The term structures of equity and interest rates

This paper proposes a dynamic risk-based model capable of jointly explaining the term structure of interest rates, returns on the aggregate market, and the risk and return characteristics of value and growth stocks. Both the term structure of interest rates and returns on value and growth stocks convey information about how the representative investor values cash flows of different maturities. We model how the representative investor perceives risks of these cash flows by specifying a parsimonious stochastic discount factor for the economy. Shocks to dividend growth, the real interest rate, and expected inflation are priced, but shocks to the price of risk are not. Given reasonable assumptions for dividends and inflation, we show that the model can simultaneously account for the behavior of aggregate stock returns, an upward-sloping yield curve, the failure of the expectations hypothesis, and the poor performance of the capital asset pricing model.     

Financial activity in agricultural futures markets: evidence from quantile regressions

This study analyses the relationship between financial activity and price returns in 12 US agricultural futures markets. It contributes to the existing research by exploring the forecasting power of trading activity for returns from the perspective of conditional quantiles. Quantile regressions detect Granger‐causal effects from positions of speculators and index traders to price returns in a wide range of commodity markets such as cocoa, coffee, corn, sugar and SRW wheat.     

Market reactions to ECB policy innovations: A cross-country analysis

Regulators have been paying increasing attention to governing and steering market fluctuations, with their role in shaping the economic cycle being ever more crucial. The combined effect of the financial and sovereign debt crises, as well as the approach to the zero lower bound, has made actions even more pressing, forcing the European Central Bank to resort to unconventional instruments to revive the economies and counter deflationary pressures. By using a combined event study and panel regression methodology, we investigate whether European Monetary Union equity markets react heterogeneously to standard and non-standard European Central Bank policy innovations. Our results show that conventional policies unevenly affect financial indices in the Eurozone and, hence, are bound to generate asymmetries that reflect on real economies, while unconventional measures, albeit with different intensities, exercise a homogeneous pressure on all markets. Our evidence highlights the beneficial impact of unconventional measures and suggests that they can play a useful role even in non-crisis times.     

Inferring latent social networks from stock holdings

We infer the latent social networks of investors using data on their stock holdings. We map linkages to portfolio weights using a portfolio-choice model. The precision of an investor’s private signal about firm value is assumed to increase with his connections in the city where the firm is headquartered. Using money-manager data, we find that managerial linkages to a city are overly dispersed relative to the Erdös–Rényi model of i.i.d. connections. Managers at the tail of this distribution with non-i.i.d. linkages have more university alumni in that city. Their stock holdings there outperform their holdings in other cities.     

THE STATISTICS OF LONG-HORIZON REGRESSIONS REVISITED1

This paper compares commonly used approaches for estimating the relation between long-horizon returns and a predetermined variable X₁, such as dividend yields. Specifically, we look at regression of (i) nonoverlapping multiperiod returns on X_t (ii) overlapping multiperiod returns on X_t, (iii) single-period returns on multiperiod X_t, and (iv) single-period returns on X_t and its implied long-horizon regression coefficient. We provide analytical formulae which quantify the efficiency of the estimators used in the various approaches. Using the formulae, as well as Monte Carlo simulations, we demonstrate that the relative efficiency of the estimators used in the various approaches differs remarkably, depending on the dynamic structure of the regressor. of special interest for financial economists, when the regressors are highly autocorrelated, we find that the regressions (ii) (iii), and (iv) provide only marginal efficiency gains above and beyond the nonoverlapping long-horizon regression.     

Spurious principal components

The principal component regression (PCR) is often used to forecast macroeconomic variables when there are many predictors. In this letter, we argue that it makes sense to pre-whiten the predictors before including these in a PCR. With simulation experiments, we show that without such pre-whitening, spurious principal components can appear and that these can become spuriously significant in a PCR. With an illustration to annual inflation rates for five African countries, we show that non-spurious principal components can be genuinely relevant in empirical forecasting models.     

The expectations hypothesis of the term structure of interest rates: The Brazilian case revisited

This article tests the Expectations Hypothesis (EH) using Brazilian monthly data for bond yields spanning the 2000–2017 sample period and ranging in maturity from 3 months to 5 years. Three tests are examined: the first is based on interest rates spread and the other two are based on the forward rates. On balance our results suggest rejection of the EH throughout the maturity spectrum examined, and are broadly consistent with previous findings that a linear combination of forward rates provides a statistically significant prediction of bond excess returns.     

The impact of new goods and service products on firm growth: evidence from Austrian-linked firm-level data

Using a matched innovation survey and structural business statistics, we investigate the impact of the introduction of new service products and other types of technological innovations on firm growth measured as subsequent two-year employment growth. Results, based on median and robust regression methods for manufacturing firms, show that, on average, both the introduction of new goods and process innovations have a significant and positive impact on subsequent firm growth. In contrast, the introduction of new services does not, on average, have a significant impact on firm growth for both manufacturing and service firms. However, quantile regressions show that the introduction of new service products has a significant and positive impact on firm growth for high-growth service firms. Finally, in manufacturing, the introduction of product innovations has a positive impact on firm growth at both the lower and higher ends of distribution (i.e. for both high-growth and shrinking firms).     

Better peers,better scores? A study of twin junior high school graduates in Taiwan

Using data of twin students graduating from junior high schools between 2002 and 2004 in Taiwan, we estimate the effects of peers on high school joint entrance examination performance. To alleviate the potential endogeneity of peer educational achievement, linear models with twin fixed effect and instrumental variables are estimated. Quantile, quantile with twin fixed effect and quantile with instrument variables regressions are also implemented to determine whether estimated peer effects differ at various locations of the testing scores’ conditional distributions. Positive and statistically significant peer effects are found to exist at the mean and at different quantile levels.     

Are there nonlinear relationships between the profitability of Portuguese service SME and its specific determinants?

Using quantile regressions, this paper examines the possibility of significant nonlinear relationships between the profitability of Portuguese service small- and medium-sized enterprises (SMEs) and its specific determinants. The results lead to the conclusion that there is a significant nonlinearity between specific determinants and profitability in Portuguese service SMEs. In the lower quantiles of the distribution of profitability of Portuguese SMEs, it is found that profitability on the one hand is catalysed by size, long-term debt and managerial control, and on the other hand, it is restricted by risk and research and development intensity. In the upper quantiles of the profitability distribution of Portuguese service SMEs, liquidity and research and development intensity serve as catalysers of profitability, while long-term debt restricts the level of profitability.