the economics of a blend mandate for biofuels a biofuel blend mandate may increase or decrease consumer fuel prices with endogenous oil prices depending on relative supply elasticities biofuel tax credits always reduce fuel prices tax credits result in lower fuel prices than under a mandate for the same level of biofuel production if tax credits are implemented alongside mandates then tax credits subsidize fuel consumption instead of biofuels this contradicts energy policy goals by increasing oil dependency co 2 emissions and traffic congestion while providing little benefit to either corn or ethanol producers these social costs will be substantial with tax credits costing taxpayers 28 7 billion annually by 2022 copyright 2008 oxford university press

testing the option value theory of irreversible investment this article statistically tests the option theory of irreversible investment using contingent claims valuation we derive the value of options to invest in capacity where the projects are endogenous to the economic circumstances prevailing at the investment date we then test whether decisions made by canadian copper mines are compatible with the trigger price implied by the theory our model explains investment size and timing satisfactorily from a statistical and an economic point of view simulations with a mean reverting process suggest that the results do not depend crucially on the assumption that price follows a geometric brownian motion

demystifying rins a partial equilibrium model of u s biofuels markets abstract we explore four fundamental channels of mandate compliance available under current u s biofuel policy increased ethanol blending through e10 or e85 increased biodiesel blending and a reduction in the overall compliance base simulation results highlight the interplay and varying importance of these channels at increasing blend mandate levels in addition we establish how rin prices are formed the value of a rin in equilibrium is shown to reflect the marginal cost of compensating the blender for employing one additional ethanol equivalent unit of biofuel this contrasts with existing research equating the price of rins to the gap between ethanol supply and demand evaluated at the mandate level we demonstrate the importance of this distinction in case of binding demand side infrastructure constraints such as the ethanol blend wall as percentage blend mandates increase the market for low ethanol blends may contract in order to reduce the overall compliance base this has important implications for implied ethanol demand in the economy

getting ppp right identifying mean reverting real exchange rates in panels abstract recent advances in testing for the validity of purchasing power parity ppp focus on the time series properties of real exchange rates in panel frameworks one weakness of such tests however is that they fail to inform the researcher as to which cross section units are stationary as a consequence a reservation for ppp analyses based on such tests is that a small number of real exchange rates in a given panel may drive the results in this paper we examine the ppp hypothesis focusing on the stationarity of the real exchange rates in up to 25 oecd countries we introduce a methodology that when applied to a set of established panel unit root tests allows the identification of the real exchange rates that are stationary our results reveal evidence of mean reversion that is significantly stronger as compared to that obtained by the existing literature strengthening the case for ppp

on the number of factors in the arbitrage pricing model recent theory has demonstrated that the arbitrage pricing model with k factors critically depends on whether k eigenvalues dominate the covariance matrix of returns as the number of securities grows large the purpose of this paper is to test whether sample covariance matrices can be characterized as having k large eigenvalues using all available data on the 1983 crsp tapes we compute sample covariance matrices of returns in sequentially larger portfolios of securities analyzing their eigenvalues we find evidence that one eigenvalue dominates the covariance matrix indicating that a one factor model may describe security pricing we also find that for values of k larger than one there is no obvious way to choose the number of factors nevertheless we find that while only the first eigenvalue dominates the matrix the first five eigenvalues are growing more distinct arbitrage pricing theory apt as originally developed by ross 22 23 is built on the twin assumptions of no arbitrage opportunities in the capital market and a linear relationship between actual returns and k common factors the principal hypothesis of the model is that expected returns should be linearly related to the weights of the common factors in the assumed linear process in every test of the model the focus has been to use factor analysis to extract k factors from sample covariance matrices and then to test the hypothesis by regressing returns or average returns against the factor loadings of the common factors most previous tests have either assumed that the number of factors is equal to some predetermined number or have estimated k simultaneously with estimation of the factor loadings thus existing tests of the apt are joint tests of the apt pricing result and an assumed or estimated number of factors the question of how many factors are important has not been addressed separately from the pricing tests because the apt pricing result is the significant prediction of a theory which has little to say about the value of k nevertheless crosssection linear models have been a central part of financial economics and it is clearly important to know at least the approximate number of factors which will be significant in such regressions particularly given the computational difficulties of large scale factor analysis furthermore dhrymes friend and gultekin 6 report that the number of factors needed for standard chi squared tests increases university at buffalo suny i am in debt to donald bosshardt gary chamberlain thomas ho richard roll lemma senbet mark zmijewski and the participants in finance workshops at the universities of michigan wisconsin and buffalo for their extensive comments nevertheless i am solely responsible for what remains this paper would not have been started without the unselfish cooperation of jay leavitt director of academic computing university at buffalo suny who designed the eigenvalue algorithm which i used i am also grateful for partial financial support and lavish computer funds from the school of management and for the expert programming assistance provided by ravi shukla

modelling macroeconomic shocks in the cfa franc zone abstract in this paper we modify the method of blanchard and quah american economic review 79 1989 655 in order to estimate a structural var model appropriate for a small open economy in this way we identify shocks to output and prices in the members of the two monetary unions that make up the african cfa franc zone the costs of monetary union membership will depend on the extent to which price and output shocks are correlated across countries and the degree of similarity in the long run effects of the shocks on the macroeconomy the policy conclusions depend on the relative importance of different macroeconomic variables to policymakers and the speed with which a policymaker is able to respond to a shock

compliance path and impact of ethanol mandates on retail fuel market in the short run past studies have examined the impact of ethanol mandates with a long run perspective and were thus able to assume away short run rigidities and some of the specifics of the biofuel mandates these studies have been of limited use in informing current policy debates because the short to medium run reality is one of strong regulatory and infrastructure rigidities that restrict how ethanol can be consumed in the united states our objectives in this paper are to provide a more coherent framework than currently exists to model and understand how compliance with ethanol mandates in the short run cannot be met with conventional gasoline blends how compliance impacts fuel prices and consumer and producer welfare and also to measure the size of the transfer that occurs between refineries and ethanol producers through the market s renewable identification numbers rins in a model calibrated to 2015 data we find that the effects of increasing ethanol mandates that are physically feasible are close to zero on the retail price of gasoline this result is robust to different gasoline prices supply elasticities and export demand elasticities increased mandates can have a large negative effect on the price of high level ethanol gasoline blends such as e85 if the mandates are increased to approach consumption capacity

structural analysis of cointegrating vars this survey uses a number of recent developments in the analysis of cointegrating vector autoregressions vars to examine their links to the older structural modelling traditions using autoregressive distributed lag ardl and simultaneous equations models sems in particular it emphasizes the importance of using judgement and economic theory to supplement the statistical information after a brief historical review it sets out the statistical framework discusses the identification of impulse responses using the generalized impulse response functions reviews the analysis of cointegrating vars and highlights the large number of choices applied workers have to make in determining a specification in particular it considers the problem of specification of intercepts and trends and the size of the var in more detail and examines the advantages of the use of exogenous variables in cointegration analysis the issues are illustrated with a small u s macroeconomic model

a comparison of autoregressive univariate forecasting procedures for macroeconomic time series the actual performance of several automated univariate autoregressive forecasting procedures applied to 150 macroeconomic time series are compared the procedures are the random walk model as a basis for comparison long autoregressions with three alternative rules for lag length selection and a long autoregression estimated by minimizing the sum of absolute deviations the sensitivity of each procedure to preliminary transformations data periodicity forecast horizon loss function employed in parameter estimation and seasonal adjustment procedures is examined the more important conclusions are that akaike s lag length selection criterion works well in a wide variety of situations the modeling of long memory components becomes important for forecast horizons of three or more periods and linear combinations of forecasts do not improve forecast quality appreciably

unit roots and infrequent large shocks new international evidence on output growth the authors examine output growth for the g 7 countries they use nathan s balke and thomas fomby s procedure to identify the date and type of trend breaks and note that these occur in clusters the authors estimate country specific intervention models and test the unit root hypothesis their critical values explicitly take account of the prior outliner search procedure for italy japan and the united kingdom the unit root null hypothesis can be rejected this suggests that the variance of output growth in these countries is generated by low frequency high magnitude shocks rather than high frequency low magnitude shocks copyright 1995 by ohio state university press

unit roots and infrequent large shocks new international evidence on output abstract the nature and magnitude of the economic shocks that have affected the per capita gdp of 16 oecd countries are analyzed over a long period using the outlier method strong proof of infrequent large permanent and transitory shocks were found essentially resulting from the two major wars in the twentieth century the recession in the 1920s the great depression among others we also examine the nature of the output trend by combining different tests of non stationarity on different gdp series corrected by the outliers detected it is shown that the per capita gdp series cannot reject the unit root hypothesis in 13 of the 16 countries examined no conclusion could be drawn for the other countries because the test results were contradictory

does real u k gdp have a unit root evidence from a multi century perspective we employ linear and nonlinear unit root tests to examine the stationarity of five multi century historical u k series of real output compiled by the bank of england three series span 1270 to 201

cross sectional heterogeneity and the persistence of aggregate fluctuations abstract the microevidence indicates that small firms grow faster than big firms i argue that this relationship between the expected growth rate of a firm and its size may provide a microfoundation for the well known high degree of persistence of shocks to aggregate output the logic goes as follows almost any shock tends to temporarily alter firms incentive to invest in growth thereby leading to a reallocation of firms across size categories if small firms grow faster than big ones the impact effect of the shock on aggregate output is gradually absorbed but as fast growing small firms become big and start to grow at the lower rate of big firms the rate at which the shock is absorbed decreases over the adjustment path as a result shocks are absorbed yet at a very low decreasing rate which induces long memory in aggregate output i argue that this transmission mechanism may reconcile the microevidence with the observed degree of aggregate persistence it requires changes in neither the number of firms in the market nor the rate of technological progress it is merely the result of the cross sectional heterogeneity that we observe in real economies

further evidence regarding nonlinear trend reversion of real gdp and the cpi abstract this paper examines whether the cpi and real gdp for the us exhibit nonlinear reversion to trend as recently concluded by beechey and osterholm beechey m and osterholm p 2008 revisiting the uncertain unit root in gdp and cpi testing for nonlinear trend reversion economics letters 100 221 223 the wild bootstrap is used to correct for non normality and heteroscedasticity in a nonlinear unit root test the use of wild bootstrapped critical values affects test conclusions in some cases results also are sensitive to the sample period examined

unit root and trend breaks in per capita output evidence from sub saharan african countries abstractthis article examines the nonstationary properties of per capita real output in 28 sub saharan african ssa countries covering the period 1960 2014 the sequential testing approach proposed by kejriwal and lopez 2013 econometric reviews 32 8 892 927 is used to categorize ssa countries into growth shift level shift and linear trend hypotheses based on the presence or not of breaks in slope and or level of the trend function the break dates are associated to major historical or economic events such as sociopolitical crisis commodity price fluctuations on international market the discovery and the exploitation of mineral deposits or unfavourable environmental and climatic conditions the empirical evidences of appropriate unit root tests fail to reject the unit root hypothesis in all the countries suggesting that a shock would have a permanent effect on growth process and stabilization policies may be implemented in dealing with income fluctuations

segmented trends and non stationary time series since the influential work of charles r nelson and charles plosser 1982 many empirical studies have concluded that macroeconomic time series are difference stationary this paper proposes the segmented trend model as an alternative in which the series is the sum of a nonstationary trend and a stationary cycle and where the trend shows infrequent shifts the paper proposes tests between the difference stationary and segmented trends models and applies these to the data of nelson and plosser in general the results indicate that prices are difference stationary but quantities follow segmented trend processes copyright 1989 by royal economic society

stable factors in security returns identification using cross validation recent papers in financial research focus on identifying a stable factor structure for security returns the likelihood ratio test typically is used to determine the number of factors from exploratory factor analysis models in this article we consider the use of cross validation to identify a stable factor structure in security returns when applied to actual stock return data cross validation identifies a smaller number of stable factors than the likelihood ratio test in groups of 30 60 randomly selected securities cross validation suggests one dominant factor whereas the likelihood ratio test identifies from four to six factors furthermore when groups are designed to highlight industry or size effects the discovery of more than one dominant factor is problematic even if there are multiple economic factors generating stock returns they may be difficult to disentangle if the underlying factors tend to be correlated

potential pitfalls in determining multiple structural changes with an application to purchasing power parity we investigate the empirical performance of the bai and perron multiple structural change tests and show that the use of their critical values may cause severe size distortions in persistent series to correct these size distortions while maintaining a good power we implement the bai structural change test and extend it in two directions developing a new procedure to choose the number of breaks and a restricted version that specifically models breaks that imply mean or trend reversion using our new methodologies we reconcile the results of unit root tests with those of tests for structural change when testing for long run purchasing power parity

joint estimation of factor sensitivities and risk premia for the arbitrage pricing theory the apt is represented as a multivariate regression model with across equations restrictions both observed and unobserved latent macroeconomic factors are included thus generalizing and unifying two previous strands of literature large portfolios representing unobserved factors are treated as endogenous and nonlinear 3sls estimates are shown to differ sharply from estimates that ignore this endogeneity using monthly stock returns and six factors we cannot reject january effects the following results are invariant with respect to the inclusioh of january effects we reject the capm in favor of the apt however we cannot reject the apt restrictions on the linear factor model most empirical work on the arbitrage pricing theory apt has followed a factor analysis approach papers by burmeister and wall 5 chan chen and hsieh 7 chen roll and ross 9 and mcelroy and burmeister 22 represent some exceptions in which measured macroeconomic factors such as unexpected inflation are used to explain asset prices in an apt or multifactor model both the factor analysis approach and the measured macroeconomic factor approach have their merits the primary advantages of using measured economic factors are 1 the factors and their apt prices in principle can be given economic interpretations while with a factor analysis approach it is unknown what factors are being priced and 2 rather than using only asset prices to explain asset prices measured macroeconomic factors introduce additional information linking asset price behavior to macroeconomic events in this exploratory paper we investigate an apt or multifactor model in which there are both measured macroeconomic factors and other nonobserved factors we impose the nonlinear across equation apt pricing restrictions exactly by using three multivariate estimation methods iterated nonlinear weighted least squares itnlwls iterated nonlinear seemingly unrelated regressions itnlsur and iterated nonlinear three stage least squares itnl3sls see gallant 13 and discussion below the appropriate estimation method depends upon alternative assumptions about the error terms nonsystematic risk in the asset returns equations the primary objective of this work is to investigate whether or not certain apt tests are sensitive to these alternative error assumptions the details of which are given in the text our focus is on the interrelation

the case for trend stationarity is stronger than we thought in dejong and whiteman 1991a we concluded that 11 of the 14 macroeconomic time series originally studied by nelson and plosser 1982 supported trend stationarity phillips 1991 criticizes this inference claiming that our procedure is biased against integration and that our results are sensitive to model and prior specification however phillips alternative models and priors bias his results in favour of integration despite these biases phillips own findings indicate that the data provide the greatest relative support to trend stationarity this result is similar to our own 1989 1990 1991b findings concerning the sensitivity of our results the trend stationarity inference is remarkably robust

the great depression and output persistance the persistence of shocks to aggregate output has been the subject of continuing investigation since nelson and plosser 1982 suggested they are largely permanent recent literature reaches mixed conclusions largely due to disagreement about how to treat the great depression we estimate output persistence based on a parametric bootstrap of a markov switching model for gdp 1870 1994 in which the economy can switch in and out of a turbulent state our results suggest that real shocks persist indefinitely if we drop the maintained assumption of homoskedasticity in favor of a markov switching representation of the great depression

long memory and persistence in aggregate output abstract we examine persistence in u s aggregate output by estimating fractionally integrated arima models these models provide better low frequency approximations to the wold representation than previous stochastic specifications and earlier results on the importance of a permanent component emerge as special cases we find evidence of long memory which induces persistence though this long memory need not be associated with a unit root our point estimates indicate that macroeconomic shocks while persistent are distinctly less persistent than many earlier studies suggest however confidence intervals associated with the long run response are quite wide

an asset pricing theory unifying the capm and apt this study shows that the competitive equilibrium version of the arbitrage pricing theory may be extended to develop an exact mode l if idiosyncratic risks obey the ross separating distribution the r esults indicate that one only need add the market portfolio as an ext ra factor to the factor model in order to obtain an exact asset prici ng relation the empirical arbitrage pricing theory is also general ized to allow for some factors to be omitted from the econometric m odel employed to test the theory the importance of the market portfo lio is shown to be a monotonic increasing function of the number of o mitted factors copyright 1988 by american finance association

markov switching models and the unit root hypothesis in real us gdp abstract i find that real us gdp is better characterized as a trend stationary markov switching process than as having a regime dependent unit root i examine the effects of both assumptions on the analysis of business cycle features and their implications for the persistence of the dynamic response of output to a random disturbance

integration or segmentation of the canadian stock market evidence based on the apt the domestic and international arbitrage pricing theories are modified to encom pass the hypotheses that the canadian and global north american equity markets are com pletely or partly integrated segmented the exchange rate determination literature is used to identify potentially priced binational factors and the sensitivities and factor prices are es timated using non linear sur the two equity markets are only partly integrated segmented canadian stock returns are influenced by the pure domestic components of the term structure and lagged industrial production and by the pure international components of the differential

intraday market price integration for shares cross listed internationally this study investigates market price integration by testing per share trade execution price or cost tep c differentials for matched intraday trades for a sample of canadian shares cross listed in the u s the tse trade price advantage over the entire time period changed significantly after both the tse s own minimum quotation increment reduction and that of its u s competitors we show that the differential tep c is equivalent to the international effective spread differential and that market quality comparisons which benchmark using the national instead of the international bbo need to compare both national effective half spread and midspread differences our cross sectional regression results support our predictions that tep c differentials can be explained by differences in national midspreads and by ex ante proxies of national effective half spreads the tep c differentials vary inversely with increasing levels of our measure of signed market nonfragmentation

the uncertain trend in u s gdp abstract several recent papers conclude that gdp is trend stationary implying that all shocks are transitory we re examine the evidence in light of test size distortion due to data based lag selection and departures from the maintained hypothesis of temporal homogeneity and find both effects trigger false rejections of the unit root hypothesis when it is true and signal the presence of permanent shifts in trend that did not occur trend stationarity is not supported by the more homogeneous post war data but if imposed implies cycles of implausible duration and pattern 1997 output was 8 below trend

second best biofuel policies and the welfare effects of quantity mandates and subsidies abstract the quest for biorenewable energy sources is held to justify a number of government interventions including support policies for biofuels such as those responsible for the recent rapid growth of us ethanol production this article provides an analytical assessment of such policies we construct a general equilibrium open economy model that captures the rationale typically invoked to justify government intervention in this setting to alleviate the environmental impact of energy consumption and to decrease us energy dependence on foreign sources the model is used to study both the positive and normative implications of alternative policy instruments including the subsidies and mandates specified by the 2007 energy independence and security act from a positive perspective we find that biofuels mandates are equivalent to a combination of fuel taxes and biofuels subsidies that are revenue neutral from a welfare perspective we show that biofuels mandates dominate biofuels subsidies and that combining fuel taxes with mandates would be welfare enhancing

aggregation persistence and volatility in a macro model we introduce firm heterogeneity into the standard monopolistically competitive real business cycle rbc model the fundamental equilibrium path is derived and the time series properties of aggregate gdp are studied analytically although firms productivities are subject to temporary shocks the aggregate process displays a surprising novel form of nonlinearity and long memory which had not been built into the model at the outset this aggregate gdp turns out to have very different properties from log linear time series models such as auto regressive ar models and their extensions it displays very strong persistence which ends abruptly with a sudden change of tendency giving its autocorrelation function acf an s shape although persistent it is mean reverting unlike the everlasting memory of unit root processes its volatility is of a greater order of magnitude than that of any of its components so small micro shocks can generate large macro fluctuations it is also characterized by long asymmetric cycles of random lengths increased monopoly power tends to reduce the amplitude and increase the

multiple breaks terms of trade shocks and the unit root hypothesis for african per capita real gdp summary this paper presents an investigation of the unit root hypothesis for per capita real gdp series in 46 african countries from maddison 2003 over the period spreading during 1950 and 2001 toward this end we employ highly flexible panel techniques which incorporate multiple mean and slope shifts in the output series our findings are clearly supportive of regime wise trend stationarity in output after 1 allowing for cross dependence and multiple breaks and 2 removing four countries that exert undue influence on the whole panel remarkably our main results hold true for alternative per capita real gdp proxies retrieved from the penn world table 6 2 as well as for different country groups constructed on the basis of the country s participation in regional integration processes interestingly the timing of the breaks broadly coincides with terms of trade shocks associated with large fluctuations in the price of primary commodities based on our results we draw some policy prescriptions that point to the need for managing adequately terms of trade booms and busts to avoid large swings in africa s aggregate output

trends and cycles in macroeconomic time series two structural time series models for annual observations are constructed in terms of trend cycle and irregular components the models are then estimated via the kalman filter using data on five u s macroeconomic time series the results provide some interesting insights into the dynamic structure of the series particularly with respect to cyclical behavior at the same time they illustrate the development of a model selection strategy for structural time series models

a measure of the u s output gap abstract an autoregressive distributed lag regression of the unemployment rate on output growth is structurally stable over the 1890 1986 period inverting this equation yields a measure of the output gap which is not subject to the spurious detrending problem

global biofuels key to the puzzle of grain market behavior these jumps in the prices of these three major grains have also revealed the these jumps in the prices of these three major grains have also revealed the chaotic state of economic analysis of agricultural commodity markets economists chaotic state of economic analysis of agricultural commodity markets economists and scientists have engaged in a blame game apportioning percentages of responand scientists have engaged in a blame game apportioning percentages of responsibility for price spikes to bewildering lists of factors which include a surge in meat sibility for price spikes to bewildering lists of factors which include a surge in meat consumption caused by unprecedented increases of income of the vast populations consumption caused by unprecedented increases of income of the vast populations of china and india idiosyncratic regional droughts and fi res speculative bubbles a of china and india idiosyncratic regional droughts and fi res speculative bubbles a new fi nancialization of grain markets the slowdown of global agricultural research new fi nancialization of grain markets the slowdown of global agricultural research spending jumps in costs of energy and fertilizers shifts in interest rates the decline spending jumps in costs of energy and fertilizers shifts in interest rates the decline of the dollar the surge in biofuels demands bans on genetically modifi ed plants of the dollar the surge in biofuels demands bans on genetically modifi ed plants and climate change several observers have claimed to identify a perfect storm in and climate change several observers have claimed to identify a perfect storm in the grain markets in 2007 2008 a confl uence of some of the factors listed above the grain markets in 2007 2008 a confl uence of some of the factors listed above the continuing confused state of the economics of grain price volatility may the continuing confused state of the economics of grain price volatility may seem odd after all grain markets have many of the features of textbook competiseem odd after all grain markets have many of the features of textbook competitive models the products are relatively uniform their primary producers and tive models the products are relatively uniform their primary producers and ultimate consumers are atomistic price takers prices and outputs in the united ultimate consumers are atomistic price takers prices and outputs in the united states and other developed countries are unusually well measured by the standards states and other developed countries are unusually well measured by the standards of most goods and services in the world economy with data freely available from of most goods and services in the world economy with data freely available from

the number of factors in security returns both factor analysis of security returns and the analysis of eigenvalues seem to indicate that a market factor explains the major part of security returns we find that such evidence is consistent with an economy where there are in fact k equally important priced factors eigenvalue analysis in the context of such an economy will lead an investigator to the false inference that the one important factor is the return on an equally weighted market index this paper examines a particular exact k factor economy where each of the k factors is priced and contributes equally on average to the variance of returns we show analytically that for such an economy the approximate factor solution identifies the first factor as the return on an equally weighted market index and would lead to the inference that the remaining h 1 factors are not priced using a cross section regression technology our particular model is consistent with existing empirical work that has studied the number of factors in security markets these results suggest an important caveat to the interpretation of approximate factor solutions in an apt or multibeta pricing context one might also infer a capm bias in tests of the apt using the factor analysis technology on a more positive note the results suggest a simple rotation of the factor analysis solution that will lead to more powerful tests of the asset pricing relations to motivate this study consider the fact that the single factor market model suggested by markowitz 1959 and developed by sharpe 1963 remains one of the most popular empirical models of the return generating process the widespread acceptance of this model owes much to the work of king 1966 through a seven factor analysis of return data he concludes that one factor explains a large percentage of the variance of stock prices a factor on which each security tends to weight positively he interpreted this result to mean that there exists a basic market factor in operation which has a major effect on all securities this work supported the development of empirical research into the capital asset pricing model the model has been extensively applied in the event study context

size distortions of tests of the null hypothesis of stationarity evidence and implications for the ppp debate abstract tests of the null hypothesis of stationarity against the unit root alternative play an increasingly important role in empirical work in macroeconomics and in international finance we show that the use of conventional asymptotic critical values for stationarity tests may cause extreme size distortions if the model under the null hypothesis is highly persistent this fact calls into question the use of these tests in empirical work we illustrate the practical importance of this point for tests of long run purchasing power parity ppp under the recent float we show that the common practice of viewing tests of stationarity as complementary to tests of the unit root null will tend to result in contradictions and in spurious rejections of long run ppp while the size distortions may be overcome by the use of finite sample critical values the resulting tests tend to have low power under economically plausible assumptions about the half life of deviations from ppp thus the fact that stationarity is not rejected cannot be interpreted as convincing evidence in favor of mean reversion only in the rare case that stationarity is rejected do size corrected tests shed light on the question of long run ppp

is the trend in post ww ii us real gdp uncertain or non linear abstract this paper examines the presence of deterministic trend and or absence of a unit root in the log of post ww ii us real gdp evidence favoring non linear deterministic trend and trend stationarity unit root absence is found contradicting recent unit root and trend uncertainty findings

model evaluation based on residual analysis of two similar models models that may appear to have different properties may in fact produce residuals that differ only in subtle ways by analysing the relationships between model residuals the problems in distinguishing between models can perhaps be discovered as illustrated by the econometric examples considered regressing residuals gives the long memory residual which is the difference between two models but this difference is very subtle and deeply hidden which explains why the traditional standard technique does not find this difference

permanent and transitory components in macroeconomic fluctuations fluctuations in real gnp have traditionally been viewed as transitory deviations from a deterministic time trend the purpose of this paper is to review some of the recent developments that have led to a new view of output fluctuations and then to provide some additional evidence using post war quarterly data it is hard to reject the view that real gnp is as persistent as a random walk with drift we also consider the hypothesis that the recent finding of persistence are due to the failure to distinguish the business cycle from other fluctuations in real gnp we use the measured unemployment rate to decompose output fluctuations we find no evidence for the view that business cycle fluctuations are more quickly trend reverting this abstract was borrowed from another version of this item

output growth and its volatility the gold standard through the great moderation this study examines the relationship between u s output growth and its volatility over the period 1876 i to 2012 ii we adjust the data for outliers and structural breaks we employ generalized autoregressive conditional heteroskedasticity garch and exponential garch egarch specifications normality and homoskedasticity appear only in the garch or egarch model that corrects for the outliers when including the break in the mean equation high volatility persistence remains after also accommodating the breaks in the variance equation the integrated garch effect proves spurious either for the symmetric or the asymmetric model finally our empirical results suggest that the finding of higher output growth volatility stimulating output growth and higher output growth reducing its volatility obtained from the symmetric garch in mean garch m model also proves spurious as a result of the emergence of an asymmetric effect our more appropriately specified asymmetric egarch m model suggests positive volatility in mean and level effects in the long period real gross national product series

examining trends of criteria air pollutants are the effects of governmental intervention transitory despite its growth in other areas of economics time series econometric methods have not beenwidespread in the area of environmental andresource economics we illustrate one use oftime series methods by examining the time pathof us nitrogen oxide nox emission dataover the period 1900 1994 the analysishighlights that proper time series methods canaid in optimal regulatory policy as well asdeveloping empirical verification of theoriesput forth to explain economic phenomena inaddition several interesting results emerge first we find that the emissions seriescontains both a permanent and random component second if one attributed all of the emissionsreductions to regulatory policy interventionanalysis suggests that the 1970 clean air act caa did not merely have transitory effects but permanently influenced the noxemission path in terms of total regulatoryimpact an upper bound on the emissions saveddue to the 1970 caa is in the range of27 48

pass through of the policy induced e85 subsidy insights from hotelling s model abstract we build a structural model of imperfect competition for a retail market that supplies both low ethanol e10 and high ethanol e85 gasoline blends the model permits us to study some impacts of the e85 subsidy induced by the u s renewable fuel standard specifically how the pass through of this subsidy to retail prices is affected by market power the model is rooted in hotelling s horizontal differentiation framework which is extended to also represent the imperfect substitutability between e10 and e85 a vertical product differentiation attribute the model naturally captures two sources of imperfect competition in the fuel market refueling stations market power arising from their spatial location and limited availability of e85 stations we derive both analytical and numerical solutions for nash equilibrium outcomes under various scenarios in our baseline parameterization when the penetration of e85 stations is incomplete we find that the pass through rate is about 0 7 complete penetration of e85 stations leads to near complete pass through notwithstanding the market power enjoyed by stations because of their spatial location with monopolistic market power e g collusion however with full penetration of e85 stations the pass through rate is lower moreover when market power only arises from location differentiation duopoly model with full penetration of e85 the pass through rate converges to one as the subsidy gets large whereas it converges to zero if a station has exclusivity in selling e85 partial penetration of e85 or there is collusion monopoly power from collusion

new tests of the apt and their implications this paper provides new tests of the arbitrage pricing theory apt test results appear to be extremely sensitive to the number of securities used in the two stages of the tests of the apt model new tests also indicate that unique risk is fully as important as common risk while these tests have serious limitations they are inconsistent with the apt

does gnp have a unit root a re evaluation abstract stock and watson 1986 test the hypothesis that real per capita gnp has a unit root by using a test statistic due to phillips 1985 which incorporates a non parametric correction for the serial correlation induced by system and error dynamics the version of this test that is used by stock and watson does not accomodate the presence of a drift and to compensate they detrend the series by extracting a 1 5 annual trend growth we use a version of this class of non parametric tests developed by phillips and perron 1986 which allows for an estimated drift and reassess the stock and watson findings

the demand for e85 geographical location and retail capacity constraints abstract consumption of high ethanol gasoline blends must increase if united states renewable biofuel mandates are to rise above current levels as envisioned by the renewable fuel standard one such blend is e85 which contains no more than 85 ethanol and no less than 15 gasoline we derive the demand for e85 based on a model of motorists preferences for motor fuel blends and calibrate the demand for e85 using data on the location of flex vehicles and fuel stations that sell e85 in the united states we also show how limits on the capacity of fuel stations to sell e85 affect demand and explore the potential future demand for e85 by increasing the number of fuel stations offering e85 and the number of flex vehicles we show that the existing fleet of flex vehicles is sufficient to accommodate more than 15 billion gallons of ethanol without a large price discount on e85 only if the number of stations that sell e85 increases substantially provided with fast enough installation of new e85 pumps this level of consumption would be sufficient to meet the mandates envisioned for conventional ethanol by 2015

fractional beta convergence abstract unit roots in output an exponential 2 rate of convergence and no change in the underlying dynamics of output seem to be three stylized facts that cannot go together this paper extends the solow swan growth model allowing for cross sectional heterogeneity in this framework aggregate shocks might vanish at a hyperbolic rather than at an exponential rate this implies that the level of output can exhibit long memory and that standard tests fail to reject the null of a unit root despite mean reversion exploiting secular time series properties of gdp we conclude that traditional approaches to test for uniform conditional and unconditional convergence suit first step approximation we show both theoretically and empirically how the uniform 2 rate of convergence repeatedly found in the empirical literature is the outcome of an underlying parameter of fractional integration strictly between 1 2 and 1 this is consistent with both time series and cross sectional evidence recently produced

arbitrage pricing theory as a restricted nonlinear multivariate regression model iterated nonlinear seemingly unrelated regression estimates by replacing the unknown random factors of factor analysis with observed macroeconomic variables the arbitrage pricing theory apt is recast as a multivariate nonlinear regression model with across equation restrictions an explicit theoretical justification for the inclusion of an arbitrary well diversified market index is given using monthly returns on 70 stocks iterated nonlinear seemingly unrelated regression techniques are employed to obtain joint estimates of asset sensitivities and their associated apt risk prices without the assumption of normally distributed errors these estimators are strongly consistent and asymptotically normal with the additional assumption of normal errors they are also full information maximum likelihood estimators classical asymptotic nonlinear nested hypothesis tests are supportive of the apt with measured macroeconomic factors

re examining long run purchasing power parity abstract our results complement the recent findings of real exchange rates as stationary processes applying a battery of unit root tests can be problematic since the tests are sensitive to the specifics of the time series process the novelty of our approach is in emphasizing the information content of the data to distinguish between the competing processes stationary and non stationary arima processes are fitted to the us uk real exchange rate series covering 134 years artificial data are generated and the small sample distributions of the chosen test statistics are computed under each of the two hypotheses the values of the actual sample statistics seem to come rather from the stationary than from the non stationary process

measuring global gasoline and diesel price and income elasticities abstract price and income elasticities of transport fuel demand have numerous applications they help forecast increases in fuel consumption as countries get richer they help develop appropriate tax policies to curtail consumption help determine how the transport fuel mix might evolve and show the price response to a fuel disruption given their usefulness it is understandable why hundreds of studies have focused on measuring such elasticities for gasoline and diesel fuel consumption in this paper i focus my attention on price and income elasticities in the existing studies to see what can be learned from them i summarize the elasticities from these historical studies i use statistical analysis to investigate whether income and price elasticities seem to be constant across countries with different incomes and prices although income and price elasticities for gasoline and diesel fuel are not found to be the same at high and low incomes and at high and low prices patterns emerge that allow me to develop suggested price and income elasticities for gasoline and diesel demand for over one hundred countries i adjust these elasticities for recent fuel mix policies and suggest an agenda of future research topics

revisiting the uncertain unit root in gdp and cpi testing for non linear trend reversion we test for the presence of a unit root in u s gdp and cpi allowing for non linear trend reversion under the alternative hypothesis in contrast to most previous results we find evidence in favour of trend stationarity for both variables

general factor models and the structure of security returns based on markowitz s pioneering study 40 sharpe 56 and lintner 38 advanced the first positivist formulations of the capital asset pricing model capm their models were subsequently refined by mossin 45 fama 15 black 1 and others even though the capm has been studied extensively it has not been empirically validated according to roll 48 the capm cannot be tested in an unambiguous fashion because of a number of intractable measurement and computational difficulties and the joint nature of the hypotheses to be tested

capital controls and international capital market segmentation the evidence from the japanese and american stock markets the paper focuses on two countries japan and the u s to test the integration of capital markets in japan the enactment of the foreign exchange and foreign trade control law in december of 1980 amounted to a true regime switch that virtually eliminated capital controls using multifactor asset pricing models we show that the price of risk in the u s and japanese stock markets was different before but not after the liberalization this evidence supports the view that governments are the source of international capital market segmentation the notion that world capital markets are perfectly integrated is central to most theoretical developments in both international finance and macroeconomics indeed it also lies behind much of the recent international policy discussion capital markets are integrated if assets with perfectly correlated rates of return have the same price regardless of the location in which they are traded 1 segmentation may arise either because of government impediments to capital movements or because of individuals attitudes or irrationality if the hypothesis that the international capital markets are integrated is rejected there is still an important empirical question left unanswered which is related to the source of segmentation while there is a rich body of theoretical research on international market integration only a few studies have tried to investigate this important question empirically a first group of empirical studies on market integration has generally adopted

policy shocks and market based regulations evidence from the renewable fuel standard the renewable fuel standard mandates large increases in u s biofuel consumption and is implemented using tradable compliance credits known as rins in early 2013 rin prices soared causing the regulator to propose reducing future mandates we estimate empirically the effect of three policy shocks that reduced the expected mandates in 2013 we find that the largest of these shocks decreased the value of the fuel industry s 2013 compliance obligation by 7 billion we then study the effects of the shocks on commodity markets and the market value of publicly traded biofuel firms results show that the burden of the mandate reductions fell primarily on advanced biofuel firms and commodity markets of the marginal compliance biofuel we argue that the policy shocks reduced the incentive to invest in the technologies required to meet the future objectives of the rfs and discuss alternative policy designs to address the problems that arose in 2013

the past present and future of macroeconomic forecasting he reports of the death of large scale macroeconomic forecasting models are not exaggerated but many observers interpret the failure of the early models as indicative of a bleak future for macroeconomic forecasting more generally such is not the case although the large scale macroeconomic forecasting models didn t live up to their original promise they nevertheless left a useful legacy of lasting contributions from which macroeconomic forecasting will continue to benefit they spurred the development of powerful identification and estimation theory computational and simulation techniques comprehensive machinereadable macroeconomic databases and much else moreover past failures do not necessarily imply a bleak future we learn from our mistakes just as macroeconomics has benefitted from rethinking since the 1970s so too will macroeconomic forecasting understanding the future of macroeconomic forecasting requires understanding the interplay between measurement and theory and the corresponding evolution of the nonstructural and structural approaches to forecasting nonstructural macroeconomic forecasting methods attempt to exploit the reduced form correlations in observed macroeconomic time series with little reliance on economic theory structural models in contrast view and interpret economic data through the lens of a particular economic theory structural econometric forecasting because it is based on explicit theory rises and falls with theory typically with a lag structural keynesian macroeconomic forecasting based on postulated systems of decision rules enjoyed a golden age in the 1950s and 1960s following the advances in keynesian theory in the 1930s and 1940s

multi beta capm or equilibrium apt a reply in their influential empirical paper roll and ross 11 state we think that in many discussions of the capm scholars were actually thinking of the apt and of process 1 the factor model with just a single factor in light of recent developments in the asset pricing literature i think it can now meaningfully be suggested that in many discussions of the apt scholars may have actually been thinking of a multi beta interpretation of the capm indeed much can be said in support of each of these perspectives for a single paradigm is emerging which integrates fundamental aspects of both the capm and the apt broadly speaking the equilibrium capm paradigm emphasizes the role of covariance between asset returns and an endogenous preference based aggregate while the arbitrage apt paradigm focuses on the covariance between asset returns and factors in the return generating process the emerging equilibrium factor paradigm encompasses each of these relations as well as a third covariance between the factors and the equilibrium aggregate my thesis in shanken 17 was that i the arbitrage paradigm has not produced a refutable hypothesis and that ii recognition of the role of the factor aggregate covariance relation appears to be essential if positive economic significance is to be attributed to asset pricing empirical work dybvig and ross d r attempt to resolve the empirical indeterminacy of the arbitrage paradigm by appealing to the condition that residual variance should not be too large i explain in section ii that this condition is inherently ambiguous from an empirical perspective and does not permit the formulation of a precise testable implication the equilibrium factor models which d r discuss do yield testable restrictions on parameters in the return generating process however consistent with my second point above these restrictions involve joint hypotheses that cannot be verified without observing the entire universe of assets thus contrary to their claim considerations similar to those in roll s 10 critique are indeed relevant to the testing of these models this and other similarities between the equilibrium apt and the capm are discussed in section iii i begin by clarifying some basic terminology

the estimation of prewar gross national product methodology and new evidence the paper develops new methodology for the estimation of prewar gnp taps previously unused data sources and develops new estimates for the periods 1869 1908 and 1869 1928 primary among the new data sources are direct measures of output in the transportation communications and construction sectors and estimates of the consumer price index new measures of real gnp nominal gnp and the gnp deflator are developed the new estimates of real gnp are as volatile on average over the business cycle as the traditional kuznets kendrick series but dampen the amplitude of some cycles while raising the amplitude of others the new estimates of the gnp deflator are distinctly less volatile than the traditional series and in fact no more volatile than those in the postwar period

non renewable resource prices deterministic or stochastic trends in this paper we examine temporal properties of 11 natural resource real price series from 1870 to 1990 recent studies by ahrens and sharma trends in natural resource commodity prices deterministic or stochastic j environ econom manage 33 1997 59 74 berck and roberts natural resource prices will they ever turn up j environ econom manage 31 1996 65 78 and slade grade selection under uncertainty least cost last and other anomalies j environ econom manage 15 1988 189 205 among others find that many non renewable resource prices have a stochastic trend we revisit this issue by employing a lagrangian multiplier unit root test that allows for two endogenously determined structural breaks with and without a quadratic trend contrary to previous research we find evidence against the unit root hypothesis for all price series our findings support characterizing natural resource prices as stationary around deterministic trends with structural breaks we additionally show that both pre testing for unit roots with breaks and allowing for breaks in the forecast model can improve forecast accuracy overall the results in this paper are important in both a positive and normative sense without an appropriate understanding of the dynamics of a time series empirical verification of theories forecasting and proper inference are potentially fruitless