Optimal experimental design in econometrics: The time series problem

Experiments in economics are expensive in terms of dollars and time. This suggests that efficient design is crucial, and that there is a need for econometricians to extend design theory to handle peculiarities of economic experimentation. This paper concerns optimal experimental design for various time series models. Examples are presented illustrating the improvement in estimation accuracy that can be obtained.     

Bootstrap methods for autocorrelation test with uncorrelated but not independent errors

By using bootstrap technique we investigate the properties of the Breusch [Breusch, T.S., 1978. Testing for autocorrelation in dynamic linear models. Australian Economic Papers 17, 334–355]–Godfrey [Godfrey, L.G., 1978. Testing for higher order serial correlation in regression equations when the regressors include lagged dependent variables. Econometrica 46, 1303–1310] autocorrelation tests in dynamic models with uncorrelated but not independent errors. In this paper we show that, under conditions when the errors are uncorrelated but not independent, even the best likelihood ratio test cannot achieve the asymptotic distribution under the null hypothesis of no autocorrelation. Standard bootstrap methods also fail to produce consistent results. To overcome this problem we applied several bootstrap testing methods for the same purpose and found the stationary bootstrap and Wild bootstrap with static model to perform adequately among the other bootstrap methods.     

Size effect,methodological issues and ‘risk-to-default’: evidence from the UK stock market

The hedging effectiveness of dynamic strategies is compared with static (traditional) ones using futures contracts for the five leading currencies. The traditional hedging model assumes time invariance in the joint distribution of spot and futures price changes thus leading to a constant optimal hedge ratio (OHR). However, if this time-invariance assumption is violated, time-varying OHRs are appropriate for hedging purposes. A bivariate GARCH model is employed to estimate the joint distribution of spot and futures currency returns and the sequence of dynamic (time-varying) OHRs is constructed based upon the estimated parameters of the conditional covariance matrix. The empirical evidence strongly supports time-varying OHRs but the dynamic model provides superior out-of-sample hedging performance, compared to the static model, only for the Canadian dollar.     

U.S. demand for organic and conventional vegetables: a Bayesian censored system approach

Demand for organic and conventional vegetables is investigated using data from A.C. Nielsen’s 2006 Homescan panel. We use a Bayesian Markov chain Monte Carlo technique, along with data augmentation, to estimate a large linear approximate Almost Ideal Demand System with censored dependent variables. Demands are price elastic, and expenditure elasticities are very high for organic vegetables, whilst demands for conventional vegetables are primarily inelastic. We find a mix of gross substitution and complementarity among the vegetable products, but net substitution is the dominant pattern. Socio‐demographic characteristics also play important roles in demands. These findings can inform deliberations about marketing campaigns, nutrition education and policy interventions.     

A note regarding the problem of perfect multicollinearity

In this paper, the problem of multicollinearity is considered and a way to overcome such singular cases is analysed. The method proposed is based upon some useful properties of the generalized inverse.     

Environmental Externalities in the Presence of Network Effects: Adoption of Low Emission Technologies in the Automobile Market*

The paper considers a market currently dominated by a dirty technology that imposes significant environmental costs. A clean technology, with zero environmental costs, is introduced after the maturity of the dirty technology’s network. Adoption of the clean technology is not possible due to the network benefits in favour of the dirty technology. The paper considers two types of policy intervention to correct for the environmental externality. First, we find that the tax necessary to induce adoption of the clean technology is very high implying that a tax equal to the marginal environmental damage would not resolve the externality problem in many cases. Second, if tax revenues are earmarked towards subsidizing the clean technology, the tax is lower than in the previous case and can be set equal to the marginal external damage. *The authors are indebted to two anonymous referees for their insightful comments. We would also like to thank Robert Androkovich, Jim Seldon, Gordon Tarzwell, Christos Constantatos, participants of the EAERE 2002 conference, and the Sevilla Workshop on Public Economics and the Environment 2004 for their suggestions. Financial support by the Scholarly Activity Committee of the University College of the Cariboo is acknowledged by both authors. Eftichios Sartzetakis acknowledges also financial support by the Pythagoras I research grant of the Greek government.     

Asset pricing and foreign exchange risk

According to the International Capital Asset Pricing Model (ICAPM), the covariance of assets with foreign exchange currency returns should be a risk factor that must be priced when the purchasing power parity is violated. The goal of this study is to re-examine the relationship between stock returns and foreign exchange risk. The novelties of this work are: (a) a data set that makes use of daily observations for the measurement of the foreign exchange exposure and volatility of the sample firms and (b) data from a Eurozone country.The methodology we make use in reference to the estimation of the sensitivity of each stock to exchange rate movements is that it allows regressing stock returns against factors controlling for market risk, size, value, momentum, foreign exchange exposure and foreign exchange volatility. Stocks are then classified according to their foreign exchange sensitivity portfolios and the return of a hedge (zero-investment) portfolio is calculated. Next, the abnormal returns of the hedge portfolio are regressed against the return of the factors. Finally, we construct a foreign exchange risk factor in such manner as to obtain a monotonic relation between foreign exchange risk and expected returns.The empirical findings show that the foreign exchange risk is priced in the cross section of the German stock returns over the period 2000-2008. Furthermore, they show that the relationship between returns and foreign exchange sensitivity is nonlinear, but it takes an inverse U-shape and that foreign exchange sensitivity is larger for small size firms and value stocks.     

Singular value decomposition in cointegration analysis: a note regarding the difference stationary series

Many methods and techniques have been developed gradually to compute cointegration vectors. We present here a comparatively simple method for computing the matrix of cointegrating vectors, by applying singular value decomposition. With this method, one can easily accommodate in the cointegrating vectors any deterministic factors, such as a dummy, apart from the constant term and the trend. Besides the errors corresponding to the finally selected cointegrating vector have the property of minimum variance. It is noted that this procedure is not mentioned in the relevant literature. Additionally, a sequential technique is introduced, for determining the order of integration for a given series. With this procedure one can directly detect whether the differencing process produces a stationary series or not, since it seems to be a common belief that differencing a variable (one or more times) we will always get a stationary series [Harris, R.: Using Cointegration Analysis in Econometric Modelling. Prentice Hall, London (1995)]. It will be seen that this is not necessarily the case.