Specification tests of parametric dynamic conditional quantiles

This article proposes omnibus specification tests of parametric dynamic quantile models. In contrast to the existing procedures, we allow for a flexible specification, where a possible continuum of quantiles is simultaneously specified under fairly weak conditions on the serial dependence in the underlying data-generating process. Since the null limit distribution of tests is not pivotal, we propose a subsampling approximation of the asymptotic critical values. A Monte Carlo study shows that the asymptotic results provide good approximations for small sample sizes. Finally, an application suggests that our methodology is a powerful alternative to standard backtesting procedures in evaluating market risk.     

The tradeoff between risk sharing and information production in financial markets

The production of information in financial markets is limited by the extent of risk sharing. The wider a stock's investor base, the smaller the risk borne by each shareholder and the less valuable information. A firm which expands its investor base without raising capital affects its information environment through three channels: (i) it induces incumbent shareholders to reduce their research effort as a result of improved risk sharing, (ii) it attracts potentially informed investors, and (iii) it may modify the composition of the base in terms of risk tolerance or liquidity trading. Implications for individual firms and the market as a whole are derived.     

Can diaries help in improving agricultural production statistics? Evidence from Uganda

Although good and timely information on agricultural production is critical for policy-decisions, the quality of underlying data is often low and improving data quality could have high payoff. We use data from a production diary, administered concurrently with a standard household survey in Uganda to analyze the nature and incidence of responses, the magnitude of differences in reported outcomes, and factors that systematically affect these. Despite limited central supervision, diaries elicited a strong response, complemented standard surveys in a number of respects and were less affected by problems of respondent fatigue than expected. The diary-based estimates of output value consistently exceed that from the recall-based production survey, in line with reported disposition. Implications for policy and practical administration of surveys are drawn out.     

Benford's Law as an Indicator of Fraud in Economics

Abstract. Contrary to intuition, first digits of randomly selected data are not uniformly distributed but follow a logarithmically declining pattern, known as Benford's law. This law is increasingly used as a 'doping check' for detecting fraudulent data in business and administration. Benford's law also applies to regression coefficients and standard errors in empirical economics. This article reviews Benford's law and examines its potential as an indicator of fraud in economic research. Evidence from a sample of recently published articles shows that a surprisingly large proportion of first digits, but not of second digits, contradicts Benford's law.     

Competitive inventory management in Treasury markets

We decompose US Treasury bid-ask spreads into inventory, adverse selection and order processing costs by using the fact that inventory trades have different effects on spreads than do proprietary trades. We exploit this asymmetry and develop a technique to identify the three components of the spread in order to test three hypotheses: dealers make larger changes to inventory (1) following macroeconomic announcements (2) at the start and toward the end of the New York trading hours, and (3) when transaction sizes are relatively large. We test these predictions using GovPX data for on-the-run 2-year and 10-year Treasury Notes. All three predictions are supported. We also assess how primary dealers react to the Federal Reserve’s open market operations (OMOs). Our findings reveal interesting intraday patterns in the inventory component for both securities.