Asymmetric ACD models: Introducing price information in ACD models

This paper proposes an asymmetric autoregressive conditional duration (ACD) model, which extends the ACD model of Engle and Russell (1998). The asymmetry consists of letting the duration process depend on the state of the price process. If the price has increased, the parameters of the ACD model can differ from what they are if the price has decreased. The model is applied to the bid-ask quotes of two stocks traded on the NYSE and the evidence in favour of asymmetry is strong. Information effects (Easley and O'Hara 1992) are also empirically relevant. As the model is a transition model for the price process, it delivers `market forecasts' of where prices are heading. A trading strategy based on the model is implemented using tick-by-tick data.While remaining responsible for any error in this paper, the authors would like to thank R. Anderson, G. Le Fol, C. Gouriéroux, J. Jasiak, W. Pohlmeier, A. Roell, O. Scaillet, S. Wei and three anonymous referees for useful remarks and suggestions on previous versions. The authors would also like to thank A. Ruttiens from KBC-CBC for useful discussions on practical issues related to trading. Support of the European Commission Human Capital and Mobility Program through the network `Econometric inference using simulation methods' is gratefully acknowledged. This paper presents research results of the Belgian Program on Interuniversity Poles of Attraction initiated by the Belgian State, Prime Minister's Office, Science Policy Programming. The scientific responsibility is assumed by the authors.     

Inflation, investment and economic performance: The role of internal financing

This paper studies a link between inflation and economic activity that is built on two hypotheses. First, firms mitigate informational frictions in financial markets by accumulating retained earnings over a period of time. Second, firms allocate earnings among three competing uses - dividends, current investment, and the accumulation of internal funds - and inflation directly distorts this allocation decision as well as the real value of accumulated internal funds. The model predicts that the level of inflation - both unanticipated and expected inflation - as well as the variability of inflation distort firms’ internal financing decisions, increases frictions in financial markets, reduces the level and efficiency of investment, and reduces aggregate output. The marginal effects of inflation are increasing in the inflation rate.     

Regulating an Externality-Generating Utility Environmental Taxes Under Limited Information

Global warming is currently an important item on most nationalenvironmental agendas. In many countries, coal-fired electricity generatingstations represent an important source of greenhouse gases. We examinehow regulations to curb emissions affect public utility pricing regulationwhen regulators act non-cooperatively. We show that, when there is limitedinformation on fixed abatement costs, an environmental regulator prefersan emission tax over an output tax or a lump sum environmental tax. Thepublic utility regulator prefers the lump sum tax regime.     

Structural Decomposition Analysis of Physical Flows in the Economy

Many environmental problems can be attributedto the extraction and emissions of physicalsubstances. Increasing our understanding of theeconomic and technological driving forcesbehind these physical flows can contribute tosolving the environmental problems related tothem. The input-output framework is a usefulsetting in which to integrate detailedinformation about economic structure andphysical flows. In this article a specificmethod in input-output analysis is reviewed,namely Structural Decomposition Analysis (SDA).It is based on comparative static analysis,which decomposes historical changes of a policyvariable into determinant effects. SDA has beenapplied, for example, to analyze the demand andtechnological driving forces of energy use,CO₂-emissions and various other pollutantsand resources. This article examines thetheoretical aspects of structuraldecomposition, in particular those concerningphysical flows and environmental issues.Furthermore, the article includes an extensivesurvey of empirical studies.     

Does the dutch model really exist?

The policy that led from the "Dutch disease" (in the 1980s) to the "Dutch miracle" (in the 1990s) consists of three tracks: wage moderation, retrenching public expenditure and reducing the tax burden, and slimming the welfare system. The wage moderation track seems to have been the most important. The term "Dutch model" refers to the socioeconomic system of the Netherlands. Most observers point particularly to the relatively low unemployment rate to indicate the success of this model. However, the economic inactivity rate in the Netherlands is not lower than in neighboring countries. This suggests that open unemployment in the Netherlands has been partly replaced with hidden unemployment. In particular, the disability scheme seems to contain a large component of hidden unemployment. Another feature of the Dutch model is its consensus-seeking nature, which is fostered by its institutional structure.     

Regulating an externality-generating public utility: A multi-dimensional screening approach

In this paper, I present a monopoly screening model in which a firm holds private information on fixed abatement costs. Because of the nature of the optimal contracts, bunching is never optimal even with ‘n’ distinct types. A characterization of full and limited information solutions is offered and it is shown that the design standards alone determine the value of an information rent. The variable charge is completely free of any marginal information costs. This allows the variable charge to track marginal damages and thereby ensures that marginal social costs are covered. A fixed charge implements the optimal solution.     

Natural conjugate priors for the instrumental variables regression model applied to the Angrist–Krueger data

We propose a natural conjugate prior for the instrumental variables regression model. The prior is a natural conjugate one since the marginal prior and posterior of the structural parameter have the same functional expressions which directly reveal the update from prior to posterior. The Jeffreys prior results from a specific setting of the prior parameters and results in a marginal posterior of the structural parameter that has an identical functional form as the sampling density of the limited information maximum likelihood estimator. We construct informative priors for the Angrist–Krueger [1991. Does compulsory school attendance affect schooling and earnings? Quarterly Journal of Economics 106, 979–1014] data and show that the marginal posterior of the return on education in the US coincides with the marginal posterior from the Southern region when we use the Jeffreys prior. This result occurs since the instruments are the strongest in the Southern region and the posterior using the Jeffreys prior, identical to maximum likelihood, focusses on the strongest available instruments. We construct informative priors for the other regions that make their posteriors of the return on education similar to that of the US and the Southern region. These priors show the amount of prior information needed to obtain comparable results for all regions.     

Fit performance of several programs used for non-linear least squares problems

Seven computerprograms for non-linear regression or curve fitting problems are compared. The comparison of the programs, running in different computing centra, is restricted to the fit performance. Six model functions are fitted according to the least squares criterion to data series, arising from practical work. The special least squares minimization programs turned out to be better suited for these problems than general optimizing programs.     

Dynamic modelling of pollution abatement in a CGE framework

This paper deals with the specification of pollution abatement in dynamic computable general equilibrium (CGE) models and analyses the dynamic feedback mechanisms between economy and abatement in the context of environmental policy. A Ramsey-type economic model is presented, in which bottom-up technical and economic information on abatement techniques is integrated in a top-down dynamic CGE context. The practical suitability of the specification is illustrated by an empirical application for climate change and acidification in the Netherlands. The results show that a mixture of some slowdown of economic growth, a substantial restructuring of the economy and implementation of most technical abatement measures is optimal.