mean reversion in real exchange rates evidence and implications for forecasting abstract the stationarity of real exchange rates over the recent flexible exchange rate period is an issue that has long bedeviled researchers in international finance using a constrained multivariate framework this paper provides the strongest evidence yet that real exchange rates were mean reverting over the 1973 93 period we also investigate shifts in long run real exchange rates which may be important for the purpose of forecasting out of sample forecasting shows that the random walk model is outperformed by a mean stationary model especially at long horizons in addition there are substantial forecasting benefits from using a multivariate approach

volatility spread and stock market response to earnings announcements abstract using a broad sample of earnings announcements we find a monotonic increase in the spread between call and put implied volatilities as it gets closer to the earnings announcement date the steady build up of volatility spread in the days leading up to the announcement date coupled with the predictive power of cumulative abnormal implied volatility spread on subsequent announcement returns suggests that informed traders are the driving force behind the option market activities prior to earnings announcements such informed trading as proxied by the abnormal implied volatility spread increases rather than decreases the stock market response to earnings announcements after controlling for an array of firm and announcement characteristics this effect is most pronounced when the pre earnings option trading volume is heightened overall our findings lend strong support to the notion that informed options trading immediately before earnings announcements helps alleviate the stock market under reaction to earnings announcements and make it closer to a complete response

comparing the post earnings announcement drift for surprises calculated from analyst and time series forecasts post earnings announcement drift is the tendency for a stock s cumulative abnormal returns to drift in the direction of an earnings surprise for several weeks following an earnings announcement we show that the drift is significantly larger when defining the earnings surprise using analysts forecasts and actual earnings from i b e s than when using a time series model based on compustat earnings data neither compustat s policy of restating earnings nor the inclusion of special items in reported earnings contribute significantly to the disparity in drift magnitudes rather our results suggest that this disparity is attributable to differences between analyst forecasts and those of time series models or at least to factors correlated with these differences further we document that analyst forecasts lead to return patterns around future earnings announcements that differ from those observed when using time series models suggesting that the two types of surprises may capture somewhat different forms of mispricing

the declining talent pool of government we consider a government for which success requires high performance by talented ministers a leader provides incentives to her ministers by firing those who fail however the consequent turnover drains a finite talent pool of potential appointees the severity of the optimal firing rule and ministerial performances decline over time the lifetime of an effective government is limited we relate this lifetime to various factors including external shocks the replenishment of the talent pool and the leader s reputation some results are surprising an increase in the stability of government and the exogenous imposition of stricter performance standards can both shorten the era of effective government and an increase in the replenishment of the talent pool can reduce incumbent ministers performance

potential pitfalls for the purchasing power parity puzzle sampling and specification biases in mean reversion tests of the law of one price the ppp puzzle is based on empirical evidence that international price differences for individual goods loop or baskets of goods ppp appear highly persistent or even nonstationary the present consensus is these price differences have a half life that is of the order of five years at best and infinity at worst this seems unreasonable in a world where transportation and transaction costs appear so low as to encourage arbitrage and the convergence of price gaps over much shorter horizons typically days or weeks however current empirics rely on a particular choice of methodology involving i relatively low frequency monthly quarterly or annual data and ii a linear model specification in fact these methodological choices are not innocent and they can be shown to bias analysis towards findings of slow convergence and a random walk intuitively if we suspect that the actual adjustment horizon is of the order of days then monthly and annual data cannot be expected to reveal it if we suspect arbitrage costs are high enough to produce a substantial band of inaction then a linear model will fail to support convergence if the process spends considerable time random walking in that band thus when testing for ppp or loop model specification and data sampling should not proceed without consideration of the actual institutional context and logistical framework of markets

testing the monetary model of exchange rate determination new evidence from a century of data abstract we test the long run monetary model of exchange rate determination for a collection of 14 industrialized countries using data spanning the late nineteenth or early twentieth century to the late twentieth century interestingly we find support for a simple form of the long run monetary model in over half of the countries we consider for these countries we estimate vector error correction models to investigate the adjustment process to the long run monetary equilibrium in the spirit of meese and rogoff journal of international economics 14 1983 3 24 we also compare nominal exchange rate forecasts based on monetary fundamentals to those based on a naive random walk model

purchasing power parity and unit root tests using panel data abstract this paper reports the results of unit root tests for real exchange rates using a panel framework this panel approach provides greatly improved power compared to conventional univariate time series unit root tests we obtain evidence supporting ppp over the recent flexible exchange rate period for g 6 and oecd countries we show explicitly that failure to find such evidence in previous research was due to the low power of the tests

oil wealth and regime survival in the developing world 1960 1999 the global oil market and its associated booms and busts have generated a large literature in political science one contention in this literature is that political instability is a near certain long term outcome of oil wealth another line of argument maintains just the opposite that oil makes authoritarian regimes stronger by funding patronage and repressive apparatuses in this article i conduct the first cross national tests of these arguments and investigate the effects of oil wealth and the oil booms and busts on political stability drawing on data from 107 developing countries between 1960 and 1999 i estimate the effects of oil wealth on regime failure antistate social protest and domestic armed conflict thus as a first goal this article addresses an analytic shortcoming in previous studies by separating regime survival empirically from both economic policy and regime type democratic or authoritarian and by focusing on the direct effects of oil wealth on several measures of political stability i address the relationship between oil wealth and these outcomes both by comparing exporters to the rest of the developing world and by comparing oil rich states across pre boom boom and bust periods the results indicate that oil wealth is robustly associated with more durable regimes and significantly related to lower levels of protest and civil war moreover

predisclosure information firm capitalization and security price behavior around earnings announcements several studies on the relationship between earnings reports and security price behavior provide evidence suggesting that a significant portion of the information revealed through earnings reports is reflected in security prices prior to the report month e g ball and brown 1968 and brown and kennelly 1972 this has been attributed at least partly to the existence of other more timely sources of information which allow market agents to forecast earnings prior to their release the evidence above reflects an average finding across all firms one question of interest is whether there are significant systematic crosssectional differences in the security price reactions to earnings announcements of firms which are associated with specific firm characteristics that lead to differential amounts of predisclosure information this study focuses on firm size capitalization as one such characteristic a firm

smooth breaks and non linear mean reversion post bretton woods real exchange rates the recent literature on purchasing power parity ppp has emphasized the role of two phenomena that may lead to the rejection of the ppp hypothesis structural breaks and non linear adjustment induced by transaction costs these two hypotheses are analyzed separately in the literature we develop tests for unit roots that account jointly for structural breaks and non linear adjustment structural breaks are modeled by means of a fourier function that allows for infrequent smooth temporary mean changes and is hence compatible with long run ppp nonlinear adjustment is modeled by means of an estar model our tests present good finite sample properties the tests are applied to a set of 15 oecd countries rers and are able to reject the null of a unit root in 14 cases the breaks are usually associated with the great appreciation and later depreciation of the dollar in the 1980s and the estar adjustment appears to play an important role

mean reversion in g 10 nominal exchange rates according to conventional wisdom industrial country floating exchange rates contain unit roots sur tests on panels of monthly group of ten g 10 log nominal rates reject the null of unit roots for various samples over the current float with significance levels from 0 5 to 15 on average in out of sample forecasts mean reversion models beat random walks significantly in some forecast periods for monthly data the range of expected usd dem appreciation rates exceeds 15 per year in the mean reversion model mean reversion places strong restrictions on international models over the sample period the g 10 had to run monetary policies consistent with stable long run nominal rates

trading volume and cross autocorrelations in stock returns this paper finds that trading volume is a significant determinant of the lead lag patterns observed in stock returns daily and weekly returns on high volume portfolios lead returns on low volume portfolios controlling for firm size nonsynchronous trading or low volume portfolio autocorrelations cannot explain these findings these patterns arise because returns on low volume portfolios respond more slowly to information in market returns the speed of adjustment of individual stocks confirms these findings overall the results indicate that differential speed of adjustment to information is a significant source of the cross autocorrelation patterns in short horizon stock returns both academics and practitioners have long been interested in the role played by trading volume in predicting future stock returns 1 in this paper we examine the interaction between trading volume and the predictability of short horizon stock returns specifically that due to lead lag cross autocorrelations in stock returns our investigation indicates that trading volume is a significant determinant of the cross autocorrelation patterns in stock returns 2 we find that daily or weekly returns of stocks with high trading volume lead daily or weekly returns of stocks with low trading volume additional tests indicate that this effect is related to the tendency of high volume stocks to respond rapidly and low volume stocks to respond slowly to marketwide information

do currency unions deliver more economic integration than fixed exchange rates evidence from the franc zone and the eccu in this article we develop a model to identify determinants of macroeconomic integration in the african franc zone and in dollar pegging caribbean countries including members of the east caribbean currency union these two groups of countries each comprise states using several different local currencies on the one hand the uemoa cfa franc and the cemac cfa franc both pegged to the euro on the other the eccu dollar and other national dollar pegged currencies the purpose of the analysis is to distinguish the effect of monetary union on macroeconomic integration from the effect of pegging to a common oecd currency

option volume and stock prices evidence on where informed traders trade this paper investigates the informational role of transactions volume in options markets we develop an asymmetric information model in which informed traders may trade in option or equity markets we show conditions under which informed traders trade options and we investigate the implications of this for the linkage between markets our model predicts an important informational role for the volume of particular types of option trades we empirically test our model s hypotheses with intraday option data our main empirical result is that negative and positive option volumes contain information about future stock prices the information content of trading activity is a subject of widespread interest if trades are correlated with private information then the outcome of the transaction process may portend future movements in price the extension of trading to different venues or to derivative instruments however means that this link between transactions and information need not be easily discernible if there are alternative markets in which informed traders can profit from their information then where informed traders choose to trade may have important implications not only for security p rice movements but for the behavior of related prices as well this suggests that transactions in derivative markets may be an important predictor of future security price movements in this paper we investigate the informational role of transactions volume in options markets for some readers this focus may seem puzzling an option is a derivative security so its price should be dictated unilaterally by the behavior of the stock price this unidirectional linkage is only true however in complete markets if information is impounded into prices by trading then the ability of informed traders to transact in options markets mearns

investor attention overconfidence and category learning abstract motivated by psychological evidence that attention is a scarce cognitive resource we model investors attention allocation in learning and study the effects of this on asset price dynamics we show that limited investor attention leads to category learning behavior i e investors tend to process more market and sector wide information than firm specific information this endogenous structure of information when combined with investor overconfidence generates important features observed in return comovement that are otherwise difficult to explain with standard rational expectations models our model also demonstrates new cross sectional implications for return predictability

are real exchange rates nonstationary evidence from a panel data test it is well documented that real exchange rates between the united states and many industrialized countries in the post bretton woods period are integrated this result implies that purchasing power parity ppp does not hold even as a long run relationship this paper demonstrates that the failure to reject the unit root hypothesis may result from the low power of existing univariate test procedures i test for unit roots in real exchange rates by employing a more powerful panel based procedure using both cpi and wpi real dollar exchange rate data i strongly reject the null hypothesis of a unit root my results provide overwhelming support for the long run ppp under the current float copyright 1996 by ohio state university press

tests for symmetric and asymmetric nonlinear mean reversion in real exchange rates new tests based on smooth transition autoregressive models for mean reversion in time series of real exchange rates are proposed one test forces mean reversion to be symmetric about the integrated process central case while the other permits asymmetry the tests are applied to monthly series of seventeen real exchange rates against the u s dollar and fourteen against the deutsche mark they reveal stronger evidence against the unit root null hypothesis than does the usual dickey fuller test

real exchange rate adjustment in european transition countries abstract in single equation tests real exchange rates show mean reversion for nine of 10 central and eastern european transition countries for the period january 1993 to december 2005 because of the shift from controlled to market economies and accompanying crises failed policy regimes and changes in exchange rate regimes unit root tests for transition countries often require allowance for structural changes accounting for structural breaks gives substantially faster mean reversion speeds than those found for major industrialized countries these fast adjustment speeds are plausible transition countries had perhaps 10 years to make unprecedented adjustments required for accession to the european union a number of papers have applied non linear models to the central and eastern european countries this paper investigates four non linear models and compares them with piece wise linear break models the break models appear superior in detecting mean reversion for the central and eastern european transition countries

the purchasing power parity persistence paradigm abstract rogoff journal of economic literature 1996 34 647 668 describes the remarkable consensus of 3 5 year half lives of purchasing power parity deviations among studies using long horizon data these studies however focus on rejections of unit roots in real exchange rates and do not use appropriate techniques to measure persistence our half life estimates explicitly account for serial correlation sampling uncertainty and most importantly small sample bias calculating confidence intervals as well as point estimates for long horizon and post 1973 data we find that even though most of the point estimates lie within the 3 5 year range univariate methods provide virtually no information regarding the size of the half lives

how puzzling is the ppp puzzle an alternative half life measure of convergence to ppp summary evidence of lengthy half lives for real exchange rates in the presence of a high degree of exchange rate volatility has been considered as one of the most puzzling empirical regularities in international macroeconomics this paper suggests that the measure of half life used in the literature might be problematic and proposes alternative measures with desirable properties their focus on the cumulative effects of the shocks distinguishes them from the measures used in the literature an empirical analysis of bilateral us dollar real exchange rates employing the alternative half life measure produces results consistent with theory and indicates that the ppp puzzle is less pronounced than initially thought copyright 2012 john wiley sons ltd

real exchange rate behavior the recent float from the perspective of the past two centuries using annual data spanning two centuries for dollar sterling and franc sterling real exchange rates we find strong evidence of mean reverting real exchange rate behavior using simple stationary autoregressive models estimated on prefloat data we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float such stationary univariate equations explain 60 80 percent of the in sample variation in real exchange rates although the degree of short run persistence may be high the econometric estimates imply a half life of shocks to the real exchange rate of about 6 years for dollar sterling and a little under 3 years for franc sterling

trading volume definitions data analysis and implications of portfolio theory we examine the implications of portfolio theory for the cross sectional behavior of equity trading volume two fund separation theorems suggest a natural definition for trading activity share turnover if two fund separation holds share turnover must be identical for all securities if k 1 fund separation holds we show that turnover satisfies an approximately linear k factor structure these implications are examined empirically using individual weekly turnover data for nyse and amex securities from 1962 to 1996 we find strong evidence against two fund separation and a principal components decomposition suggests that turnover is well approximated by a two factor linear model if price and quantity are the fundamental building blocks of any theory of market interactions the importance of trading volume in modeling asset markets is clear although most models of asset markets have focused on the behavior of returns predictability variability and information content their implications for trading volume have received far less attention in this article we derive the implications of various asset market models for volume and quantify their importance using recently available volume data for individual securities from the center for research in security prices crsp although the volume literature is voluminous 1 we hope to add to this literature in two ways first we develop the volume implications of popular asset market models rather than construct more specialized and often stylized models to

the association between accounting earnings and security returns for large and small firms abstract the differential information hypothesis advanced by atiase 1980 states that information production and dissemination by private parties for the purpose of identifying mispriced securities is an increasing function of firm size this study examines two corollaries of that hypothesis first security prices of large firms anticipate accounting earnings earlier than security prices of small firms second for a given level of unexpected earnings the cumulative abnormal returns of small firms exceed those of large firms the results are generally consistent with atiase s hypothesis

option listing and the stock price response to earnings announcements abstract we examine the effect of option listing on the immediate stock price response to earnings announcements contrary to prior studies using earlier data we find firms initiating option trading after 1986 fail to exhibit a significant decline in earnings response we then examine 420 firms initiating option trading during 1973 1993 in a series of tests controlling for market wide effects and changing firm size we find some evidence that option listing may actually increase the stock price response to earnings but no evidence listing reduces the response both longitudinal and cross sectional tests produce similar results

earnings announcements stock price adjustment and the existence of option markets this paper employs a new approach to study the effects of option trading on the behavior of underlying stock prices extant research compares distributional properties of the stock price at two points in time divided by an event in the option market that might affect price behavior as an alternative we examine the stock price adjustment to the release of quarterly earnings using samples of firms with and without listed options we find the two samples exhibit different adjustment processes with the nonoption firms requiring substantially more time to adjust since the advent of organized stock option trading the investment community

more powerful panel data unit root tests with an application to mean reversion in real exchange rates unit root tests seeking mean or trend reversion are frequently applied to panel data we show that more powerful variants of commonly applied tests are readily available moreover power gains persist when the modifications are applied to bootstrap procedures that may be employed when cross correlation of a rather general sort among individual panel members is suspected copyright 2004 john wiley sons ltd

purchasing power parity in developing countries multi period evidence under the current float abstract using panel unit root tests we examine purchasing power parity ppp for us dollar real exchange rates of developing countries during the current floating rate period since evidence of ppp may vary from period to period we examine the data for moving 10 year periods from 1976 85 up to 1990 99 we organize panels based on country characteristics influencing the validity of ppp those characteristics include openness inflation and the level and growth rate of per capita gdp although we find stronger evidence of ppp after 1980 our examination of panel data over 15 10 year periods yields only limited support for ppp

dissecting the ppp puzzle the unconventional roles of nominal exchange rate and price adjustments the conventional view as expounded by sticky price models is that price adjustment determines the ppp reversion rate this study examines the mechanism by which ppp deviations are corrected nominal exchange rate adjustment not price adjustment is shown to be the key engine governing the speed of ppp convergence moreover nominal exchange rates are found to converge much more slowly than prices with the reversion being driven primarily by nominal exchange rates real exchange rates also revert at a slower rate than prices as identified by the ppp puzzle j econ lit 34 1996 647 c 2003 elsevier b v all rights reserved

firm size and the information content of prices with respect to earnings abstract beaver lambert and morse 1980 suggest that prices may be useful in forecasting future earnings we explore the information content of prices with respect to earnings by focusing on firm size and its relation to the predictive accuracy of price based earnings forecasts firm size proxies for the amount of information and for the number of traders and professional analysts processing the available information about an enterprise our empirical results are consistent with the hypothesis that price based earnings will outperform univariate time series forecasts by a greater margin for larger firms than for smaller firms

trading volume reactions to annual accounting earnings announcements the incremental role of predisclosure information asymmetry abstract this study provides empirical evidence regarding the effect of annual accounting earnings announcements on investors trading behavior we find that the magnitude of trading volume reaction is an increasing function of both the magnitude of the associated price reaction and the level of predisclosure information asymmetry these results are consistent with kim and verrecchia s 1991a theoretical trading volume proposition

stationarity of the european real exchange rates evidence from panel data this paper employs a panel unit root test for the real exchange rates of 13 eu member countries the estimation period covers the ems period from 1980 1 to 1992 2 in contrast with the earlier panel unit root studies concerning purchasing power parity ppp effective real exchange rates are used as a result the non stationarity of the real exchange rate was rejected however the half life of the real exchange rate adjustment turned out to be long potential reasons for this might be the relatively short estimation period and the nature of the data

dynamic government performance honeymoons and crises of confidence we use a formal theoretical framework to explore the interplay between a government s longevity and its performance ministers perform well when their careers are valuable this is so when the government s duration is expected to be long the government s survival depends on its popularity and finally that popularity depends on its ministers performance the feedback loop between performance and longevity means that multiple rational expectations equilibria can arise ministers work hard for a popular government but divert efforts elsewhere if they believe the government is doomed these alternatives are both self fulfilling prophecies however the presence of perhaps small random events that buffet the performance and popularity of a government is sufficient to pin down a unique equilibrium we explore the dynamics that arise a crisis of confidence involving the rapid collapse of a government s performance is sparked when a sequence of negative shocks push the popularity of the government below a unique critical threshold

cabinet survival and competing risks we attempt to resolve a recent controversy in the study of cabinet terminations pertaining to the shape of hazard rates on the one hand warwick 1992b provides evidence that cabinets are more likely to terminate the longer they are in office alt and king s 1994 analysis on the other hand suggests that hazard rates are constant over the life time of a cabinet this issue is of particular theoretical importance since a constant hazard rate would add support to the nonstrategic model of cabinet termination due to browne et al 1986 while an increasing hazard rate would seem to favor lupia and strom s 1995 strategic approach by applying a semi parametric competing risk approach to data on cabinet durations we are able to show that through its use of theory based censoring the previous literature in effect analyzed only one mode in which cabinets terminate the case where one cabinet is replaced by another without a new election once cabinet terminations that lead to chamber dissolutions with subsequent elections are analyzed directly we can show that they are governed by a very different stochastic process hazard rates are not flat as in the case of replacements but increase over the life of the government further the covariates governing replacement terminations fail to explain dissolution terminations these findings add support to the strategic approach suggested by lupia and strom

forecasting exchange rates out of sample with panel methods and real time data abstract this paper evaluates out of sample exchange rate forecasting with purchasing power parity ppp and taylor rule fundamentals for 9 oecd countries vis a vis the u s dollar over the period from 1973 q1 to 2009 q1 at short and long horizons in contrast with previous work which reports forecasts using revised data i construct a quarterly real time dataset that incorporates only the information available to market participants when the forecasts were made using bootstrapped out of sample test statistics the exchange rate model with taylor rule fundamentals performs better at the one quarter horizon and panel estimation is not able to improve its performance the ppp model however forecasts better at the 16 quarter horizon and its performance increases in panel framework the results are in accord with previous research on ppp and taylor rule models

flexible exchange rates prices and the role of news lessons from the 1970s recent experience with flexible exchange rate systems has led to renewed interest in the operation of foreign exchange markets as reflected in many recent studies of the principal determinants of exchange rates the 1970s witnessed the dramatic alteration of the international monetary system from a regime of pegged exchange rates which prevailed for about a quarter of a century since the bretton woods conference into a regime of flexible though managed rates as a consequence of the emergence of the new legal and economic system traders national governments and international organisations were confronted with new economic problems choices and instruments during the 1970s ex change rates fluctuated widely and inflation rates accelerated the international monetary system had to accommodate extraordinarily large oil related shocks which affected trade flows in goods and assets huge oil payments had to be recycled uncertainties concerning future developments in international politics reached new heights and the prospects for the world economy got gloomier these developments placed unprecedented pressures on the markets for foreign exchange as well as on other asset markets they were associated with a large slide in the value of the us dollar and resulted in speeding up the creation of new institutions like the european monetary system which provided the formal framework for the management of exchange rates among members

arima and cointegration tests of ppp under fixed and flexible exchange rate regimes real exchange rates between the united states and its major trading partners were calculated for the bretton woods and flexible exchange rate periods unit root tests indicate that purchasing power parity performed poorly in both periods tests for cointegration reveal limited instances in which it is possible to estimate the deviations from ppp as an error correcting model the estimated error correcting models indicate that foreign but not u s prices responded to deviations from ppp frenkel s 1981b finding that purchasing power parity ppp worked better during the 1920s than the 1970s caused considerable controversy for example davutyan and pippenger 1985 contend that the socalled collapse of ppp is a result of an increase in the relative importance of real versus monetary shocks they argue that the 1970s as opposed to the 1920s was characterized by real supply shocks and the international coordination of monetary policies the argument is that ppp did not fail rather there was an increase in the volatility of those factors giving rise to deviations from ppp hakkio 1984 reestimated ppp over the 1920s and 1970s using cross country tests i e sure estimates to improve the efficiency of his estimates he was able to support the hypothesis that ppp worked better in the 1970s than in the 1920s on the other hand papers by adler and lehman 1983 dornbusch 1980 frenkel 1981a junge 1985 and krugman 1978 report findings contrary to the ppp hypothesis moreover kenen and rodrik 1986 find that the volatility of real exchange rates has increased throughout the flexible rate period this paper tries to shed some light on the importance and persistence of the observed deviations from purchasing power parity under alternative exchange rate systems while it is interesting to compare ppp in the 1920s versus the 1970s it is equally useful to compare the 1960s versus the 1970s and 1980s if real supply shocks and lack of monetary coordination are characteristic of the latter period ppp should perform better in the 1960s to illustrate the issues involved consider the following econometric model of relative purchasing power

multi country evidence on the behavior of purchasing power parity under the current float abstract using panel data for the united states and 22 other oecd countries for the current float this paper presents evidence that despite substantial short term perturbations purchasing power parity actually performed much better than commonly believed average rates of growth of real exchange rates over long horizons bear little relationship either to average rates of growth of nominal exchange rates or to average inflation differentials thus implying a close to one to one relation between average rates of growth of nominal exchange rates and average inflation differentials panel data variants of standard unit root tests suggest that the real exchange rates of these countries can be characterized as mean reverting

arbitrage risk and post earnings announcement drift this study examines whether the magnitude of post earnings announcement drift is related to the risk faced by arbitrageurs who may view the anomaly as a trading opportunity consistent with this hypothesis the magnitude of the drift is strongly related to the arbitrage risk measure developed by wurgler and zhuravskaya 2002 the effect of arbitrage risk is statistically and economically significant in a range of specifications the results support the view of post earnings announcement drift as an underreaction to earnings information

panel stationarity tests for purchasing power parity with cross sectional dependence we investigate the purchasing power parity ppp hypothesis for a group of 17 countries using a new panel based test of stationarity that allows for arbitrary cross sectional dependence we treat the short run time series dynamics nonparametrically and thus avoid the need to fit separate and potentially misspecified models for the individual series the statistic is simple to compute and uses standard normal critical values even in the presence of a wide range of different deterministic components we also evaluate the behavior of the test using a factor model to approximate cross sectional dependence and find that it generally improves finite sample performance taken together these features provide a widely applicable solution to the problem of testing for stationarity versus unit roots in macro panel data the test finds significant evidence against the ppp null hypothesis being true even when allowance is made for structural breaks

a panel project on purchasing power parity mean reversion within and between countries abstract previous time series studies have shown evidence of mean reversion in real exchange rates deviations from purchasing power parity ppp appear to have half lives of approximately four years however the long samples required for statistical significance are unavailable for most currencies and are potentially inappropriate because of regime changes in this study we re examine deviations from ppp using a panel of 150 countries and 45 annual post wwii observations our panel shows strong evidence of mean reversion that is similar to that from long time series ppp deviations are eroded at a rate of approximately 15 annually i e their half life is around four years such findings can be masked in time series data but are relatively easy to find in cross sections

rising hazards an underlying dynamic of parliamentary government this paper undertakes a quantitative examination of underlying rates of government termination in west european parliamentary systems most previous research assumed that these rates remain constant over the lifetimes of governments but this assumption has never been subjected to careful scrutiny a variety of tests is performed on a new data set that covers 16 systems over the 1945 89 period each of which points to a general tendency for the rate of termination or hazard rate to increase with the length of time a government remains in power this information is incorporated into an empirical model of government survival that also includes ideological policy differences within governments and the impact of economic trends

economic trends and government survival in west european parliamentary democracies in this study i investigate the linkage between trends in key economic indicators inflation unemployment and growth in gross domestic product and government survival in 16 postwar european parliamentary democracies the partial likelihood method which allows for variation in indicator values over the lifetimes of individual governments constitutes the basic analytic tool the findings reveal overall causal roles for both inflation and unemployment as well as important differences in these roles between socialist and bourgeois governments and between pre oil crisis and post oil crisis eras most significant the introduction of these indicators to the analysis helps to resolve the debate between two rival explanations of governmental stability the bargaining complexity hypothesis and the ideological diversity hypothesis in favor of the latter

long lived private information and imperfect competition we develop a multi period auction model in which multiple privately informed agents strategically exploit their long lived information we show that such traders compete aggressively and cause most of their common private information to be revealed very rapidly in the limit as the interval between auctions approaches zero market depth becomes infinite and all private information is revealed immediately these results are in contrast to those of kyle 1985 in which the monopolistic informed trader causes his information to be incorporated into prices gradually and when the interval between auctions is vanishingly small market depth is constant over time fama 1970 defines a strong form efficient market as one in which security prices fully reflect all available information including both publicly and privately held information in a pioneering and influential article kyle 1985 develops a model in which a single privately informed trader with long lived information optimally exploits his monopoly power over time kyle s 1985 main results are i the informed trader trades in a gradual manner so that his information is incorporated into prices at a slow almost linear rate and ii when auctions are held continuously the depth of the market is constant over time however kyle s 1985 assumption of a single informed trader is strong in the sense that in actual financial markets it is reasonable to expect that at least a few players will have access to private information and will trade in the knowledge that they will face competition with other informed agents in the market 1 we develop a multi period auction model in which multiple strategic informed traders optimally exploit their long lived informational advantage we thus explore the restrictiveness of kyle s assumption of a single informed trader and also examine

inflation unemployment and government collapse a poisson application as democracies enter an era of economic retrenchment the political costs associated with economic decline have come under close scrutiny by students of comparative politics and public policy of particular concern is the linkage between inflation unemployment and the collapse of incumbent governments the present study provides an initial application of an alternative approach to measuring this linkage across 8 european democracies and offers significant evidence linking political costs for cabinet governments with rising prices and the growing unemployment by utilizing the poisson method of determining probabilities of discrete events increasing probabilities of government collapse are significantly associated with rising inflation and unemployment in european democracies between january 1958 and december 1979 subsequent use of the sanders and herman s 1977 and warwick 1979 analyses of cabinet stability provides a useful means to disaggregate the nation sample of the study into four discrete s

relationship between differential amounts of prior information and security return variability this study investigates the relation between stock return variability at annual earnings announcements and the amount of prior information available about a firm which is measured by both the number of security analysts annual earnings forecasts and firm size market value of common equity we find that each of these information measures is inversely related to return variability at annual earnings announcements after controlling for differences in the other this result suggests that number of security analysts earnings forecasts and firm size measure dimensions of the amount of prior information available about a firm that are not subsumed by one another the study also provides evidence using empirically generated distributions that test statistics derived from squared standardized market model prediction errors have larger means and variances for firms with few analysts forecasts or for small firms than for firms with many analysts forecasts or for large firms this result implies that the probability of obtaining large values of those test statistics is greater for firms with few analysts forecasts or for small firms therefore the probability of concluding there is increased return variability at annual earnings announcements is greater for those firms consistent with marais 1984

the panel purchasing power parity puzzle does long run purchasing power parity ppp hold over the post 1973 floating exchange rate period panel unit root tests provide evidence of ppp that increases with the number of observations the strengthening of the evidence however is highly cyclical when the dollar appreciates at the end of the sample the evidence of ppp strengthens and when it depreciates the evidence weakens while these patterns cannot be explained by the specifications that are normally used to model real exchange rates the strengthening but not the cyclical pattern can be explained by a specifi cation that incorporates ppp restricted structural change

is there a unit root in the inflation rate evidence from sequential break and panel data models summary using sequential trend break and panel data models we investigate the unit root hypothesis for the inflation rates of thirteen oecd countries with individual country tests we find evidence of stationarity in only four of the thirteen countries the results are more striking with the panel data model we can strongly reject the unit root hypothesis both for a panel of all thirteen countries and for a number of smaller panels consisting of as few as three countries the non rejection of the unit root hypothesis for inflation is very fragile to even a small amount of cross section variation 1997 john wiley sons ltd

searching for stationarity purchasing power parity under the current float abstract using panel data methods we investigate long run purchasing power parity by testing for unit roots in real exchange rates of industrial countries under the current float the evidence against the unit root hypothesis is stronger for larger than for smaller panels for monthly than for quarterly data and when the german mark rather than the united states dollar is used as the base currency while we find that accounting for serial correlation considerably weakens the evidence against the unit root null the results as a whole are consistent with long run purchasing power parity

understanding the empirical literature on purchasing power parity the post bretton woods era abstract this paper argues that the empirical failure of statistical tests of ppp in post bretton woods data is largely due to the low power of the tests employed this result is demonstrated using monte carlo experiments on the size and power of different testing procedures a new procedure based on horvath and watson econometric theory 11 pp 984 1014 1995 has greater power than previous approaches using the horvath watson procedure we find moderate evidence in favor of ppp in the post bretton woods era

a unified model of cabinet dissolution in parliamentary democracies the literature on cabinet duration is split between two apparently irreconcilable positions the attributes theorists seek to explain cabinet duration as a fixed function of measured explanatory variables while the events process theorists model cabinet durations as a product of purely stochastic processes in this paper we build a unified statistical model that combines the insights of these previously distinct approaches we also generalize this unified model and all previous models by including 1 a stochastic component that takes into account the censoring that occurs as a result of governments lasting to the vicinity of the maximum constitutional interelection period 2 a systematic component that precludes the possibility of negative duration predictions and 3 a much more objective and parsimonious list of explanatory variables the explanatory power of which would not be improved by including a list of indicator variables for individual countries

economic dynamics and government stability in postwar italy in this paper i estimate a duration model of the italian government the main finding of the paper is that the downfall probability of an italian government depends on both political and economic factors in particular the higher the inflation rate and the higher the number of workhours lost in strikes both at the time a government forms and during its tenure in office the more likely it is for a government to collapse this result has important consequences for the validity of political theories of the business cycle

informed speculation with imperfect competition competitive rational expectations models have the unsatisfactory property dubbed the schizophrenia problem by hellwig that each trader takes the equilibrium price as given despite the fact that he influences that price an examination of information aggregation in a non competitive rational expectations model using a nash equilibrium in demand functions shows that the schizophrenia problem is avoided by having each trader take into account the effect his demand has on the equilibrium price given a distribution of private information across traders prices reveal less information than in the competition equilibrium and prices no longer become fully informative in the limit as noise trading vanishes or as traders become risk neutral with small traders the model may become one of monopolistic competition not perfect competition in contrast to the competitive model a reasonable model of endogenous acquisition of costly private information is obtained even when traders are risk neutral

evidence on the purchasing power parity in a panel of cities evidence is provided on the ppp hypothesis using a sample of 50 spanish cities for a long time period through the application of panel data unit root tests although results suggest non rejection of the ppp short run deviations as measured by half lives indicate that real factors might be causing a slow rate of convergence to a common price index even in highly integrated economies