Non-separability and sectoral comovement in a sticky price model

This paper resolves the sectoral comovement problem between nondurable and durable outputs that arises in response to a monetary shock in a two-sector sticky price model with flexibly priced durable goods. We analytically demonstrate that the non-separability between aggregate consumption and labor can generate the comovement between nondurable and durable outputs in response to a monetary policy shock. We then estimate the degree of non-separability, together with other parameters, using a Bayesian approach. We find that the non-separable preferences are supported by the data and our estimated model generates the sectoral comovement in response to a monetary shock.     

Sectoral Effects of News Shocks

This paper argues that an aggregate news shock reveals news about technological improvements in the durable goods sector. Better technological prospects translate into large responses of the fundamentals in the durable goods sector; much larger than the responses of the fundamentals in the non‐durable goods sector. These better technological prospects, contrary to common belief, do not induce short‐run comovement among fundamentals within either of the two sectors. The behaviour of inventories, an important margin that durable goods producers can use to buffer news shocks, proves to be crucial for reconciling the effects of news shocks in a two‐sector model with the data.     

The interrelationship between order flow,exchange rate,and the role of American economic news

The aim of this study is to investigate the comovement and interconnection between US economic news in seven different categories and the exchange rate of the US dollar against the currencies of seven developed countries, with the corresponding order flows. Our empirical investigation is based on using the Spearman correlation method to analyze the correlation between the economic news and exchange rate using order flows before, during, and after the financial news announcement. We use wavelet transform analysis to assess the comovement in the time–frequency domains. The bivariate outcomes demonstrate that changes in economic news impact price changes for only a short time, or even no time at all. Moreover, for longer time periods, the order flow is shown to have stronger coherency than economic news and a steady comovement against the exchange rate. Wavelet coherency reveals that the lead-lag effect of order flow changes on price changes starts in the medium frequency bands to low-frequency bands during the entire sample period. In addition, economic news weakens the correlation between exchange rate and order flow in the short run, which means that the combination of economic news and order flow can achieve a higher degree of consistency of exchange rate. The implication of this study is that macro policy makers, import and export enterprises, foreign exchange investors and exchange fund managers can predict the future exchange rate based on the order flow and choose hedging measures under different objectives.     

Peer effect on dividends and return comovement

This study investigates the stock return comovement of dividend-paying and nonpaying firms induced by peer effects of dividend payout policies. We consider peer effect as a channel that links a firm’s dividend initiation to firms that did not change dividend status. Dividend initiation attracts investors to the industry and puts pressure on peer firms to change their dividend policy, which leads to return comovement between nonpaying peers and paying firms. Using matched peer firms that resemble dividend initiators, we find that return comovement can be induced through an indirect channel without changes in style or category. Excess return comovement for firms without dividends is observed with dividend payers of the market and their industries through peer influence.     

Fiscal policy,entry and capital accumulation: Hump-shaped responses

In this paper we consider the entry and exit of firms in a Ramsey model with capital and an endogenous labour supply. At the firm level, there is a fixed cost combined with increasing marginal cost, which gives a standard U-shaped cost curve with optimal firm size. The costs of entry (exit) are quadratic in the flow of new firms. The number of firms becomes a second state variable and the entry dynamics gives rise to a richer set of dynamics than in the standard case: in particular, there is likely to be a hump shaped response of output to a fiscal shock with maximum effect after impact and before steady-state is reached. Output and capital per firm are also likely to be hump shaped.     

How well is productivity being priced?

By understanding how productivity shocks affect firm value, an entrepreneur can better compute the risk premium associated with uncertainty in production. This study explores the link between plant-level productivity and firm value for the baking and confectionary sector. From the impulse response analysis, the study finds that there is a lag in the firm’s response to productivity shocks at the plant level. Further, the paper employs Tobin’s Q as a valuation metric that acts as a link between a firm’s manufacturing plant productivity and firm value. Empirical estimations indicate that there is comovement between firm valuation and plant level productivity.     

Durable goods, inter-sectoral linkages and monetary policy

Durable goods pose a challenge for standard sticky-price models because the near constancy of their shadow value and their apparent price flexibility lead to perverse and counterfactual economic implications, such as the tendency of the durables and nondurables sectors to move in opposite directions following a monetary policy shock. This paper introduces input-output interactions and limited input mobility into an otherwise standard sticky-price model with durable and nondurable goods. The extended model generates substantial aggregate effects and positive sectoral comovement following a monetary policy shock, even when durable goods have flexible prices. The latter result is consistent with empirical evidence on the sectoral effects of monetary policy.     

The revision frequency of earnings forecasts and firm characteristics

This study investigates how the revision frequency of earnings forecasts affects firm characteristics. Previous studies generally focus on the number of analysts following a firm to measure a firm's information environment. The frequency with which news is updated is often defined as an analyst's effort. Analysts provide more information to investors if they update news more frequently. This study examines whether the frequency of information updating for a particular firm affects the firm's performance. We apply three proxies for firm performance: stock liquidity, the cost of equity capital, and firm value. Our findings indicate that the analysts’ effort as measured by the frequency of news updating is effective in providing additional power beyond the number of analysts to represent the information environment of a firm. Therefore, this study suggests that combining both the number of analysts following a firm and the frequency of news updating can be a better proxy for assessing a firm's information environment.     

Information flows and stock market volatility

This study examines how news is distributed across stocks. A model is developed that categorizes a stock's latent news into normal and nonnormal news, and allows both types of news to be filtered through to other stocks. This is achieved by formulating a model that jointly incorporates a multivariate lognormal‐Poisson jump process (for nonnormal news) and a multivariate GARCH process (for normal news), in addition to a news (or shock) transmission mechanism that allows the shocks from both processes to impact intertemporally on all stocks in the system. The relationship between news and the expected volatility surface is explored and a unique news impact surface is derived that depends on time, news magnitude, and news type. We find that the effect of nonnormal news on volatility expectations typically builds up before dissipating, with the news transmission mechanism effectively crowding‐out normal news and crowding‐in nonnormal news. Moreover, in contrast to the standard approach for measuring leverage effects using asymmetric generalized autoregressive conditional heteroskedasticity models, we find that leverage effects stem predominantly from nonnormal news. Finally, we find that the capacity to identify positively or negatively correlated stock returns is ambiguous in the short term, and depends heavily on the behavior of the nonnormal news component.     

Information or Opinion? Media Bias as Product Differentiation

Two aspects of media bias are important empirically. First, bias is persistent: it does not seem to disappear even when the media is under scrutiny. Second, bias is conflicting: different people often perceive bias in the same media outlet to be of opposite signs. We build a model in which both empirical characteristics of bias are observed in equilibrium. The key assumptions are that the information contained in the facts about a news event may not always be fully verifiable, and consumers have heterogeneous prior views ("ideologies") about the news event. Based on these ingredients of the model, we build a location model with entry to characterize firms' reports in equilibrium, and the nature of bias. When a news item comprises only fully verifiable facts, firms report these as such, so that there is no bias and the market looks like any market for information . When a news item comprises information that is mostly nonverifiable, however, then consumers may care both about opinion and editorials, and a firm's report will contain both these aspects—in which case the market resembles any differentiated product market . Thus, the appearance of bias is a result of equilibrium product differentiation when some facts are nonverifiable. We use the model to address several questions, including the impact of competition on bias, the incentives to report unpopular news, and the impact of owner ideology on bias. In general, competition does not lead to a reduction in bias unless this is accompanied by an increase in verifiability or a smaller dispersion of prior beliefs.     

Regional differences in small firm entry in manufacturing industries: Lower Saxony, 1979–1991 †

This paper is an empirical study of inter-regional and inter-temporal variations in entry of new firms using longitudinal data covering all manufacturing establishments in Lower Saxony between 1979 and 1991. Patterns of entry are reported for sixteen regions based on gross rates of entry (number of new firms) and entry intensities (shares of employees). An empirical model is applied to detect regional characteristics that are highly correlated with entry. Pooling of cross-section and time-series data allows for control of influences of varying macroeconomic conditions and unobserved regional characteristics that turned out to be important. Small firm entry tends to be positively related to high overall economic growth, and to be higher in regions where both the small firm employment share and the level of wealth are high while the wage rate is low. We find no evidence for a negative impact of the business tax rate or for a positive effect of regional subsidies.     

Mixed oligopoly and spatial price discrimination with foreign firms

This paper is the first to examine the welfare consequences of foreign competition in a mixed oligopoly set in a linear model of spatial price discrimination. It demonstrates that the entry of a foreign firm often lowers domestic welfare. This results because the public firm locates largely independently of the presence of the foreign firm and because the profit earned by the foreign firm reduces domestic welfare. Privatization of the public firm typically lowers domestic welfare but can increase global welfare. Thus, domestic governments are unlikely to allow foreign entry and when they do, they are unlikely to privatize the public firm despite the potential rise in global welfare.     

行业间生产率联动对中国工业生产率增长的影响——引入经济距离矩阵的空间GMM估计

本文把反映行业间生产率联动的购买距离矩阵和销售距离矩阵引入空间自回归模型,研究行业间生产率联动对我国工业生产率增长的影响。为了克服引入社会经济距离矩阵带来的异方差和矩阵的行标准化问题,本文采用空间GMM法进行模型的估计。结果表明,行业生产率联动对我国工业生产率增长具有显著的正影响,并且在资源密集型、劳动密集型和资本密集型工业行业中,行业间生产率联动对工业生产率增长的影响相对于其他因素的影响更为稳健。此外,由销售距离矩阵所体现的联动作用效果整体上大于购买距离矩阵体现的相关效果。     

SEQUENTIAL MONTE CARLO SAMPLING FOR DSGE MODELS

We develop a sequential Monte Carlo (SMC) algorithm for estimating Bayesian dynamic stochastic general equilibrium (DSGE) models; wherein a particle approximation to the posterior is built iteratively through tempering the likelihood. Using two empirical illustrations consisting of the Smets and Wouters model and a larger news shock model we show that the SMC algorithm is better suited for multimodal and irregular posterior distributions than the widely used random walk Metropolis–Hastings algorithm. We find that a more diffuse prior for the Smets and Wouters model improves its marginal data density and that a slight modification of the prior for the news shock model leads to drastic changes in the posterior inference about the importance of news shocks for fluctuations in hours worked. Unlike standard Markov chain Monte Carlo (MCMC) techniques; the SMC algorithm is well suited for parallel computing. Copyright © 2014 John Wiley & Sons, Ltd.     

Neighborhood effect on stock price comovement

We investigate how the geographic distance between firms’ headquarters affects their stock price comovement. Our results show that a firm's stock return has stronger comovement with the returns of nearby firms than with those of distant firms. Being in the same state and/or in the same industry strengthens the return comovement, but does not substitute for the negative effect of geographic distance on price comovement. Firms of similar share price and size also show stronger return comovement, but these factors do not mitigate the negative distance impact. Consistent with investor home bias and neighborhood effect literature, our results suggest that investors’ preference for local stocks and their interactions lead to correlated trading in local stocks and therefore stronger local price comovement.     

Irreversible Investment in Stochastically Cyclical Markets

This paper studies entry and exit decisions in markets whose demand alternates between growth and decline phases at uncertain times. We introduce a stochastic process that captures these features of random market evolution, and we provide key mathematical results related to first passage times which make the characterization of entry and exit behavior quite simple and straightforward (even when the process is subject to an endogenously determined upper or lower barrier). We characterize entry and exit patterns in a dynamic competitive equilibrium, and we show why our results differ from those obtained if demand follows a diffusion process (e.g., a Geometric Brownian Motion). Despite the stochastic process of the underlying variable has a continuous sample path in both cases, we demonstrate in our setting that positive rates of entry and exit discontinuously fall to zero owing to informational overshooting. Another advantage of our framework is that it can explain discontinuities in firm values even if sample paths are continuous. Our framework is also amenable to empirical implementations (as we show using Corts’ 2008 offshore oil drilling application), and to an intuitive interpretation of optimal (dis) investment rules based on Bernanke’s (1983) “bad news principle of irreversible investment.”     

Interest rate, demand and input price uncertainty and the value of firms

In an infinite-horizon inventory model, an increase in interest rate uncertainty increases the value of a firm which has positive value. An increase in input price uncertainty increases the value of the firm. If decisions are made before the realization of demand uncertainty, increased uncertainty about an additive demand shock reduces the value of a price-setting firm with a concave value function, and leaves unchanged or increases the value of a quantity-setting firm. If decisions are made after the realization of demand uncertainty, an increase in the uncertainty of an additive demand shock increases the value of the firm.     

What (really) accounts for the fall in hours after a technology shock?

The paper asks how state of the art DSGE models that account for the conditional response of hours following a positive neutral technology shock compare in a marginal likelihood race. To that end we construct and estimate several competing small-scale DSGE models that extend the standard real business cycle model. In particular, we identify from the literature six different hypotheses that generate the empirically observed decline in hours worked after a positive technology shock. These models alternatively exhibit (i) sticky prices; (ii) firm entry and exit with time to build; (iii) habit in consumption and costly adjustment of investment; (iv) persistence in the permanent technology shocks; (v) labor market friction with procyclical hiring costs; and (vi) Leontief production function with labor-saving technology shocks. In terms of model posterior probabilities, impulse responses, and autocorrelations, the model favored is the one that exhibits habit formation in consumption and investment adjustment costs. A robustness test shows that the sticky price model becomes as competitive as the habit formation and costly adjustment of investment model when sticky wages are included.     

The Relationship Between Stock Market Returns and Technical Efficiency Innovations: Evidence from the US Airline Industry

This paper analyzes the association between two firm performance measures: stock market returns and relative technical efficiency. Using linear programming techniques (Data Envelopment Analysis and Free Disposal Hull), technical efficiencies are calculated for a panel of eleven US airlines observed quarterly from 1970–1990. A relationship, between efficiency news in a quarter and stock market performance in the following two months, is found. A risky arbitrage portfolio strategy, of buying firms with the most positive efficiency news and short-selling those with the worst news during this time frame, results in zero beta risk yet yields annual returns of 17% and 18% for the two methodologies.     

Timeliness of Annual Report Releases and Market Reaction to Earnings Announcements in an Emerging Capital Market: The Case of China

This paper examines the relation between firm performance and the timing of annual report releases in an emerging capital market. Based on the population of listed Chinese firms with A-shares for 1994-1997, we find that good news firms release their annual reports earlier than bad news firms, and loss firms release their annual reports the latest. Moreover, consistent with Chambers and Penman (1984) and Begley and Fischer (1998), these firms unexpectedly accelerate the release of good news and delay the disclosure of bad news relative to their previous reporting pattern. We also observe a significant price reaction to the annual earnings announcements for both early (good news) and late (bad news) reporting firms. Similar results are found for those A-share firms which have also issued B- or H-shares to foreign investors. Our study documents a systematic timing pattern of annual report disclosures, which is useful for investors to predict future earnings, especially in anticipating bad news in China's emerging market where information about future earnings is very limited.