Trading Frictions and House Price Dynamics

We model liquidity in housing markets. The model provides a simple characterization for the joint process of prices, sales, and inventory. We compare the implications of the model to certain properties of housing markets. The model can generate the large price changes and the positive correlation between prices and sales that we see in the data. Unlike the data, prices are negatively autocorrelated and high inventory predicts price appreciation. We investigate several amendments to the model. Informational frictions show promise.     

MODELLING PRODUCTIVITY EFFECTS OF TRADE OPENNESS: A DUAL APPROACH*

A cost function framework is used to model the productivity effect of trade openness in terms of cost saving. The idea of ‘cost saving’ is closer to the entrepreneur's view of productivity. An entrepreneur would expect a reduction in the cost of production if trade openness brings any benefits to their firm. The output‐enhancing (primal) productivity effect of openness is obtainable from the cost‐saving (dual) productivity effect through the cost‐output link. The cost‐function framework also enables us to investigate whether trade openness induces firms to adopt a technology that is biased towards the use or saving of any factor of production. An empirical exercise based on time series data for the Australian two‐digit manufacturing industries reveals significant cost‐saving and output‐enhancing productivity effects of trade openness. Trade openness is biased towards the saving of labour and the use of capital. These results are quite insensitive to the choice of alternative measures of openness.     

INTERGENERATIONAL INCOME MOBILITY IN URBAN CHINA

This paper estimates the intergenerational income elasticity for urban China, paying careful attention to the potential biases induced by income fluctuations and life cycle effects. Our preferred estimate indicates that the intergenerational income elasticity for father–son is 0.63. This suggests that while China has experienced rapid growth of absolute incomes, the relative position of children in the distribution is largely related to their parents' incomes. By investigating possible causal channels, we find that parental education plays one of the most important roles in transmitting economic status from parents to children.     

Output Gaps In Real Time: How Reliable Are They?

The output gap is of central interest to policymakers. Being unobservable, however, its estimation is prone to error, particularly in real time. Errors result from revisions to the data and unavoidable end-point problems associated with the econometric techniques used to estimate it.
This is the first study of the seriousness of these problems for Australia. Over a 28-year period, we obtain real-time output-gap estimates which are unbiased and highly correlated with final estimates derived with the latest data and the benefit of hindsight. We conclude that reasonably reliable output gap estimates can be obtained in real time.     

‘The rules of the game’: London finance,Australia, and Canada,c.1900–14

It is often asserted that, between 1865 and 1914, economic dependence on British capital subjected settler societies to an unofficial imperialism wielded by the City of London. This article argues that both advocates and critics of such models, particularly in the recent controversy over ‘gentlemanly capitalism’, pay insufficient attention to the City itself. Using the Edwardian City's connections with Australia and Canada, it illustrates the range of financial intermediaries involved and explores their perceptions of political economy in these countries. It concludes that the City's influence (or ‘structural power’) was limited by its internal divisions and hazy conceptions of political economy.     

Model Comparison with Transaction Costs

Failing to account for transaction costs materially impacts inferences drawn when evaluating asset pricing models, biasing tests in favor of those employing high-cost factors. Ignoring transaction costs, Hou, Xue, and Zhang (2015, Review of Financial Studies, 28, 650–705) q-factor model and Barillas and Shanken (2018, The Journal of Finance, 73, 715–754) six-factor models have high maximum squared Sharpe ratios and small alphas across 205 anomalies. They do not, however, come close to spanning the achievable mean-variance efficient frontier. Accounting for transaction costs, the Fama and French (2015, Journal of Financial Economics, 116, 1–22; 2018, Journal of Financial Economics, 128, 234–252) five-factor model has a significantly higher squared Sharpe ratio than either of these alternative models, while variations employing cash profitability perform better still.