Fitting dynamic factor models to non-stationary time series

Factor modelling of a large time series panel has widely proven useful to reduce its cross-sectional dimensionality. This is done by explaining common co-movements in the panel through the existence of a small number of common components, up to some idiosyncratic behaviour of each individual series. To capture serial correlation in the common components, a dynamic structure is used as in traditional (uni- or multivariate) time series analysis of second order structure, i.e. allowing for infinite-length filtering of the factors via dynamic loadings. In this paper, motivated from economic data observed over long time periods which show smooth transitions over time in their covariance structure, we allow the dynamic structure of the factor model to be non-stationary over time by proposing a deterministic time variation of its loadings. In this respect we generalize the existing recent work on static factor models with time-varying loadings as well as the classical, i.e. stationary, dynamic approximate factor model. Motivated from the stationary case, we estimate the common components of our dynamic factor model by the eigenvectors of a consistent estimator of the now time-varying spectral density matrix of the underlying data-generating process. This can be seen as a time-varying principal components approach in the frequency domain. We derive consistency of this estimator in a “double-asymptotic” framework of both cross-section and time dimension tending to infinity. The performance of the estimators is illustrated by a simulation study and an application to a macroeconomic data set.     

Killing off cohorts: Forecasting mortality of non-extinct cohorts with the penalized composite link model

Mortality forecasting has crucial implications for insurance and pension policies. A large amount of literature has proposed models to forecast mortality using cross-sectional (period) data instead of longitudinal (cohort) data. As a consequence, decisions are generally based on period life tables and summary measures such as period life expectancy, which reflect hypothetical mortality rather than the mortality actually experienced by a cohort. This study introduces a novel method to forecast cohort mortality and the cohort life expectancy of non-extinct cohorts. The intent is to complete the mortality profile of cohorts born up to 1960. The proposed method is based on the penalized composite link model for ungrouping data. The performance of the method is investigated using cohort mortality data retrieved from the Human Mortality Database for England & Wales, Sweden, and Switzerland for male and female populations.     

Strategic Interactions and Contagion Effects under Monetary Unions

This paper applies game theory and a cost‐benefit analysis to study voluntary exits and contagion effects in countries joined to a monetary union. The paper looks at two non‐core or periphery countries of a large union and examines the role of structural asymmetries and strategic interactions as determinants of equilibrium outcomes, following both country‐specific and common shocks. The paper finds that under almost symmetry between countries, country‐specific shocks are never associated with multiple equilibria and, if large enough, can spread to other countries leading to contagion. By contrast, common shocks are seen to sustain multiple equilibria if almost‐symmetric countries are considered and to have implications similar to those found in the country‐specific case if large structural asymmetries are admitted.     

Explaining UK wage inequality in the past globalisation period, 1880–1913

The current era of globalisation has witnessed a rising premium paid to skilled workers resulting in increasing wage inequality in most OECD countries. This pattern differs from that observed during the past globalisation period (1880–1913), in which wage inequality decreased in most of the Old World countries. The present debate over wage inequality focuses on the implications of globalisation, technological change, the role of labour market institutions and education. Similar factors were at work in the past globalisation process. In order to disentangle the main factors that contribute to wage inequality, we calibrate a general equilibrium model for the UK economy in the past globalisation period. The results show that a trade shock and a skilled-biased technology shock increased wage inequality. However, education and emigration had a more significant impact and led to a decrease in wage inequality.     

Bankruptcy delay and firms’ dynamics

Small Business Economics - The present paper explores the link between bankruptcy law and firms’ dynamics, focusing on Italy as a case study. Relying on a previous literature dealing with the...     

Taking Actively Advantage of MNCs’ Presence

In this paper, not only do we posit that the presence of a multinational corporation may entail significant benefits for the host economy and local firms’ performance, but also that these benefits can be actively sought and dynamically reinforced by local firms through the development of intense, embedded customer–supplier relationships. Building on the relational view, we argue that this may happen through the commitment of resources to relation-specific investments. Our hypotheses find support in a sample of SMEs suppliers of ST Microelectronics, the fourth largest producer of microelectronic components in the world. We show that by making relation-specific investments, local firms can grow quantitatively and qualitatively, improve their innovativeness, and acquire new clients.