the inflation tax in a real business cycle model money is incorporated into a real business cycle model using a cash in advance constraint the model economy is used to analyze whether the business cycle is different in high inflation and low inflation economies and to analyze the impact of variability in the growth rate of money in addition the welfare cost of the inflation tax is measured and the steady state properties of high and low inflation economies are compared

international real interest rate equalization a multivariate time series approach this paper investigates the dynamic behaviour of monthly ex post real interest rates from several countries over the period 1980 to 1991 it is found that real interest rates are stationary over this period and that deviations from real interest parity are significant in the short run but disappear in the long run the latter evidence is established using the concept of co dependent time series proposed by gourieroux and peaucelle 1989 for the analysis of multivariate stationary time series

trade credit in a monetary economy abstract this paper examines the importance of financial and technological stochastic trends in the context of a stochastic dynamic general equilibrium monetary economy with multiple means of payment in contrast to earlier empirical work we find support for both a long run substitution condition between money trade credit and interest rates as well as a long run transactions demand for alternative payments media consistent with real business cycle frameworks

short sales are almost instantaneously bad news evidence from the australian stock exchange this paper investigates the market reaction to short sales on an intraday basis in a market setting where short sales are transparent immediately following execution we find a mean reassessment of stock value following short sales of up to 0 20 percent with adverse information impounded within fifteen minutes or twenty trades short sales executed near the end of the financial year and those related to arbitrage and hedging activities are associated with a smaller price reaction trades near information events precipitate larger price reactions the evidence is generally weaker for short sales executed using limit orders relative to market orders this article analyzes the intraday price behavior surrounding short sales executed using market and limit orders within a transparent setting a number of recent studies have focused on daily or monthly stock price behavior surrounding short selling activity in u s markets e g senchack and starks 1993 figlewski and webb 1993 conrad 1994 hanley and seyhun 1994 asquith and meulbroek 1996 and dechow et al 1997 this research has been motivated by the continued interest of market regulators i n short selling activity and the controversy surrounding the desirability restrictions and disclosure requirements related to short selling see janvey 1992 and ramsay 1993 in particular several studies such as that by figlewski and webb 1993 have examined the relationship between short positions and subsequent abnormal returns without finding a strong relationship asquith and meulbroek 1996 in contrast focus on firms with large short positions and find a strong and consistent relationship dechow et al 1997 find a correlation between short selling strategies and strategies based on fundamental analysis these results are consistent with short sellers being able to identify

output dynamics in real business cycles models the time series literature reports two stylized facts about output dynamics in the united states gnp growth is positively autocorrelated and gnp appears to have an important trend reverting component this paper investigates whether current real business cycle rbc models are consistent with these stylized facts many rbc models have weak internal propagation mechanisms and must rely on external sources of dynamics to replicate both facts models that incorporate labor adjustment costs are partially successful they endogenously generate positive autocorrelation in output growth but they need implausibly large transitory shocks to match the trend reverting component in output

an equilibrium model of asset trading with sequential information arrival in an effort to better understand the dynamic market price adjustment process this paper develops a model which describes the impact of new information on a financial market the primary emphasis is on the price change volume relationship in the presence of a margin requirement we find that the margin requirement significantly affects the relation of price change to volume furthermore this relationship is shown to be affected by the number of investors in the market the degree of information dissemination differences in interpretation of information and the implicit cost of the margin requirement

day of the week effects and asset returns the number of empirical studies using daily stock returns is rapidly increasing researchers generally assume that the distribution of stock returns is identical for all days of the week a convenient statistical assumption but not a necessary condition of market equilibrium nevertheless there are reasons to suspect that the distribution of returns may vary according to the day of the week the most obvious is the impact of weekends on monday s return since monday s return is calculated over three instead of one calender day the mean and variance may well be higher on monday compared with any other daily return perhaps three times as large previous research has examined the daily distribution of stock returns for a monday effect while fama 1965 does not compare daily mean returns he does report that monday s variance is about 20o greater than other daily returns with a traditional distributional assumption regarding the returns on a financial asset specifies that the expected returns are identical for all days of the week contrary to this plausible assumption this paper discovers that the expected returns on common stocks and treasury bills are not constant across days of the week the most notable evidence is for monday s returns where the mean is unusually low or even negative several explanations of the results are investigated but none proves satisfactory aside from documenting significant day of the week effects the implications of the results for tests of market efficiency are examined while market adjusted returns continue to exhibit day of the week effects these effects are no longer concentrated on monday during the last year we have had many conversations with our colleagues throughout the professions we are particularly thankful to the participants at sessions of the western and american finance associations where preliminary versions of this paper were presented special thanks are due to gene fama gailen hite jon ingersoll robert jarrow merton miller clifford smith and rex thompson the expert research assistance of frank rabinovitch and youngsup yun is gratefully acknowledged 1 the list of papers using daily stock returns is too long to name recent examples include charest 1978 dodd 1980 banz 1981 and reinganum 1981

sticky prices and volatile output abstract we examine the effect of introducing a specific type of price stickiness into a stochastic growth model subject to a cash in advance constraint as in previous studies we find the introduction of price rigidities provides a substantial source of monetary non neutrality which contributes significantly to output volatility we show that the introduction of this form of sticky prices improves the model s performance at explaining inflation but worsens it for output the most dramatic failure of the model is the extremely high frequency fluctuations in output that it generates sticky prices not only fail to produce persistent business cycle fluctuations but they generate extreme volatility at very high frequencies

real rigidities and the non neutrality of money rigidities in real prices are not sufficient to create rigidities in nominal prices and real effects of nominal shocks and by themselves small frictions in nominal adjustment such as costs of changing prices create only small non neutralities but this paper shows that substantial nominal rigidity can arise from a combination of real rigidities and small nominal frictions the paper shows the connection between real and nominal rigidity given the presence of nominal frictions both in general and for two specific sources of real rigidity one arising from goods market imperfections and the other from labour market imperfections

cotrending and the stationarity of the real interest rate abstract this paper introduces the concept of cotrending to trend stationary series with structural breaks we apply it to nominal interest rates and inflation in order to test the long run fisher effect

endogenous money or sticky prices comment on monetary non neutrality and inflation dynamics abstract we show that the highly persistent inflation dynamics and its lead lag relationship with output can be explained by a standard flexible price rbc model augmented with endogenous monetary policy endogenous monetary policy acting upon the illusion that prices are sticky and money is effective can create price movements that appear to indicate price stickiness although there is none in the economy

procyclical labor productivity and competing theories of the business cycle some evidence from interwar u s manufacturing industries we study the phenomenon of short run increasing returns to labor srirl in a sample of 10 interwar u s manufacturing industries our main findings are that srirl was common in the interwar period and that the pattern of srirl across industries was similar to that observed in the postwar period we argue that since presumably the depression was not caused by technical regress these findings are inconsistent with the claim of real business cycle theorists that srirl is in general due to procyclical technical shocks we propose tests for discriminating between two other leading explanations of srirl but find that our conclusions differ by industry

the identification of monetary policy disturbances explaining the liquidity puzzle abstract this paper examines recent work on the identification of monetary policy disturbances its main finding is that the empirical anomalies found in the literature reflect a failure to properly address the federal reserve s policy of accommodating reserve demand shocks a new method of identifying monetary policy using nonborrowed reserves is proposed using this specification policy has a strong persistent liquidity effect regardless of subsample policy granger causes output even in the presence of interest rates explaining approximately 49 of the variance in output at a two year horizon and the residual explanatory power of interest rates for output is negligible

another look at sticky prices and output persistence abstract price rigidity is the key mechanism for propagating business cycles in traditional keynesian theory yet the new keynesian literature has failed to show that sticky prices by themselves can effectively propagate business cycles we show that price rigidity in fact can by itself give rise to a strong propagation mechanism in standard models provided that investment is also subject to a cash in advance constraint reasonable price stickiness can generate highly persistent hump shaped movements in output under either monetary or non monetary shocks hence whether or not price rigidity is responsible for output persistence is not a theoretical question but an empirical one

common trends and common cycles the existence of a serial correlation common feature among the first differences of a set of i 1 variables implies the existence of a common cycle in the beveridge nelson stock watson decomposition of those variables a test for the existence of common cycles among cointegrated variables is developed the test is used to examine the validity of the common trend common cycle structure implied by flavin s excess sensitivity hypothesis and campbell and mankiw s mixture of rational expectations and rule of thumb hypothesis for consumption and income linear independence between the cointegration and the cofeature vectors is exploited to decompose consumption and income into their trend and cycle components copyright 1993 by john wiley sons ltd

monetary information and monetary neutrality abstract the monetary theory of business fluctuations in market clearing models constructed under the rational expectations assumption as advanced by lucas and others involves the idea that suppliers and demanders will typically misinterpret movements in the general level of prices as representing more or less favorable relative opportunities for real activities the present paper examines the consequences of agents possessing contemporaneous monetary information of a potentially noisy variety for the non neutrality of unanticipated monetary events within such an equilibrium business cycle model this modification of the information structure has the strong testable implication that real activity will be uncorrelated with contemporaneous monetary data

convergence in european gdp series convergence in gross domestic product series of five european countries is empirically identified using multivariate time series models that are based on unobserved components with dynamic con verging properties we define convergence in terms of a decrease in dispersion over time and model this decrease via mechanisms that allow for gradual reductions in the ranks of covariance matrices associated with the disturbance vectors driving the unobserved components of the model the inclusion of such convergence mechanisms within the formulation of unobserved components makes the identification of various types of convergence possible the common converging component model is estimated for the per capita gross domestic product of five european countries germany france italy spain and the netherlands it is found that convergence features in trends and cycles are present and are associated with some key events in the history of european integration

interpreting the macroeconomic time series facts the effects of monetary policy existing theory and evidence on the effects of monetary policy are reviewed substantial room for disagreement among economists remains new evidence based on multivariate time series studies of several countries is presented while certain patterns in the data consistent with effective monetary policy are strikingly similar across countries others particularly the tendency of interest rate increases to predict high inflation are harder to reconcile with effective monetary policy

nominal price rigidity money supply endogeneity and business cycles abstract this paper investigates the ability of nominal price rigidity to explain the co movement of inflation with the cyclical component of output observed in the post war u s data a dynamic general equilibrium model is constructed with the introduction of monopolistic competition and nominal price rigidity in a standard real business cycle model allowing for an endogenous money supply rule it is then demonstrated that sticky price models can explain the observed associations between movements in inflation and output much better than flexible price models this result depends little on whether money supply is assumed to be endogenous or not

an empirical examination of information differences of opinion and trading activity abstract we investigate the relations between trading volumes and our proxies for information flows and divergences in opinions we view s p 500 index futures open interest as a useful proxy for divergences of traders opinions and find that volumes are higher on days when open interest increases than on days with declines volume in individual equities is more closely related to firm specific information flows while equity basket volume is more closely associated with market information this differential impact is greatest for small capitalization stocks where market wide news has no explanatory power

nonparametric nonlinear cotrending analysis with an application to interest and inflation in the united states given the assumption that the components of a vector time series are stationary around nonlinear deterministic time trends nonlinear cotrending is the phenomenon that one or more linear combinations of the time series are stationary around a linear trend or a constant hence the series have common nonlinear deterministic time trends in this article i develop nonparametric tests for nonlinear cotrending and i derive nonparametric estimators of the cotrending vectors i apply this approach to the federal funds rate and the consumer price index inflation rate in the united states using monthly data to analyze the price puzzle

sticky price models of the business cycle can the contract multiplier solve the persistence problem we construct a quantitative equilibrium model with firms setting prices in a staggered fashion and use it to ask whether monetary shocks can generate business cycle fluctuations these fluctuations include persistent movements in output along with the other defining features of business cycles like volatile investment and smooth consumption we assume that prices are exogenously sticky for a short time persistent output fluctuations require endogenous price stickiness in the sense that firms choose not to change prices much when they can do so we find that for a wide range of parameter values the amount of endogenous stickiness is small thus we find that in a standard quantitative model staggered price setting alone does not generate business cycle 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

some consequences of temporal aggregation in empirical analysis i derive the generating mechanism of a temporally aggregated process when the disaggregated one belongs to the vector autoregressive integrated moving average class i then study the effects of temporal aggregation on a set of characteristics of usual interest such as exogeneity causality cointegration and common features an empirical example with canadian interest rates illustrates the main issues

the dynamic effects of aggregate demand and supply disturbances we interpret fluctuations in gnp and unemployment as due to two types of disturbances disturbances that have a permanent effect on output and disturbances that do not we interpret the first as supply disturbances the second as demand disturbances demand disturbances have a hump shaped mirror image effect on output and unemployment the effect of supply disturbances on output increases steadily over time peaking after two years and reaching a plateau after five years

oil and the macroeconomy since world war ii all but one of the u s recessions since world war ii have been preceded typically with a lag of around three fourths of a year by a dramatic increase in the price of crude petroleum this does not mean that oil shocks caused these recessions evidence is presented however that even over the period 1948 72 this correlation is statistically significant and nonspurious supporting the proposition that oil shocks were a contributing factor in at least some of the u s recessions prior to 1972 by extension energy price increases may account for much of post opec macroeconomic performance

macroeconomic fluctuations and the allocation of time what are the fundamental driving forces of macroeconomic fluctuations in particular why do people spend more time working in booms and less in recessions these are basic questions of macroeconomics recent thinking has emphasized technology shifts preference shifts and changes in government purchases as likely driving forces it is useful to distinguish atemporal and intertemporal effects of the driving forces under standard assumptions the technology shift has no effect through atemporal channels because income and substitution effects exactly offset a straightforward decomposition of movements of employment attributes most of them to the atemporal effects of preference shifts

forecasting the volatility of australian stock returns do common factors help this article develops multivariate factor models for forecasting volatility in australian stocks we suggest estimation procedures for approximate factor models that are robust to jumps when the cross sectional dimension is not very large and also work with volatility measures that have been constructed so that they contain no jump components out of sample forecast analysis shows that multivariate factor models of volatility outperform univariate models but there is little difference between simple and sophisticated factor models

sectoral shifts and cyclical unemployment a substantial fraction of cyclical unemployment is better characterized as fluctuations of the frictional or natural rate than as deviations from some relatively stable natural rate shifts of employment demand between sectors of the economy necessitate continuous labor reallocation since it takes time for workers to find new jobs some unemployment is unavoidable this paper presents evidence that most of the unemployment fluctuations of the seventies unlike those in the sixties were induced by unusual structural shifts within the u s economy simple time series models of layoffs and unemployment are constructed that include a measure of structural shifts within the labor market these models are estimated and a derived natural rate series is constructed

short sale restrictions and market reaction to short interest announcements according to the diamond verrecchia hypothesis if increases in short interest are correlated with information that is not yet public they should precipitate a price adjustment stocks with unexpected increases in short interest are found to generate statistically significant but small negative abnormal returns for a short period around the announcement date when the sample is divided into stocks with and without tradable options nonoptioned stocks closely mimic these results but the optioned stocks do not in a cross sectional analysis of individual firms the short term negative abnormal returns are found to be 1 more negative the higher the degree of unexpected short interest and 2 less negative if the firm has tradable options

indeterminacy aggregate demand and the real business cycle abstract we show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual fluctuations that standard rbc models predict fairly well but also aspects of actual fluctuations that standard rbc models cannot explain such as the hump shaped trend reverting impulse responses to transitory shocks found in us output cogley and nason am econom rev 85 1995 492 the large forecastable movements and comovements of output consumption and hours rotemberg and woodford am econom rev 86 1996 71 and the fact that consumption appears to lead output and investment over the business cycle indeterminacy arises in our model due to capacity utilization and mild increasing returns to scale

capital asset prices with and without negative holdings prize lecture to the memory of alfred nobel december 7 1990 this abstract was borrowed from another version of this item

measuring common cyclical features during financial turmoil evidence of interdependence not contagion abstract this paper develops a test of contagion in financial markets by considering a measure of co movement based on the notion of common cycles to detect short run co movements between a set of time series we apply our methodology to the international effects of the 1994 mexican peso crisis and the 1997 asian crisis our results can be interpreted as evidence of a high level of market co movement during all states of the world and therefore question the hypothesis of shift contagion in the transmission of financial shocks during the 1997 asian crisis and to a lesser extent the 1994 mexican crisis

testing and valuing dynamic correlations for asset allocation we evaluate alternative models of variances and correlations with an economic loss function we construct portfolios to minimize predicted variance subject to a required return it is shown that the realized volatility is smallest for the correctly specified covariance matrix for any vector of expected returns a test of relative performance of two covariance matrices is based on work of diebold and mariano the method is applied to stocks and bonds and then to highly correlated assets on average dynamically correct correlations are worth around 60 basis points in annualized terms but on some days they may be worth hundreds

capacity utilization under increasing returns to scale abstract this paper overcomes an important objection against the empirical relevance of the benhabib farmer model as a potential account of actual business cycle fluctuations this is attributable to an elasticity effect and a returns to scale effect of capacity utilization these effects are closely related to the empirical puzzles that capital appears to play an insignificant role in explaining cyclical movements in output and that the estimated labor elasticity appears to be larger than labor s share due to these effects multiple equilibria and persistent fluctuations can easily occur in a growth model for externalities mild enough so that the aggregate labor demand curve is downward sloping analyses show that the propagation mechanism generated by capacity utilization under mild increasing returns is capable of explaining the periodic patterns of u s business cycles documented by watson journal of economic literature classification numbers e32 e22 c52

short sale constraints and information driven short selling evidence on nasdaq abstractthis article examines the impact of the nasdaq s bid test rule on the information content of short sales surrounding the u s security exchange commission introduction of the pilot programme in 2005 it shows that abnormal short selling prior to analyst recommendation changes were very informative when stocks were restricted by the bid test rule such informativeness of short selling disappears when the bid test rule was temporarily suspended for pilot stocks the results are robust after controlling for various factors that may contribute to this anomaly both the shorting efficiency hypothesis and the regulatory concern hypothesis are developed to provide explanations for this anomaly additional tests show that the regulatory concern is more consistent with the data

day of the week and intraday effects in stock returns abstract this study examines day of the week effects using hourly values of the dow jones industrial average we find that over the 1963 1983 period the weekend effect has sifted from characterizing active trading on monday to characterizing the non trading weekend over the early part of our sample period negative returns characterize each hour of trading on monday while the return from friday close to monday open is positive in the most recent subperiod monday average hourly returns after noon are all positive and the weekend effect is due to negative average returns from friday close to monday open

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

the impact of short selling on the price volume relationship evidence from hong kong this paper considers the relationship between traded volume and volatility allowing for the impact of short sales the evidence supports a nonlinear bidirectional relationship between volume and volatility short selling is found to have a significant impact on this relationship and our results suggest i that the hong kong market displays greater volatility following a period of short selling and ii that asymmetric responses to positive and negative innovations to returns appear to be exacerbated by short selling

the u s embargo act of 1807 its impact on new england money banking and economic activity the u s embargo act of 1807 its impact of new england money banking and economic activity i introduction the period 1793 through 1807 was one of unusual prosperity in the united states paced by the growth of american carrying and re export trade 1 the embargo act of 1807 however supposedly halted this period of growth and prosperity the act was an attempt by a new nation to persuade great britain and france to refrain from seizing neutral american ships by prohibiting the trading of certain goods between the united states and other countries the provisions of the act forbade u s ships to sail with cargoes to foreign ports the act was in effect from december 1807 through march 1809 historians generally assert that the embargo had at least three important consequences of the u s economy the embargo allegedly initiated a severe economic depression led to a signficant increase in the level of smuggling between the united states and other countries and was instrumental in bringing about an expansion of domestic manufacturing that started the united states on a path to self sufficiency with respect to the depression effects of the embargo mcmaster 1903 415 described the economic losses of the period as follows the newspapers were full of insolvent debtor notices all over the country the court house doors the tavern doors the post offices the cross road posts were covered with advertisements of sheriffs sales in the cities the jails were not large enough to hold the debtors at new york during 1809 thirteen hundred men were imprisoned for no other crime than being ruined by the embargo a traveler who saw the city in this day of distress assures us that it looked like a town ravaged by pestilence the counting houses were shut or advertised to let the coffee houses were almost empty the streets along the water side were almost deserted the ships were dismantled their decks were cleared their hatches were battened down illegal trade arose as people searched for other sources of income malone and rauch 1960 118 described the situation in the following manner the ancient art of smuggling was revived particularly along the land frontier with canada where drovers of wagon trains shot down federal agents and concerning the stimulative effect of the embargo upon the rise in domestic manufacturing north 1961 56 stated the closing off of the import trade was effective in promoting the rise of domestic manufactures and capital which had been devoted to shipping and foreign commerce was partially absorbed in a rapid growth of industry before 1808 only fifteen cotton mills had been built in the united states one in 1791 one in 1795 two more in 1803 and 1808 by the end of 1809 eighty seven additional mills had been constructed and capacity had been increased from eight thousand spindles in 1808 to thirty one thousand at the end of 1809 and an estimated eighty thousand by 1811 other branches of manufacturing also made substantial gains through 1814 similar comments concerning the embargo are abundant in most economic history texts and in numerous articles devoted to the subject while dramatic such discussion is based on casual empiricism at best and little in the way of rigorous economic analysis has ever been applied to discern the actual effects of the embargo upon the u s economy as usual with such historically remote events a paucity of data on such variables as real income output and employment constitutes the major obstacle to empirical analysis until recently economic historians have attempted to make inferences about the effects of the embargo upon the economy by relying primarily upon data reflecting the volume of import export and re export trade domestic and imported price indices and governmental duties 2 in a recent article for example frankel 1982 argues that an examination of british shipping statistics rather than those of the u

the information content of short interest a natural experiment an increase in the cost of selling short should increase the bearish information content of short interest announcements by driving relatively uninformed short sellers out of the market we extend the diamond and verrecchia 1987 model to include short selling against the box and test the extended model using a natural experiment based around the taxpayer relief act of 1997 tra97 tra97 made short selling more costly for those shorting against the box consistent with the implications of our extended model this increase in short selling costs strengthens the negative relationship between short interest and subsequent stock price performance post tra97

on corporate governance a study of proxy contests abstract this paper examines a sample of firms experiencing proxy contests for seats on their board of directors dissident shareholders usually fail to obtain a majority of board seats nevertheless they capture some seats via mechanisms such as cumulative voting in over half of the sample contests regardless of proxy contest outcome positive and statistically significant share price performance is associated with the contest that finding is predicted by the standard economic analysis of proxy contests in which the challenges benefit shareholders by improving corporate performance the finding runs counter to the claim of berle 1962 that the economists view of proxy contests is a wholly imaginary picture a portion of the positive share price changes taking place in the early stages of some proxy contests is not permanent however and as suggested by manne 1962 is at least partially attributable to temporary increases in the market value of the vote attached to corporate shares

short selling and price discovery in corporate bonds we show short selling in corporate bonds forecasts future bond returns short selling predicts bond returns where private information is more likely in high yield bonds particularly after lehman brothers collapse of 2008 short selling predicts returns following both high and low past bond returns this together with short selling increasing following past buying order imbalances suggests short sellers trade against price pressures as well as trade on information short selling predicts bond returns both in the individual bonds that are shorted and in other bonds by the same issuer past stock returns and short selling in stocks predict bond returns but do not eliminate bond short selling predicting bond returns bond short selling does not predict the issuer s stock returns these results show bond short sellers contribute to efficient bond prices and that short sellers information flows from stocks to bonds but not from bonds to stocks

new keynesian economics and the phillips curve models with sticky prices are an important part of new keynesian economics the author shows that several of the new keynesian models imply a formulation that is similar to the expectations augmented phillips curve of milton friedman and edmund phelps he then presents new estimates of the new keynesian phillips curve the author uses two proxies for price expectations survey based measures and an econometric based measure originally developed by bennett mccallum 1976 overall the results are consistent with the model but the survey based results are more precise suggesting that the surveys may be better measures of actual expectations copyright 1995 by ohio state university press

common cycles in seasonal non stationary time series this paper extends the notion of common cycles to quarterly time series having unit roots both at the zero and seasonal frequencies it is shown that common cycles are present in the hylleberg engle granger yoo decomposition of these series when there exists a linear combination of their seasonal differences which follows an ma process of order at most three the pitfalls of seasonal adjustment for common cycles analysis are also documented inference on common cycles in seasonally cointegrated series is derived from existing statistical methods for codependence concepts and methods are illustrated with an empirical analysis of the comovements between consumption and output using italian data copyright 1999 john wiley sons ltd

a traditional interpretation of macroeconomic fluctuations under the traditional interpretation of macroeconomic fluctuations aggregate demand shocks move output and prices in the same direction while aggregate supply shocks move output and prices in opposite directions this paper examines the joint behavior of u s output unemployment prices wages and nominal money and asks whether it is consistent with this interpretation the answer is a qualified yes

future lending income and security value i test the duffie g rleanu and pedersen hypothesis that security prices incorporate expected future securities lending income to determine whether institutional investors anticipate gains from future lending of securities i examine their trading behavior around loan fee increases the evidence suggests that institutions buy shares in response to an increase in lending fees and that this could explain the premium associated with high lending fee stocks expected future lending income affects stock prices although the effect seems to be attenuated by the negative information that arises from short selling

common features in economics and finance an overview of recent developments this introductory article offers an overview of some developments in the common features literature since the publication of the seminal article by engle and kozicki in the journal of business economic statistics in 1993 with the aim of highlighting the unifying theme of the contributions in this volume

money prices interest rates and the business cycle the mechanisms governing the relationship of money prices and interest rates to the business cycle are the most studied and most disputed topics in macroeconomics in this paper we first document key empirical aspects of this relationship we then ask how well three benchmark rational expectations macroeconomic models a real business cycle model a sticky price model and a liquidity effect model account for these central facts while the models have diverse successses and failures none can account for the fact that real and nom inal interest rates are inverted leading indicators of real economic activity that is none of the models captures the post war u s business cycle fact that a high real or nominal interest rate in the current quarter predicts a low level of real economic activity two to four quarters in the future i introduction the positive correlation of monetary aggregates and real economic activity over the course of many business cycles is a key empirical fact about the u s economy indeed the dynamic dimension of this covariation is so strong and stable that a monetary variable has long been included in the commerce department s index of leading economic indica tors while this pattern of cyclical comovement is widely agreed upon its interpretation is not some macroeconomists view money as purely passive with a positive response to varying levels of economic activity producing the positive correlation others view changes in the quantity of money as an important perhaps dominant source of economic fluctua tions frequently the real effects of monetary changes are suggested to arise from frictions in commodity labor or financial markets in economic theories that describe the influence of these frictions the transmission mechanism from monetary changes to real activity is typically viewed as involving interest rates and the price level the primary goal of this paper is to evaluate three models that explain the link between money prices interest rates and the business cycle we do this in three steps first we docu ment the cyclical behavior of these variables in the united states over the postwar period second we construct three quantitative rational expectations models of macroeconomic activity i a real business cycle model with endogenous money ii a model of commodity market frictions with mon etary non neutralities arising from gradual adjustment of goods prices and iii a model of financial market frictions with monetary non neutralities arising from gradual adjust ments of portfolios finally we compare the models predic tion for the business cycle behavior of money prices and interest rates with the data in exploring the predictions of these models we take the stock of money to be one of several exogenous variables in the system all of our models are capable of generating a forecasting role for money relative to real economic activity similar to that found in the u s data in the real business model monetary changes can forecast real activity because productivity is related to many underlying sources of shocks and because these real shocks also affect the money stock in the models with sticky prices and liquidity effects short hand names for the models with frictions in the com modity and financial markets monetary changes have an additional direct positive effect on aggregate output the outline of the paper is as follows section ii describes the data and documents its business cycle characteristics section iii outlines the three macroeconomic models and develops the particular quantitative versions of the models used in our analysis our main empirical results are pre sented in section iv and section v summarizes our results and concludes

short sales and speed of price adjustment evidence from the hong kong stock market abstract we present empirical evidence that short sales contribute to market efficiency by increasing the speed of price adjustment to not only private public firm specific information but also market wide information shortable stocks are characterized by weaker trade continuity and stronger quote reversals they adjust faster to new information than non shortable counterparts these findings remain robust even in an up market condition in which short sales are not binding the amount of information incorporated in each trade is also significantly higher for shortable than non shortable stocks in both up and down market conditions after controlling for firm size trading volume liquidity price and option trading short sales stand out as one of the significant factors that speed up the price adjustment

the informational effects of restrictions on short sales some empirical evidence in a world of heterogeneous investors a competitive financial market has two major functions first it is the mechanism by which ownership of the existing supply of risky assets is distributed among investors this is the role which is analyzed in detail by the standard capital asset pricing model capm and its many extensions the second important market function is to aggregate the diverse information held by different investors into a single price most versions of the capm eliminate the information aggregation function by assuming that investors hold homogeneous beliefs with respect to the probability distribution of asset returns exceptions which deal with some aspects of the problem are lintner 7 grossman 4 grossman and stiglitz 5 and figlewski 1 3

short interest explanations and tests cross sectional and time series tests are performed to explain levels and changes in short interest explanatory variables and tests are chosen based on tax arbitrage and speculative reasons for going short short interest is found to follow a seasonal pattern that is weakly consistent with tax based trading stocks with high betas and the existence of convertible securities or options tend to have higher levels of short interest which is con sistent with arbitrage efforts for firms with traded options there is a positive association between the month to month changes in option open interest and short interest prior months returns and changes in short interest are positively related but there is no rela tionship between changes in short interest and returns in the subsequent month

short selling and exchange traded funds returns evidence from the london stock exchange abstractan exchange traded fund etf is a security that tracks a basket of stocks an etf investor gains immediate exposure to the basket by taking either a long or short position on this instrument both hedgers and speculators can short etfs making the informational content of increases in etf short interest difficult to interpret using high frequency daily short interest data for etfs traded on the london stock exchange between june 2006 and april 2010 we examine the price impact on etfs of increases in short interest contrary to most of the previous empirical evidence for individual stocks we find that large increases in etf short interest are associated with subsequent over performance relative to a benchmark index and this pattern is most pronounced during pre financial crisis period

role of speculative short sales in price formation the case of the weekend effect we argue that short sellers aiect prices in a signi cant and systematic manner in particular we contend that speculative short sales contribute to the weekend eiect the inability to trade over the weekend is likely to cause these short sellers to close their speculative positions on fridays and reestablish new short positions on mondays causing stock prices to rise on fridays and fall on mondays we nd evidence in support of this hypothesis based on a comparison of high short interest stocks and low short interest stocks stocks with and without actively traded options ipos zero short interest stocks and highly volatile stocks in this paper we empirically examine whether speculative short sales aiect prices in a systematic manner the focus is on the weekend eiect that has remained an unexplained anomaly beginning with french 1980 and gibbons and hess 1981 there is much evidence in support of higher returns on fridays and lower returns on mondays keim and stambaugh 1984 nd that friday returns are lower when there is saturday trading ariel 1990 nds that a signi cantly larger number of stocks rises preholiday than postholiday empirical evidence related to more recent periods points to an insigni cant weekend eiect for large rms but continuance of the weekend eiect for an equally weighted index as documented herein 1 many potential explanations of the weekend eiect have been proposed and investigated measurement errors gibbons and hess 1981 and keim and stambaugh 1984 delay between trading and settlement in stocks dyl and martin 1985 and lakonishok and levi 1982 specialist related biases in prices keim and stambaugh timing of corporate releases after friday s close damodaran 1989 reduced institutional trading and greater individual trading on mondays

anticipated inflation and the capital stock in a cash in advance economy abstract an economy is constructed in which the steady state capital stock is inversely related to the rate of inflation as a result that is directly opposite the usual conclusion

flexible multivariate garch modeling with an application to international stock markets this paper offers a new approach to estimating time varying covariance matrices in the framework of the diagonal vech version of the multivariate garch 1 1 model our method is numerically feasible for large scale problems produces positive semidefinite conditional covariance matrices and does not impose unrealistic a priori restrictions we provide an empirical application in the context of international stock markets comparing the new estimator with a number of existing ones

intermediate monetary targets and macroeconomic fluctuations it is investigated whether the choice of intermediate target has altered macroeconomic fluctuations and whether the observed changes are consistent with predictions from economic theory since implications from the theoretical literature focus on the effects of structural disturbances an empirical analysis must identify these effects the structural vector autoregressive var technique estimates structural disturbances using restrictions from standard macroeconomic theory based on descriptions of actual targeting procedures by insiders to federal reserve policy decisions the intermediate target for the united states is identified as the interest rate from 1951 to 1969 and money from 1970 to 1986 var models are estimated over each subsample to assess whether the estimated structural disturbances cause endogenous variables to behave as economic theory predicts tests are also performed to assess whether or not the targeting rule affects the variance of endogenous variables attributable to structural sh

productivity shocks and real business cycles abstract productivity shocks play a central role in real business cycles as an exogenous impulse to macroeconomic activity however measured solow prescott residuals do not behave as an exogenous impulse rather econometric evidence provided in this paper indicates that 1 money interest rates and government spending granger cause these impulses and 2 a substantial component of the variance of these impulses between one quarter and one half is attributable to variations in aggregate demand these results are robust to a number of econometric issues including measurement errors specification of the production function and certain forms of omitted real variables

endogenous money or sticky prices abstract what explains the correlations between nominal and real variables in the postwar us data are these correlations indicative of significant nominal rigidity or do they simply reflect the particular way that monetary policymakers react to developments in the real economy to answer these questions this paper uses maximum likelihood to estimate a model of endogenous money this model allows but does not require nominal prices to be sticky the results show that nominal price rigidity over and above endogenous money plays a role in accounting for key features of the data

periodic cointegration representation and inference textabstractthis paper considers a new approach to the analysis of stable relationships between nonstationary seasonal time series the basis of this approach is an error correction model in which both long run effects and adjustment parameters are allowed to vary per season first we discuss theoretical arguments for such a periodic error correction model we define periodic cointegration and compare this to the concept of seasonal cointegration next we analyze statistical inference in the periodic error correction model a sequential procedure is proposed consisting of a test for periodic cointegration an estimator of the cointegration parameters and adjustment coefficients and a class of tests for the hypothesis that some of the parameters are constant over the seasons the finite sample behavior of the proposed test statistics is analyzed in a limited monte carlo exercise we conclude the paper with an application to a model of aggregate swedish consumption

the business cycle effects of christmas abstract why do countries and industries with large seasonal fluctuations also have large business cycles it is well known that seasonal fluctuations account for the bulk of total output fluctuations yet it is unknown whether seasonal fluctuations can trigger business cycles using a procedure that allows for identification of seasonal innovations i found that seasonal shocks explain 50 of the business cycle in aggregate output such findings provide a novel and powerful explanation for the observed strong correlation between seasonal fluctuations and business cycles the implication is that in addition to trying to determine whether it is monetary technology or other types of shocks that cause business cycles we should be looking at what causes seasonality

unexpected monetary disturbances during the gold standard era abstract this empirical paper uses the barro methodology of estimating unexpected monetary shocks to determine the effect these shocks had on real output in the u s during the gold standard era between 1880 and 1913 it also investigates whether changes in a measure of financial intermediation had real effects the results indicate that neither expected nor unexpected money shocks affected output changes in financial intermediation however were significantly correlated with output this result lends support to theories which stress the endogeneity of broad measures of the money supply

inflation dynamics a cross country investigation we document that persistent and lagged inflation with respect to output is a world wide phenomenon in that these short run inflation dynamics are highly synchronized across countries in particular the average cross country correlation of inflation is significantly and systematically stronger than that of output while the cross country correlation of money growth is essentially zero we investigate whether standard monetary models driven by monetary shocks are consistent with the empirical facts we find that neither the new keynesian sticky price model nor the sticky information model can fully explain the data an independent contribution of the paper is to provide a simple solution technique for solving general equilibrium models with sticky information

tests of seasonal integration and cointegration in multivariate unobserved component models this paper considers tests of seasonal integration and cointegration for multivariate unobserved component models first the locally best invariant lbi test of the null hypothesis of a deterministic seasonal pattern against the alternative of seasonal integration is derived for a model with gaussian i i d disturbances and deterministic trend then the null hypothesis of seasonal cointegration is considered and a test for common nonstationary components at the seasonal frequencies is proposed the tests are subsequently generalized to account for stochastic trends weakly dependent errors and unattended unit roots asymptotic representations and critical values of the tests are provided while the finite sample performance is evaluated by monte carlo simulation experiments finally the tests are applied to the series of industrial production of the four largest countries of the european monetary union it is found that germany does not appear to cointegrate with the other countries at most seasonal frequencies while there seems to exist a common nonstationary seasonal component between france italy and spain copyright 2006 john wiley sons ltd

productivity shocks and business cycles this note uses two measures of productivity growth the solow residual and the dual residual from the cost function to test competing theories of the cycle in a number of oecd countries the empirical results indicate that both demand and supply shocks play a role in driving economic cycles and therefore refute the stronger real business cycle hypothesis

financial innovation price smoothing and monetary policy financial innovation price smoothing and monetary policy i introduction in a monetary economy the volume of nominal transactions fluctuates with the level of economic activity empirical evidence suggests that the supply of nominal transaction assets such as currency and bank deposits also fluctuates with the level of economic activity some researchers have attributed these observations to the phenomenon of money endogeneity 1 one explanation for this endogenous supply response is a systematic monetary policy as described by black 1972 under which the central bank passively adjusts the money supply to accommodate the changes in money demand alternatively king and plosser 1984 and saving 1979 stress the role of the private banking system in producing this endogenous response they argue that exogenous changes in real activity elicit sympathetic changes in the demand for transaction services that may be partially or fully accommodated by the banking system through its supply of inside money in either case this endogenous supply response tends to mitigate the price adjustment that accompanies a real supply shock 2 in the long run however the price level is ultimately determined by the central bank in the market for the nominal quantity that it controls e g currency bank reserves when deposit accounts are subject to reserve requirements or the monetary base 3 this suggests that if the private banking system does not fully accommodate the real shock and if the shock exhibits a well defined persistence then endogenous price adjustments that are fully anticipated may be further damped by a passive supply response by the central bank in addition if price expectations affect real interest rates then current period price level smoothing via a passive monetary policy may also be possible 4 in addition to employing transaction assets currency and checkable bank deposit accounts to meet their transaction requirements agents may purchase non deposit transaction services directly for firms these services include the tools available to the modern corporate cash manager such as lockbox collection systems repurchase agreements and zero balance accounts in the household sector they take the form of atms debit and credit cards and overdraft privilages on checkable accounts among others these non deposit transaction services represent an increasingly important medium of exchange their supply by the banking system is not directly controlled by the central bank and also offers another avenue by which the economy may respond endogenously to fluctuating transaction requirements associated with real shocks thereby further mitigating the price adjustment 5 the production of non deposit transaction services is subject to technology shocks in the form of financial innovations these innovations alter the economy wide demand for currency and checkable bank deposit accounts and prices adjust as with the introduction of new technology into the production of goods financial innovations are not fully adopted immediately due to the fixed costs of adjusting individual cash management practices but are instead assimilated over time this implies that their effects on transaction asset demands persist if the rate of adoption has a forecastable component the central bank can smooth expected prices by passively accommodating these innovations as with aggregate productivity shocks this persistence may also enable the central bank to damp the disturbances to the current period price level that these innovations create through the impact of price expectations on real interest rates this paper examines a non deposit transaction services market in a model economy that is developed in section ii it has the following features transactors can meet their transaction requirements by allocating wealth to currency or to bank deposit accounts that pay a market determined interest rate or by purchasing non deposit transaction services directly at a market determined price

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances

macroeconomic forecasting using diffusion indexes this article studies forecasting a macroeconomic time series variable using a large number of predictors the predictors are summarized using a small number of indexes constructed by principal component analysis an approximate dynamic factor model serves as the statistical framework for the estimation of the indexes and construction of the forecasts the method is used to construct 6 12 and 24 monthahead forecasts for eight monthly u s macroeconomic time series using 215 predictors in simulated real time from 1970 through 1998 during this sample period these new forecasts outperformed univariate autoregressions small vector autoregressions and leading indicator models

a seasonal model of consumption in this paper the authors present strong empirical evidence that the long run income elasticity of u k nondurable consumers expenditure and its short run rate of adjustment both vary across seasons such variability in the behavior of consumers is consistent with the hypotheses that consumers have seasonal preferences and that they exhibit seasonally varying degrees of habit persistence the tests are based on a modified form of the error correction methodology that allows for seasonally varying slope coefficients simulations for the dynamic responses of the authors model illustrate the important policy implications of these results coauthors are r c bladen hovell a p l chui denise r osborn and j p smith copyright 1989 by royal economic society