Ten-year forecasts of real stock price changes

This paper provides the strongest evidence to-date on the predictability of real stock prices over long horizons. Ex ante forecasts account for over two-thirds of the variation of the growth rate of real stock prices over ten year spans from 1940 through 2001. The paper forecasts negative growth rates of real stock prices over the next ten years. This bearish long-run outlook is buttressed by the long-run relationship between the growth rates of real stock prices, inflation, dividends, and productivity. First version received: June 2000/Final version received: June 2001 RID="*" ID="*"  Special thanks to an anonymous referee for helpful comments.     

A generalized additive Tobit model

This paper proposes a semi-parametric approach to estimation in Tobit models. A generalized additive Tobit model of residential local long distance (intra-LATA) telephone demand is estimated on a cross-section of residential telephone consumers across twenty-eight states. While past studies of telecommunications demand have used fully parametric models, the model presented here is non-parametric in two dimensions: first no distributional assumption is made for the error distribution, and second, the demand equation is non-parametric with respect to price. We find that the elasticity of demand is substantially lower (in absolute value) that found in previous studies for a 40% cut in tariffs. First version received: July 2000/Final version received: March 2001 RID="*" ID="*"  I thank the referee and Associate Editor for suggestions which improved the paper. The views expressed here are of the author and not Analysis Group | Economics.     

Estimation of hedonic price functions via additive nonparametric regression

We model a hedonic price function for housing as an additive nonparametric regression. Estimation is done via a backfitting procedure in combination with a local polynomial estimator. It avoids the pitfalls of an unrestricted nonparametric estimator, such as slow convergence rates and the curse of dimensionality. Bandwidths are chosen using a novel plug in method that minimizes the asymptotic mean average squared error (AMASE) of the regression. We compare our results to alternative parametric models and find evidence of the superiority of our nonparametric model. From an empirical perspective our study is interesting in that the effects on housing prices of a series of environmental characteristics are modeled in the regression. We find these characteristics to be important in the determination of housing prices.First version received: October 2002/Final version received: October 2003We thank B. Baltagi and two anonymous referees for their comments. The authors retain responsibility for any remaining errors.     

Long-run matching relationship in the Japanese labor market

This paper investigates the long-run relationship among new hiring, unemployment (job seekers), and unfilled vacancies in Japan, using an annual panel data on 47 prefectures for 1972-1999. We find that these three variables are I(1) processes, and are cointegrated in our panel data. Further, we estimate the panel cointegration equation derived from a Cobb-Douglas matching function by the heterogeneous fully modified OLS and heterogeneous dynamic OLS. The estimation results reveal that conventional within estimates could have non-negligible biases.First version received: November 2002/Final version received: October 2003All correspondence to Shigeki Kano. The authors are grateful to the associate editor and two anonymous referees of this journal for helpful comments. Doctor Stephen J. Turnbull (University of Tsukuba) is also acknowledged for correcting English errors in this paper. Remaining errors are due to the authors. The data set and GAUSS programming code used in this paperare available upon request.     

A test for rational bubbles in stock prices

This paper presents two necessary conditions for the absence of rational bubbles on the assumption that the discount rate is stationary. One condition is that real stock prices and real dividends are cointegrated with the time-varying cointegrating vector. The other is that the order of integration of real stock prices is equal to that of real dividends. The first condition is different from that proposed on the assumption of a constant discount rate. In contrast, the second condition is the same as that presented on this assumption. Examining the second condition using Japanese data, we find that Japanese stock prices and dividends satisfy the necessary condition. First version received: May 2000/Final version accepted: April 2001     

Money and prices: U.S. Data 1869–1914 (A study with directed graphs)

This paper reconsiders empirical evidence on relationships among money, income, nominal prices, and wheat prices. Error correction and directed acyclic graphs are used to study both lagged and contemporaneous relations in late 19^th and early 20^th century U.S. data. We summarize evidence supporting the view that money was a causal actor in price movement in this period. In the long run (at a five year horizon), over twenty percent of the movement in price is explained by earlier movements in money supply; whereas, wheat price accounts for less than ten percent of this movement. There is also evidence that money supply was not exogenous, as it was determined, in contemporaneous time, by movements in the general price level and income. About forty percent of the variation in money is explained by current or lagged prices and income. There remains considerable uncertainty with respect to role of wheat prices in this period. Innovations in wheat price explain over twenty five percent of the uncertainty in real income at the five year forecast horizon – suggesting wheat price as either causal or proxying for more fundamental causal forces in the U.S. economy over our period of analysis. First version received: December 1999/Final version received: February 2001     

Long memory and level shifts: Re-analyzing inflation rates

A key application of long memory time series models concerns inflation. Long memory implies that shocks have a long-lasting effect. It may however be that empirical evidence for long memory is caused by neglecting one or more level shifts. Since such level shifts are not unlikely for inflation, where the shifts may be caused by sudden oil price shocks, we examine whether evidence for long memory (indicated by the relevance of an ARFIMA model) in G7 inflation rates is spurious or exaggerated. Our main findings are that apparent long memory is quite resistant to level shifts, although for a few inflation rates we find that evidence for long memory disappears. First version received: March 1998/final version received: October 1998     

Requiem for the unit root in per capita real GDP? Additional evidence from historical data

We present new evidence on the uncertain nature of nonstationarity – that is, trend stationarity vs. difference stationarity – of aggregate per capita real output, by submitting to a composite testing procedure a 20-country sample over an historically relevant time span. We find that the degree of uncertainty associated with the presence of a unit root appears to be well exceeding that shown by other studies conducted so far on cross-country historical data. For almost all the countries in our sample, inference appears to be strongly dependent on the type of test one makes use of, so that conclusions reached at early stages of a composite confirmatory testing procedure have to be frequently discarded at subsequent stages. Our reading of these findings points towards rejecting the assumption of temporal homogeneity of per capita GDP time series over long time spans, a prerequisite implicitly assumed in all studies looking for invariant statistical properties like stochastic or deterministic nonstationarity.First version received: October 2002/Final version received: September 2003     

How Long is a Piece of Cable? Equilibrium Determination of Local Telephone Areas

This paper studies the endogenous determination of telephone local calling areas. In many telephone systems, calls between users in the same calling area are local; calls to outside the calling area are long distance and priced differently. We allow the extension of this area to be treated as a strategic variable. We show the extension of the calling areas which maximizes the carrier's profit to be the same which a welfare maximizing regulator would choose. Under a price cap regime in which prices are required to meet an average price constraint, the firm manipulates strategically the extension of the local calling areas. We end the paper by considering the case of a competitive market. In this case, again, the owner of the local loop extends the local calling areas in response to decreased efficiency or increased competition of its competitors. Received April 25, 2002; revised version received September 9, 2002 Published online: April 30, 2003     

Sraffa's system: Equal rate of profits and the notion of center of gravitation

This paper argues that the condition of uniform rate of profits in Sraffa's system is not based on his implicit assumption that the system is at the ‘equilibrium’ or the center of gravitation. It is rather a logical requirement of a reproducing system of basic goods as long as prices are not imposed from outside the system. This condition holds irrespective of supplies being equal to their respective effectual demands. It conjectures that Sraffa could have arrived at this conclusion through his analysis of the Standard system. On the basis of this result, a critique of the received interpretation, led by Garegnani, of Sraffa's prices is developed.     

What color are commodity prices? A fractal analysis

Commodity price behavior holds much interest not only because these markets are affected by waves of speculative activity similar to security markets but more so that these commodities are linked to industries which purchase them and developing country producers which supply them. Commodity spot and future prices have thus been studied extensively. This research extends this work by employing recent fractal approaches to evaluate how the apparent random movements associated with short term behavior can also persist when examining long run behavior. We thus test for the presence of a persistent and finite variance component (i.e. long memory stationary process) as opposed to an infinite variance component (i.e. short memory nonstationary process) in a selected group of international commodity price series. Both fractal and persistent dependence hypotheses and test statistics have been employed. Estimates made of the power law exponent and of the nonintegral or fractional exponent suggest generating processes which are closer to black noise than to white, pink or brown noise. First version received: October 1997/Final version received: April 2000     

The cyclical behaviour of prices in the U.K.: Some structural time series evidence

The cyclical behaviour of prices in the U.K. is investigated using a sample of annual observations covering the period 1886–1993. A structural time series model relating consumer prices to output is estimated over four sub-periods. The results indicate that prices were procyclical in the inter-war period, countercyclical in the post-1973 period and acyclical otherwise. The proposition that the cyclical behaviour of prices is determined by the dominance of supply or demand shocks alone is disputed on the basis of empirical evidence and theoretical reasoning. It is concluded that the cyclical behaviour of prices cannot be explained just by analysing time series on output and prices and that due attention should be paid to the institutional and policy changes occurring during the period under study. It is demonstrated that the empirical results are consistent with the events experienced by the U.K. economy in the most recent period. First version received: November 1998/final version accepted: October 1999     

Explaining House Prices in Australia: 1970–2003*

This paper aims to explain changes in real house prices in Australia from 1970 to 2003. We develop and estimate a long-run equilibrium model that shows the real long-run economic determinants of house prices and a short-run asymmetric error correction model to represent house price changes in the short run. We find that, in the long run, real house prices are determined significantly and positively by real disposable income and the consumer price index. They are also determined significantly and negatively by the unemployment rate, real mortgage rates, equity prices and the housing stock. Employing our short-run asymmetric error correction model, we find that there are significant lags in adjustment to equilibrium. When real house prices are rising at more than 2 per cent per annum, the housing market adjusts to equilibrium in approximately four quarters. When real house prices are static or falling, the adjustment process takes six quarters.     

Welfare-improving financial innovation with a single good

Summary. We show that at any equilibrium of almost every single-good incomplete markets economy, it is possible to find an asset which when introduced makes every agent better-off. Diamond (1967) has shown, however, that such economies are constrained suboptimal, so it is of course impossible to find a new asset which makes all agents worse-off. This contrasts with the case of multiple consumption goods, for which Cass and Citanna (1995) and Elul (1995) demonstrate that equilibrium utilities may be arbitrarily perturbed via financial innovation. Proving our result requires us to exploit not changes in equilibrium prices, but rather the gains to trading the new asset. In particular, we find an asset which when introduced does not change the existing asset prices even though it is traded by every agent – by a revealed preference argument it must therefore make everyone better-off. Received: May 28, 1997; revised version: July 1, 1997     

The impact of imports on price-cost margins: An empirical illustration

This article decomposes the impact of imports on domestic price-cost margins into separate price and cost effects. Using data from 24 food-processing industries, the empirical results show that although the direct impact of imports on prices is always negative, a positive net impact on price-cost margins occurs in industries characterized by low own-price elasticity of demand and diseconomies of scale. Further results show that the disciplining effect of imports is more preponderant the lower the degree of domestic competition. First version received: September 2000/Final version received: March 2002 RID="*" ID="*"  Professor and Associate Professor, respectively, in their respective departments. They can be reached at rigoberto.lopez@uconn.edu or elena.lopez@uah.es. The authors are grateful to two anonymous referees for their fruitful and helpful comments. Financial support provided by the USDA CSREES special grant No. 00-34178-9036 and by the Cátedras del Banco Santander Central Hispano-Universidad de Alcalá. This is Scientific Contribution No. 1794 of the Storrs Agricultural Experiment Station. RID="*" ID="*"  Professor and Associate Professor, respectively, in their respective departments. They can be reached at rigoberto.lopez@uconn.edu or elena.lopez@uah.es. The authors are grateful to two anonymous referees for their fruitful and helpful comments. Financial support provided by the USDA CSREES special grant No. 00-34178-9036 and by the Cátedras del Banco Santander Central Hispano-Universidad de Alcalá. This is Scientific Contribution No. 1794 of the Storrs Agricultural Experiment Station.     

The contribution of institutions, trade, and geography to the development process: How robust is the empirical evidence to variations in the sample?

This paper uses an influence spectrum to identify influential subsets in a stylized cross-country data set and finds that institutions, geography, and trade (policy), all appear to play a significant role in the development process for a relatively large sub-sample of countries. For example, equatorial distance, a proxy for geography, becomes positive and significant (originally negative and insignificant) after removing only eight countries or observations from the original sample of sixty-three, while controlling for institutions and trade. In fact, for this set of fifty-five countries all three variables have the correct sign and are statistically significant. As another example, the trade variable becomes positive and significant (originally insignificant) after removing only two countries from the original sample.First version received: May 2003/Final version received: February 2004     

Domestic and international strategic interactions in environment policy formation

Summary. In this paper, we establish the most possilbe general formulation of the technology governing carbon-gas emission, giving rise to global external diseconomies, and ty to explore into the strategic interactions,both domestic and international, when an individual country decides on the environmental policies. Through the comparison among emission taxes, quotas, and standard in the perfectly competitive private economies, we find that the first two policies are equivalent but they are different in effects by virtue of what we may call the tax-exemption effect of emission standards. Such a difference in the policy effect further affects the other country's welfare through the global externalities, amplified through whether the government can precommit to either the emission tax or the emission standard. Received: January 16, 2001; revised version: April 16, 2002 RID="*" ID="*" The authors thank the valuable comments by an anonymous referee. Ministry of Education and Science for its financial support is also greatly acknowledged. Correspondence to:K. Kiyono     

Statistical analysis of inequality with decompositions: the Canadian experience

This study carries out a decomposition of Theil-entropy measures into a between-group component, based on factors such as education, age, gender, and marital status, and a component representing inequality within each group. We apply a bootstrapping technique to measures of inequality to enable statistical inference. Trends in household income inequality in Canada are investigated using data from 1991 to 1997 drawn from Survey of Consumer Finance. We find an evident trend toward increasing inequality of household incomes between the years 1991–1997, during which the economy was recovering from a steep recession. Although most of the increase in measured inequality is attributed to the `within-group' component, we find the change in `between-group' inequality to be significant for education, age, and marital status. First version received: May 2001/Final version received: September 2001     

On moment condition failure in German stock returns: an application of recent advances in extreme value statistics

This note reconsiders divergent results on the extremal behaviour of German stock returns that have been published recently. In particular, investigations of this issue have arrived at different conclusions regarding the finiteness of the second moment of the return distributions. Here we apply some newly developed, improved techniques for the estimation of the so-called tail index to the time series of returns on various German stocks. We find evidence indicating that in the vast majority of cases the tails are not fat enough to conform with an infinite-variance distribution. Conflicting results in previous studies are shown to be due to different a priori choices of the size of the tail region. First version received: Dec. 1998/Final version received: April 2000