Central bank transparency and financial market expectations: The case of emerging markets

In this paper, we study how central bank transparency influences the formation of money market expectations in emerging markets. The sample covers 25 countries for the period from January 1998 to December 2009. We find, first, that transparency reduces the bias (the difference between the money market rate and the weighted expected target rate over the contract period) in money market expectations. The effect is larger for countries with no exchange rate peg and countries with low income. Second, an intermediate level of transparency is found to have the most favorable influence on money market expectations: neither complete secrecy nor complete transparency is optimal. Finally, all subcategories of the Eijffinger and Geraats (2006) index lead to a smaller bias in expectations, with political transparency having the largest effect.     

Property taxation and the demand for housing: An econometric analysis

There is disagreement among economists regarding the effect of a local increase in property taxation on the housing market. In defining the price of housing services studies of the demand for housing have treated the property tax exclusively as an excise tax on housing consumption. Two recent theoretical developments suggest this is a misrepresentation of the tax. One theory holds that the excise effects of property taxation may be shifted backward to the factors employed in the production of housing. The other theory concludes that the property tax is not an excise, but rather serves as an efficient price for local public services. To investigate these hypotheses, data from the Annual Housing Survey were employed to estimate a housing demand model which included the net effective property tax rate among the set of independent variables. In addition to revealing the property tax-housing demand relationship, the model provides more reliable estimates of income and price elasticities by eliminating specification errors found in previous studies. Results indicate that the property tax reduces the housing consumption of central city homeowners, but does not distort the suburban housing market.     

The demand for retailer-financed instalment credit: An econometric analysis

During the mid- to late 1980s the UK's Chancellor of the Exchequer has attempted to reduce the volume of consumer credit extended by increasing interest rates rather than by re-introducing terms controls. This paper presents estimates of demand functions for new credit extended by retailers which was financed by them and repaid by instalments. Following earlier papers, a stock-adjustment model is presented that is extended to allow for credit rationing. The results suggest that the demand for such new credit extended is related negatively to terms control and positively to personal disposable income and expectations. Demand was not found to be related to (a proxy for) the nominal interest rate charged by retailers (although it was found to be positively related to the real rate). The former finding is consistent with questionnaire evidence that consumers are unaware of the interest rate that they pay for credit. Elasticities of demand are presented.     

Offshoring and job loss fears: An econometric analysis of individual perceptions

We quantify the impact of offshoring and other globalisation measures on individual perceptions of job security. For the analysis we combine industry-level offshoring measures with micro-level data from a large German household panel survey and estimate ordinal fixed effects models. Our results indicate that offshoring to low-wage countries significantly raises job loss fears whilst offshoring to high-wage countries somewhat lowers them. Over our sample period from 1995 to 2006, offshoring to low and high-wage countries together can account for about 13% of the total increase in job loss fears. High-skilled workers are more sensitive to offshoring although their objective job loss risk is lower relative to low-skilled workers, which we argue reflects the fact that they have more to lose from unemployment.     

An econometric analysis of asymmetric volatility: Theory and application to patents

The purpose in registering patents is to protect the intellectual property of the rightful owners. Deterministic and stochastic trends in registered patents can be used to describe a country's technological capabilities and act as a proxy for innovation. This paper presents an econometric analysis of the symmetric and asymmetric volatility of the patent share, which is based on the number of registered patents for the top 12 foreign patenting countries in the USA. International rankings based on the number of foreign US patents, patent intensity (or patents per capita), patent share, the rate of assigned patents for commercial exploitation, and average rank scores, are given for the top 12 foreign countries. Monthly time series data from the United States Patent and Trademark Office for January 1975 to December 1998 are used to estimate symmetric and asymmetric models of the time-varying volatility of the patent share, namely US patents registered by each of the top 12 foreign countries relative to total US patents. A weak sufficient condition for the consistency and asymptotic normality of the quasi-maximum likelihood estimator (QMLE) of the univariate GJR(1,1) model is established under non-normality of the conditional shocks. The empirical results provide a diagnostic validation of the regularity conditions underlying the GJR(1,1) model, specifically the log-moment condition for consistency and asymptotic normality of the QMLE, and the computationally more straightforward but stronger second and fourth moment conditions. Of the symmetric and asymmetric models estimated, AR(1)–EGARCH(1,1) is found to be suitable for most countries, while AR(1)–GARCH(1,1) and AR(1)–GJR(1,1) also provide useful insights. Non-nested procedures are developed to test AR(1)–GARCH(1,1) versus AR(1)–EGARCH(1,1), and AR(1)–GJR(1,1) versus AR(1)–EGARCH(1,1).     

Interdependent preferences: an econometric analysis

The theoretical model of Gaertner (1974) and Pollak (1976) for the interdependence of preferences in the Linear Expenditure System is estimated for a cross-section of households. The interdependence of consumption of different households has implications for the stochastic structure of the model and for the identifiability of its parameters. Both aspects are dealt with. The empirical results indicate a significant role played by the interdependence of preferences. One of its implications is that predictions of the effects of changes in a household's exogenous variables differ according to whether the exogenous variable only changes for this household or for all households jointly. © 1997 John Wiley & Sons, Ltd.     

Inflation dynamics and the New Keynesian Phillips Curve: An identification robust econometric analysis

We use identification-robust methods to assess a New Keynesian Phillips Curve (NKPC) equation. We focus on the Gali – Gertler [1999. Inflation dynamics: a structural econometric analysis. Journal of Monetary Economics 44, 195–222] specification, for U.S. and Canadian data. Two variants of the model are studied: one based on a rational-expectations assumption, and a modification which uses survey-based data on inflation expectations. The two specifications exhibit sharp differences concerning: (i) identification difficulties, (ii) backward-looking behavior, and (iii) price adjustment frequency. Overall, the results provide some support to the hybrid NKPC for the U.S., whereas the model is not suited to Canada. Our analysis underscores the need for employing identification-robust inference methods.     

Modeling the price side of econometric models: An analysis of the underlying hypotheses

Using a non-linear vector autoregression, this paper investigates the dynamic interactions between a set of disaggregated price series. A hypothesis, positing that all sectoral prices are a function of a ‘major price index’, is tested and the way this hypothesis is used in econometric models is discussed. The model is based upon the theory of covariance stationary time series. Non-linear estimation procedures are used.     

Bond review and rating change announcements: An examination of informational value and market efficiency

This paper examines the impact of announcements of both bond rating reviews and rating changes on equity returns. We find that announcements of review for possible down grading of debt have a significant negative effect on stock prices while subsequent actual downgrades have a negligible impact. Further, we find that press releases convey new information to the market whereas the subsequent reporting of this information in the financial press causes little market reaction. We conclude that extreme care regarding details of the dissemination of financial information must be exercised in any event study.     

An analysis of firm and market volatility

In this paper, using time series data for the period 2 January 1998 to 31 December 2008 for 560 firms listed on the NYSE, we examine whether firm volatility is related to market volatility. The main contribution of this paper is that we develop an analytical framework motivating the firm-market volatility relationship. We present three new findings on volatility. First, we discover significant evidence of common volatility; for 12 out of 14 sectors, market volatility has a statistically significant effect on firm volatility for at least 50 percent of firms. Second, we discover significant evidence of size effects: for small-sized firms, there is weak evidence of commonality in volatility, while for large-sized firms there is high evidence (for as much as 75 percent of firms) of commonality in volatility. Third, we find that market volatility predicts firm volatility for firms belonging to five of the 14 sectors.     

The scope for market segmentation within the charity market: An empirical analysis

Based on the analysis of 384 questionnaires, this paper investigates the scope for market segmentation for a variety of UK charities. The results call into question the idea that donor preferences expressed for a particular type of charity are associated with particular demographic, lifestyle or opinion and attitude segments. The managerial implications of the findings are discussed and suggestions for future research are made.     

Earnings dynamics in Canada: an econometric analysis

This paper reports the results of an empirical analysis of earnings dynamics in the Canadian labour market based on earnings data based drawn from tax returns between 1982 and 1994. Individuals' movements up and down quintiles of the earnings distribution are analysed using a hazard model approach. This represents one of the first studies for any country which models mobility across the entire distribution of earnings, including the middle and upper ranges as well as the lower ranges. The effects on transitions between quintiles are analyzed for the following variables: elapsed time spent in a given quintile (i.e., duration dependence effects), age, sex, geographical region, area size of residence, family status, language and overall macroeconomic conditions. One principal finding is that the conditional probability of transiting up or down the earnings distribution depends negatively on the elapsed time that an individual has spent in a given quintile. The earnings mobility patterns appear to be cyclical and exhibit some tendency of reversion to the mean, whereby the conditional probability of upward (downward) mobility is higher for those individuals presently situated in the lower (higher) quintiles.     

Value stocks and market efficiency

We form portfolios based on firm book-to-market equity ratios and apply stochastic dominance tests. Value (high book-to-market) portfolios dominate low book-to-market portfolios. Thus, value stocks are not rationally priced by the market and the book-to-market ratio is not an efficiently priced proxy for equity risk. We also find that the superior performance of value stocks is not due to the January effect.     

An econometric model of internal migration and development: extensions and tests

The author extends a previous work on migration in Italy "from 1958-1976 to 1958-1981, tests for the stability of the model and its coefficients, and uses the model for policy simulations and forecasting. The model performs as well over the extended sample period as over the original period and, even more important..., the model is found to be quite stable. This is remarkable in view of the economic turmoil that characterized the years by which the original sample period was extended."     

Index fund rebalancing and market efficiency

Stocks newly added to the S&P 500 Stock Index experience significantly positive abnormal returns on the date of their inclusion. This study looks at the rebalancing required by index funds when RJR/Nabisco was replaced by First Union. On that date, approximately one percent of the market capitalization was removed and had to be reallocated among the remaining 499 stocks in the Index, but there was no change in information or attention for these 499 stocks. We find that while there was abnormal trading volume on the original takeover date, there were no abnormal returns. The only hypotheses consistent with previous results, as well as these results, are the information or the attention hypotheses, that stocks newly added to the index have positive information disclosed or experience increased investor attention.     

Monetary policy transparency in a forward-looking market: Evidence from the United States

Because unsatisfactory measures of the monetary policy transparency were used, the existing literature found mixed empirical results for the relationship between the monetary policy transparency and risk/volatility. This paper extends the literature by using a recently developed monetary transparency index [Kia’s (2011) index] which is dynamic and continuous. Furthermore, the existing literature ignores the fact that market participants can be forward looking and, therefore, not policy invariant. This study also finds that the agents in the market are not policy invariant and the more transparent the monetary policy is the less risky and volatile the money market will be.     

Testing unstable econometric models for stability: An empirical study

Econometric models may be tested for stability using the asymptotic distribution of the dominant characteristic root of the system as derived by Theil and Boot (1962) or by Oberhofer and Kmenta (1973). This paper points out that this distribution is known for stable models only which implies that the null hypothesis must always be stability and the power of the test is in question. A Monte Carlo study is performed to investigate the power of the test and the distribution of the test statistic for unstable and stable models in the small sample case.