The econometrics of the environmental Kuznets curve: an illustration using Australian CO2 emissions

Four econometric issues associated with the estimation and testing of the environmental Kuznets curve (EKC) are considered: (i) model specification with respect to the order of the polynomial, (ii) model specification with respect to the use of linear or log-linear specifications, (iii) integration and cointegration considerations, and (iv) missing variables and time trends. These issues are examined in reference to Australian data on four measures of CO2 emissions and three measures of per capita income. While evidence is provided for an inverted U-shaped EKC, the results cannot be generalized. It is concluded that without the use of sensitivity analysis, the results are typically fragile.     

Blaming suicide on NASA and divorce on margarine: the hazard of using cointegration to derive inference on spurious correlation

Contrary to common belief, cointegration testing may not distinguish between spurious relations and genuine ones. It is demonstrated that highly correlated series appear as cointegrated, even though common sense tells us that the underlying relation does not make sense. Empirical testing using simulated data, data from daily life and historical data on interest rates shows that cointegration may fail not only to detect spurious correlation but also to capture cointegration in a genuine relation. Cointegration testing to reveal spurious correlation can only be used in conjunction with theory, common sense and intuition.     

The mystery of the Chinese exchange rate regime: basket or no basket?

Economists have taken for granted the claim made by the Chinese government that the policy shift introduced in July 2005 constituted a change in the exchange rate regime from a fixed peg to a basket peg. We demonstrate that neither the stylized facts nor the empirical evidence support the proposition of a basket peg and suggest several reasons as to why China has not adopted this regime. The results could prove useful for identifying the Chinese exchange rate regime in the aftermath of the perceived policy shift following the August 2015 devaluation.     

The sectoral effects of Brexit on the British economy: early evidence from the reaction of the stock market

We investigate the impact of the outcome of the EU referendum (Brexit) on various sectors of the British economy over the period June–July 2016. Using the event study methodology, we assess the effects of Brexit, relative to what had been anticipated, as measured by abnormal returns (ARs). The results show that the banking and travel and leisure sectors were affected negatively, with a cumulative AR of ?15.37% for the banking sector. We observe that Brexit has a mixed effect on ARs with apparent sector-by-sector differences.     

A reappraisal of the Meese–Rogoff puzzle

Several explanations have been put forward for the Meese–Rogoff puzzle that exchange rate models cannot outperform the random walk in out-of-sample forecasting. We suggest that a simple explanation for the puzzle is the use of the root mean square error (RMSE) to measure forecasting accuracy, presenting a rationale as to why it is difficult to beat the random walk in terms of the RMSE. By using exactly the same exchange rates, time periods and estimation methods as those of Meese and Rogoff, we find that their results cannot be overturned even if the models are estimated with time-varying coefficients. However, we also find that the random walk can be outperformed by the same models if forecasting accuracy is measured in terms of the ability to predict direction, in terms of a measure that combines magnitude and direction and in terms of profitability.     

Narcissism,political tenure,financial indicators and the effectiveness of environmental regulation

This article explores the factors that determine the effectiveness of environmental regulation in the United States and Australia. Unlike prior literature, in which lagging performance measures (such as carbon emissions) are used, we use financial data to develop effectiveness scores and identify the determinants of effectiveness, including narcissistic behaviour, tenure of political leaders and financial indicators. Consistent with the emerging literature on environmental finance, we find that abnormal returns are associated with environmental regulation and that effectiveness is adversely affected when narcissistic leaders are in power. Our results remain robust when we control for various event windows and models.     

The effects of the Paris climate agreement on stock markets: evidence from the German stock market

We investigate the effects of the 2016 Paris Climate Agreement on the German stock market by considering the impact of 20 announcements pertaining to the Agreement on 17 industries. The event study methodology is used for this purpose, together with several robustness tests, such as the nonparametric rank test and non-parametric conditional distribution approach. The change in systematic risk following the announcements is captured by using various risk models. In general, we find that the Paris Climate Agreement is achieving its objectives in the short run. Our results show that the announcements affected polluting industries in terms of risk and return. Furthermore, we observe two distinct diamond risk structures when (1) Conference of the Parties (COP) 21 took place, and (2) the Agreement came into force.     

The effects of environmental regulation on the stock market: the French experience

The impact of environmental regulation on the French stock market is investigated by using event study methodology and asset pricing models. The impact of environmental regulation on the stock prices of environmentally friendly businesses and polluters is assessed. Additionally, we estimate the change in systematic risk following the introduction of new regulations. According to the results, the French stock market is particularly sensitive to the environmental regulation embodied in the European Union Emissions Trading System and less so to the regulation on water, soil and air. The chemicals, oil and gas industries exhibit negative reactions, whereas other polluters (such as construction and materials, and industrial transportation) produce positive abnormal returns.     

The determinants of recovery from the Black Saturday bushfire: demographic factors,behavioural characteristics and financial literacy

We investigate the contribution of demographic factors, behavioural characteristics and financial literacy to recovery from the financial losses inflicted by the Black Saturday bushfire. Behavioural characteristics (such as overconfidence, self-serving and loss aversion biases) in conjunction with bushfire survivors’ knowledge of financial indicators are used to determine recovery time. Data are collected through in-depth interviews with bushfire survivors, academics and experts in natural disasters. The results show that demographic, behavioural and financial literacy factors have the potential to enhance the recovery process.     

Identification of a basket peg: the model specification controversy

A controversy has been triggered by the Chinese exchange rate regime shift from a single currency peg to an alleged basket peg. The controversy is about the specification of the model used to represent the basket as three models have been used: levels, log levels and first log differences. It is suggested that one way to confirm the validity or otherwise of a model is to use data on the special drawing rights exchange rate since the currency weights are known. The results show that the estimated weights are almost identical no matter which model and which numeraire is used. However, nonnested model selection criteria show that the best model is that written in levels, simply because this is what is used in practice by central banks adopting basket pegs.