Modelling optimal strategies for the allocation of wealth in multicurrency investments

This paper analyzes rates of return on financial assets denominated in five major currencies and provides a framework for the determination of optimal strategies for the allocation of wealth in multicurrency investments. Three models are estimated: a univariate autoregressive conditional heteroskedasticity (ARCH) model, an extended ARCH model using the random coefficient (RC) procedure, and a pure RC model. A comparison of the forecasts of these models with those generated by a random walk model demonstrates that forecasts based on the RC/extended ARCH procedure are superior to those based on the random walk model and those based on direct ARCH estimation. These results could be useful for both international investors for the allocation of their wealth among fixed-income investment securities and central banks for the management of their external reserve assets.     

Energy productivity convergence: new evidence from club converging

The goal of this study is to explore the convergence of energy productivity across 31 countries from 1972 to 2012 by using the convergence club algorithm developed by Phillips and Sul (2007). The empirical results lead to the rejection of full convergence and to the presence of a certain number of clubs. The transitional curves, however, indicate that over the long run energy productivity tends to converge, indicating the strong attempts of the countries under investigation to adopt energy policies that eventually contribute to a convergence pattern.     

Political and Institutional Factors in the Convergence of International Equity Markets: Evidence from the Club Convergence and Clustering Procedure

In this study the new panel convergence methodology developed by Phillips and Sul (2007) is employed to explore the convergence dynamics of international equity markets and determine whether political and institutional factors can explain convergence or divergence patterns across international equity markets. The empirical findings suggest that international equity markets do not form a homogeneous convergence club. Seven specific political and institutional factors are used to explain such divergent behavior. The empirical analysis documented specific factors, i.e. democratization, unemployment benefits, and public expenditure on pensions, which seem capable of explaining such a heterogeneous divergent pattern among the equity markets under study.     

Convergence patterns in financial development: evidence from club convergence

This article analyzes the degree of convergence of financial development for a panel of 50 countries. We apply the methodology of Phillips and Sul (Econometrica 75:1771?C1855, 2007) to various indicators of financial development to assess the existence of convergence clubs. We consider ten alternative indicators of financial development that various researchers use to proxy for the degree of financial development in countries. Overall, the results do not support the hypothesis that all countries converge to a single equilibrium state in financial development. Nevertheless, strong evidence exists of club convergence. Countries demonstrate a high degree of convergence in the sense that in the majority of financial indexes they form only two or three convergence clubs, depending on the measure of financial development used. We also apply the Phillips and Sul method to two real variables, per capita output and fixed capital investment to GDP, and find strong evidence of five and four distinct convergence clubs, respectively. Finally, we compare the various convergence clubs associated with financial development indicators to those clubs for per capita output and fixed capital investment to GDP. We conclude that strong evidence supports the correspondence between the convergence clubs for financial development and those two real variables.     

On the origin of high persistence in GARCH-models

We show that the (Baillie and Chung, 2001) minimum distance estimates of the GARCH (1,1) model induce spurious persistence in the volatility when there are structural changes in the mean of the process.     

Dynamic adaptation to resource scarcity and backstop availability: theory and application to groundwater*

In this paper we analyse the optimal management of a renewable resource (groundwater) with stock‐dependent extraction cost and a backstop substitute, facing two‐sector linear demands. Application to the Kiti region in Cyprus demonstrates the model's performance and is used to test for the difference between optimal and myopic behaviour. It is found that the presence of a backstop resource diminishes the importance of optimal dynamic behaviour, whereas in the absence of backstop the optimal control solution yields a value for social welfare significantly larger than the myopic policy.     

Foreign Debt and Economic Development

This paper characterizes the optimal path of foreign public debt that can support politically unanimous (Pareto welfare improving) economic growth under uncertainty. The feasibility of the plan depends on whether the maintenance of political consensus in the debtor country requires additional loans that are high relative to the country's outstanding debt. If a program is feasible, then the creditors will have an incentive to preserve political support for the plan, in case of adverse developments, by offering debt relief. Unlike the certainty case, where only total debt matters, uncertainty makes also the timing of debt repayments critical for economic development.