Asset-pricing anomalies and spanning: Multivariate and multifactor tests with heavy-tailed distributions

In this paper we propose a multivariate regression based assessment of the multifactor model first developed by Fama and French (1993). We study mean-variance efficiency and spanning, as well as factor relevance. In particular, we assess the relative contribution of the factors in accounting for asset pricing anomalies. Our tests are motivated by a finite-sample distributional theory, invariant to portfolio repackaging, and achieve size control exactly conditioning on observed factors, in normal and non-normal contexts. We focus on the multivariate normal and Student-t distributions, in which case we rely on the simulation procedure proposed and applied in Beaulieu et al. (2007). We also assess, from a finite-sample and multivariate test perspective, the specification and fit of the model and error distributions considered. In its most general form, the model considered includes six factors: the market portfolio, size, the ratio of book equity to market equity as well as term structure variables (a term premium and a default premium) and momentum. Portfolio returns (coming from assets traded at NYSE, AMEX and NASDAQ) from Fama and French's data base are analyzed on monthly frequencies from 1961–2000.Our results show the following. (1) Normality in model residuals becomes more dependable as a working hypothesis, over short time spans, when the book to market equity and size factors or when the momentum factor are accounted for. (2) Allowing for heavy tailed distributions empirically accommodates some stylized asset pricing anomalies. (3) Loadings on the term structure variables and the momentum factor seem (jointly, across portfolios) statistically insignificant at usual levels in many sub-periods. (4) Mean-variance efficiency is rejected in fewer subperiods allowing for non-normal errors in multi-factor settings; the book to market equity and size factors contribute importantly in reinforcing efficiency. (5) Enlarging the set of assets [from a one factor to a six factor model] does not reinforce the mean-variance spanning hypothesis, which is globally rejected at usual levels.     

The impacts of standard monetary and budgetary policies on liquidity and financial markets: International evidence from the credit freeze crisis

This paper evaluates the domestic and international impacts of lowering short-term interest rates and increasing budget spending on several indicators of liquidity, volatility, credit and economic activity. Data from the 2003–2011 period in the United States, the Euro zone and Canada were used to develop two SVAR models for assessing the national effectiveness and the international spillovers of monetary and budgetary policies during the credit freeze crisis. While monetary policies caused a temporary decrease in volatility and increase in liquidity in North American stock markets, the shocks were mainly domestic and ineffective at generating liquidity in the banking sector. In contrast, government spending shocks had a positive impact on credit and consumption, especially in Europe and Canada. Moreover, budgetary policies also had a positive international spillover effect on consumption and credit, especially for smaller economies such as Canada.     

Optimality of impulse harvesting policies

We explore the link between cyclical and smooth resource exploitation. We define an impulse control framework which can generate both cyclical solutions and steady-state solutions. Our model can admit convex and concave profit functions and allows the integration of different stock-dependent profit functions. We show that the strict concavity of the profit function is only a special case of a more general condition, related to submodularity, that ensures the existence of optimal cyclical policies. We then establish a link with the discrete-time models with cyclical solutions by Benhabib and Nishimura (J Econ Theory 35:284–306, 1985) and Dawid and Kopel (J Econ Theory 76:272–297, 1997). For the steady-state solution, we explore the relation to Clark’s (1976) continuous control model.     

The pollution terms of trade and its five components

Based on two extensions, this paper proposes a re-appraisal of the concept of the pollution terms of trade (PTT) introduced by Antweiler (1996). First, detailed data allows capturing the effect of differences in emission intensities across countries and over time. Second, relying on Johnson and Noguera (2012), the revised PTT index controls for trade in intermediate goods and is based on value-added rather than gross output figures. Applied to a database for SO₂ emission intensities for 62 developed and developing countries over the 1990–2000 period, it turns out that the first extension has a larger empirical importance than the second one. The global pattern is one in which the major rich economies exhibit a PTT index below one (higher pollution intensity in imports than in exports). Trade imbalances tend to exacerbate this asymmetry, allowing rich economies to further offshore their pollution through trade.     

Short and long run causality measures: Theory and inference

The concept of causality introduced by Wiener [Wiener, N., 1956. The theory of prediction, In: E.F. Beckenback, ed., The Theory of Prediction, McGraw-Hill, New York (Chapter 8)] and Granger [Granger, C. W.J., 1969. Investigating causal relations by econometric models and cross-spectral methods, Econometrica 37, 424–459] is defined in terms of predictability one period ahead. This concept can be generalized by considering causality at any given horizon h$h$ as well as tests for the corresponding non-causality [Dufour, J.-M., Renault, E., 1998. Short-run and long-run causality in time series: Theory. Econometrica 66, 1099–1125; Dufour, J.-M., Pelletier, D., Renault, É., 2006. Short run and long run causality in time series: Inference, Journal of Econometrics 132 (2), 337–362]. Instead of tests for non-causality at a given horizon, we study the problem of measuring causality between two vector processes. Existing causality measures have been defined only for the horizon 1, and they fail to capture indirect causality. We propose generalizations to any horizon h$h$ of the measures introduced by Geweke [Geweke, J., 1982. Measurement of linear dependence and feedback between multiple time series. Journal of the American Statistical Association 77, 304–313]. Nonparametric and parametric measures of unidirectional causality and instantaneous effects are considered. On noting that the causality measures typically involve complex functions of model parameters in VAR and VARMA models, we propose a simple simulation-based method to evaluate these measures for any VARMA model. We also describe asymptotically valid nonparametric confidence intervals, based on a bootstrap technique. Finally, the proposed measures are applied to study causality relations at different horizons between macroeconomic, monetary and financial variables in the US.     

Enforcement in informal saving groups

Informal groups cannot rely on external enforcement to insure that members abide by their obligations. It is generally assumed that these problems are solved by ‘social sanctions’ and reputational effects. The present paper focuses on roscas, one of the most commonly found informal financial institutions in the developing world. We first show that, in the absence of an external (social) sanctioning mechanism, roscas are never sustainable, even if the defecting member is excluded from all future roscas. We then argue that the organizational structure of the rosca itself can be designed so as to address enforcement issues. The implications of our analysis are consistent with first-hand evidence from rosca groups in a Kenyan slum.     

Monte Carlo tests with nuisance parameters: A general approach to finite-sample inference and nonstandard asymptotics

The technique of Monte Carlo (MC) tests [Dwass (1957, Annals of Mathematical Statistics 28, 181–187); Barnard (1963, Journal of the Royal Statistical Society, Series B 25, 294)] provides a simple method for building exact tests from statistics whose finite sample distribution is intractable but can be simulated (when no nuisance parameter is involved). We extend this method in two ways: first, by allowing for MC tests based on exchangeable possibly discrete test statistics; second, by generalizing it to statistics whose null distribution involves nuisance parameters [maximized MC (MMC) tests]. Simplified asymptotically justified versions of the MMC method are also proposed: these provide a simple way of improving standard asymptotics and dealing with nonstandard asymptotics.     

Joint production under uncertainty and multifunctionality of agriculture: policy considerations and applied analysis

The impact of various policy instruments on the production ofenvironmental goods that are complementary to or competing withagricultural commodities is analysed in the light of the uncertaintyin output prices and farmers' risk aversion. Some theoreticalassessments are first summarised and then tested on a case studyconcerning beef and grassland biodiversity production in Montsdu Cantal, France. The results of simulations carried out bymathematical programming farm-level models show that joint commodityand non-commodity production is nearly independent of the degreeof farmers' risk aversion, and that commodity-linked policyinstruments are not suitable for the production of environmentalgoods even under uncertainty.     

New Phillips curve under alternative production technologies for Canada, the United States, and the Euro area

This paper shows that alternative production technologies imply two modifications to the New Phillips Curve (NPC): A specific ‘strategic complementarity parameter’ that affects the relationship between real marginal cost and inflation and a specific modification to the labour share measure of real marginal cost. Estimates of average duration of nominal price stickiness obtained conditional on the strategic complementarity parameter are substantially smaller, and therefore more plausible, relative to when this parameter is ignored. Modifications to the marginal cost measure alone have little effect on the NPC estimates. The empirical fit of the NPC under alternative production technologies is similar.