estimating the marginal law of a time series with applications to heavy tailed distributions this article addresses estimating parametric marginal densities of stationary time series in the absence of precise information on the dynamics of the underlying process we propose using an estimator obtained by maximization of the quasi marginal likelihood which is a likelihood written as if the observations were independent we study the effect of the neglected dynamics on the asymptotic behavior of this estimator the consistency and asymptotic normality of the estimator are established under mild assumptions on the dependence structure applications of the asymptotic results to the estimation of stable generalized extreme value and generalized pareto distributions are proposed the theoretical results are illustrated on financial index returns supplementary materials for this article are available online

further evidence on business cycle asymmetries in g7 countries this paper tests for business cycle symmetry in g7 countries during the post world war ii period using a number of tests each reflecting alternative definitions of business cycle asymmetry the tests are applied to monthly coincident economic indicators of business cycles this found that business cycles in the us are characterized by both longitudinal deepness and transversal steepness and sharpness asymmetries further it is found that asymmetric transition probabilties and time irreversibility are due to nonlinearities on the contrary business cycles in germany exhibits a symmetric behaviour between these extremes are the other countries for which at least one of the tests here considered rejects the null of cyclical symmetry particularly business cycle is characterized by deepness and sharpness in canada asymmetry in persistence in france and japan and asymmetric transition probabilities in france and united kingdom

u s and canadian industrial production indices as coupled oscillators abstract this paper uses ozaki s 1985 variable amplitude coefficient model to explore the impact of different types of dynamical linkages coupling between the indices of industrial production for the u s and canada empirical analysis reveals that for each country the requisite lag structure extends for up to six years and that the coupling linkages are functions of lagged changes in growth rates incorporating these linkages leads to an increased degree of oscillation in the equilibrium paths a marginal improvement in stability and somewhat greater synchronization between the two series the out of sample forecasts for each series are improved by the coupling

heavy tails and copulas limits of diversification revisited we show that diversification does not reduce value at risk for a large class of dependent heavy tailed risks the class is characterized by power law marginals with tail exponent no greater than one and by a general dependence structure which includes some of the most commonly used copulas

the brevity and violence of contractions and expansions abstract early studies of business cycles argued that contractions in economic activity were briefer shorter and more violent rapid than expansions this paper systematically investigates this claim and in the process discovers a robust new business cycle fact contractions in employment are briefer and more violent than expansions but we cannot reject the null of equal brevity and violence for expansions and contractions in output the difference arises because employment typically lags output around peaks but they coincide in their troughs we discuss the performance of existing business cycle models in accounting for this fact and conclude that none can fully account for it we then show that a business cycle model with asymmetric adjustment costs on employment and a choice of when to scrap old technologies can account for the business cycle fact both qualitatively and quantitatively

on the frequency of large stock returns putting booms and busts into perspective textabstractnumerous articles have investigated the distribution of share prices and find that the returns are fat tailed nevertheless there is still controversy about the amount of probability mass in the tails and hence about the most appropriate distribution to use in modeling returns this controversy has proven hard to resolve as the alternatives are non nested we employ extreme value theory focusing exclusively on the larger observations in order to assess the tail shape within a unified framework we find that at least the first two moments exist this enables one to generate robust probabilities on large returns which put the recent stock market swings into historical perspective

volume and skewness in international equity markets abstract we examine the relation between trading volume and skewness in 11 international stock markets using daily and monthly data from january 1980 to august 2004 we construct single equation and var models of the relation between the first three moments of market returns and trading volumes our results show hitherto unrecognised channels of influence and support the investor heterogeneity approach to explaining return asymmetries

how the baby boomers retirement wave distorts model based output gap estimates hours per capita measures based on the private sector as usually included in the set of observables for estimating macroeconomic models are affected by low frequent demographic trends and sectoral shifts that cannot be explained by standard models further model based output gap estimates are closely linked to the observable hours per capita series hence hours per capita that are not measured in concordance with the model assumptions can distort output gap estimates this paper shows that sectoral shifts in hours and the changing share of prime age individuals in the working age population lead indeed to erroneous output gap dynamics regarding the aftermath of the global financial crisis model based output gaps estimated using standard hours per capita series are persistently negative for the us economy this is not caused by a permanently depressed economy but by the retirement wave of baby boomers which lowers aggregate hours per capita after adjusting hours for changes in the age composition to bring them in line with the model assumptions the estimated output gap gradually closes in the years following the global financial crisis

the asymptotic distribution of extreme stock market returns this article presents a study of extreme stock market price movements according to extreme value theory the form of the distribution of extreme returns is precisely known and independent of the process generating returns using data for an index of the most traded stocks on the new york stock exchange for the period 1885 1990 the author shows empirically that the extreme returns obey a frechet distribution copyright 1996 by university of chicago press

unexpected tails in risk measurement some international evidence risk management critically depends on the assumptions made about the distribution of stock returns this paper applies extreme value methods to investigate the limiting distribution of the extreme returns of the nikkei225 ftse100 and s p500 indices as well as the indices of some of largest sectors in japan uk and us the results indicate that the much celebrated generalised extreme value distribution does not provide the most accurate description of the minima since the generalised logistic distribution performs better due to its ability to better capture the fat tails of returns the time varying nature of extremes is also confirmed while a simulation exercise adds to the robustness of our results it is also shown that the findings may have important implications for risk models such as var and expected shortfall since risk measures which cannot capture the fatness of tails of the empirical distribution function of returns may lead to serious underestimation of downside risk

a variance ratio test of random walks in foreign exchange rates the separate variance ratio tests under homoscedasticity and heteroscedasticity both provide evidence rejecting the random walk hypothesis using five pairs of weekly nominal exchange rate series over the period from august 7 1974 to march 29 1989 the rejections cast doubt on the random walk hypothesis in exchange rates which has received support in the existing literature furthermore since the rejections are robust to heteroscedasticity they suggest autocorelations of weekly increments in the nominal exchange rate series which may be consistent with the exchange rate overshooting or undershooting phenomenon in the past decade there has been a consensus that nominal exchange rates follow a random walk process since a unit root and uncorrelated increments are both required for a random walk process the random walk is usually supported in the existing literature either because a unit root component is detected in the exchange rate series or because the increment in the exchange rate is found to be serially uncorrelated for example meese and singleton 1982 and baillie and bollerslev 1989 both find a unit root component in the exchange rate series and the evidence provided in giddy and dufey 1975 cornell and dietrich 1978 logue sweeney and willett 1978 and hsieh 1988 all suggest that the exchange rate series contains uncorrelated increments in this paper the random walk hypothesis for the nominal exchange rate series is reexamined by applying a variance ratio test developed in lo and mackinlay 1988 to five pairs of weekly nominal exchange rate series over the period from august 7 1974 to march 29 1989 while there are two implications of the random walk unit root and uncorrelated increments this paper focuses on the uncorrelated increments aspect this is not only because there are some important departures from the random walk that unit root test cannot detect but also because the autocorrelation aspect may yield

are business cycles asymmetric some european evidence economic thought has often regarded business cycles as asymmetric this study examines the existence of asymmetries over the business cycle in seven european countries france germany ireland italy luxembourg the netherlands and the united kingdom to analyse this issue industrial production in these countries from 1957 to 1998 is examined and quarterly contractions and expansions in this variable are compared the results obtained with both parametric and non parametric methods allow the existence of asymmetries in these countries to be questioned

time irreversibility and egarch effects in us stock index returns in this paper we suggest using a modified version of the time reversibility tr test of chen chou and kuan 2000 as a complementary diagnostic test for time series models the modified cck test is easy to compute and requires weaker moment conditions than existing tests our simulations demonstrate that this test is powerful against asymmetry in volatility but the bds test is not in the empirical study of us stock index returns we first find that these returns are all time irreversible applying the garch and egarch models to these returns we also find that the q and bds tests always accept the null hypothesis and cannot distinguish between these models by contrast the modified cck test accepts only the egarch model with an order that can accommodate the underlying asymmetry in volatility our results suggest that the detected time irreversibility in these return series may be attributed to volatility asymmetry and that such asymmetry may be captured using a proper egarch model copyright 2002 john wiley sons ltd

steepness and deepness in the australian macroeconomy this study uses nonparametric tests the triples test and the bds test to examine whether key australian macroeconomic aggregates exhibit nonlinearities and important steepness and deepness asymmetries at the business cycle frequency evidence is found of nonlinearities but there is little evidence of deepness in the australian macroeconomy however there is evidence of steepness especially concerning labour market variables as well as both the cpi and m3 the evidence suggests that unemployment employment rises falls rapidly in recessions and only recovers slowly over time also positive asymmetries in m3 are reflected in similar asymmetries in the cpi but not in output consumption or investment

breaks and outliers when modelling the volatility of the u s stock market this study analyses volatility persistence of the u s stock market after taking into account the role of breaks and outliers by employing a wavelet based algorithm it identifies several outliers which are comfortably associated with major events such as the black monday and the asian crisis there is also evidence of clustering of breaks and a substantial variation in the properties of the identified segments

on the importance of the participation margin for labor market fluctuations abstract conventional analyses of labor market fluctuations ascribe a minor role to labor force participation we show by contrast that flows based analyses imply that the participation margin accounts for around one third of unemployment fluctuations a novel stock flow apparatus establishes these facts delivering three further contributions first the role of the participation margin appears robust to adjustments for spurious transitions induced by reporting error second conventional stocks based analyses are subject to a stock flow fallacy neglecting offsetting forces of worker flows on the participation rate third increases in labor force attachment among the unemployed during recessions are a leading explanation for the role of the participation margin

natural resources and economic development new panel evidence the question as to whether natural resources are a curse on economic growth and development is subject to considerable debates and remains controversial using heterogeneous panel cointegration techniques this paper provides a fresh re examination of the resource curse while allowing for cross section heterogeneity and commonalities in the nexus between natural resource abundance and economic development it finds in a sample of developing countries that economies endowed with abundant natural resources tend to develop more slowly than countries with scarce resources natural resources are on average a curse however there is considerable heterogeneity in the effects of resource abundance on economic development across countries perhaps because of differences in the extent of government intervention access to sound money legal structures and the security of property rights the degree of globalization and or corruption

exchange rate return predictability and the adaptive markets hypothesis evidence from major foreign exchange rates this study examines return predictability of major foreign exchange rates by testing for martingale difference hypothesis mdh using daily and weekly nominal exchange rates from 1975 to 2009 we use alternative mdh tests for linear and nonlinear dependence which include wild bootstrap automatic variance ratio test generalized spectral test and consistent tests we evaluate time varying return predictability by applying these tests with fixed length moving sub sample windows of two years while exchange rate returns are found to be unpredictable most of times we do observe episodes of statistically significant return predictability they are associated with coordinated central bank interventions and the subprime mortgage crisis in 2007 this finding suggests that return predictability of foreign exchange rates occurs from time to time depending on changing market conditions which is consistent with the implications of the adaptive markets hypothesis

the day of the week effect the international evidence abstract we re examine the day of the week effect for eleven indexes from nine countries during the 1969 1992 period the standard methodology as well as the moving average methodology are used and we find returns to be lower at the beginning of the week but not necessarily on monday for the full period as in chang et al international evidence on the robustness of the day of the week effect journal of financial and quantitative analysis 28 1993 497 514 the anomaly disappears for the most recent period in the usa however the effect is still strong for european countries hong kong and toronto

slow boom sudden crash abstract many asset markets exhibit slow booms and sudden crashes this pattern is explained by an endogenous flow of information in the model agents undertake more economic activity in good times than in bad economic activity generates public information about the state of the economy if the economic state changes when times are good and information is abundant asset prices adjust quickly and a sudden crash occurs when times are bad scarce information and high uncertainty slow agents reactions as the economy improves a gradual boom ensues data from u s and emerging credit markets support the theory

the cyclicality of separation and job finding rates this paper uses cps gross flow data to analyze the business cycle dynamics of separation and job finding rates and to quantify their contributions to overall unemployment variability cyclical changes in the separation rate are negatively correlated with changes in productivity and move contemporaneously with them while the job finding rate is positively correlated with and tends to lag productivity contemporaneous fluctuations in the separation rate explain between 40 and 50 percent of fluctuations in unemployment depending on how the data are detrended this figure becomes larger when dynamic interactions between the separation and job finding rates are considered

financial crashes as endogenous jumps estimation testing and forecasting abstract this paper provides an econometric approach for forecasting financial crashes based on diffusion processes with time varying parameters that are driven by market fundamentals under a polynomial drift function one obtains a cusp stochastic process that entails a generalized exponential stationary distribution this class of densities is quite convenient as it allows for skewness different tail shapes and even multimodality which corresponds to multiple equilibria movements from one equilibrium to another due to changes in the market fundamentals then relates to crashes methods for fitting and evaluating this sort of diffusion processes are proposed to enable the estimation and forecast of crash events finally an empirical assessment is carried out by tracking the likelihood of a crash during the swedish twin crises in the early 1990s

cointegration and threshold adjustment this article proposes an extension to the engle granger testing strategy by permitting asymmetry in the adjustment toward equilibrium in two different ways we demonstrate that our test has good power and size properties over the engle granger test when there are asymmetric departures from equilibrium we consider an application namely whether there exists cointegration among interest rates for instruments with different maturities this issue has been widely tested with mixed results we argue that either cautious policy or possibly opportunistic behavior on the part of the federal reserve implies that an equilibrium relationship between short and long term interest rates exists but that adjustments from disequilibrium are asymmetric in nature empirical tests using u s yields confirm the asymmetric nature of error correction among interest rates of different maturities

natural resource booms and inequality theory and evidence we develop a theory in the context of a two sector growth model in which learning by doing drives growth to explain the time path of income inequality following natural resource booms in resource rich countries under the condition of a relatively unskilled labor intensive non traded sector inequality falls immediately after a boom and then increases steadily over time until the initial impact of the boom disappears using data for 90 countries between 1965 and 1999 we find evidence in support of the theory especially for oil and mineral booms we also find that uncertainty about future commodity prices increases long run inequality

long memory in foreign exchange rates using the geweke porter hudak test we find evidence of long memory in exchange rate data this implies that the empirical evidence of unit roots in exchange rates may not be robust to long memory alternatives fractionally integrated autoregressive moving average arfima models are estimated by both the time domain exact maximum likelihood ml method and the frequency domain approximate ml method impulse response functions and forecasts based on these estimated arfima models are evaluated to gain insight into the long memory characteristics of exchange rates some tentative explanations of the long memory found in the exchange rates are discussed

contagion risk in the australian banking and property sectors abstract the australian banking system emerged from the global crisis virtually unhurt with most banks still profitable adequately capitalized and with aa credit ratings are there any risks or vulnerabilities in this success story this paper analyzes australia s systemic banking risk and attempts to determine if this risk increased with the recent global crisis and whether this risk is related to the downturn experienced in the real estate market we use extreme value theory to measure banks and property firms univariate value at risk as well as multivariate intra sector and inter sector contagion risks of the 13 sectors analyzed we find that the property sector exhibits the highest level of extremal dependence with the banking sector the credit crisis significantly increased the probability of a bank or property firm crashing moreover contagion risks significantly increased not only within the banking and property sectors but also between those sectors

long run purchasing power parity with asymmetric adjustment further evidence from african countries this study applies threshold cointegration test advanced by enders and siklos 2001 to investigate the properties of asymmetric adjustment in long run purchasing power parity ppp in 22 selected african countries during the period of january 1980 to december 2003 although there is evidence of long run ppp for most african countries the adjustment mechanism is asymmetric these results have particularly important policy implications for african countries

variance ratio tests of random walk an overview this paper reviews the recent developments in the field of the variance ratio vr tests of the random walk and martingale hypothesis in particular we present the conventional individual and multiple vr tests as well as their improved modifications based on power transformed statistics rank and sign tests subsampling and bootstrap methods among others we also re examine the weak form efficiency for five emerging equity markets in latin america

tail risk and systemic risk of us and eurozone financial institutions in the wake of the global financial crisis we evaluate multiple market based measures for us and eurozone individual bank tail risk and bank systemic risk we apply statistical extreme value analysis to the tails of bank equity capital losses to estimate the likelihood of individual institutions financial distress as well as individual banks exposure to each other spillover risk and to global shocks extreme systematic risk the estimation procedure presupposes that bank equity returns are heavy tailed and tail dependent as identifying assumption using both us and eurozone banks allows one to make a cross atlantic comparison of tail risks and systemic stability we also assess to what extent magnitudes of tail risk and systemic risk have been altered by the global financial crisis the results suggest that both tail risk and systemic risk in the us are higher than in the eurozone regardless of the considered sample period

the limits of diversification when losses may be large abstract recent results in value at risk analysis show that for extremely heavy tailed risks with unbounded distribution support diversification may increase value at risk and that generally it is difficult to construct an appropriate risk measure for such distributions we further analyze the limitations of diversification for heavy tailed risks we provide additional insight in two ways first we show that similar non diversification results are valid for a large class of risks with bounded support as long as the risks are concentrated on a sufficiently large interval the required length of the support depends on the number of risks available and on the degree of heavy tailedness second we relate the value at risk approach to more general risk frameworks we argue that in markets for risky assets where the number of assets is limited compared with the bounded distribution support of the risks unbounded heavy tailed risks may provide a reasonable approximation we suggest that this type of analysis may have a role in explaining various types of market failures in markets for assets with possibly large negative outcomes

the siable law model of stock returns this study investigates the tail shapes of empirical distributions of returns on an extensive group of common stocks the tails of the return distributions are found to be thinner than those of infinite variance stable distributions therefore although homogeneity is evident in general economic and statistical inferences drawn from stable law parameters estimated from samples of stock returns may be misleading this is in spite of the apparent overall similarity in shape between empirical and stable distributions

international business cycles world region and country specific factors the paper investigates the common dynamic properties of business cycle fluctuations across countries regions and the world we employ a bayesian dynamic latent factor model to estimate common components in macroeconomic aggregates output consumption and investment in a 60 country sample covering seven regions of the world the results indicate that a common world factor is an important source of volatility for aggregates in most countries providing evidence for a world business cycle we find that region specific factors play only a minor role in explaining fluctuations in economic activity we also document similarities and differences across regions countries and aggregates jel f41 e32 c11 c32

prudent margin levels in the finnish stock index futures market futures market officials are confronted with the difficult task of setting appropriate margin levels that must balance the costs of trader default and the benefits of increased market liquidity one way to guard against default is prudent margin setting practices designed to protect futures positions from extreme price movements the objective of this research is to extrapolate the probabilities of encountering extreme price movements by applying statistical extreme value theory to the finnish stock index futures market the extreme value technique is found to be appropriate since it generates theoretical margin violation probabilities that closely follow the empirical probability distribution the extrapolated results provide decision makers information on extreme events that have not yet occurred

testing for multiple regimes in the tail behavior of emerging currency returns it is by now generally accepted that foreign exchange returns exhibit heavy tails as measured by the so called tail index however it is unclear whether the tail behavior remains stationary in the presence of recurrent switches in the exchange rate regime we therefore test the null hypothesis of tail index constancy by applying a single breaks test in rounds which enables the detection of multiple breakpoints we are able to identify multiple jumps in the tail index of currency returns moreover some breaks coincide with documented shifts in monetary and exchange rate policies

government expenditures and revenues evidence from asymmetric modeling 1 introductionexamining the empirical relationship between government revenues and expenditures is a crucial step in understanding the future path of the budget deficit four alternative explanations have been used to describe the relationship between these variables in the budgetary process i the tax and spend hypothesis ii the spend and tax hypothesis iii the fiscal synchronization hypothesis and iv the institutional separation hypothesis the issue of which hypothesis best describes the nature of the budgetary process has yet to be resolved in the literature however existing research has implicitly assumed that the state of the budget and whether or not the budget deficit or surplus is worsening or improving does not matter we argue that government decision makers may take these factors into account when determining expenditures and tax policy as such this article reexamines the tax spend debate by using a more robust econometric technique that allows for asymmetry in the relationship between revenues and expenditures until now the empirical evidence on the tax spend debate has focused almost exclusively on two conventional econometric techniques depending on the cointegrating properties between revenues and expenditures these techniques are based on either variations of the unrestricted vector autoregression uvar or the vector autoregression error correction model ecm 1 if for example the two budgetary variables are not cointegrated then the application of causality2 tests requires the use of stationary variables in the uvar model 3 on the other hand if the two budgetary variables are cointegrated then the application of causality tests requires an ecm specification it is important to note that the ecm specification implicitly assumes that the adjustment process of expenditures and revenues due to disequilibrium between the variables is strictly symmetric indeed if the adjustment is asymmetric then the symmetric adjustment implicitly assumed in the conventional techniques to ascertain causality implies model misspecification this specification error may lead to misguided and perhaps inappropriate fiscal policy decisions accurate estimation of the revenue and expenditure process is especially important as changes in taxes and spending alter incentives for work investment and productive activity cea 2004 thus the anticipated behavioral responses of households and businesses may be better captured by more general models that allow for asymmetry in the tax spend relationship to this end this article examines the existence of cointegration between revenues and expenditures and the corresponding ecm specification by using the recently developed techniques of asymmetric modeling in particular we employ the threshold autoregression tar and momentum threshold autoregression m tar models developed by enders and granger 1998 and enders and siklos 2001 within the context of these models we shed new light on whether budget surpluses versus budget deficits or an improving budget versus a worsening budget have asymmetric effects on the dynamic behavior of expenditures and revenues there is an a priori rationale for modeling asymmetry in the budget and for the response of its components to disequilibrium this rationale can be categorized into four factors first the fiscal policymakers may respond differently to a deviation of the deficit or surplus from its long run trend one would expect for example that the response would be more aggressive if the deficit was greater than its long run trend than if it was less than its trend second it is widely acknowledged that there is a very close connection between the budget and the business cycle through automatic fiscal stabilizers and discretionary fiscal measures to the extent that the business cycle is asymmetric the associated change in the budget may also be asymmetric

the equilibrium relationship among money income prices and interest rates evidence from a threshold cointegration test the long run equilibrium relationship among money income prices and interest rates in japan is investigated by the threshold cointegration test which allows for asymmetric adjustment introduced by enders and siklos 2001 the threshold cointegration approach provides clear evidence of the cointegration relationship characterized by asymmetric adjustment by allowing for asymmetric adjustment results are obtained showing the stability of the money demand function similar to lucas 1988 who pointed out that the money demand function is stable if unit income elasticity is imposed in particular the estimated results show that the adjustment process toward equilibrium is highly persistent above an appropriately estimated threshold whereas the adjustment process toward equilibrium quickly converges below it this finding indicates that deviations from equilibrium resulting from increases in money or decreases in income and prices are highly persistent

short sales in log robust portfolio management abstract this paper extends the log robust portfolio management approach to the case with short sales i e the case where the manager can sell shares he does not yet own we model the continuously compounded rates of return which have been established in the literature as the true drivers of uncertainty as uncertain parameters belonging to polyhedral uncertainty sets and maximize the worst case portfolio wealth over that set in a one period setting the degree of the manager s aversion to ambiguity is incorporated through a single intuitive parameter which determines the size of the uncertainty set the presence of short selling requires the development of problem specific techniques because the optimization problem is not convex in the case where assets are independent we show that the robust optimization problem can be solved exactly as a series of linear programming problems as a result the approach remains tractable for large numbers of assets we also provide insights into the structure of the optimal solution in the case of correlated assets we develop and test a heuristic where correlation is maintained only between assets invested in in computational experiments the proposed approach exhibits superior performance to that of the traditional robust approach

systemic risk and bank business models textabstractin this paper we decompose banks systemic risk into two dimensions the risk of a bank bank tail risk and the link of the bank to the system in financial distress systemic linkage based on extreme value theory we estimate a systemic risk measure that can be decomposed into two subcomponents reflecting these dimensions empirically we assess the relationships of bank business models to the two dimensions of systemic risk the observed differences in these relationships partly explain why micro and macroprudential perspectives sometimes have different implications for banking regulation

simulating and calibrating diversification against black swans abstract an investor concerned with the downside risk of a black swan only needs a small portfolio to reap the benefits from diversification this matches actual portfolio sizes but does contrast with received wisdom from mean variance analysis and intuition regarding fat tailed distributed returns the concern for downside risk and the fat tail property of the distribution of returns can explain the low portfolio diversification a simulation and calibration study is used to demonstrate the relevance of the theory and to disentangle the relative importance of the different effects

institutional investors and stock market volatility statement of responsibility on t p reads xavier gabaix parameswaran gopikrishnan vasiliki plerou h eugene stanley

extreme us stock market fluctuations in the wake of 9 11 we apply extreme value analysis to us sectoral stock indices in order to assess whether tail risk measures like value at risk and extremal linkages were significantly altered by 9 11 we test whether semi parametric quantile estimates of downside risk and upward potential have increased after 9 11 the same methodology allows one to estimate probabilities of joint booms and busts for pairs of sectoral indices or for a sectoral index and a market portfolio the latter probabilities measure the sectoral response to macro shocks during periods of financial stress so called tail s taking 9 11 as the sample midpoint we find that tail s often increase in a statistically and economically significant way this might be due to perceived risk of new terrorist attacks copyright 2008 john wiley sons ltd

prospects for commodity exporters those low income countries that export non agricultural commodities are in the midst of a resource transfer it is undoubtedly the biggest opportunity for transformative development that these societies have experienced dwarfing both aid and previous commodity booms to get it in proportion in 2004 commodity exports from sub saharan africa accounted for 146 billion us dollars or 28 percent of the region s gdp while aid amounted to 5 percent of gdp compared with the boom of the 1970s many more countries are beneficiaries the push to diversify sources of supply has resulted in exploitable discoveries in places that were previously political no go areas further whereas the boom of the 1970s was conjured up by the opec cartel this one is grounded in asian growth and so is intrinsically less precarious in this paper the authors draw on a range of new research that provides a prognosis of prospects a diagnostic of likely problems and prescribes an agenda for international action the paper is organized around these three objectives

time irreversibility and business cycle asymmetry the problem of business cycle symmetry is addressed within the context of time reversibility to this effect the authors introduce a time domain test of time reversibility the tr test in an application they show that time irreversibility is the rule rather than the exception for two well known representative macroeconomic data sets this shows that many components of the business cycle have asymmetric fluctuations the characterization of asymmetry provided by the tr test shows that many series exhibit steepness asymmetry a few series appear to be either deep or sharp copyright 1996 by ohio state university press

asymmetry in business fluctuations international evidence on friedman s plucking model abstract friedman s plucking model of business fluctuations suggests that output cannot exceed a ceiling level and it is occasionally plucked downward by recession output has depth and steepness this study uses a sample of 12 industrial and emerging economies and finds some evidence that negative shocks are largely transitory while positive shocks are mostly permanent in a few cases as implied by the plucking model output fluctuations tend to be asymmetric recessions are transitory and duration dependent although expansions are not there is however serial correlation in almost all cases international evidence on friedman s plucking model is far from robust

some evidence of random walk behavior of euro exchange rates using ranks and signs abstract this study utilises recently developed tests based on ranks and signs in addition to the traditional variance ratio test to examine the behavior of euro exchange rates we show that adjustments for multiple tests must be employed in order to avoid size distortions overall such adjustments provide evidence consistent with random walk behavior of euro exchange rates

an extreme value approach to estimating volatility and value at risk this article determines the type of asymptotic distribution for the extreme changes in u s treasury yields the thin tailed gumbel and exponential distributions are strongly rejected against the fat tailed frechet and pareto distributions the empirical results indicate that the volatility of maximal and minimal changes in interest rates declines as time to maturity rises yielding a downward sloping volatility curve for the extremes the article proposes an extreme value approach to estimating value at risk and shows that the statistical theory of extremes provides a more accurate approach for risk management and value at risk var calculations than the standard models

trade linkages and macroeconomic effects of the price of oil in this paper we assess the impact of oil price shocks on oil producer and oil consuming economies var models for different countries are linked together via a trade matrix as in abeysinghe 2001 as expected we find that oil producers here russia and canada benefit from oil price shocks for example a large oil shock leading to a price increase of 50 boosts russian gdp by about 6 however oil producers are hurt by indirect effects of positive oil price shocks as economic activity in their exporter countries suffers for oil consumers the effects are more diverse in some countries output falls in response to an oil price shock while other countries seem to be relatively immune to oil price changes finally indirect effects are also detected for oil consumer countries those countries which trade more with oil producers gain indirect benefits via higher demand from oil producing countries in general the largest negative total effects from positive oil price shocks are found for japan china the usa finland and switzerland while other countries in our sample seem to have fared quite well during recent positive oil price shocks the indirect effects are negative for russia finland germany and netherlands

overnight borrowing interest rates and extreme value theory we examine the dynamics of extreme values of overnight borrowing rates in an inter bank money market before a financial crisis during which overnight borrowing rates rocketed up to simple annual 4000 percent it is shown that the generalized pareto distribution fits well to the extreme values of the interest rate distribution we also provide predictions of extreme overnight borrowing rates before the crisis the examination of tails extreme values provides answers to such issues as what are the extreme movements expected in financial markets have we already seen the largest moves is there a possibility for even larger movements and are there theoretical processes that can model the type of fat tails in the observed data the answers to such questions are essential for proper management of financial exposures and laying ground for regulations

are statistical reporting agencies getting it right data rationality and business cycle asymmetry this article provides new evidence on the rationality of early releases of industrial production ip and producer price index ppi data rather than following the usual practice of examining only first available and fully revised data we examine the entire revision history for each variable thus we are able to assess for example whether earlier releases of data are in any sense less rational than later releases and when data become rational our findings suggest that seasonally unadjusted ip and ppi become rational after approximately 3 4 months whereas seasonally adjusted versions of these series remain irrational for at least 6 12 months after initial release for all variables examined we find evidence that the remaining revision is predictable from its own past or from publicly available information in other economic and financial variables in addition we find a clear increase in the volatility of revisions during recessions suggesting that early data releases are less reliable in toughe

the impact of young workers on the aggregate labor market an increase in the share of youth in the working age population of one state or region relative to the rest of the united states causes a sharp reduction in that state s relative unemployment rate and a modest increase in its labor force participation rate this is inconsistent with many theories of the labor market but can be easily explained by a model of frictional unemployment with on the job search the theory makes strong predictions regarding the behavior of wages which are shown to be consistent with the data the paper also reconciles its findings with an existing body of apparently contradictory empirical evidence

non linearities in the dynamics of oil prices abstract examining stationarity is of particular importance and represents the first step in empirical time series research non stationarity invalidates many of the results obtained from standard techniques and therefore requires special treatment because oil prices play an important role in affecting economic variables this paper examines the stationarity of real oil prices brent dubai wti and the world over the period 1973 2 2011 2 real oil prices are expressed in the currencies of seven asian countries indonesia japan korea malaysia the philippines singapore and thailand and in the u s dollar while using linear unit root tests without structural breaks shows no evidence of stationarity allowing for breaks shows very limited evidence of stationarity we argue that these results are attributed to the presence of nonlinearities in the behavior of oil prices testing for nonlinearity shows significant evidence of nonlinearity in all the cases with evidence of exponential smooth transition autoregression estar nonlinearity type in most cases applying unit root tests that account for two types of nonlinearities smooth transition and nonlinear deterministic trends reveals evidence of stationarity in all the cases

nonlinearities and nonstationarities in stock returns this article addresses the question of whether recent findings of nonlinearities in high frequency financial time series have been contaminated by possible shifts in the distribution of the data it applies a recursive version of the brock dechert scheinkman statistic to daily data on two stock market indexes between january 1980 and december 1990 it is shown that october 1987 is highly influential in the characterization of the stock market dynamics and appears to correspond to a shift in the distribution of stock returns sampling experiments show that simple linear processes with shifts in variance can replicate the behavior of the tests but autoregressive conditional heteroscedastic filters are unable to do so

joint variance ratio tests of the martingale hypothesis for exchange rates there is considerable interest in whether exchange rates behave like martingales liu and he tested the martingale hypothesis for exchange rates using the variance ratio methodology of lo and mackinlay they found that exchange rates have violated the martingale property since the inception of floating rates in 1973 liu and he did not consider the joint implications of their tests however in this article we reassess the martingale hypothesis for exchange rates using the joint tests developed by hochberg and by richardson and smith contrary to the findings of liu and he the joint tests indicate that the martingale model worked quite well for exchange rates in the recent years of the floating rate regime

an empirical characterization of the dynamic effects of police spending on violent and property crime the study estimates the dynamic effects of shocks to police expenditures on measures of violent and property crime rates using annual u s state level data for the period 1960 2015 we employ a structural panel var model and achieve identification by imposing the restriction that police spending responds to structural shocks to crime with at least a lag of 1 year results indicate that a shock to police spending leads to a persistent and significant decreases in violent and property crime rates and b significant and persistent negative impacts on crime rates in periods of high crime but little impacts in periods of low crime variance decompositions show that shocks to police spending account for moderate to large proportions of the variability of u s state level crime rates our findings are robust across separate measures of violent and property crime rates as well as to the inclusion of additional variables to the baseline panel var model jel k42

the choice of the distribution of asset returns how extreme value theory can help abstract one of the issues of risk management is the choice of the distribution of asset returns academics and practitioners have assumed for a long time for more than three decades that the distribution of asset returns is a gaussian distribution such an assumption has been used in many fields of finance building optimal portfolio pricing and hedging derivatives and managing risks however real financial data tend to exhibit extreme price changes such as stock market crashes that seem incompatible with the assumption of normality this article shows how extreme value theory can be useful to know more precisely the characteristics of the distribution of asset returns and finally help to chose a better model by focusing on the tails of the distribution an empirical analysis using equity data of the us market is provided to illustrate this point

exchange rates and fundamentals co movement long run relationships and short run dynamics abstract the present study builds upon the seminal work of engel and west 2005 and in particular on the relationship between exchange rates and fundamentals the paper discusses the well known puzzle that fundamental variables such as money supply and interest rate provide help in predicting changes in floating rates it also tests the theoretical result of engel and west 2005 that in a rational expectations present value model the asset price manifests near random walk behaviour if the fundamentals are i 1 and the factor for discounting future fundamentals is near one the study explores the direction and nature of causal interdependencies among the most widely traded currencies in the world their country specific fundamentals and their us differentials a new var vecm garch multivariate filtering approach is implemented whilst linear and nonlinear non causality is tested and validated on simulated and empirical data the evidence implies that there is no indication of a prevailing causal behaviour and when nonlinear effects are accounted for the pattern of leads and lags changes over time the variations in this linkage can be attributed to parameter instability in structural models which may have little effect on fx forecastability over short horizons yet it is significant for long run cointegrating relationships while it is difficult to reconcile these findings with the rational expectations hypothesis the theory of consistent expectations or bounded rationality matches simulation and empirical findings more efficiently overall fundamentals may be important determinants of fx rates however there may be some other unobservable variables driving the currency rates that current asset pricing models have not yet captured

on the demographic adjustment of unemployment the unemployment rate is one of the most important business cycle indicators but its interpretation can be difficult because slow changes in the demographic composition of the labor force affect the level of unemployment and make comparisons across business cycles difficult to purge the unemployment rate from demographic factors labor force shares are routinely used to control for compositional changes this paper shows that this approach is ill defined because the labor force share of a demographic group is mechanically linked to that group s unemployment rate as both variables are driven by the same underlying worker flows we propose a new demographic adjustment procedure that uses a dynamic factor model for the worker flows to separate aggregate labor market forces and demographic specific trends using the u s labor market as an illustration our demographic adjusted unemployment rate indicates that the 2008 2009 recession was much more severe and generated substantially more slack than the early 1980s recession

understanding the evolution of world business cycles abstract this paper studies the changes in world business cycles during the period 1960 2003 we employ a bayesian dynamic latent factor model to estimate common and country specific components in the main macroeconomic aggregates output consumption and investment of the g 7 countries we then quantify the relative importance of the common and country components in explaining comovement in each observable aggregate over three distinct time periods the bretton woods bw period 1960 1 1972 2 the period of common shocks 1972 3 1986 2 and the globalization period 1986 3 2003 4 the results indicate that the common g 7 factor explains on average a larger fraction of output consumption and investment volatility in the globalization period than it does in the bw period

is investment time irreversible some empirical evidence for disaggregated uk manufacturing data it has long been suggested that investment may be time irreversible and consideration of the option value of waiting to invest has aroused renewed interest in this issue this study tests for time irreversibility in uk investment according to disaggregation by type of investment expenditure and across manufacturing sector groupings the test results reported indicate that the irreversibility of investment patterns varies not only from industry to industry but also according to the type of capital being purchased with significant time irreversibility detected in gross fixed capital formation and aggregate vehicles expenditure and industrial sector groupings comprising fuels and oil refining engineering and vehicles and textiles and leather however only in the first and last of these series is time irreversibility attributable to non linearities in the underlying data generating process and consistent with threshold effects which may be associated with s s type models of investment dynamics

extreme value theory in finance a survey extreme value theory is concerned with the study of the asymptotic distribution of extreme events that is to say events which are rare in frequency and huge in magnitude with respect to the majority of observations statistical methods derived from it have been employed increasingly in finance especially for risk measurement this paper surveys some of those main applications namely for testing different distributional assumptions for the data for value at risk and expected shortfall calculations for asset allocation under safety first type constraints and for the study of contagion and dependence across markets under conditions of stress

robust tests of forward exchange market efficiency with empirical evidence from the 1920s summary this paper provides a robust statistical approach to testing the unbiasedness hypothesis in forward exchange market efficiency studies the methods we use allow us to work explicitly with levels rather than differenced data they are statistically robust to data distributions with heavy tails and they can be applied to data sets where the frequency of observation and the futures maturity do not coincide in addition our methods allow for stochastic trend non stationarity and general forms of serial dependence the methods are applied to daily data of spot exchange rates and forward exchange rates during the 1920s which marked the first episode of a broadly general floating exchange rate system the tail behaviour of the data is analysed using an adaptive data based method for estimating the tail slope of the density the results confirm the need for the use of robust regression methods we find cointegration between the forward rate and spot rate for the four currencies we consider the belgian and french francs the italian lira and the us dollar all measured against the british pound we find support for a stationary risk premium in the case of the belgian franc the italian lira and the us dollar and we find support for the simple market efficiency hypothesis where the forward rate is an unbiased predictor of the future spot rate and there is a zero mean risk premium in the case of the us dollar

robust measures of skewness and kurtosis for macroeconomic and financial time series abstractthe sample skewness and kurtosis of macroeconomic and financial time series are routinely scrutinized in the early stages of model building and are often the central topic of studies in eco

are health expenditures and gdp characterized by asymmetric behaviour evidence from 11 oecd countries in this article we examine whether per capita health expenditures and per capita gdp for 11 oecd countries can be characterized by asymmetric behaviour we achieve this goal by using the nonparametric triples test suggested by randles et al 1980 we examine two forms of asymmetries namely deepness and steepness our main finding is that for 6 out of 11 countries namely for the usa the uk japan spain finland and iceland either per capita health expenditures or per capita gdp are characterized by asymmetric behaviour this finding to some extent casts doubt on those studies that model the relationship between health and gdp using unit root and cointegration tests that assume symmetric disturbances

asset market linkages in crisis periods we characterize asset return linkages during periods of stress by an extremal dependence measure contrary to correlation analysis this nonparametric measure is not predisposed toward the normal distribution and can allow for nonlinear relationships our estimates for the g 5 countries suggest that simultaneous crashes between stock markets are much more likely than between bond markets however for the assessment of financial system stability the widely disregarded cross asset perspective is particularly important for example our data show that stock bond contagion is approximately as frequent as flight to quality from stocks into bonds extreme cross border linkages are surprisingly similar to national linkages illustrating a potential downside to international financial integration

time reversibility tests of volume volatility dynamics for stock returns abstract non parametric tests based on the concept of time reversibility in statistical mechanics are applied to assess the dynamic implications of the mixture of distributions hypothesis mdh the tests show that shocks to volume and volatility are dynamically asymmetric thus rejecting the one factor mdh