate volatility on real economic growth in Nigeria on the basis of quarterly data from 1986Q1 to 2007Q4. The empirical analysis starts by analyzing the time series properties of the data which is followed by examining the nature of causality among the variables. Furthermore, the Johansen VAR-based cointegration technique is applied to examine the sensitivity of real economic growth to changes in oil prices and real exchange rate volatility in the long-run while the short run dynamics was checked using a vector error correction model. Results from ADF and PP tests show evidence of unit root in the data and Granger pairwise causality test revealed unidirectional causality from oil prices to real GDP and bidirectional causality from real exchange rate to real GDP and vice versa. Findings further show that oil price shock and appreciation in the level of exchange rate exert positive impact on real economic growth in Nigeria. The paper recommends greater diversification of the economy through investment in key productive sectors of the economy to guard against the vicissitude of oil price shock and exchange rate volatility.

Price volatility in ethanol markets

Abstract: Our paper looks at how price volatility in the Brazilian ethanol industry changes over time and across markets. Demand and supply forces in the energy and food markets are likely to ensure that crude oil, ethanol and feedstock prices co-move in the long-run. Hence, when assessing price volatility changes and spillovers in the ethanol industry, one should also pay attention to the notion of cointegration. Until recently, the methods proposed to estimate cointegration relationships, have not explicitly considered time varying volatility in the data. Seo (2007) suggests an estimator of the cointegration vector that explicitly models conditional heteroskedasticity. More specifically, he proposes a maximum likelihood estimator that estimates the error correction model and the multivariate GARCH process jointly. We follow this proposal.

Electricity consumption, income, foreign direct investment, and population in Malaysia

Abstract: Purpose – This study attempts to re‐investigate the electricity consumption function for Malaysia through the cointegration and causality analyses over the period 1970 to 2005.Design/methodology/approach – The study employed the bounds‐testing procedure for cointegration to examine the potential long‐run relationship, while an autoregressive distributed lag model is used to derive the short‐ and long‐run coefficients. The Granger causality test is applied to determine the causality direction between electricity consumption and its determinants.Findings – New evidence is found in this study: first, electricity consumption, income, foreign direct investment, and population in Malaysia are cointegrated. Second, the influx of foreign direct investment and population growth are positively related to electricity consumption in Malaysia and the Granger causality evidence indicates that electricity consumption, income, and foreign direct investment are of bilateral causality.Originality/value – The estimated mult...