Asymptotic behaviour of tests for a unit root against an explosive alternative

We compare the asymptotic local power of upper-tail unit root tests against an explosive alternative based on ordinary least squares (OLS) and quasi-differenced (QD) demeaning/detrending. We find that under an asymptotically negligible initialisation, the QD-based tests are near asymptotically efficient and generally offer superior power to OLS-based approaches; however, the power gains are much more modest than in the lower-tail testing context. We also find that asymptotically non-negligible initial conditions do not affect the power ranking in the same way as they do for lower-tail tests, with the QD-based tests retaining a power advantage in such cases.     

Testing the predictive power of the term structure without data snooping bias

It is well documented that the term structure of interest rates has predictive power for real economic growth. Applying the stepwise superior predictive ability test, we find that superior models contain both a short-term rate and a term spread.     

Some cautions on the use of nonlinear panel unit root tests: Evidence from a modified series-specific non-linear panel unit-root test

The purpose of this paper is to examine the relevance of applying nonlinear panel unit root test to examine the non-linear mean reversion behaviors of real exchange rates. We find that nonlinear panel unit root test may achieve lower power performance as compared to its alternative of linear panel unit test when the data generating process does not contain significant non-linear components. This finding post cautions to researchers in modeling and testing real exchanges behavior. We also develop a modified series-specific nonlinear panel unit root test and find evidence in favor of purchasing power parity hypothesis for China's four ASEAN trading partners in the period of February 1997 to August 2009.     

Testing of the mean reversion parameter in continuous time models

In this paper we use the approximate bias expressions developed in Yu (2012) and Bao et al. (2013) to improve the testing of the ordinary least squares or quasi-maximum likelihood estimator of the mean reversion parameter in continuous time models. We follow the approach given in Iglesias and Phillips (2005) and Chambers (2013), where if we bias correct the estimated mean reversion parameter, we can improve on the small sample properties of the testing procedure. Simulation results confirm the usefulness of this approach using a t$t$-statistic in this setting in the near unit root situation when the mean reversion parameter is approaching its lower bound. Therefore we always recommend bias correcting when applying a t$t$-statistic in practice in this context.     

Power monotonicity in detecting volatility levels change

We show that the CUSUM and LM tests for structural change in the volatility process enjoy monotonic power. The framework is general including many recently proposed non-stationary GARCH-type models. The result is in contrast to the well-known issue of non-monotonic power for the CUSUM-based tests for changing mean. Simulations and an empirical example provide further support.     

The FMLS-based CUSUM statistic for testing the null of smooth time-varying cointegration in the presence of a structural break

In this paper we extend the FMLS-based CUSUM cointegration test (Xiao and Phillips, 2002) for testing the smooth time-varying cointegration null hypothesis. For this purpose we use Chebyshev time polynomials to specify time-varying coefficients under the null. We derive the limiting distribution of the statistic, which is pivotal with the order of the Chebyshev time polynomials, and we provide the critical values to conduct the proposed test.     

Dynamic persistence in the unemployment rate of OECD countries

Previous studies use a variety of increasingly advanced unit root tests to determine whether Blanchard and Summers (1986) hysteresis theory of unemployment or the classical ‘natural’ rate theory of Friedman (1968) and Phelps (1967, 1968) is most relevant for a given country. However these tests all specify a unit root under the null hypothesis against a stationary alternative, such as in the paper by Lee and Chang (2008), making the two theories of unemployment mutually exclusive over the sample period. This paper moves away from this dichotomy by allowing for switches between hysteresis and the natural rate theory using the recently developed test of Leybourne, Kim and Taylor (2007). We find that in countries like the United Kingdom, the natural rate theory is detected in the post-World War Two period of stabilisation: the time leading up to the seminal works of Friedman and Phelps. Hysteresis is found over the First World War and Great Depression periods, and in the period from the 1970s; a time characterised by rising trade union power. We also compute numerical measures of persistence using grid-bootstrap estimates of the autoregressive parameter, following Hansen (1999).     

Specification tests and tests for overidentifying restrictions in panel data models with selection

Standard tests are generally not applicable in panel data models with selection. The paper shows how the Hausman specification test and the Sargan-Hansen test for overidentifying restrictions can be generalized to panel data models with unobserved heterogeneity and sample selection.     

Spurious regressions driven by excessive volatility

This paper shows that the excessive volatility results in spurious regressions. The spuriousness can be driven by persistency in the error variances unlike the conventional spurious regressions that are generated by the persistency in the level of regression errors.     

Long memory and changing persistence

We study the empirical behaviour of semi-parametric estimation for long-memory models when the true data generating process exhibits a change in persistence. Evidence for long memory is likely to be found. Procedures for discrimination between different models are proposed.     

Modeling life expectancy in Turkey

This study is concerned with understanding the factors of life expectancy in Turkey for the period 1965-2005. The determinants of life expectancy in Turkey are related to selected social, economical and environmental factors. Bounds testing approach to cointegration is employed to compute the long-run elasticities of longevity with respect to the selected economic, social and environmental factors. There exists no previous study that estimates empirically the determinants of life expectancy in Turkey on the basis of time series data and cointegration framework. Empirical results suggest that nutrition and food availability along with health expenditures are the main positive factors for improving longevity whereas smoking seems to be the main cause for mortality. The results also draw a number of policy recommendations for improving longevity.     

IV threshold cointegration tests and the Taylor rule

The usual cointegration tests often entail nuisance parameters that hinder precise inference. This problem is even more pronounced in a nonlinear threshold framework when stationary covariates are included. In this paper, we propose new threshold cointegration tests based on instrumental variables estimation. The newly suggested IV threshold cointegration tests have standard distributions that do not depend on any stationary covariates. These desirable properties allow us to formally test for threshold cointegration in a nonlinear Taylor rule. We perform this analysis using real-time U.S. data for several sample periods from 1970 to 2005. In contrast to the linear model, we find strong evidence of cointegration in a nonlinear Taylor rule with threshold effects. Overall, we find that the Federal Reserve is far more policy active when inflation is high than when inflation is low. In addition, we reaffirm the notion that the response to counteract high inflation was weakest in the 1970s and strongest in the Greenspan era.     

Nowcasting causality in mixed frequency vector autoregressive models

This paper introduces nowcasting causality as the mixed-frequency version of instantaneous causality. We analyze the relationship between nowcasting and Granger causality in a mixed-frequency VAR and illustrate its impact on the significance of high-frequency variables in mixed-frequency conditional models.     

Volatility spill-overs in commodity spot prices: New empirical results

The classical rational expectations model of commodity markets implies that expected spot price risk is an explanatory variable in spot price regressions; and also that inventory carryover, which is reduced by a larger price variance, creates autoregressive conditional heteroscedastic processes in spot prices. In order to falsify/verify this theory, it has typically been assumed that the square root of the conditional variance of spot prices, a proxy for spot price risk, enters the conditional mean function of spot prices. Based on this simple representation, a typical but counter intuitive outcome has been that spot price risk has an insignificant impact on spot prices, see, e.g., Beck (Beck, S., 1993. A Rational Expectations Model of Time Varying Risk Premia in Commodities Futures Markets: Theory and Evidence. International Economic Review 34, 149–168, Beck, S., 2001. Autoregressive Conditional Heteroskedasticity in Commodity Spot Prices. Journal of Applied Econometrics 16, 115–132). In this paper, we propose an alternative functional relationship (from GARCH(1,1) to GARCH(1,1)-AR(m)) between spot price risk and spot prices that is fully supported by the classical rational expectations model, and based on this new representation we are able to provide stronger empirical support for Muth's rational expectation theory.     

Panel LM unit root tests with level and trend shifts

This paper considers a Lagrange multiplier (LM) based panel unit root test that allows for heterogeneous structural breaks in both the intercepts and slopes of a series. We note that many popular time series variables are likely to exhibit changing means and/or trends over time. Given that the usual tests will depend on the nuisance parameters indicating the locations of the trend breaks, we adopt a transformation procedure that makes our new panel unit root tests invariant to the nuisance parameters. To illustrate the importance of the power gain provided by our test, we examine the convergence hypothesis using relative ratios of per capita health care expenditures in 20 OECD countries. Our results provide evidence that the convergence hypothesis is supported.     

Modelling the risk–return relation for the S&P 100: The role of VIX

A significantly positive risk–return relation for the S&P 100 market index is detected if the implied volatility index (VIX) is allowed for as an exogenous variable in the conditional variance equation. This result holds for 4 alternative GARCH specifications, irrespective of the conditional distribution, and regardless of whether the conditional mean equation includes a constant term. This finding is robust to sub-samples, and to using VIX innovations to control for dividend yield and trading volume effects. Monte Carlo evidence suggests that if VIX is not included, the risk–return relation is more likely to be negative or weak, in line with several previous studies. If VIX is included, the distribution of the risk–return parameter has more than 99% of its mass in the area of positive values. We conclude that VIX carries important forward-looking information which improves the precision of the conditional variance estimation and, subsequently, reveals a significantly positive relation.     

New trade theory,non-price competitiveness and export performance

This paper develops a demand function for Greece's exports of manufactures according to New Trade Theory. Non-price competitiveness plays a vital role in explaining export performance and failure to include it in the export equation may lead to mis-specification error. Foreign income has a moderately high effect on exports in the long run and no effect in the short run. Exports are also sensitive to domestic and competitors' prices in the long run, but cost and price competitiveness elasticities are close to one, indicating that Greek exporters have some ability to compete on the basis of prices.     

Modified Quasi‐Likelihood Ratio Test for Regime Switching

In this paper we propose a modified quasi‐likelihood ratio test of the null hypothesis of one regime against the alternative of two regimes in Markov regime‐switching models. The asymptotic distribution of the proposed test statistic is a simple function of Gaussian random variables, and the inference is no more complicated than in the standard case. Our simulations show that the proposed test has good finite sample size and power that are comparable to the quasi‐likelihood ratio test of Cho and White. We apply our test to stock returns and Japanese policy functions.     

THE INF‐T TEST FOR A UNIT ROOT AGAINST ASYMMETRIC EXPONENTIAL SMOOTH TRANSITION AUTOREGRESSIVE MODELS

This paper proposes a new test for a unit root against an alternative of asymmetric exponential smooth transition autoregressive models, by extending the infimum test developed by Park and Shintani. Simulation results suggest that the test performs reasonably well in finite samples. The proposed test is also applied to real exchange rates to examine their asymmetric and nonlinear mean‐reverting properties.     

GARCH with omitted persistent covariate

This paper analyzes the effect of omitting a persistent covariate in the GARCH-X model. In particular, we show that if the relevant persistent covariate is omitted and the usual GARCH(1,1) model is fitted, the model will be estimated approximately as an IGARCH model. This may well explain the ubiquitous evidence of the IGARCH in empirical volatility analysis.