A fractional cointegration analysis of Fisher hypothesis: evidence from Turkey

This paper examines the validity of Fisher hypothesis in Turkey over the period from 1990:01 through 2010:03 by using cointegration and fractional cointegration approaches. The findings from Engle and Granger cointegration test indicate that inflation and nominal interest rate series are cointegrated. Since the conventional cointegration tests do not provide strong evidence on the long run relationship, we also use fractional cointegration definition suggested by Cheung and Lai (J Bus Econ Stat 11:103–112, 1993) which requires only a mean reverting (d < 1) relationship between the series. The results from fractional cointegration tests based on GPH and Robinson methods show that inflation and nominal interest rate series are fractionally cointegrated. These findings support the validity of the Fisher hypothesis in Turkey.     

A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test

The panel data unit root test suggested by Levin and Lin (LL) has been widely used in several applications, notably in papers on tests of the purchasing power parity hypothesis. This test is based on a very restrictive hypothesis which is rarely ever of interest in practice. The Im–Pesaran–Shin (IPS) test relaxes the restrictive assumption of the LL test. This paper argues that although the IPS test has been offered as a generalization of the LL test, it is best viewed as a test for summarizing the evidence from a number of independent tests of the sample hypothesis. This problem has a long statistical history going back to R. A. Fisher. This paper suggests the Fisher test as a panel data unit root test, compares it with the LL and IPS tests, and the Bonferroni bounds test which is valid for correlated tests. Overall, the evidence points to the Fisher test with bootstrap-based critical values as the preferred choice. We also suggest the use of the Fisher test for testing stationarity as the null and also in testing for cointegration in panel data.     

线性和非线性视角下的费雪效应实证检验

基于2000年1月~2009年12月我国名义利率和通货膨胀率均为非平稳时间序列的事实,采用Johansen协整检验和门限协整(threshold cointegration)两种方法对我国是否存在费雪效应进行检验;实证发现,两种方法均支持我国存在弱费雪效应,但得出来的弱费雪效应程度却存在差别,前者认为我国通货膨胀率的变化只有6%反应到名义利率上面,而后者认为这个比例达到42.4%。     

Truncated Product Methods for Panel Unit Root Tests*

This paper proposes two new panel unit root tests based on Zaykin et al. (2002) ’s truncated product method. The first one assumes constant correlation between P‐values and the second one uses sieve bootstrap to allow for general forms of cross‐section dependence in the panel units. Monte Carlo simulation shows that both tests have reasonably good size and are powerful in cases of some very large P‐values. The proposed tests are applied to a panel of real GDP and inflation density forecasts, resulting in evidence that professional forecasters may not update their forecast precision in an optimal Bayesian way.     

Is there a unit root in the inflation rate? Evidence from sequential break and panel data models

Using sequential trend break and panel data models, we investigate the unit root hypothesis for the inflation rates of thirteen OECD countries. With individual country tests, we find evidence of stationarity in only four of the thirteen countries. The results are more striking with the panel data model. We can strongly reject the unit root hypothesis both for a panel of all thirteen countries and for a number of smaller panels consisting of as few as three countries. The non-rejection of the unit root hypothesis for inflation is very fragile to even a small amount of cross-section variation. © 1997 John Wiley & Sons, Ltd.     

A Long-Term Analysis of Regional Housing Markets and Inflation

This paper reexamines the relationship between inflation and residential property over a 30-year period. Using conventional OLS models and cointegration and causality models we examine regional markets in the United Kingdom. The OLS tests provide little evidence of a consistent and stable relationship, with large variations in the results between different regions. The cointegration results, and in particular those obtained using the Engle-Granger procedure, provide strong evidence to support the hypothesis that housing and inflation are cointegrated. Additionally, the causality results provide strong evidence to support the hypothesis that housing leads inflation.     

A re‐examination of the stationarity of inflation

In a recent examination of the integrated nature of inflation, Culver and Papell (Journal of Applied Econometrics, 1997) applied a range of unit root and stationarity tests to data from a panel of 13 OECD economies. The results obtained were mixed. While little evidence of stationarity was detected using univariate methods, rejection of the unit root hypothesis was observed under panel data unit root testing, although rejection was found to be sensitive to cross‐sectional variation. In this note the results of Culver and Papell are reconsidered in light of conditional heteroskedasticity detected in the inflation rate series. Using a more appropriate univariate testing procedure combining local‐to‐unity detrending and joint maximum likelihood estimation of a unit root testing equation and GARCH process, strong evidence in favour of stationarity is detected in 11 of 13 economies examined. In contrast to the univariate findings of Culver and Papell, the results obtained herein using an alternative univariate procedure provide evidence in support of their I(0) inference drawn using panel methods. Copyright © 2009 John Wiley & Sons, Ltd.     

Testing for Error Correction in Panel Data*

This paper proposes new error correction‐based cointegration tests for panel data. The limiting distributions of the tests are derived and critical values provided. Our simulation results suggest that the tests have good small‐sample properties with small size distortions and high power relative to other popular residual‐based panel cointegration tests. In our empirical application, we present evidence suggesting that international healthcare expenditures and GDP are cointegrated once the possibility of an invalid common factor restriction has been accounted for.     

More powerful panel data unit root tests with an application to mean reversion in real exchange rates

Unit root tests, seeking mean or trend reversion, are frequently applied to panel data. We show that more powerful variants of commonly applied tests are readily available. Moreover, power gains persist when the modifications are applied to bootstrap procedures that may be employed when cross‐correlation of a rather general sort among individual panel members is suspected. Copyright © 2004 John Wiley & Sons, Ltd.     

Cointegration Testing in Panels with Common Factors*

Panel unit‐root and no‐cointegration tests that rely on cross‐sectional independence of the panel unit experience severe size distortions when this assumption is violated, as has, for example, been shown by Banerjee, Marcellino and Osbat [Econometrics Journal (2004), Vol. 7, pp. 322–340; Empirical Economics (2005), Vol. 30, pp. 77–91] via Monte Carlo simulations. Several studies have recently addressed this issue for panel unit‐root tests using a common factor structure to model the cross‐sectional dependence, but not much work has been done yet for panel no‐cointegration tests. This paper proposes a model for panel no‐cointegration using an unobserved common factor structure, following the study by Bai and Ng [Econometrica (2004), Vol. 72, pp. 1127–1177] for panel unit roots. We distinguish two important cases: (i) the case when the non‐stationarity in the data is driven by a reduced number of common stochastic trends, and (ii) the case where we have common and idiosyncratic stochastic trends present in the data. We discuss the homogeneity restrictions on the cointegrating vectors resulting from the presence of common factor cointegration. Furthermore, we study the asymptotic behaviour of some existing residual‐based panel no‐cointegration tests, as suggested by Kao [Journal of Econometrics (1999), Vol. 90, pp. 1–44] and Pedroni [Econometric Theory (2004a), Vol. 20, pp. 597–625]. Under the data‐generating processes (DGP) used, the test statistics are no longer asymptotically normal, and convergence occurs at rate T rather than as for independent panels. We then examine the possibilities of testing for various forms of no‐cointegration by extracting the common factors and individual components from the observed data directly and then testing for no‐cointegration using residual‐based panel tests applied to the defactored data.     

Around the world with Irving Fisher

This paper aims to show why Irving Fisher's own data on interest rates and inflation in New York, London, Paris, Berlin, Calcutta, and Tokyo during 1825–1927 suggested to him that nominal interest rates adjusted neither quickly nor fully to changes in inflation, not even in the long run. In Fisher's data, interest rates evolve less rapidly than inflation and change less than inflation over time. Even so, the “Fisher effect” is commonly defined as a point-for-point effect of inflation on nominal interest rates rather than what Fisher actually found: a persistent negative effect of increased inflation on real interest rates.     

Savings and investments in the OECD, 1970–2007: A test of panel cointegration with regime changes

In this paper we test for the existence of a long-run relationship between investment and savings (the Feldstein–Horioka puzzle) in a panel of 18 OECD countries, 1970–2007, allowing for heterogenous breaks in the coefficients. For this purpose we develop a bootstrap panel cointegration with breaks robust to cross-section dependence, shown by simulation to enjoy good size and power properties provided that some care is applied in its use. The tests suggest that, even allowing for parameter shifts in the countries where capital control regulations changed in the sample period, there is no evidence of an investment–savings long-run relationship for the panel as a whole.     

Residual based tests for cointegration in dependent panels

In the paper, we propose residual based tests for cointegration in general panels with cross-sectional dependency, endogeneity and various heterogeneities. The residuals are obtained from the usual least squares estimation of the postulated cointegrating relationships from each individual unit, and the nonlinear IV panel unit root testing procedure is applied to the panels of the fitted residuals using as instruments the nonlinear transformations of the adaptively   fitted lagged residuals. The t$t$-ratio, based on the nonlinear IV estimator, is then constructed to test for unit root in the fitted residuals for each cross-section. We show that such nonlinear IV t$t$-ratios are asymptotically normal and cross-sectionally independent under the null hypothesis of no cointegration. The average or the minimum of the IVt$t$-ratios can, therefore, be used to test for the null of a fully non-cointegrated panel against the alternative of a mixed panel, i.e., a panel with only some cointegrated units. We also consider the maximum of the IV t$t$-ratios to test for a mixed panel against a fully cointegrated panel. The critical values of the minimum, maximum as well as the average tests are easily obtained from the standard normal distribution function. Our simulation results indicate that the residual based tests for cointegration perform quite well in finite samples.     

Numerical distribution functions for unit root and cointegration tests

This paper employs response surface regressions based on simulation experiments to calculate distribution functions for some well-known unit root and cointegration test statistics. The principal contributions of the paper are a set of data files that contain estimated response surface coefficients and a computer program for utilizing them. This program, which is freely available via the Internet, can easily be used to calculate both asymptotic and finite-sample critical values and P-values for any of the tests. Graphs of some of the tabulated distribution functions are provided. An empirical example deals with interest rates and inflation rates in Canada.     

面板数据非线性阈值协整的检验方法

非线性阈值协整是线性协整的后续发展。本文使用两机制TR模型对Westerlund和Edgerton(2005)的面板数据协整向量结构突变模型进行扩展,提出截距项具有阈值效应、截距项和斜率系数都具有阈值效应的面板数据非线性阈值协整模型。在此基础上,本文进而分别构造Zc、Ztc、Zr、Ztr统计量检验阈值协整,并对上述统计量的极限分布进行了数学推导,发现它们都收敛于随机泛函。仿真实验结果表明,有限样本下上述检验统计量具有较小的水平扭曲和较高的检验势。     

Hedging inflation with individual US stocks: A long-run portfolio analysis

This paper examines whether individual stocks can act as inflation hedgers. We focus on longer investment horizons and construct in- and out-of-sample portfolios based on the long-run relationship (cointegration) of stock prices with respect to consumer prices. Empirical evidence suggests that investors are better off by holding a portfolio of stocks with higher long-run betas as part of asset selection and allocation strategy. Stocks that outperform inflation tend to be drawn from the Energy and Industrial sectors. Finally, we observe that the companies average inflation hedging ability declined steadily over the past ten years, while the number of firms that hedge inflation has decreased considerably after the recent downturn of the US economy.     

Income convergence within the MENA countries: A panel unit root approach

This article aims at testing the convergence hypothesis in MENA region using new tests of a unit root in panel data. Evans and Karras [Evans P., & Karras G. (1996). Convergence revisited. Journal of Monetary Economics, 37, 249–265] and Bernard and Jones [Bernard A., & Jones C. I. (1996). Productivity across industries and countries: Time series theory and evidence. The Review of Economics and Statistics, 135–146] recommend this technique to evaluate the income convergence hypothesis. According to them it avoids econometric problems of the cross-countries growth regressions testing convergence and sample bias of the multivariate cointegration techniques. We test for both absolute and the conditional convergence with panel unit root tests using the Summers and Heston's data 5.6 and 6.1 on the periods of 1960 to 1990 and from 1960 to 2000. The absolute convergence hypothesis use panel unit roots test with no fixed individual effects. The catching-up hypothesis is not rejected for most groups of countries of the region during both periods. If we allow a break in the unit root tests, the hypothesis is not rejected for more groups. The conditional convergence requires panel unit root tests with fixed individual effects. Again, during the whole periods, the conditional convergence is not rejected for the major part of the remaining groups of MENA countries.     

Testing long‐run PPP with infinite‐variance returns

This paper investigates the long‐run purchasing power parity hypothesis when exchange rate returns and inflation rates are assumed to be heavy‐tailed stochastic processes. More specifically, residual‐based and likelihood‐ratio‐based cointegration tests of PPP that explicitly allow for infinite‐variance innovations are applied to monthly data (1973:1–1999:12) for Belgium, Canada, Denmark, France, Germany, Italy, Japan, the Netherlands, Norway, Spain, Sweden, and the United Kingdom. Our test results are marginally less supportive of PPP when the innovations are assumed to be infinite‐variance, α‐stable processes. Copyright © 2003 John Wiley & Sons, Ltd.     

A note on the foreign exchange market efficiency hypothesis

This paper examines the weak and strong forms of the foreign exchange market efficiency hypothesis (MEH) (as defined in the paper) using the recently available Harris-Inder null of cointegration procedure, which is powerful enough to distinguish between cointegration and near cointegration, and thus provide more robust results than conventional cointegration tests. Our results indicate that both forms of the MEH are rejected for all the major currencies of the European Economic Community (EEC). (JEL F310).     

The dynamics of Central European equity market comovements

This paper examines short-term and long-term comovements between developed European Union (EU) stock markets and those of three Central European (CE) countries which recently joined the EU. Dynamic cointegration and principal components methods are applied, in addition to static tests. While we find no evidence of cointegration for the period July 1995–February 2005 as a whole, dynamic tests reveal alternating period of cointegration disrupted by episodes dominated by short-term domestic factors. Principal components analysis reveals that a stable factor explains a large proportion of return variances. Ultimately, despite the decade-long process of alignment by CE countries with the EU, evidence of steadily increasing convergence of equity markets is lacking.