Multimaturity efficient market hypotheses: Sorting out rejections in international interest and exchange rate markets

This paper is concerned with econometric testing of multimaturity efficient market hypotheses for Canadian and Japanese foreign exchange and Eurocurrency deposit rates. A multimaturity efficient market hypothesis is developed and it is demonstrated that for the null hypothesis of multimarket efficiency to hold in the forward exhange market, rational expectations of the term structure of the matching Eurocurrency deposit rates must hold.     

An error-correction model for forecasting changes in foreign currency futures spreads

The foreign currency futures pricing model of Amin and Jarrow (1991) is used to develop a model that predicts the primary determinants of foreign currency futures spreads. Our data set consists of daily observations of futures prices, spot exchange rates, and Eurocurrency LIBOR for the British pound and Japanese yen from January 2, 1990 to December 31, 2004. Using a 5-year moving window methodology, we find repeated evidence of cointegration between the futures spread, spot exchange rates, and interest rates over ten different estimation periods. An errorcorrection model is used to develop a trading strategy that generates significant out-of-sample profits.     

The expectations hypothesis and decoupling of short- and long-term US interest rates: A pairwise approach

The link between short-term policy rates and long-term rates elucidate the potential effectiveness of monetary policy. We examine the US term structure of interest rates using a pairwise econometric approach advocated by Pesaran (2007). Our empirical modelling strategy employs a probabilistic test statistic for the expectations hypothesis of the term structure based on the percentage of unit root rejections among all interest rate differentials. We find support for the expectations hypothesis and provide new insights into the nature of interest rate decoupling which are of value to policymakers. The maturity gap associated with interest rate pairs negatively impacts on the probability of stationarity, and also on the speed of adjustment towards long-run equilibrium. We further show that the speed of adjustment has become more sensitive to the maturity gap over time.     

Adaptive consistent unit-root tests based on autoregressive threshold model

This paper proposes SupWald tests from a threshold autoregressive model computed with an adaptive set of thresholds. Simple examples of adaptive threshold sets are given. A second contribution of the paper is a general asymptotic null limit theory when the threshold variable is a level variable. We obtain a pivotal null limiting distribution under some simple conditions for bounded or asymptotically unbounded thresholds. Our general approach is flexible enough to allow a choice of the auxiliary threshold model or of the threshold set involved in the test specifically designed for nonlinear stationary alternatives relevant for macroeconomic and financial topics involving arbitrage in presence of transaction costs. A Monte-Carlo study and an application to the interest rates spread for French, German, New-Zealander and US post-1980 monthly data illustrate the ability of the adaptive SupWald tests to reject unit-root when the ADF does not.     

A class of stochastic unit-root bilinear processes: Mixing properties and unit-root test

A class of stochastic unit-root bilinear processes, allowing for GARCH-type effects with asymmetries, is studied. Necessary and sufficient conditions for the strict and second-order stationarity of the error process are given. The strictly stationary solution is shown to be strongly mixing under mild additional assumptions. It follows that, in this model, the standard (non-stochastic) unit-root tests of Phillips–Perron and Dickey–Fuller are asymptotically valid to detect the presence of a (stochastic) unit-root. The finite sample properties of these tests are studied via Monte-Carlo experiments.     

Robust estimation for structural spurious regressions and a Hausman-type cointegration test

This paper analyzes an approach to correcting spurious regressions involving unit-root nonstationary variables by generalized least squares (GLS) using asymptotic theory. This analysis leads to a new robust estimator and a new test for dynamic regressions. The robust estimator is consistent for structural parameters not just when the regression error is stationary but also when it is unit-root nonstationary under certain conditions. We also develop a Hausman-type test for the null hypothesis of cointegration for dynamic ordinary least squares (OLS) estimation. We demonstrate our estimation and testing methods in three applications: (i) long-run money demand in the U.S., (ii) output convergence among industrial and developing countries, and (iii) purchasing power parity (PPP) for traded and non-traded goods.     

Unemployment in Greece: Evidence from Greek regions using panel unit root tests

The purpose of the paper is to examine the nature of Greek regional unemployment. The paper contributes to the literature assessing the stochastic properties of Greek unemployment rate in the context of the Greek regions by relying on various univariate and panel unit root tests. In particular, recently developed and more powerful panel unit-root tests that control for structural breaks, heterogeneity and cross-sectional dependence in the panel are employed. The results show that in all cases, after taking into account the fact that regional unemployment rates in Greece are subject to a structural break, the null hypothesis of a unit root is not rejected, indicating that the Greek regional unemployment series are non-stationary with the presence of a structural break.     

Unit roots and structural breaks in North American unemployment rates

This paper examines the univariate time-series properties of the unemployment rate in Canada, Mexico, and the United States. Tests are employed that allow for endogenously determined break dates and the results are compared to stationarity tests that assume no break in the data. The structural break unit-root tests contradict the findings of the standard tests. We conclude that North American unemployment rates are trend stationary around a breaking trend.     

Testing Uncovered Interest Rate Parity and Term Structure Using a Three‐regime Threshold Unit Root VECM: An Application to the Swiss ‘Isle’ of Interest Rates*

In this article, a three‐regime multivariate threshold vector error correction model with a ‘band of inaction’ is formulated to examine uncovered interest rate parity (UIRP) and expectation hypothesis of the term structure (EHTS) of interest rates for Switzerland. Combining both UIRP and EHTS in a model that allows for nonlinearities, we investigate whether the Swiss advantage is disappearing with respect to Europe. Our results favour threshold cointegration and show that both hypotheses hold, at least in one of the three regimes of the process for Switzerland/Germany. The same is not true between Switzerland and the United States.     

The demand for M3 in the euro area

In this paper, an empirically stable money demand model for M3 in the euro area is constructed. Starting with a multivariate system, three cointegrating relationships with economic content are found: (i) the spread between the long‐term and the short‐term nominal interest rates, (ii) the long‐term real interest rate, and (iii) a long‐run demand for broad money M3. There is evidence that the determinants of M3 money demand are weakly exogenous with respect to the long‐run parameters. Hence, following a general‐to‐specific modelling approach, a parsimonious conditional error‐correction model for M3 money demand is derived which can be interpreted economically. For the conditional model, long‐run and short‐run parameter stability is extensively tested and not rejected. Copyright © 2001 John Wiley & Sons, Ltd.     

Forecasts of US short-term interest rates: A flexible forecast combination approach

This paper develops a flexible approach to combine forecasts of future spot rates with forecasts from time-series models or macroeconomic variables. We find empirical evidence that, accounting for both regimes in interest rate dynamics, and combining forecasts from different models, helps improve the out-of-sample forecasting performance for US short-term rates. Imposing restrictions from the expectations hypothesis on the forecasting model are found to help at long forecasting horizons.     

Recent Developments in Modelling Nonstationary Vector Autoregressions

In this paper we review some recent developments in the modelling of nonstationary vector autoregressions (VARs) which we feel have great potential for furthering applied researchers understanding of the relationships linking the variables making up a VAR. The developments surveyed are the use of model determination criteria in selecting lag length, trend order and cointegrating rank, causality testing in vector error correction models, FM-VAR estimation of levels VARS, common trends and cycles analysis, permanent and transitory decompositions, impulse response asymptotics, and the links between cointegrated VARs and structural models. The techniques are illustrated by applications to the modelling of U.K. equities, dividends and interest rates.     

Multi-step forecasting in emerging economies: An investigation of the South African GDP

To forecast at several, say h, periods into the future, a modeller faces a choice between iterating one-step-ahead forecasts (the IMS technique), or directly modeling the relationship between observations separated by an h-period interval and using it for forecasting (DMS forecasting). It is known that structural breaks, unit-root non-stationarity and residual autocorrelation may improve DMS accuracy in finite samples, all of which occur when modelling the South African GDP over the period 1965–2000. This paper analyzes the forecasting properties of 779 multivariate and univariate models that combine different techniques of robust forecasting. We find strong evidence supporting the use of DMS and intercept correction, and attribute their superior forecasting performance to their robustness in the presence of breaks.     

MODELLING LARGE OPEN ECONOMIES WITH INTERNATIONAL LINKAGES: THE USA AND EURO AREA

Empirical modelling of the linkages between the euro area and the USA requires an open economy framework. The methodology proposed in this paper achieves identification of a structural vector error correction model by supplementing restrictions from economic theory with assumptions for the direction of causality in cross‐country contemporaneous relationships. Our baseline model assumes contemporaneous causality runs from the USA to the euro area for both output and inflation, with monetary policy domestically focused. The role of the USA as leading the euro area business cycle is reinforced by our results, but strong bidirectional cross‐country interactions are uncovered for inflation and interest rates. Copyright © 2013 John Wiley & Sons, Ltd.     

The impact ofThe Wall Street Journal’s closely watched reports on short-term interest rates

Using a reduced-form macroeconomic model, suggested by the Real Economic Activity hypothesis, in this study the authors examine the effect of certain economic indicators, published weekly byThe Wall Street Journal, on interest rates, for the period November 1987–November 1989. The results suggest that unexpected M3 announcements significantly affect market interest rates. However, there is no evidence of significant announcement effects for the other government statistics (new jobless claims, auto sales, M1, and M2). The evidence suggests that financial markets have not considered information in these economic announcements to be particularly newsworthy, in the face of M3 announcements.     

Hedonic analysis of a housing market in disequilibrium

This paper tests the hypothesis that information about housing market activity and about specific dwellings becomes capitalized into single family dwelling prices through a disequilibrium adjustment process. A dynamic price adjustment model, which is an extension of the standard hedonic model widely used in the literature, is derived, specified, and tested with both micro and aggregated data from the city of Chicago and for the period 1972–1976. The results show that from 32 to 75% of the variance in dwelling prices, unexplained by the standard hedonic attributes under assumptions of equilibrium, is explained by market activity signals such as mortgage interest rates and neighborhood transaction rates of the preceding period. Dwellings about which there is less information, making comparison pricing difficult, are shown to command a price premium. The standard equilibrium hypothesis appears readily rejectable and better predictions are obtained from the disequilibrium specifications. Several directions for extending this line of research are discussed.     

凯恩斯假设下AD-AS模型的比较静态分析

在凯恩斯假设下的AD-AS模型是一个静态分析模型,文章在假设下,讨论了财政政策和货币政策对产出和价格、利率和投资的影响,分析结果表明:财政政策和货币政策对产出水平和劳动力市场的失业率具有直接的影响,结果同的假设下的分析结果相同,不过变动幅度同以上不同。     

A Reconciliation of Some Paradoxical Empirical Results on the Expectations Model of the Term Structure

In this paper we attempt to reconcile contradictory empirical results for the expectations model of the term structure which are found when it is tested by a variety of methods based on single-equation and VAR models. Using monthly data for one-month and three-month interest rates, we show that the expectations hypothesis is rejected for the US and UK term structures on the basis of some popular tests. However, tests based on VAR models or on IV regressions of yield spreads on future short rate changes provide no evidence against the expectations model with a random component in the term premium.     

What if they had not Gone Negative? A Counterfactual Assessment of the Impact from Negative Interest Rates

The counterfactual estimation technique of Pesaran and Smith ( 2016 ) is employed to provide an assessment of the impact stemming from the implementation of negative interest rates in three European economies (Denmark, Sweden and Switzerland). The analysis indicates that negative interest rates did not have a significant effect on bank lending growth or inflation in any country. This failure to reject the policy ineffectiveness hypothesis most likely lies in the fact that negative interest rates did not ease the situation for the factors restricting the supply of bank lending, namely bank funding costs and Return‐on‐Equity.