Nonlinear Alternatives to Unit Root Tests and Public Finances Sustainability: Some Evidence from Latin American and Caribbean Countries*

We analyse the sustainability of government debt for Latin American and Caribbean countries employing unit‐root tests with nonlinear alternative hypotheses and examine the robustness of our results against those from unit‐root tests with breaks and threshold nonlinearities. We show that, in general support for sustainability substantially improves when nonlinear mean reversion is taken into account. We also find that the results obtained from applying various tests with nonlinear alternatives, although broadly consistent, are not identical. This suggests that reliance on a single unit‐root test for assessing fiscal policy sustainability may be misleading.     

Political cycles under external economic constraints: Evidence from Cyprus

This paper examines the presence of political cycles in a small open economy using data from Cyprus over the period 1978–2006, and explores their conditionality upon external economic constraints, such as globalization and European integration. Two basic results emerge. First, we find evidence of partisan shifts in economic policies and outcomes, although these effects seem to decrease as globalization progresses, and to disappear in the run-up to EMU. This implies that, while partisan cycles can emerge under a certain domestic political setting, the sensitivity of an economy to globalization pressures and the challenges resulting from EU/EMU membership can lead to their weakening. Second, we find evidence of electoral shifts in certain, more visible, subcomponents of the fiscal balance. However, in contrast to partisan distinctions, these opportunistic effects become more pronounced as globalization proceeds. It seems that constraints imposed on the ability of politicians to ingratiate themselves with partisans, may actually strengthen their incentives to engage in electioneering.     

Regulating the Platform Economy: How to Protect Workers While Promoting Innovation

The rise of the platform economy has made it a topic of great interest among European policymakers, as evidenced by the European Commission’s 2016 Communication “A European agenda for the collaborative economy”. The regulatory challenges facing policymakers are manifold, ranging from taxation to competition policy to worker protection. Furthermore, many basic aspects of the platform economy are unclear, such as its size, the number of workers who take part in it and, indeed, its very definition. What types of regulation are necessary to ensure that the benefits of the platform economy are maximised for all Europeans? How can the productivity gains associated with the platform economy be distributed throughout society? Perhaps most importantly, how can policymakers support innovation while also protecting consumers, workers and communities?     

Collaborative Economy: Market Design and Basic Regulatory Principles

The rise of the collaborative economy platforms reveals that policymakers need to start thinking about how to introduce flexibility in the provision of services in these formal relationships with adequate protection for all of the involved parties.     

You get what you give: theory and evidence of reciprocity in the sharing economy

We develop an analytical framework of peer interaction in the sharing economy that incorporates reciprocity, the tendency to increase (decrease) effort in response to others’ increased (decreased) effort. In our model, buyers (sellers) can induce sellers (buyers) to exert more effort by behaving well themselves. We demonstrate that this joint increased effort can improve the utility of both parties and influence the market equilibrium. We also show that bilateral reputation systems, which allow both buyers and sellers to review each other, are more responsive to reciprocity than unilateral reputation systems. By rewarding reciprocal behavior, bilateral reputation systems generate trust among strangers and informally regulate their behavior. We test the predictions of our model using data from Airbnb, a popular peer-to-peer accommodation platform. We show that Airbnb hosts that are more reciprocal receive higher ratings and that higher rated hosts can increase their prices. Therefore, reciprocity affects equilibrium prices on Airbnb through its impact on ratings, as predicted by our analytical framework.     

Net entry behaviour in Greek manufacturing: consumer, intermediate and capital goods industries

This research explores the nature and causes of net entry of firms in three groups of Greek manufacturing industries–consumer, intermediate and capital goods. The research questions whether or not the determinants of net entry rates across sectors are different. Econometric analyses reveal that, indeed, there are significant differences in the determinants of net entry rates across industry groups, but also there is strong within-group correlation across sectors.     

How important is the term structure in implied volatility surface modeling? Evidence from foreign exchange options

We claim that previously proposed parametric specifications that linearly approximate the term structure of the implied volatility surface (IVS) in option prices fail to capture important information regarding the expectations of market participants. This paper proposes a parametric specification for describing the IVS that allows flexible modeling of the term structure through a Nelson and Siegel (1987) factorization, recently proposed by Diebold and Li (2006) in the context of yield curve modeling. The specification is tested on implied volatilities from the over-the-counter foreign exchange options market, where contracts with long expiries are actively traded and thus the term structure dimension of the surface should be very important. We first show that the proposed volatility specification can consistently and remarkably improve our ability to describe the surface on any given day. We then establish the economic relevance of the incremental information captured by our proposed specification by showing that it can produce more accurate forecasts of implied volatility that can support long-term profitable trading strategies in the absence of transaction costs.     

Mean and Variance Causality between Official and Parallel Currency Markets: Evidence from Four Latin American Countries

This paper examines the issue of mean and variance causality across four Latin American official and black markets for foreign currency using monthly data for the period 1976–1993. We apply a recent test developed by Cheung and Ng (1996) in order to test for mean and variance spillovers. The main findings are: (1) In contrast to the findings of previous studies, EGARCH-M processes characterize each bilateral exchange rate series in both markets; (2) There is substantial evidence of causality in both mean and variance with the causality in mean largely being driven by the causality in variance; and (3) The results indicate that the major exporter of causality is the Mexican black market with the black market of Argentina and the black and official markets of Brazil being the smallest contributors.     

Predictable dynamics in implied volatility surfaces from OTC currency options

Recent empirical studies report predictable dynamics in the volatility surfaces that are implied by observed index option prices, such as those prescribed by general equilibrium models. Using an extensive data set from the over-the-counter options market, we document similar predictability in the factors that capture the daily variation of surfaces implied by options on 25 different foreign exchange rates. We proceed to demonstrate that simple vector autoregressive specifications for the factors can help produce accurate out-of-sample forecasts of the systematic component of the surface at short horizons. Profitable delta-hedged positions can be set up based on these forecasts; however, profits disappear when typical transaction costs are taken into account and when trading rules on wide segments of the surface are sought.