Dynamic local models for segmentation and prediction of financial time series

In the analysis and prediction of many real-world time series, the assumption of stationarity is not valid. Aspecial form of non-stationarity, where the underlying generator switches between (approximately) stationary regimes, seems particularly appropriate for financial markets. We introduce a new model which combines a dynamic switching (controlled by a hidden Markov model) and a non-linear dynamical system. We show how to train this hybrid model in a maximum likelihood approach and evaluate its performance on both synthetic and financial data.     

APPLICATION OF PANEL DATA MODELS IN BENCHMARKING ANALYSIS OF THE ELECTRICITY DISTRIBUTION SECTOR*

ABSTRACT ** : This paper explores the application of several panel data models in measuring productive efficiency of the electricity distribution sector. Stochastic Frontier Analysis has been used to estimate the cost‐efficiency of 59 distribution utilities operating over a nine‐year period in Switzerland. The estimated coefficients and inefficiency scores are compared across three different panel data models. The results indicate that individual efficiency estimates are sensitive to the econometric specification of unobserved firm‐specific heterogeneity. This paper shows that alternative panel models such as the ‘true’ random effects model proposed by Greene (2005) could be used to explore the possible impacts of unobserved firm‐specific factors on efficiency estimates. When these factors are specified as a separate stochastic term, the efficiency estimates are substantially higher suggesting that conventional models could confound efficiency differences with other unobserved variations among companies. On the other hand, refined specification of unobserved heterogeneity might lead to an underestimation of inefficiencies by mistaking potential persistent inefficiencies as external factors. Given that specification of inefficiency and heterogeneity relies on non‐testable assumptions, there is no conclusive evidence in favour of one or the other specification. However, this paper argues that alternative panel data models along with conventional estimators can be used to obtain approximate lower and upper bounds for companies' efficiency scores.     

The Reaction of Real Estate–Related Industries to the Monetary Policy Actions

We study the impact of changes in U.S. monetary policy on the equity returns of real estate–related industries. We find that, over the 1989–2005 sample period covered in our study, a hypothetical unexpected rate cut of 25 basis points (bps) is associated with an increase of about 170 bps in the value‐weighted returns of real estate–related industries. We find that monetary policy impacts the stock prices in real estate–related industries through its impact on the future expected stock returns and not on real interest rates or expected future dividends. There is also some evidence of asymmetry in the responses of the industry returns to the monetary policy actions. A strong stock price response to reversals in the direction of the Federal Reserve's monetary policy is reported.     

Female consumers as agents of change for transforming the environmental sustainability landscape

Faith in others (FIO; governments and businesses) can be seen as society's predisposition to handle environmental problems. The article examines whether women, who undertake a large majority of household purchases, can influence change in consumption practices so as to contribute to sustainability initiatives. Understanding women's character in this manner is informative, it helps us to consider how a women's role as a household purchasing agent is an important nexus to environmental sustainability. The study found that FIO has an influence on women's purchasing decisions. The study provides additional support to strengthen women's role in environmental matters. Not all women were found to be sustainability‐minded. In the challenges faced by women with respect to their influence, evidence from this research suggests that if women have more faith in governments and businesses it would make them more eco‐savvy to act as agents of change for transforming the environmental sustainability landscape.     

Efficiency Measurement in Network Industries: Application to the Swiss Railway Companies

The persistence of increasingly high government subsidies in Switzerland’s railroads has led the federal and cantonal authorities to discussing the possibility of high-powered incentive contracts such as those based on cost efficiency benchmarking. Railways are however, characterized by a high degree of unobserved heterogeneity that could bias the efficiency estimates. This paper examines the performance of several panel data models to measure cost efficiency in network industries. The unobserved firm-specific effects and the resulting biases are studied through a comparative study of several stochastic frontier models, applied to a panel of 50 railway companies operating over a 13-year period.* The authors wish to thank Michael Crew and two anonymous referees for their helpful suggestions. Aurelio Fetz provided an excellent assistance, which is gratefully acknowledged. Any remaining errors are the responsibility of the authors.This revised version was published in June 2005 with corrections in the author affiliations.     

American depositary receipts: An analysis of international stock price movements

With significant increases in private capital flows across the globe, there has been a rise in the US listing of foreign stocks as American depositary receipts (ADRs). In this study, we employ cointegration techniques and estimate error-correction (EC) models to examine the degree of integration between US and three foreign equity markets. We find that ADRs are cointegrated with ordinary shares trading in the UK, Japan, and Germany, which implies that for long-term investors, they are a substitute for ordinary shares. Our analysis of the dynamic relationships between ADRs and foreign equities suggest that both markets contribute information pertinent to portfolio valuation. However, the foreign markets are found to be the more important source of information.     

Against the Wind: Labor Force Participation of Women and Economic Instability in Iran

In the last three decades, Iranian women's educational attainment has continuously increased while their fertility rate has fallen rapidly. Yet in spite of these developments, which in many countries have a positive effect on women's labor force participation, female labor force participation (FLFP) rates have remained at low levels. This paper argues that despite its overall static trend, FLFP of some Iranian women responded to economic pressures induced by macroeconomic instabilities. Looking at the Iranian economic crisis of 1994–5, the study shows that, controlling for individual fixed effects, married women in rural areas and never-married women in urban areas increased their participation rate by as much as 38 percent. No change in hours worked was found for any group of women. The differences in responses and their underlying reasons have policy implications for many developing countries.     

The Fisher hypothesis: a multi-country analysis

This paper tests whether the Fisher hypothesis holds for a sample of 26 countries by assessing the long run relationship between nominal interest rates and inflation rates taking into consideration the short run dynamics of interest rates. The empirical evidence supports the hypothesis that there is a one-to-one relationship between the interest rate and inflation for more than half of the countries under study.     

Unobserved heterogeneity in stochastic cost frontier models: an application to Swiss nursing homes

Housing price-to-income and price-to-rent ratios are among the most widely monitored indicators of housing market conditions. While these ratios tend to fluctuate around a constant level or a mild trend over the long term, they also tend to deviate from these benchmarks for protracted periods. Traditional unit root tests often indicate the presence of a unit root. This article uses the framework of fractional integration to test the persistence of price-to-income and price-to-rent ratios in a sample of 16 OECD countries spanning four decades. The results indicate that the ratios are highly persistent. The possibility that persistence estimates may be affected by structural breaks in the series is also considered, but evidence of such breaks is found only in a very limited number of cases. Policy action may be required if high price-to-income and price-to-rent ratios have adverse social and economic consequences. Policies should be guided by a careful analysis of the factors behind high ratios.