does the great recession imply the end of the great moderation international evidence in this paper we examine whether or not the great recession had a temporary or permanent effect on output growth volatility after years of low macroeconomic volatility since the early eighties based on break detection methods applied to a set of advanced countries our empirical results do not give evidence to the end of the great moderation period but rather that the great recession is characterized by a dramatic short lived effect on the output growth but not on its volatility we show that neglecting the breaks both in mean and in variance can have large effects on output volatility modeling based on garch specifications

testing for nonlinear dependence in daily foreign exchange rates the purpose of this article is to investigate whether daily changes in five major foreign exchange rates contain any nonlinearities although the data contain no linear correlation evidence indicates the presence of substantial nonlinearity in a multiplicative rather than additive form further examination reveals that a generalized autoregressive conditional heteroskedasticity model can explain a large part of the nonlinearities for all five exchange rates copyright 1989 by the university of chicago

are the discounts on closed end funds a sentiment index in investor sentiment and the closed end fund puzzle charles lee andrei shleifer and richard thaler 1991 claim to solve not one but two longstanding puzzles discounts on closed end funds and the small firm effect both according to lee et al are driven by the same waves of small investor sentiment killing two such elusive birds with one stone would be a neat trick indeed if lee et al could bring it off but they can t measured properly the comovement between fund discounts and small firm returns is neither strong enough nor robust enough to support their common sentiment story the case of lee et al rests mainly on their key table iv in which monthly returns for 10 separate size grouped portfolios are regressed on monthly changes in the discount of a value weighted portfolio of closed end funds avwd and the monthly return on a value weighted portfolio of nyse firms vwny for their twenty year sample period running from july 1965 to december 1985 lee et al find changes in the value weighted discount holding market returns constant to be positively related to the returns of the largest firms decile 10 but negatively related to those of all other size deciles the negative coefficient is largest for the very small firms in decile 1 leading lee et al to conclude that when individual investors become optimistic about closed end funds and smaller stocks these stocks do well and discounts narrow and when individual investors become pessimistic about closed end funds and smaller stocks smaller stocks do badly and discounts widen pp 94 95 could the observed relation between fund discounts and small firm returns be just a chance sampling fluctuation lee et al checked for robustness by dividing their sample in half and rerunning their regressions on each half separately their table vii they found the coefficient of avwd in the decile 1 regression dropped in the second subperiod by 80 percent and in absolute size fell to barely one standard error from zero similar attenuation in size and significance was noted for all other size groups the virtual disappearance of the relation between the discounts and small firm returns after 1975 might have led other researchers to abandon a common sentiment hypothesis but not lee shleifer and thaler they see

international diversification through closed end country funds abstract the primary objectives of this paper are to assess the potential of closed end country funds cecfs as vehicles for achieving international diversification at home and to examine the effect of the closed end status of these funds on their investment characteristics the main findings are first cecfs exhibit significant exposure to the u s market factor and act more like u s securities than do their underlying assets second despite these characteristics cecfs retain significant exposure to their local home market factors and provide u s investors with substantial diversification benefits emerging market funds such as brazil mexico and taiwan receive large weights in optimal international portfolios comprised of cecfs implying that these funds can play a unique role in spanning the opportunity set for u s investors third performance evaluations indicate that our sample cecfs generally did not offer significant overseas alphas fourth fund value and net asset value are found to be co integrated for the majority of cecfs from north america and europe but not for those representing the asian emerging markets

the demand for local public goods choosing an appropriate functional form the demand for public goods is typically specified in direct form prices are assumed exogenous quantities are the choice variable based on cross section data the fact that public goods are characterized by jointness suggests that the indirect form quantity exogenous may be more appropriate than the direct form in addition it is not likely that cross sectional data will satisfy integrability in this paper integrability in this paper integrability is tested for in both the direct and indirect form using data on a typical cross section of municipalities it is found that the homogeneity equality and symmetry conditions are violated in both the direct and indirect forms

exchange rate volatility and u s monetary policy an arch application this paper examines the effect of shifts in u s monetary policy regimes on the stochastic process that generates foreign exchange rates to account for the observed behavior of the data record the author models nominal dollar exchange rates as univariate autoregressive conditional heteroskedastic processes he then tests the stability of this process across u s monetary policy regimes for four of the currencies in the sample accounting for regime shifts improves the fit of the model regime shifts also appear to diminish the degree of persistence of variance making it less likely that exchange rates are integrated in variance copyright 1989 by ohio state university press

the distribution of foreign exchange price changes trading day effects and risk measurement this study investigates the nature of price changes in a variety of major and minor foreign exchange markets the results suggest that the log of price changes over one trading day intervals seems to follow a non normal stable distribution function different measures of location and to lesser extent scale are present for different days of the week dollar denominated price changes are high on mondays and wednesdays and low on thursdays and fridays for all currencies the wednesday thursday result is consistent with the settlement procedures used in foreign exchange transactions in the dollar the friday monday result is consistent with an increase in demand for the dollar prior to the weekend this study offers some previously unavailable results on the nature of price changes in a certain set of speculative markets in particular this is a study of the distributional characteristics of daily and weekly price changes for a number of major and minor foreign exchange markets the results document the existence of non normal stable distributions for price changes in foreign exchange markets these price change distributions differ by day of the week in ways that are only partly attributable to the institutional structure of the market the results of the study are interpreted within the context of understanding how foreign exchange markets operate and within the context of prior studies of stock market data concerned with summarizing the probability distribution of price changes for different intervals including days of the week since bachelier s 1 original treatise that contained the proposition that speculative market prices follow a process that could be described by a normal distribution there have been numerous alternative attempts to describe the stochastic processes which characterize speculative market prices these studies have not resulted in any generalized description of the probability distribution of price changes in such markets indeed the evidence suggests substantial differences in the process among various types of financial instruments the failure to achieve consensus can be traced to the lack of robustness in the statistical procedures employed to estimate processes and to differences in the underlying institutional or economic arrangements which are unique to that market the possibility of differences in the information set used to assess value or differences in technology for transmitting information makes it important to secure additional

sensitivity of the bank stock returns distribution to changes in the level and volatility of interest rate a garch m model abstract the objective of this paper is to employ the generalized autoregressive conditionally heteroskedastic in the mean garch m methodology to investigate the effect of interest rate and its volatility on the bank stock return generation process this framework discards the restrictive assumptions of linearity independence and constant conditional variance in modeling bank stock returns the model presented here allows for shifts in the volatility equation in response to the changes in monetary policy regime in 1979 and 1982 to be estimated arch garch and volatility feed back effects are found to be significant interest rate and interest rate volatility are found to directly impact the first and the second moments of the bank stock returns distribution respectively the latter also affects the risk premia indirectly the degree of persistence in shocks is substantial for all the three bank portfolios and sensitive to the nature of the bank portfolio and the prevailing monetary policy regime

the persistence in volatility of the us term premium 1970 1986 abstract this paper examines the persistence of the volatility of the risk premia for excess holding period returns of the term structure using a garch m model of the conditional variance the finding of a high degree of persistence cannot be sustained once allowance is made for a structural break in the unconditional variance caused by a change in the operation of us monetary policy during 1979 1982

volatility persistence and stock valuations some empirical evidence using garch summary in this paper issues of volatility persistence and the changing risk premium in the stock market are investigated using the garch estimation technique we get a point estimate of the index of relative risk aversion of 4 5 and confirm the existence of changing equity premiums in the us during 1962 1985 the persistence of shocks to the stock return volatility is so high that the data cannot reject a non stationary volatility process specification the results of this paper are consistent with malkiel and pindyck s hypothesis that it is the unforseen rise ini the investment uncertainty during 1974 that causes the market to plunge

a guide to public sector debt and deficits government deficits reinterpreted willem h buiter public sector debt and deficits are a matter of concern to governments throughout the world after presenting data on the public debt and deficits in the uk and abroad this paper considers four key issues first does an increase in the budget deficit today make an increase in inflation in the future more likely in economies like the uk the answer is no because the scope for raising revenue by money creation is limited compared to raising taxes second how does one evaluate the consistency of a given spending and tax programme a number of measures are presented which indicate the adjustment that must be made to spending and tax plans if the government is to remain solvent third it is often argued that an increase in budget deficits will merely crowd out private spending the paper shows that the truth of this proposition depends critically on the state of the economy the time horizon and whether the increased deficit is temporary or permanent finally the question of deriving a suitable measure of fiscal stance is considered developing an index of fiscal impact requires a suitable economic model and a number of different measures are considered and criticized conventional deficit measures whether actual cyclically corrected or inflation corrected are a poor indicator of the government s true fiscal stance

the dual characteristics of closed end country funds the role of risk this article explores which of two hypotheses market segmentation or investor sentiment determines the behaviour of closed end country funds cecfs with the inclusion of risk factors the risk factors are proxied volatility as estimated with a bivariate markov switching autoregressive conditional heteroskedasticity bswarch model which simultaneously includes foreign and us markets our findings are as follows on average a positive response is larger than a negative response in terms of absolute value and the market segmentation hypothesis with risk factors gains support in mexico where cecf returns are related to a market with low volatility but not to one with high volatility third the investor sentiment hypothesis which argues that cecf returns are not responsive to foreign markets is weakly supported in brazil the philippines indonesia and to a lesser degree in germany

international transmission of stock market movements this paper investigates the international transmission mechanism of stock market movements by estimating a nine market vector autoregression var system using simulated responses of the estimated var system we i locate all the main channels of interactions among national stock markets and ii trace out the dynamic responses of one market to innovations in another generally speaking a substantial amount of multi lateral interaction is detected among national stock markets innovations in the u s are rapidly transmitted to other markets in a clearly recognizable fashion whereas no single foreign market can significantly explain the u s market movements also the dynamic response pattern is found to be generally consistent with the notion of informationally efficient international stock markets

on the dual characteristics of closed end country funds abstract in a mildly segmented world market closed end country fund cecf returns and premiums or discounts would be determined by factors due mainly to market segmentation and investor sentiment the role of these two types of factors has been debated we reexamine this issue by examining the relative importance of us market returns and foreign market returns in determining cecf returns by employing time series empirical methods we find that cecf returns are more heavily influenced by their local foreign market returns than by us market returns which implies that there remains a substantial diversification benefit from investing in cecfs

the role of functional form in estimating the demand for local public goods this paper seeks to determine whether the underlying assumption of utility maximization can be empirically validated for the local public sector in addition three alternative functional forms of a system of demands are compared on the basis of their theoretical restrictions as well as their predictive performance based upon a likelihood ratio test we find that the restrictions implied by utility maximization are too restrictive to be consistent with the unrestricted estimates once integrability restrictions are imposed however both ces and cobb douglas utility functions are consistent with the data the unrestricted estimates had the best predictive performance based on information inaccuracy

arch models properties estimation and testing abstract the aim of this survey paper is to provide an account of some of the important developments in the autoregressive conditional heteroskedasticity arch model since its inception in a seminal paper by engle 1982 this model takes account of many observed properties of asset prices and therefore various interpretations can be attributed to it we start with the basic arch models and discuss their different interpretations arch models have been generalized in different directions to accommodate more and more features of the real world we provide a comprehensive treatment of many of the extensions of the original arch model next we discuss estimation and testing for arch models and note that these models lead to some interesting and unique problems there have been numerous applications and we mention some of these as we present different models the paper includes a glossary of the acronyms for the models we describe

international investment restrictions and closed end country fund prices some closed end country funds trade at large premiums relative to their net asset values this paper examines whether international investment restrictions raise country fund price net asset value ratios by segmenting international capital markets we test whether a relation exists between announcements of changes in investment restrictions and changes in these ratios using weekly data from may 1981 to january 1989 the results provide evidence that some foreign markets are at least partially segmented from the u s capital market

rational expectations econometric analysis of changes in regime an investigation of the term structure of interest rates abstract this paper is of interest both for its methodological contribution of new tools for analyzing rational expectations models and for its substantive conclusions concerning the term structure of interest rates during the monetary experiment of october 1979 the paper studies systems subject to changes in regime interpreted here as occasional discrete shifts in the parameters governing the time series behavior of exogenous economic variables the specification is shown to be quite tractable both theoretically and empirically the technique is used to analyze yields on three month treasury bills and ten year treasury bonds during 1962 to 1987 a constant parameter linear model for short term rates is shown to be inconsistent both with the univariate time series properties of short rates and with the observed bivariate relation between long and short rates under the expectations hypothesis of the term structure an alternative nonlinear model that admits the possibility of changes in regime affords a much better description of the univariate process for short rates moreover the cross equation restrictions implied by the expectations hypothesis of the term structure are consistent with the nonlinear specification indeed the residuals of the restricted relation have a standard error of only 0 8 basis points this is a third less than that of a completely unrestricted linear regression of long rates on short rates and compares with an unconditional standard deviation of long rates of 142 basis points i conclude that once the recognition by bond traders of changes in regime is taken into account the expectations hypothesis of the term structure of interest rates holds up fairly well for these data

volatility and time varying risk premiums in the stock market the stock returns generating process is analysed using alternative specifications of the autoregressive conditional heteroscedasticity model empirical anaylysis using monthly data from the finnish stock market shows a clearly significant persistence of volatility of stock prices in addition the presence of a time varying risk premium in the stock returns is also clearly supported by the data this suggests a cautious attitude towards traditional standard empirical analysis of capital markets which is based on the assumption of time invariant risk premiums the results obtained do not support the view that the risk premiums have increased during the 1980s when instability has been the main characteristic of most financial markets

the persistence of volatility and stock market fluctuations this paper examines the potential influence of changing volatility in stock market prices on the level of stock market prices it demonstrates that volatility is only weakly serially correlated implying that shocks to volatility do not persist these shocks can therefore have only a small impact on stockmarket prices since changes in volatility affect expected required rates of return for relatively short intervals these findings lead us to be skeptical of recent claims that the stock market s poor performance during the 1970 s can be explained by volatility induced increases in risk premia this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

using monthly returns to model conditional heteroscedasticity this empirical study examines the extent of non linearity in a multivariate model of monthly financial series to capture the conditional heteroscedasticity in the series both the garch 1 1 and garch 1 1 in mean models are employed the conditional errors are assumed to follow the normal and student t distributions the non linearity in the residuals of a standard ols regression are also assessed it is found that the ols residuals as well as conditional errors of the garch models exhibit strong non linearity under the student density the extent of non linearity in the garch conditional errors was generally similar to those of the standard ols the garch in mean regression generated the worse out of sample forecasts

nonlinearity breaks and long range dependence in time series models we study the simultaneous occurrence of long memory and nonlinear effects such as parameter changes and threshold effects in time series models and apply our modeling framework to daily realized measures of integrated variance we develop asymptotic theory for parameter estimation and propose two model building procedures the methodology is applied to stocks of the dow jones industrial average during the period 2000 to 2009 we find strong evidence of nonlinear effects in financial volatility an out of sample analysis shows that modeling these effects can improve forecast performance supplementary materials for this article are available online

volatility persistence in crude oil markets financial market participants and policy makers can benefit from a better understanding of how shocks can affect volatility over time this study assesses the impact of structural changes and outliers on volatility persistence of three crude oil markets brent west texas intermediate wti and organization of petroleum exporting countries opec between january 2 1985 and june 17 2011 we identify outliers using a new semi parametric test based on conditional heteroscedasticity models these large shocks can be associated with particular event patterns such as the invasion of kuwait by iraq the operation desert storm the operation desert fox and the global financial crisis as well as opec announcements on production reduction or us announcements on crude inventories we show that outliers can bias i the estimates of the parameters of the equation governing volatility dynamics ii the regularity and non negativity conditions of garch type models garch igarch figarch and hygarch and iii the detection of structural breaks in volatility and thus the estimation of the persistence of the volatility therefore taking into account the outliers on the volatility modelling process may improve the understanding of volatility in crude oil markets

public employee pensions and the local labor budget abstract this paper examines the causes and consequences of public employee pension funding by local governments the pension funding decision is analyzed within the context of two models one where current taxpayers stay and pay employees future retirement benefits and a second model where current taxpayers move and thereby hope to avoid paying future retirement benefits the empirical results test the alternative models for a sample of 60 large u s cities using data for local police and fire services the effects of underfunding on local wages and employment is then examined and found to be significant implications for national pension funding policy are drawn

modeling and forecasting the volatility of petroleum futures prices we investigate volatility models and their forecasting abilities for three types of petroleum futures contracts traded on the new york mercantile exchange west texas intermediate crude oil heating oil 2 and unleaded gasoline and suggest some stylized facts about the volatility of these futures markets particularly in regard to volatility persistence or long memory properties in this context we examine the persistence of market returns and volatility simultaneously using the following arfima garch class models arima garch arfima garch arfima igarch and arfima figarch although the arfima figarch model better captures long memory properties of returns and volatility the out of sample analysis indicates no unique model for all three types of petroleum futures contracts suggesting that investors should be careful when measuring and forecasting the volatility risk of petroleum futures markets

sudden changes in variance and time varying hedge ratios abstract this paper analyzes the influence of sudden changes in the unconditional volatility on the estimation and forecast of volatility and its impact on futures hedging strategies we employ several multivariate garch models to estimate the optimal hedge ratios for the spanish stock market including in each one some well known patterns that may affect volatility forecasts asymmetry and sudden changes the main empirical results show that more complex models including sudden changes in volatility outperform the simpler models in hedging effectiveness both with in sample and out of sample analysis however the evidence is stronger when the loss distribution tail is used as a measure for the effectiveness value at risk var and expected shortfall es suggesting that traditional measures based on the variance of the hedged portfolio should be used with caution

yes discounts on closed end funds are a sentiment index chen kan and miller 1993 best pronounced chek m provide a detailed critique of our earlier paper lee shleifer and tlialer 1991 ckm accuse lee et al of trying to kill two birds the closed end fund puzzle and the small firm effect with one stone and missing both their approach is to throw at lee et al every stone they can presumably hoping that one will hit this reply shows that none does ckm focus on four empirical issues 1 the role of utilities in the lee et al sample of small institutional ownership firms 2 the robustness of the relationship between fund discounts and the returns on high versus low ownership firms their table i 3 the appropriate way to specify the regression in table iv of lee et al their table ii and 4 the regressions using one closed end fund tricontinental their table iii we address these criticisms in turn ckm begin with the finding of lee et al that even during the second half of their sample when the relationship between closed end fund discounts and small firm returns weakens there is a significant relationship between return on stocks with low institutional ownership and changes in discounts ckm describe as a concession the finding of lee et al that most of these low ownership stocks are public utilities however this finding makes even more vivid the main claim of lee et al that stocks with similar ownership structures but very different fundamentals move together in the market after all what do public utilities have in common with closed end funds other than a similar ownership structure the one plausible common factor that might similarly affect closed end fund discounts and prices of public utility stocks is small investor sentiment ckm also say that they tested a portfolio of nyse public utility firms with more than 10 percent institutional ownership and that their results were essentially the same as for the sample with less than 10 percent ownership they do not report these results but have kindly provided us with their data to investigate their claim we divided all utilities into three groups of equal numbers of firms with high low and medium institutional ownership we then ran regressions like those in table viii of lee et al for each group the results in table i of this paper show that low institutional

forecasting volatility and volume in the tokyo stock market long memory fractality and regime switching abstract we investigate the predictability of both volatility and volume for a large sample of japanese stocks the particular emphasis of this paper is on assessing the performance of long memory time series models in comparison to their short memory counterparts since long memory models should have a particular advantage over long forecasting horizons we consider predictions of up to 100 days ahead in most respects the long memory models arfima figarch and the recently introduced multifractal model dominate over garch and arma models however while figarch and arfima also have quite a number of cases with dramatic failures of their forecasts the multifractal model does not suffer from this shortcoming and its performance practically always improves upon the naive forecast provided by historical volatility as a somewhat surprising result we also find that for figarch and arfima models pooled estimates i e averages of parameter estimates from a sample of time series give much better results than individually estimated models

persistence in variance structural change and the garch model this article examines the persistence of the variance as measured by the generalized autoregressive conditional heteroskedasticity garch model in stock return data in particular we investigate the extent to which persistence in variance may be overstated because of the existence of and failure to take account of deterministic structural shifts in the model both an analysis of daily stock return data and a monte carlo simulation experiment confirm the hypothesis that garch measures of persistence in variance are sensitive to this type of model misspecification

how relevant is volatility forecasting for financial risk management it depends if volatility fluctuates in a forecastable way volatility forecasts are useful for risk management hence the interest in volatility forecastability in the risk management literature volatility forecastability however varies with horizon and different horizons are relevant in different applications moreover existing assessments of volatility forecastability are plagued by the fact that they are joint assessments of volatility forecastability and an assumed model and the results can vary not only with the horizon but also with the assumed model to address this problem we develop a model free procedure for assessing volatility forecastability across horizons perhaps surprisingly we find that volatility forecastability decays quickly with horizon volatility forecastability although clearly of relevance for risk management at the short horizons relevant for say trading desk management may be much less important at longer horizons

modelling the conditional volatility of commodity index futures as a regime switching process commodity index futures offer a versatile tool for gaining different forms of exposure to commodity markets volatility is a critical input in many of these applications this paper examines issues in modelling the conditional variance of futures returns based on the goldman sachs commodity index gsci given that commodity markets tend to be choppy webb 1987 a general econometric model is proposed that allows for abrupt changes or regime shifts in volatility transition probabilities which vary explicitly with observable fundamentals such as the basis garch dynamics seasonal variations and conditional leptokurtosis the model is applied to daily futures returns on the gsci over 1992 1997 the results show clear evidence of regime shifts in conditional mean and volatility once regime shifts are accounted for garch effects are minimal consistent with the theory of storage returns are more likely to switch to the high variance state when the basis is negative than when the basis is positive the regime switching model also performs well in forecasting the daily volatility compared to standard garch models without regime switches the model should be of interest to sophisticated traders who base their trading strategies on short term volatility movements managed commodity funds interested in hedging an underlying diversified portfolio of commodities and investors of options and other derivatives tied to gsci futures contracts copyright 2001 john wiley sons ltd

heteroskedasticity in stock return data volume versus garch effects this paper provides empirical support for the notion that autoregressive conditional heterqskedasticity arch in daily stock return data reflects time dependence in the process generating information flow to the market daily trading volume used as a proxy for information arrival time is shown to have significant explanatory power regarding the variance of daily returns which is an implication of the assumption that daily returns are subordinated to intraday equilibrium returns furthermore arch effects tend to disappear when volume is included in the variance equation the autoregressive conditiqnal heteroskedasticity arch process of engle 1982 has been shown to provide a good fit for many financial return time series 1 arch imposes an autoregressive structure on conditional variance allqwing volatility shocks to persist over time this persistence captures the propensity of returns of like magnitude to clu ter in time and can explain the well documented nonnormality and nonstability of empirical asset return distributions see especially fama 1965 an appealing explanation for the presence of arch is based upon the hypothesis that daily returns are generated by a maiture of distributions in which the rate of daily information arrival is the stochastic mixing variable as suggested by diebold 1986 gallant hsieh and tauchen 1988 and stock 1987 1988 arch might capture the time series properties e g serial correlation of this mixing variable hqwever this linkage has not been broadly documented with the datia the objective of this study is to examine the validity of this explanation for daily stock returns the empirical strategy exploits the implication of the mixture model that the variance of daily price increments is heteroskedastic specifically positively related to the rate of daily information arrival using daily trading volume as a proxy for the mixing variable we show that for a sample of 20 common stocks arch effects vanish when volume is included as an explanatory variable in the conditional variance equation

the credit constrained consumer an empirical study of demand and supply in the loan market this article presents an empirical analysis of credit constrained households in which models of both demand and supply sides of the market for loans are simultaneously estimated we develop a discrete choice logit model of the consumers decision on whether or not to apply for credit combining this with a reduced form logistic model for the banks credit granting decision we then estimate the model with cross sectional data as a nonlinear ordered sequential logit our findings shed light on the criteria used by banks in assessing credit applications and reveal the strong dependence of preferences on demographic characteristics the results also suggest that agents face significant fixed costs in applying for loans the fact that we jointly estimate models of both supply and demand sides of the credit market enables us to examine whether particular groups in the population are more frequently credit rationed because they tend to demand more loans or because they are viewed as bad credit risks by lenders