Testing for cointegration with threshold effect between unemployment and stock prices

Under the dominant role of a belief function, Farmer argues that the stock market is the Granger cause of the unemployment rate, which implies that the natural rate hypothesis is an outdated idea. This article provides some new empirical evidence supporting this view using threshold cointegration and asymmetric error correction models. The results show that these models can assess asymmetric dynamics between unemployment and the stock market. Moreover, regime switches of the momentum threshold autoregressive adjustment specification are highly consistent with recessions in the US economy during the last 60 years.     

The impact of political connections on government bailout: the 2008 credit crunch in the United States

Why is there so little money in contributions to political action committees (PAC) in United States’ politics? While there may be several explanations for this puzzle, we consider corporate PAC contributions as an insurance-like instrument that induces firms’ expectations of safeguard at times of grave need, with the 2008 credit crunch as a case in point. Given the unlikely occurrence of a credit crunch, few financial firms invest in PAC contributions. However, we find firms that make PAC contributions may gain ex ante benefits of corporate PACs as protection from financial distress by undertaking profitable but risky projects that later become illiquid assets while requiring the bailout money during the 2008 credit crunch. We also find that both consistent PAC investments over election cycles and subsequent lobbying activity to corporate PACs further allow firms to utilize their political ties as safeguard and demand additional bailout money. Our instrumental variable analysis confirms that firms with prior experience in political investments are found to enhance the likelihood and effectiveness of PAC contributions and related political investments.     

The effects of geographic and network ties on exploitative and exploratory product innovation

Addressing the inconsistent findings in the literature, we first distinguish the type of innovation and study the relationship of industrial clusters with exploitative and exploratory product innovation. Furthermore, we study how focal cluster firms' network ties with their suppliers and buyers in their clusters might moderate these relationships. Our empirical study showed that, while cluster membership enhanced firms' exploitative product innovation, it hindered their exploratory product innovation. Moreover, the results showed that focal cluster firms' network ties with their suppliers and buyers in their clusters strengthened the effects of cluster membership on exploitative product innovation. They also showed that focal cluster firms' network ties with their buyers but not suppliers in their clusters reduced the negative effects of cluster membership on exploratory product innovation. Copyright © 2014 John Wiley & Sons, Ltd.     

The International Monetary Fund (IMF) and the Catalytic Effect: Do IMF Agreements Improve Access of Emerging Economies to International Financial Markets?

We investigate whether countries have access to loans with better conditions after an International Monetary Fund (IMF) agreement. We conduct an empirical analysis which takes into account both the maturity and the interest rate of public and publicly guaranteed private debt. A two‐stage least squares estimation method is used to avoid selection bias problems. Panel data covering 116 countries between 1984 and 2007 and two other subsets of this panel data are used. The results indicate an improvement in access to international financial markets when an IMF programme is announced. The improvement increases as the sample consists of better‐performing countries. We conclude that, the catalytic effect may lower the level of commitment, political will and ‘ownership’ of the programme of the borrower country. On the other hand, borrower countries should consider the catalytic effect in determining the amount of financial assistance from the IMF.     

The Moderating Roles of Prior Experience and Behavioral Importance in the Predictive Validity of New Product Concept Testing

Concept testing has long been recognized as an important new product development (NPD) activity. As one of the widely used concept testing techniques, the method of intentions surveys relies on the purchase intentions of the potential buyers of new products and helps firms assess the viabilities of their new products before making major financial and nonfinancial commitments to their development. Despite the importance of intentions‐based new product concept testing and its widespread use by firms, the correspondence between initial behavioral intentions and subsequent purchase behaviors has been relatively low and heterogeneous, making it very difficult for firms to draw any useful conclusions from intentions surveys. Focusing on the predictive validity of intentions‐based new product concept testing and addressing several calls for future research to identify specific conditions making it more effective, this paper tests the moderating roles of prior experience and behavioral importance in the predictive validity of intentions‐based new product concept testing. It also tests whether people who state a positive intention and people who state a negative intention are equally accurate in their intentions. Finally, it tests the relative moderating roles of prior experience and behavioral importance in the intentions–behavior relationship. The results based on two longitudinal surveys first suggested that people's prior experience moderates the relationship between behavioral intentions and actual behaviors in a way that the relationship is stronger when prior experience is high as opposed to when it is low. Second, they showed that the level of importance that people attach to a behavior also moderates the relationship between behavioral intentions and actual behaviors such that the relationship is stronger when behavioral importance is high as opposed to when it is low. Third, they indicated that the behavioral intentions of people who state that they will not perform a behavior are more accurate than are those of people who state that they will perform it. Finally, the results suggested that the impact of behavioral importance is greater than that of prior experience. This study offers several implications. Most notably, the results can help firms better understand different factors affecting the predictive validity of intentions‐based new product concept testing and hence make more accurate new product decisions.     

On the empirics of risk-sharing across MENA countries

In this article, we compute the potential welfare gains and the realized gains from risk-sharing among Middle East and North African (MENA) countries, including the oil-rich Gulf region and the resource-scarce economies. We find that the overall potential welfare gains across MENA countries are positive for all countries under the assumption of full risk-sharing. The potential welfare gains among the six Gulf Cooperation Council (GCC) countries are positive even though the magnitudes are smaller compared to those of the rest of the MENA region. We also quantify the extent of risk-sharing for the MENA region and show that it is significant for the MENA region and its subgroups; however, we could not find any sign of inter-temporal smoothing across the same groups. Decomposing the aggregate output shocks shows that the extent of risk-sharing is significant when only positive output shocks exist across the resource-scarce MENA economies. However, we observe that GCC countries share output risks with each other even under negative output shocks.     

What Can Countries in Other Regions Learn from Social Security Reform in Latin America?

About a dozen countries in Latin America have enacted reformsthat include elements being contemplated elsewhere, includingthe partial privatization of social security. It is not easyto draw universal lessons for social security reform from theexperience of countries such as Argentina, Chile, and Mexico,however, where sizeable public pension systems went bankruptbefore the populations aged, mainly because of mismanagement.Most developing economies have much smaller social securitysystems. Relatively well-managed systems in industrial countriesface problems that are long term in nature and have been broughtabout by an aging population. The experiences of Latin Americanevertheless offer some general lessons for countries in otherparts of the world. These lessons relate to changes in labormarket incentives accompanying reforms and how workers reactto them, government actions that have met with success in managingthe transition to funded pensions, and the expectations of individualsfrom social security systems. Latin America's reforms suggestthat the most effective approach is to keep payroll taxes low,governments solvent, and social security systems focused onproviding reasonable insurance against poverty in old age. JEL codes: G23, H31, H53, H55, J26     

Time‐Varying Spillover Effects on Sectoral Equity Returns

In this paper, we investigate the integration of the Euro‐ and US‐wide sector equity indices by focusing on the return, volatility, and trend spillover effects of local and global shocks. We explore that unlike volatility spillovers, return spillovers are not significant enough to explain sector equity returns. Moreover, we are able to show that when the trend is incorporated into the volatility spillover analysis, a number of sector equity indices tend to react similarly to local and global shocks. Following this path, we arrive at four major sector groups: production and industry; consumer goods and services; financial; and technology, media, and telecommunication across Euro‐ and US‐wide sector equity indices.     

Median-unbiased estimation of structural change models: an application to real exchange rate persistence

Measuring deviations from purchasing power parity has been the subject of extensive investigation. The most common practice in empirical research for measuring real exchange rate persistence is to estimate univariate autoregressive (AR) time series models and calculate the half-life, defined as the number of periods for a unit shock to a time series to decay by 50%. In the presence of structural change, there are two potential biases in the parameter estimates of AR models: (1) a downward small sample median-bias and (2) an upward bias, which occurs when structural change is present and ignored. We conduct a variety of Monte Carlo simulations and demonstrate that the existence of structural change causes a substantial increase in the small sample bias documented in Andrews (1993). We then propose an extension of median-unbiased estimation, which explicitly accounts for structural change, and apply these methods to estimate half-lives of several long-horizon real exchange rates analysed by Lothian and Taylor (1996) and Taylor (2002). The upward bias from neglecting structural change dominates the downward median-bias for these real exchange rates. When structural change is present and accounted for, the median-unbiased half-lives towards a changing mean decrease and the confidence intervals tighten.     

Decomposing the Income Insurance Channel across OECD and Emerging Markets

This paper investigates the underlying forces driving income insurance channels for the Organisation for Economic Co‐operation and Development (OECD) and emerging markets. We find income insurance channels across countries to be driven by different subchannels. For the OECD, income insurance is mostly governed by payments for financial liabilities; for the emerging markets, income flows from nationals working abroad constitute the main income smoother. Despite the growth in cross‐border financial asset trading over the years, we could not find evidence of income smoothing via foreign assets receipts for the OECD. For the majority of emerging markets, neither receipts of foreign assets nor foreign liability payments are strong enough to insure income as well.