Journal of Applied Econometrics

Published by Wiley
Online ISSN: 1099-1255
Publications
Article
This paper utilizes data on subjective probabilities to study the impact of the stock market crash of 2008 on households' expectations about the returns on the stock market index. We use data from the Health and Retirement Study that was fielded in February 2008 through February 2009. The effect of the crash is identified from the date of the interview, which is shown to be exogenous to previous stock market expectations. We estimate the effect of the crash on the population average of expected returns, the population average of the uncertainty about returns (subjective standard deviation), and the cross-sectional heterogeneity in expected returns (disagreement). We show estimates from simple reduced-form regressions on probability answers as well as from a more structural model that focuses on the parameters of interest and separates survey noise from relevant heterogeneity. We find a temporary increase in the population average of expectations and uncertainty right after the crash. The effect on cross-sectional heterogeneity is more significant and longer lasting, which implies substantial long-term increase in disagreement. The increase in disagreement is larger among the stockholders, the more informed, and those with higher cognitive capacity, and disagreement co-moves with trading volume and volatility in the market.
 
Article
Little is known about the degree to which individuals are uncertain about their future Social Security benefits, how this varies within the U.S. population, and whether this uncertainty influences financial decisions related to retirement planning. To illuminate these issues, we present empirical evidence from the Health and Retirement Study Internet Survey and document systematic variation in respondents' uncertainty about their future Social Security benefits by individual characteristics. We find that respondents with higher levels of uncertainty about future benefits hold a smaller share of their wealth in stocks.
 
Article
Medical expenses are an increasingly important contributor to household financial risk. We examine the effect of medical expenditure risk on the willingness of Medicare beneficiaries to hold risky assets. Using a discrete factor maximum likelihood method to address the endogeneity of insurance choices, we find that having a moderately protective Medigap or employer supplemental policy increases risky asset holding by 7.1 percentage points relative to those without supplemental coverage, while participation in a highly protective Medicare HMO increases risky asset holding by 13.0 percentage points. Our results highlight an important link between the availability of health insurance and financial behavior.
 
Article
Despite its importance for the analysis of life-cycle behavior and, in particular, retirement planning, stock ownership by private households is poorly understood. Among other approaches to investigate this puzzle, recent research has started to elicit private households' expectations of stock market returns. This paper reports findings from a study that collected data over a two-year period both on households' stock market expectations (subjective probabilities of gains or losses) and on whether they own stocks. We document substantial heterogeneity in financial market expectations. Expectations are correlated with stock ownership. Over the two years of our data, stock market prices increased, and expectations of future stock market price changes also increased, lending support to the view that expectations are influenced by recent stock gains or losses.
 
Article
This paper provides some refinements and updating of Fama's (1984) evidence on the information in the term structure about future spot interest rate movements. First, it uses econometric techniques that properly correct standard errors for overlapping data and for conditional heteroscedasticity. Second. it makes use of a new data set that has some potential advantages over Fama's and which has more recent data. Overall, the results are in broad agreement with those of Fama. The term structure does help predict spot interest rate movements several months into the future. Indeed. updating Fama's results indicates that the forecast power of forward rates is generally higher during the October 1982 to June 1986 period than it was during the sample periods Fama examined.
 
Article
Some recent specifications for GARCH error processes explicitly assume a conditional variance that is generated by a mixture of normal components, albeit with some parameter restrictions. This paper analyses the general normal mixture GARCH(1,1) model which can capture time variation in both conditional skewness and kurtosis. A main focus of the paper is to provide evidence that, for modelling exchange rates, generalized two-component normal mixture GARCH(1,1) models perform better than those with three or more components, and better than symmetric and skewed Student's t-GARCH models. In addition to the extensive empirical results based on simulation and on historical data on three US dollar foreign exchange rates (British pound, euro and Japanese yen), we derive: expressions for the conditional and unconditional moments of all models; parameter conditions to ensure that the second and fourth conditional and unconditional moments are positive and finite; and analytic derivatives for the maximum likelihood estimation of the model parameters and standard errors of the estimates. Copyright © 2006 John Wiley & Sons, Ltd.
 
Article
GRETL (GNU Regression, Econometrics and Time-series Library) is a reasonably sophisticated, cross platform, and open-source econometrics package. This paper discusses the functionality provided by version 1.6.0 and reports the results of comprehensive testing of the program's numerical precision. We find that, overall, GRETL can be considered at least as accurate numerically as popular commercial econometrics packages previously reviewed by various authors.
 
Article
Stochastic Dominance techniques are adapted and employed to study the extent and progress of Polarization, Welfare and Poverty of 101 nations over the period 1970-1995. The adaptations provide methods of comparing mass relocation by evaluating various degrees of right and left separation between distributions. The results reveal that, whilst welfare increased and then diminished and poverty diminished and then increased, polarization between rich and poor countries continued unabated throughout the period emphasizing the distinction between polarization and inequality. Copyright © 2004 John Wiley & Sons, Ltd.
 
Article
We apply extreme value analysis to US sectoral stock indices in order to assess whether tail risk measures like value-at-risk and extremal linkages were significantly altered by 9|11. We test whether semi-parametric quantile estimates of 'downside risk' and 'upward potential' have increased after 9|11. The same methodology allows one to estimate probabilities of joint booms and busts for pairs of sectoral indices or for a sectoral index and a market portfolio. The latter probabilities measure the sectoral response to macro shocks during periods of financial stress (so-called 'tail-βs'). Taking 9|11 as the sample midpoint we find that tail-βs often increase in a statistically and economically significant way. This might be due to perceived risk of new terrorist attacks. Copyright © 2008 John Wiley & Sons, Ltd.
 
The estimated time evolutions of the (conditional) correlations for all four examples. The figures on the left correspond with the GO-GARCH model and those on the right with O-GARCH
Article
Multivariate GARCH specifications are typically determined by means of practical considerations such as the ease of estimation, which often results in a serious loss of generality. A new type of multivariate GARCH model is proposed, in which potentially large covariance matrices can be parameterized with a fairly large degree of freedom while estimation of the parameters remains feasible. The model can be seen as a natural generalization of the O-GARCH model, while it is nested in the more general BEKK model. In order to avoid convergence difficulties of estimation algorithms, we propose to exploit unconditional information first, so that the number of parameters that need to be estimated by means of conditional information is more than halved. Both artificial and empirical examples are included to illustrate the model. Copyright © 2002 John Wiley & Sons, Ltd.
 
Article
Event data can often be analysed using different concepts of waiting time. Our application offers three choices: calendar-time, age, and duration of residence in New Orleans. We exploit the semi-parametric features of Cox regression and estimate parallel specifications in which mortality risk is treated as an arbitrary function of one of the three alternative time measures, while the remaining two enter the hazard parametrically. Comparisons of the parameter estimates with the corresponding estimates of the baseline hazards from the crux of a simple specification checking procedure. In our formal treatment we rely on Aalen's Multiplicative Intensity formulation and tackle complications such as left-truncation, functional form specification, and choice-based sampling.
 
Article
Characterization of late nineteenth-century British economic performance rests heavily on identifying trends and turning points in GDP and productivity growth. N. Crafts, S. Leybourne and T. Mills (1989) provide the most sophisticated study in this genre, deploying a time-varying parameter model, to severely dent the notion of a climacteric. This paper argues the linear trend approach to assessing the climacteric may be otiose. Investigating the order of integration of the GDP series, and the cointegration of GDP and factor input growth, suggests both GDP and productivity growth tended to revert to a constant mean rate within the period 1856-1913, and undermines the notion of a climacteric. Copyright 1992 by John Wiley & Sons, Ltd.
 
Article
This paper considers nine long Swedish macroeconomic time series whose business cycle properties were discussed by Englund, Persson, and Svensson (1992) using frequency domain techniques. It is found by testing that all but two of the logarithmed and difference series are non-linear. The observed nonlinearity is characterized by STAR models. The statistical and dynamic properties of the estimated STAR models are investigated using, among other things, parametrically estimated ‘local’ or ‘sliced’ spectra. Cyclical variation at business cycle frequencies does not seem to be constant over time for all series, and it is difficult to find a ‘Swedish business cycle’. Only two series may be regarded as having genuinely assymetric cyclical variation. Standard Granger non-causality tests are adapted to the nonlinear (STAR) case, and the null hypothesis of noncausality is tested for pairs of series. The results point at strong temporal interactions between series. They also indicate that the assumption of functional form (linear or STAR) strongly affects the outcome of these pairwise tests.
 
Article
UK inflation has varied greatly in response to many economic policy and exchange-rate regime shifts, two world wars and two oil crises, as well as legislative and technological changes. Inflation is modelled as responding to excess demands from all sectors of the economy: goods and services, factors of production, money, financial assets, foreign exchange, and government deficits. Equilibrium-correction terms are developed for each of these over the sample. Indicator variables and commodity prices capture turbulent years. Variables representative of most theories of inflation matter empirically, yielding an eclectic model inconsistent with any 'single-cause' explanation. Copyright © 2001 John Wiley & Sons, Ltd.
 
Article
In this paper we reconsider an error-correction model of UK broad money demand by Ericsson, Hendry and Prestwich. Their model is non-linear in both variables and parameters, and it can be viewed as an approximation to a smooth transition regression (STR) type specification. The corresponding STR model, when specified and estimated, fits the data better than the original model. Adopting a somewhat more general modelling approach leads to another STR model. This model variance dominates the other two, and the encompassing tests performed in this paper indicate that it is an improvement over the other two specifications. Copyright © 2001 John Wiley & Sons, Ltd.
 
Article
This paper provides a robust statistical approach to testing the unbiasedness hypothesis in forward exchange market efficiency studies. The methods we use allow us to work explicitly with levels rather than differenced data. They are statistically robust to data distributions with heavy tails, and they can be applied to data sets where the frequency of observation and the futures maturity do not coincide. In addition, our methods allow for stochastic trend nonstationarity and general forms of serial dependence. The methods are applied to daily data of spot exchange rates and forward exchange rates during the 1920's, which marked the first episode of a broadly general floating exchange rate system. The tail behavior of the data is analyzed using an adaptive data-based method for estimating the tail slope of the density. The results confirm the need for the use of robust regression methods. We find cointegration between the forward rate and spot rate for the four currencies we consider (the Belgian and French francs, the Italian lira and the US dollar, all measured against the British pound), we find support for a stationary risk premium in the case of the Belgian franc, the Italian lira and the US dollar, and we find support for the simple market efficiency hypothesis (where the forward rate is an unbiased predictor of the future spot rate and there is a zero mean risk premium) in the case of the US dollar.
 
Article
SUMMARY This paper provides a robust statistical approach to testing the unbiasedness hypothesis in forward exchange market efûciency studies. The methods we use allow us to work explicitly with levels rather than differenced data. They are statistically robust to data distributions with heavy tails, and they can be applied to data sets where the frequency of observation and the futures maturity do not coincide. In addition, our methods allow for stochastic trend non-stationarity and general forms of serial dependence. The methods are applied to daily data of spot exchange rates and forward exchange rates during the 1920s, which marked the ûrst episode of a broadly general üoating exchange rate system. The tail behaviour of the data is analysed using an adaptive data-based method for estimating the tail slope of the density. The results conûrm the need for the use of robust regression methods. We ûnd cointegration between the forward rate and spot rate for the four currencies we consider (the Belgian and French francs, the Italian lira and the US dollar, all measured against the British pound), we ûnd support for a stationary risk premium in the case of the Belgian franc, the Italian lira and the US dollar, and we ûnd support for the simple market efûciency hypothesis (where the forward rate is an unbiased predictor of the future spot rate and there is a zero mean risk premium) in the case of the US dollar.
 
Article
This paper first investigates the effects of alternative modes of deficit financing on the unemployment rate, the inflation rate and the real interest rate, within the framework of a small complete macroeconomic model. Secondly, it examines the nature of monetary and fiscal reaction functions. The two periods 1923–1960 and 1961–1982 are considered, with substantial differences in behaviour and policy being shown to exist between them. The most important conclusion is that long-run monetary neutrality properties shown to exist over the latter period are not intrinsic to the U.S. economy, but rather are the result of the stabilization policies being conducted over that period.
 
Article
For U.S. data over 1950-85 the stochastic components of GNP growth and the unemployment rate appear to be stationary, and there is substantial feedback between these variables. The unconditional mean rate of unemployment in a joint model thus provides a natural benchmark in discussions of the "business cycle." A bivariate VAR model is used to describe output-unemployment dynamics to estimate the degree of persistence of output innovations, and to decompose output into trend and cycle. The bivariate results are interpreted using a restricted VAR and it is shown that a closely related cyclical measure can be obtained directly from the Okun's Law equation. Copyright 1989 by John Wiley & Sons, Ltd.
 
Article
This re-analysis of Tobin's (l950)study makes three points: (1) graphs are a powerful device for discovery and for communication, and can reveal much of the information in the data; (2) squeezing out the more subtle multivariate messages requires some solution to the usual overparameterization problem. Data-mining is still the treatment of choice for this crippling disease, but it is more akin to leeches than to anti-biotics. A Bayesian sensitivity analysis is an alternative, but it isn't a perfect cure either; and (3) clear identification of the issues can help keep the enterprise from wandering off in technically amusing but largely irrelevant directions.
 
Article
In this paper we present a small Keynesian macro-economic model in which wage-price determination is linked to the working of goods and money markets. By explicitly treating the Keynes effect we derive a general expression for the employment-money supply elasticity, and draw the IS-LM loci in the employment-interest rate space Our empirical specification allows for short-run disequilibrium dynamic adjustments around the static long-run relations predicted by the theoretical model. By careful use of our specification search strategy we obtain a statistically sound econometric model, which exhibits sensible long-run properties. A remarkable finding implied by our estimates is that equilibrium unemployment is negatively affected by both money supply and incomes policy.
 
Article
This paper examines the importance of expectations in the determination of U.K. export prices. Export prices are found to depend upon expectations of total domestic unit costs and foreign prices. The non-linear restrictions implied by the forward-looking model are found to hold and it performs adequately relative to a backward-looking error feedback model. The law of one price is rejected and the evidence is consistent with imperfect competition in export markets.
 
Article
The relationships between real wages, output per capita, inflation and unemployment in Italy between 1970 and 1994 are modelled using a cointegrated vector autoregression. There is evidence of a change in the underlying equilibria and in the dynamic evolution of the variables, probably associated with the substantial changes in many sectors of the Italian economy after 1979. Alternative ways to model structural change in the Italian labour market are considered. In adopting a split-sample approach the results favour an hysteresis interpretation of unemployment. Copyright © 2001 John Wiley & Sons, Ltd.
 
Article
This paper presents an empirical investigation of the dynamics of prices, wages and import prices in a small open economy using data for Israel in the accelerating inflationary period of 1970–1983. The appropriateness of the specification of a price equation as a function of import prices and wages is critically reviewed using Sims's methodology. The main finding is that the only significant lags in the representation of the rate of change in prices, wages and import prices are the lags of the rate of change in prices (the rate of inflation). Other factors in the representation are attributed to market forces influencing real wages and the real exchange rate. Testing the correlation of the estimated VAR residuals leads to the conclusion that a short-term inflation equation specified as a function of present and past wages is not acceptable. A further decomposition of the VAR residuals presents evidence in favour the hypothesis that price shocks contribute to the explanation of the inflationary process in Israel. A rational expectation interpretation of the results is proposed, followed by some policy implications.
 
Article
Atkinson (1987) proposed stochastic dominance criteria for analysing poverty which, under certain conditions, establish orderings of states for any poverty line and any poverty measure within given class, refocusing debate on the nature of the income distribution of the poor. Employing new empirical techniques, these criteria are implemented for the United States from 1970 to 1990 using the Panel Study of Income Dynamics. Results highlight the pivotal role of family size scale economies in consumption, indicate different experiences for white versus non-white groups and suggest that optimism over the progress of the poor is not warranted. Copyright © 2003 John Wiley & Sons, Ltd.
 
Article
We examine the mean and variance-covariance structure of log-wages over calendar time and the life cycle of British men, hereby controlling for birth cohort effects. We attribute the strong increase in mean log-wage during the 1980s and 1990s to a rise in mean log-wage with the year of birth. This rise is diminishing with the year of birth, which implies lower wage inequality between cohorts with the year of birth. Wage inequality has increased during the 1980s and early 1990s and remained fairly stable in the second half of the 1990s. The year effects, however, show increasing wage inequality up to 2001, mainly due to a strong rise in transitory wage inequality. Transitory wages are strongly correlated over time and an increase in transitory wage inequality therefore has highly persistent inequality consequences. The stable wage inequality in the second half of the 1990s is attributed to lower within-cohort wage inequality for the younger cohorts. The age effects show that permanent wage inequality increases with age, in particular up to age 30 and over age 50. Copyright © 2007 John Wiley & Sons, Ltd.
 
Article
Sugarcane-based ethanol has become a primary automotive fuel in Brazil over the past 15 years. Because sugarcane costs are over two-thirds of the costs of ethanol production, the economic efficiency of the renewable petroleum substitute hinges on the structure of technology in sugarcane production. In this paper a modified symmetric generalized McFadden (SGM) cost function for sugarcane is estimated and the presence of technical change and economies of scale are investigated. The original SGM proposed by Diewert and Wales (1987) is modified to allow for fixed factors of production. This allows the cost function to be applied to processes which have fixed factors. The results suggest that there is no empirical evidence of economies of scale and very little technical change, only in the north of Brazil. The implications for the future economic efficiency of this petroleum substitute are discussed. Copyright 1995 by John Wiley & Sons, Ltd.
 
Article
The purpose of this paper is to provide the first comprehensive firm level analysis of cost structures and production in the interstate pipeline industry during the transition from price regulation to partial deregulation, 1977-85. The regulatory changes during this period were numerous and complex. We do not attempt to isolate the impact of any single change in regulation; rather, we examine how the regulatory environment, as a whole, affected the industry. Our study is based on a newly constructed panel of twenty-four interstate pipeline firms. We give particular attention to the impact of output change, technical change, scale economies, and non-optimal input allocation on total factor productivity growth and the implication of the 1978 Natural Gas Policy Act partial price decontrol relative to total wellhead price decontrol for residential, commercial, utility, and industrial consumers of natural gas, and for the transport industry itself. © 1998 John Wiley & Sons, Ltd.
 
Article
Modern econometrics stresses the diagnostic testing of estimated models as an important part of the model-building process. In a survey article published in this journal (Pagan and Vella 1989), methods for testing the validity of the assumptions underlying the censored regression of the Tobit model were presented. This paper questions the numerical results presented there. Indeed, my results concerning the tests when applied to Fair's well-known model for infidelity (1978) are the opposite of those presented in this journal. Copyright © 2003 John Wiley & Sons, Ltd.
 
Article
Using kernel density estimation we describe the distribution of household size-adjusted real income and how it changed over the business cycle of the 1980s in the United States and the United Kingdom. We confirm previous studies that show income inequality increased in the two countries and the middle of the distribution was squashed down. Using a series of statistical tests, however, we find that while the mass in both tails of the distribution increased significantly in both countries over the period, by far the greatest gains were in the upper tail.
 
Article
The choice of an appropriate social rate of discount is critical in the decision-making process on public investments. In this paper we review the literature on social discounting, and address in particular a recently growing field of related research, that is, individual time preferences. We argue that an explicit consideration and analysis of the behaviour of individuals regarding the concept and the use of an appropriate social discount rate are essential for balanced decision making in the public sector, especially, though not exclusively, in the field of resource or environmental policy.
 
Article
We study the impact of policy and institutional constraints, and reforms undertaken to remedy them, on relative price efficiency and cost of the private manufacturing sector of Egypt. We undertake this study using a generalized cost function, which subsumes the standard neoclassical cost function as a special case. This approach allows us to assess the impact of such constraints, which include labor market, energy and financial sector ones, on relative prices and the structure of production, including factor demands, shares and cost. Our findings indicate the presence of substantial distortions in relative prices, and hence on cost, due to the policy environment. We also find improvements in relative price efficiency and cost performance as a result of policy reforms initiated to remove the constraints. Copyright © 2007 John Wiley & Sons, Ltd.
 
Article
This paper ranks academic institutions by publication activity in applied econometrics over the period 1989-1995. Fourteen leading international journals that publish applied econometrics articles are used to provide the database. The rankings are based on standardized page counts of articles published in these journals over the stated period. A 'Hall of Fame' is developed listing the top 100 individual producers of applied econometrics in the fourteen journals considered. To control for quality differences among the applied journals, separate rankings are provided both for institutions and for individuals according to econometrics publications by journal.
 
Article
Recent studies have stressed the importance of privatization and openness to foreign competition for bank efficiency and economic growth. We study bank efficiency in Turkey, an emerging economy with great heterogeneity in bank types and ownership structures. Earlier studies of Turkish banking had three limitations: (i) excessive reliance on cost-function frontier analyses, wherein volume of loans is a measure of banking output; (ii) pooling all banks or imposing ad hoc heterogeneity assumptions; and (iii) lack of a comprehensive panel data set for proper analysis of productivity and heterogeneity. We use an estimation-classification procedure to find likelihood-driven classification of bank technologies in an 11-year panel. In addition, we augment traditional cost-frontier analysis with a labour-efficiency analysis. We conclude that state banks are not particularly inefficient overall, but that they do utilize labour inefficiently. This partially supports recent calls for privatization. We also conclude that special finance houses (or Islamic banks) utilize the same technology as conventional domestic banks, and do so relatively efficiently. This suggests that they do not cause harm to the financial system. Finally, we conclude that foreign banks utilize a different technology from domestic ones. This suggests that one should not overstate their value to the financial sector. Copyright © 2005 John Wiley & Sons, Ltd.
 
Article
We identify two major changes in the dynamics of the federal funds rate in the 1990s. We model the desired rate in a two-regime setting, one when the Fed makes no change and the other when the Fed is moving the desired rate to a new level. We find that the 1990s saw a longer duration in the no-change regime as well as smaller changes in the other regime. The smaller changes were neither due to a less aggressive Fed nor due to lower volatility of the fundamentals. In fact, the Fed responded more aggressively to changes in fundamentals in the 1990s. Copyright © 2004 John Wiley & Sons, Ltd.
 
Article
This paper examines whether the dismantling of apartheid has resulted in an improvement in the standard of living for the vast majority of South Africans. The study is based on a panel data set from the Kwazulu-Natal province. We use weighted quantile regressions to examine the distribution of standards of living, which corrects for the potential bias arising from non-random sample attrition. Our results show that there has been a significant increase in the spread of the distribution of household expenditure of the non-white households residing in Kwazulu-Natal province. Copyright © 2006 John Wiley & Sons, Ltd.
 
Top-cited authors
Hashem Pesaran
  • University of Southern California
Yongcheol Shin
  • The University of York
Pierre Perron
  • Boston University
Jeffrey M. Wooldridge
  • Michigan State University
James G. Mackinnon
  • Queen's University