mcmc based estimation of markov switching arma garch models regime switching models especially markov switching ms models are regarded as a promising way to capture nonlinearities in time series combining the elements of ms models with full autoregressive moving average generalized autoregressive conditional heteroskedasticity arma garch models poses severe difficulties for the computation of parameter estimators existing methods can become completely unfeasible due to the full path dependence of such models in this article we demonstrate how to overcome this problem we formulate a full ms arma garch model and its bayes estimator this facilitates the use of markov chain monte carlo methods and allows us to develop an algorithm to compute the bayes estimator of the regimes and parameters of our model the approach is illustrated on simulated data and with returns from the new york stock exchange nyse our model is then compared to other approaches and clearly proves to be advantageous

thanks to gordon tullock gordon tullock s impact as a scholar was far broader than his own research because he was an initiator of new fields of research rather than one who modestly extended pre existing pastures his import as founding editor of public choice as an ambassador for public choice and as a teacher mentor and friend for public choice scholars around the world should also be remembered

the political economy of gordon tullock it is fair to say that few public choice scholars have contributed to so many areas of public choice research as frequently or with as much insight as gordon tullock professor tullock s work considers not only political and contractual relationships within a well established legal order but also extraordinary political behavior within rent seeking societies within firms at court within communities at war among those considering revolution and among those emerging from or falling into anarchy the result is an unusually complete political economy that includes theories of the origin of the state theories of decision making within bureaucracy dictatorship democracy and the courts and within science itself it is also fair to say that professor tullock uses relatively simple tools to analyze these far reaching topics indeed it is the use of relatively simple tools that makes the broad scope of his work possible all the principal actors in tullock s analysis maximize expected net benefits in circumstances where the perspective on tullock s work presented here is based partly on his prolific writings and partly on numerous conversations with him over the course of several decades he was kind enough to read through a previous draft and the version presented here reflects his comments and suggestions comments and suggestions received at the 2002 meeting of the public choice society and from james buchanan charles rowley robert tollison and an

structural breaks and garch models of exchange rate volatility we investigate the empirical relevance of structural breaks for garch models of exchange rate volatility using both in sample and out of sample tests we find significant evidence of structural breaks in the unconditional variance of seven of eight us dollar exchange rate return series over the 1980 2005 period implying unstable garch processes for these exchange rates and garch 1 1 parameter estimates often vary substantially across the subsamples defined by the structural breaks we also find that it almost always pays to allow for structural breaks when forecasting exchange rate return volatility in real time combining forecasts from different models that accommodate structural breaks in volatility in various ways appears to offer a reliable method for improving volatility forecast accuracy given the uncertainty surrounding the timing and size of the structural breaks copyright 2008 john wiley sons ltd

the long run relationship between stock return dispersion and output based on the rational that some industry groups are more closely linked to the business cycle than others we re examined a previous analysis on the long term relationship between stock return dispersion by industry and gross domestic product gdp which evaluated data until 1987 by extending it to 2008 using mean square forecast errors msfe statistics we find that incorporating the return dispersion in vector autoregressive var models enhances their forecasting power for output gdp in the long run this article also determines that the relationship between stock return dispersion by industry and gdp is tenuous in the recent decade from 1999

the weak form efficiency of the finnish and scandinavian stock exchanges a comparative note on thin trading this note adds to previous scandinavian evidence produced by the jennergren korsvold 1974 1975 jennergren 1975 jennergren toftnielsen 1977 korhonen 1977 and s0rensen 1982 studies of stock market return randomness in daily data sets from the oslo and stockholm stock exchanges jennergren korsvold 1975 found evidence of nonrandomness in a majority of the 45 stocks studied a similar result was later reported for the copenhagen exchange by jennergren toft nielsen 1977 subsequent studies by jennergren 1975 and s0rensen 1980 further indicated that the serial correlation inherent in stockholm and copenhagen data was strong enough to allow supernormal yields on simple filter strategies 2 the data for our study consist of daily trading or when closings did not occur bid prices adjusted for dividends and issues for all stocks quoted on the helsinki stock exchange hese between february 2 1970 and december 31 1981 along with data on daily trading volumes for the years 1977 81 3 the price file is based on the kop index file 4 throughout this note comparisons with previous results for other scandinavian exchanges are made allowing for variations in sample periods we attempt a study of whether a smaller annual turnover of an exchange effects the degree of nonrandomness exhibited by its stock returns of the

stock returns inflation and real activity in canada this paper finds evidence that as for the united states there exists an inverse relation between real stock returns and inflation i n canada such a relation if nonspurious could signify a nonneutralit y of money the authors causality tests suggest however that inflation does not cause real stock returns instead their empirical results support e f fama s proxy effect hypothesis according to which the observed inverse relation is proxying for fundamental relations between real stock returns and anticipated real activity and between inflation and real activity the authors therefore cannot reject the fisherian hypothesis that variations in anticipated inflation have no effect on real stock returns

does the stock market predict real activity time series evidence from the g 7 countries this paper extends one aspect of the us stock market study of fama 1990 and schwert 1990 we examine the relationship between industrial production ip growth rates and lagged real stock returns for the g 7 countries using both in sample cointegration and error correction models and the out of sample forecast evaluation procedure of ashley et al 1980 the cointegration tests show a long run equilibrium relationship between the log levels of ip and real stock prices while the error correction models indicate a correlation between ip growth and lagged real stock returns for all countries except italy the out of sample tests show that in several sub periods the us uk japanese and canadian stock markets enhance predictions of future ip 1999 elsevier science b v all rights reserved

the effect of the stock market on investment a comparative study this paper is concerned with examining whether exogenous events whose only direct effect is to change stock prices can indirectly affect corporate investment through the stock price mechanism it is argued that the actual effect of share price changes depends on institutional considerations which affect the degree of managerial autonomy e g the extent of the use of the takeover mechanism gearing ratios and the role of employees in corporate decision making therefore it would be reasonable to expect the stock market to be less influential in japan or germany when compared with the u s or u k this paper provides some econometric evidence which supports this view in that once one has allowed for other influences on investment share prices provide no additional explanatory power for investment behaviour in japan or germany but they do affect investment in the u k and u s if one believes that the stock market is sometimes swayed by irrational considerations the absence of an influence of share prices on investment in japan or germany may then be regarded as an advantage

macroeconomics news and the stock market evidence from europe abstract the effects of unexpected variations in many macroeconomic variables on aggregate stock price indices are evaluated for great britain west germany and switzerland quarterly data over the recent flexible exchange rate period are used the results indicate that the effects of macroeconomic news are either very small or obscured by a low signal to noise ratio

dissipation of contestable rents by small numbers of contenders the theory of rent seeking with its origins in the observations of gordon tullock 1967 or to use jagdish bhagwati s 1982 proposed term the theory of directly unproductive profit seeking activities is concerned with the potentially adverse effects on resource allocation of incentives to cap ture and defend artificially contrived rents and transfers the scope for so cial loss proposed by the theory derives from the relation between the value of a contestable prize and the value of the resources attracted into the con test to determine the beneficiary of the prize underlying this social loss is a specification of how rational behavior by optimizing agents links the value of the prize sought to the resources expended it has been traditional to assume competitive behavior in describing the activities of lobbying and influence seeking then if some further condi tions are satisfied l the total value of the resources expended precisely equals the value of the prize sought so dissipation is complete 2 conse quently the social cost associated with contestability of a rent can be in ferred from the value of the rent itself and the detailed and hard to come by information on individual outlays made in the course of the contest be comes unnecessary by basing their analyses on competitive dissipation contributors to the rent seeking literature see the review by robert tollison 1982 have been able to presume that the observed value of a contested rent is an exact measure of the associated social cost of monopoly power or regu lation similarly in the trade theoretic literature where the rights contested are to quota premia or revenues from trade taxes krueger 1974 bhagwati

stock returns inflationary expectations and real activity this paper tests the fisher hypothesis that real stock returns are independent of inflationary expectations on data for the finnish economy a significant negative relationship is found when stock returns are regressed on the rate of inflation a possible explanation is that higher inflation may proxy a drop in the money demand induced by a lower growth in real activity which simultaneously implies a drop in expected future profits and thus a drop in stock prices to test this hypothesis actual growth in real activity is included in the regression equation for aggregate stock returns significant negative coefficients are however still obtained for expected as well as unexpected inflation it is further shown that these relations are quite insensitive to the specification of the expectations formation mechanism

adam smith and the prisoners dilemma in ordinary life we engage in many transactions with other people in which there is potential profit for both parties from some kind of cheating normally we do not see much of this cheating i have no doubt that the merchant will put in the package the merchandise which i buy or which i ordered even though if he put in something else cheaper it is quite dubious that i would be able to win a lawsuit on my part if i decide i did not like the product and returned it with the remark that it was defective having first damaged it so that it is indeed defective i could get a gain neither i nor the merchant worries particularly about this kind of behavior although the merchant worries more than i do for reasons that will become plain below if we worried about it we would both take precautions with the result that socially we would be worse off by the cost of these precautions we have here what appears to be a prisoners dilemma matrix but the two parties are behaving cooperatively what adam smith called the discipline of continuous dealings takes care of the matter the point of this article is to work out adam smith s insight in the terminology of a modern game theory we shall see that smith was right and there are some cases indeed practically very important cases where what appears to be a prisoners dilemma in fact leads to cooperative behavior consider the prisoners dilemma game shown in figure i it is orthodox that if a and b are playing a single turn of this particular game they will end up in the lower right hand corner with a net loss of one dollar each if we go from a single game to a long series of games played by the same players however there is no agreed upon solution experimental evidence seems to indicate that the players play a mixed strategy with some cooperative plays and some noncooperative plays and the mixture can be modified by changing the payoffs 2 all of these situations are simplifications of the real world and it is a point of this article to suggest that if we make the game more like many real world

predicting u s recessions financial variables as leading indicators this paper examines the out of sample performance of various financial variables as predictors of u s recessions series such as interest rates and spreads stock prices and monetary aggregates are evaluated individually and in comparison with other financial and nonfinancial indicators the analysis focuses on out of sample performance from one to eight quarters ahead results show that stock prices are useful with one to three quarter horizons as are some well known macroeconomic indicators beyond one quarter however the slope of the yield curve emerges as the clear individual choice and typically performs better by itself out of sample than in conjunction with other variables

stock returns and output growth in emerging and advanced economies abstract this paper studies the correlation between output growth and lagged stock returns in a panel of emerging market economies and advanced economies it finds that the proportion of countries in which this correlation is significant is the same for emerging market economies as it is for advanced economies using yearly data and somewhat lower using quarterly data asset prices therefore seem to contain valuable information to forecast output also in emerging market economies moreover the paper finds that the strength of the correlation between output growth and lagged stock returns is significantly related to a number of stock market characteristics such as a high market capitalization to gdp ratio and less robustly english legal origin and the number of listed domestic companies and initial public offerings

why so much stability one of duncan black s 1958 more important contributions was a classically simple proof that with complex issues and majority voting a stable outcome is unlikely this very simple proof that there would normally be no motion which can get a majority against all others and hence that any possible outcome is dominated by another has been elaborated and made more precise by later work without most improbable conditions endless cycling would be expected this is particularly true when logrolling is present as it normally is if we look at the real world however we observe not only is there no endless cycling but acts are passed with reasonable dispatch and then remain unchanged for very long periods of time thus theory and reality seem to be not only out of contact but actually in sharp conflict it is the purpose of this article to demonstrate that our existing theory when properly looked at does indeed imply a relatively stable outcome to voting in some cases however this stability will not be a true equilibrium because a random member of a large set will be chosen and then that random outcome will be left unchanged for long periods of time it does not dominate all other outcomes but is retained merely because of its particular history there are already several possible explanations for the observed stability in the literature we will take them up as they become relevant to the general line of reasoning i should however warn the reader that my own previous work including joint work with buchanan will play a major role here this may simply reflect egotism but i think that some of the early work which is now partially forgotten can provide solutions for more modern problems much recent public choice work has involved spatial models and these models frequently ignore logrolling the reason presumably is that it is very hard to put logrolling in a two dimensional diagram we shall begin considering such special models and assume that the issues are the sort that does not lead to logrolling and then turn to more complex logrolling problems with respect to the first situation in which logrolling does not occur there is already one possible explanation for the observed stability in the literature

markov switching and stochastic volatility diffusion models of short term interest rates this article empirically compares the markov switching and stochastic volatility diffusion models of the short rate the evidence supports the markov switching diffusion model estimates of the elasticity of volatility parameter for single regime models unanimously indicate an explosive volatility process whereas the markov switching models estimates are reasonable itis found that either markov switching or stochastic volatility but not both is needed to adequately fit the data a robust conclusion is that volatility depends on the level of the short rate finally the markov switching model is the best for forecasting a technical contribution of this article is a presentation of quasi maximum likelihood estimation techniques for the markov switching stochastic volatility model

a markov model of switching regime arch in this article i present a new approach to model more realistically the variability of financial time series i develop a markov arch model that incorporates the features of both hamilton s switching regime model and engle s autoregressive conditional heteroscedasticity arch model to examine the issue of volatility persistence in the monthly excess returns of the three month treasury bill the issue can be resolved by taking into account occasional shifts in the asymptotic variance of the markov arch process that cause the spurious persistence of the volatility process i identify two periods during which there is a regime shift the 1974 2 1974 8 period associated with the oil shock and the 1979 9 1982 8 period associated with the federal reserve s policy change the variance approached asymptotically in these two episodes is more than 10 times as high as the asymptotic variance for the remainder of the sample i conclude that regime shifts have a greater impact on the properties of the data and i ca

expected and unexpected changes in nominal and real variables evidence from the capital markets abstract the sources of variation in asset returns and exchange rates are empirically examined with the help of data from five industrialized countries a fourfold classification in real vs nominal and expected vs unexpected changes is used the empirical work is based on the observed time series characteristics of stock returns interest rates exchange rates and rates of inflation unexpected changes in real stock returns and real exchange rates have by far the largest variance movements in risk premia on shares and forward foreign exchange are also substantial fisher and mundell effects are however relatively small

the constitutional political economy of gordon tullock this paper surveys gordon tullock s contributions to constitutional political economy his first major contribution was his joint project with james buchanan on liberal constitutional design the explicitly constitutional analysis of the calculus was followed by a series of papers and books that focused on the use of resources in conflict including tullock s contributions to the anarchy and rent seeking literatures tullock also pioneered the rational choice based analysis of dictatorships and the relative merits of alternative legal systems topics that has been neglected until fairly recently by most scholars working in the cpe tradition