Testing for linear vector autoregressive dynamics under multivariate generalized autoregressive heteroskedasticity

In this paper, we propose a fixed design wild bootstrap procedure to test parameter restrictions in vector autoregressive models, which is robust in cases of conditionally heteroskedastic error terms. The wild bootstrap does not require any parametric specification of the volatility process and takes contemporaneous error correlation implicitly into account. Via a Monte Carlo investigation, empirical size and power properties of the method are illustrated for the case of white noise under the null hypothesis. We compare the bootstrap approach with standard ordinary least squares (OLS)-based, weighted least squares (WLS) and quasi-maximum likelihood (QML) approaches. In terms of empirical size, the proposed method outperforms competing approaches and achieves size-adjusted power close to WLS or QML inference. A White correction of standard OLS inference is satisfactory only in large samples. We investigate the case of Granger causality in a bivariate system of inflation expectations in France and the United Kingdom. Our evidence suggests that the former are Granger causal for the latter while for the reverse relation Granger non-causality cannot be rejected.     

Size-corrected inference in fiscal policy reaction functions: a three country assessment

As a reflection of both strong persistence of debt-to-GDP ratios and correlation of respective innovations with governments’ primary surpluses, standard t-tests in policy reaction functions show actual significance levels that are up to five times larger than their nominal reference. Adopting size-controlled inference by means of Monte Carlo-based and asymptotic Bonferroni critical values, we diagnose fiscal policies in the US and the UK to be sustainable in samples covering more than 100 years. Conditioning on post-WWII subsamples and 5% nominal significance, conventional t-tests signal fiscal sustainability for these countries. In contrast, size-corrected inference hints at a lack of fiscal sustainability and, thus is recommended for the ‘real-time’ monitoring of public debt. The fiscal policy of Portugal is found to lack sustainability irrespective of the considered sample period.     

The building up of new imbalances in China: the dilemma with ‘rebalancing’

This paper offers a theoretical basis for the concept of rebalancing and applies it to China, where it is currently a topical issue. Rebalancing here means the correction of economic and social imbalances built up during industrialization. This correction is accompanied by a structural transformation towards a more inward- and consumption-driven growth path, associated with growth slowdown. Attempts to mitigate this growth slowdown by either retarding this structural reform process or by using expansionary stimulus programmes as done over the past decade in China create new imbalances that have to be corrected (rebalanced) again. Managing these multiple rebalancing tasks together is a tremendous undertaking, as this paper shows.     

Acquisition of Information and Share Prices: An Empirical Investigation of Cognitive Dissonance

Abstract. This paper deals with the determinants of agents' acquisition of information. Our econometric evidence shows that the general index of Italian share‐prices and the series of Italy's financial newspaper sales are cointegrated, and the former series Granger‐causes the latter, thereby giving support to the cognitive dissonance hypothesis: (non‐professional) agents tend to buy the newspaper when share prices are high and not to buy it when share prices are low. Instead, we do not find support for the hypothesis that the agents acquire information in order to trade in the stock market: we find no relationship between quantities exchanged in the market and newspaper sales, nor between stock market volatility and newspaper sales.     

The optimal allocation of decision and exit rights in organizations

We show that in a bilateral relation with conflicting preferences and transferable utility it is unambiguously optimal to assign the authority over project decisions to the privately informed rather than the uninformed party. This holds irrespective of the degree of conflict and the distribution of private information. Under the optimal contract, the uninformed party is protected by an exit option, which it will exert when the decision maker has not chosen the promised decision. Exit terminates the relation and diminishes the project surplus. We show that the first‐best efficient solution can be obtained by such a contract.     

Sicherungssysteme für Finanzdienstleistungsunternehmen im europäischen Vergleich – Theorieperspektive

The contribution discusses the design of guarantee schemes for financial services firms, with a focus on insurance guarantee schemes. It lists reasons that contribute to the development of guarantee schemes, especially stemming from a market failure risk. It further describes the pros and cons of ex-ante and of ex-post premium payments, and sets out arguments for and against risk based premiums of insurance guarantee schemes. The contribution also investigates whether the existence of insurance guarantee schemes might lead to a more risky insurance firm policy. Finally it examines in how far consumer protection based on insurance guarantee schemes prevents consumer protection based on market discipline that should be achieved by the third pillar of Solvency II.     

Portfolio credit-risk optimization

This paper evaluates several alternative formulations for minimizing the credit risk of a portfolio of financial contracts with different counterparties. Credit risk optimization is challenging because the portfolio loss distribution is typically unavailable in closed form. This makes it difficult to accurately compute Value-at-Risk (VaR) and expected shortfall (ES) at the extreme quantiles that are of practical interest to financial institutions. Our formulations all exploit the conditional independence of counterparties under a structural credit risk model. We consider various approximations to the conditional portfolio loss distribution and formulate VaR and ES minimization problems for each case. We use two realistic credit portfolios to assess the in- and out-of-sample performance for the resulting VaR- and ES-optimized portfolios, as well as for those which we obtain by minimizing the variance or the second moment of the portfolio losses. We find that a Normal approximation to the conditional loss distribution performs best from a practical standpoint.     

Households’ foreign currency borrowing in Central and Eastern Europe

Foreign currency loans represent an important feature of recent financial developments in CEECs. This might pose a serious challenge for macroeconomic stability. Against this background, we study the determinants of foreign currency loans of households, using data on the behavior of households in nine CEECs. Our results reveal that foreign currency loans are driven by households’ lack of trust in the stability of the local currency and in domestic financial institutions. Moreover, special factors including remittances and expectations of euro adoption play an important role in selected regions. The financial crisis reduced foreign currency borrowing, but there is some indication this effect might be only temporary.     

Linear aggregation of vector autoregressive moving average processes

A framework is developed in which to analyze both temporal and contemporaneous linear aggregation of vector autoregressive moving average processes. An aggregated finite order process is shown to be again a finite order process, and upper bounds for the autoregressive and moving average order are given.