short selling and the price discovery process we show that stock prices are more accurate when short sellers are more active first in a large panel of nyse listed stocks intraday informational efficiency of prices improves with greater shorting flow second at monthly and annual horizons more shorting flow accelerates the incorporation of public information into prices third greater shorting flow reduces post earnings announcement drift for negative earnings surprises fourth short sellers change their trading around extreme return events in a way that aids price discovery and reduces divergence from fundamental values these results are robust to various econometric specifications and their magnitude is economically meaningful the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

energy consumption at business cycle horizons the case of the united states in this paper we propose a simple extension to a keynesian type macro model by augmenting it with energy consumption we show the relationship between energy consumption and output in a macroeconomic setting and ask the question do permanent shocks dominate changes in energy consumption and output at business cycle horizons for the united states to achieve the goal of this paper we undertake a variance decomposition analysis of shocks based on a common trend and common cycle framework within a vector error correction model our main finding is that permanent shocks explain the bulk of the variations in energy consumption and output at business cycle horizons for the united states

a floor and ceiling model of us output abstract building on previous nonlinear time series models we further examine the form of nonlinearity in us output we develop a model of us output that allows for floor and ceiling effects to alter the dynamics of output growth the model estimated on post korean war quarterly data displays features similar to nonlinear trade cycle models of the 1940s and 1950s thus as predicted by many of the earlier theoretical models our empirical results suggest that the turning points of the business cycle provide new initial conditions for the ensuing growth process we also find important asymmetries in the responses of output to positive and negative shocks this history and shock dependence property is not present in linear or approximately linear models of the type that arise in the standard implementations of real business cycle theory

dividend taxation and equity value the canadian tax changes of 1986 the 1986 canadian federal budget which increased the tax rate on dividends vis a vis capital gains provides a natural experiment for examining the relationship between taxation and asset values the authors employ a stock market event study to investigate the differential impact of this tax change on high and low dividend securities to control for other new information contained in the budget they focus on companies that issue both preferred high dividend stocks and common low dividend stocks the authors find that abnormal returns are negatively related to dividend yields which provides support for the hypothesis that taxes affect stock prices

an unobserved components model that yields business and medium run cycles we generalize the unobserved components uc model to allow the permanent component to have different dynamics than the transitory components when decomposing u s economic activity using a multivariate uc model of log output consumption and investment we find that these proposed dynamics in the permanent component are statistically significant and distinct from those of the transitory components our approach provides an alternative explanation for the growth cycles identified by comin and gertler 2006 that is related to the cyclical movements in technology in a framework consistent with the beveridge and nelson 1981 decomposition

measuring the business cycle effects of permanent and transitory shocks in cointegrated time series abstract this paper proposes a statistical framework to evaluate the contribution of permanent and transitory shocks to the cyclical fluctuations of cointegrated variables an empirical application with us macroeconomic data reveals that transitory shocks are responsible for most of the variability at the business cycle frequencies

multivariate detrending under common trend restrictions implications for business cycle research abstract this paper outlines a methodology to detrend multiple time series under common trend restrictions the same filters used to construct the estimated trend in univariate exercises are shown to be appropriate in multivariate studies with a single common trend however to estimate the common trend in the multivariate case the filter is applied to a linear combination of series rather than to each series individually an empirical example and simulation exercises illustrate the implications of common trend detrending for measurement of business cycle properties

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

is political popularity a random walk this paper tets for nonstationarity in the political popularity of uk parties and governments within the context of an economic model which predicts that party support is an arima 0 1 1 process the hypothesis is rejected for the government s popularity but the results for individual party support are less clear out

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

new evidence that taxes affect the valuation of dividends this paper uses british data to examine the effects of dividend taxes on investors relative valuation of dividends and capital gains british data offer great potential to illuminate the dividends and taxes question since there have been two radical changes and several minor reforms in british dividend tax policy during the last 30 years studying the relationship between dividends and stock price movements during different tax regimes offers an ideal controlled experiment for assessing the effects of taxes on investors valuation of dividends using daily data on a small sample of firms and monthly data on a much broader sample we find clear evidence that taxes affect the equilibrium relationship between dividend yields and market returns these findings suggest that taxes are important determinants of security market equilibrium and deepen the puzzle of why firms pay dividends financial economists have long been puzzled by corporate dividend behavior many individual investors should value a dollar of corporate dividends less than a dollar of corporate retentions because the former gives rise to greater tax liabilities corporations however face equal costs of paying out dividends and retaining earnings miller and modigliani 31 demonstrated that in the absence of taxes dividend policy should have no effect on share valuation if dividends are tax penalized however a value maximizing firm should pay no dividends widespread dividend payments to taxable investors are therefore surprising in 1981 dividend tax revenues in the united states were estimated to exceed 20 billion dollars indeed some have interpreted the large volume of dividends paid as evidence against the rational behavior postulates typically used by economists the dividend question has stimulated a large theoretical and empirical literature concerned with the qluestion of investors valuation of dividends in particular the question of how taxes affect the market valuation of dividends has generated considerable controversy numerous studies including auerbach 2 litzenberger and ramaswamy 24 26 morgan 34 and rosenberg and marathe

detrending and business cycle facts a user s guide this note argues that it is hardly the case that the profession is fully aware that the application of di erent filters to the data leads to di erent outcomes and that we have enough evidence to claim that these di erences are unimportant to evaluate the fit models to the data 1998 elsevier science b v all rights reserved jel classification b41 e32

multivariate estimates of the permanent components of gnp and stock prices the economic assumption that a present value relation holds between consumption and income and between stock prices and dividends or the statistical assumption that the consumption income ratio and the dividend price ratio are stationary imply that the permanent or random walk component in each series of a pair must be the same as the permanent component in the other series of a pair either assumption then allows us to estimate the variance of the permanent component of one series gnp stock prices from the variance of the permanent component of the other consumption dividends or from the covariance of the two series permanent components this paper presents such estimates and finds that the permanent components are about half those estimated by similar univariate methods a series of recent papers has examined the importance of a potential unit root to the behavior of real gnp campbell and mankiw 1986 1987 cochrane 1986 clark 1987 and stock prices fama and french 1986 lo and mai if by 0 the series is stationary the response can be any real number which is the innovation in these estimates instead of forcing us to ask the dichotomous question is there a unit root or not they allow us to continuously measure the importance of a potential unit root the actual estimating technique used in these papers varied somewhat cochrane poterba and summers and lo and mai if a series is stationary the variance of k differences will tend to a precursor to this paper appeared under the title spectral density estimates of unit roots we thank masanao aoki lam hansen masao ogaki and chris sims for helpful suggestions the computer programs and data used in this paper are available on request from the authors

cyclical fluctuations in strike durations canadian data on strikes between 1946 and 1983 are used to estimate linear regression models for the logarithm of completed duration a thorough investigation of the influence of the business cycle reveals strong support for the hypothesis that strike durations are countercyclical the cyclical effect is shown to be robust to both the choice of cyclical variable and the econometric specification and the magnitude of the effect is quite substantial experimentation with different representations of the cycle reveals that it is difficult to improve on a simple formulation involving a single continuous variable

dividends and capital asset prices tax based dividend models of capital asset pricing assume that dividends are known at the time prices are set dividends which are announced and paid in the same month and dividends which were expected but cancelled in the month constitute surprises which interfere with many empirical tests of the effects of expected dividend yield on returns this paper avoids these problems by relating returns to forecasts of dividend yield obtained from past data three distinct views of the importance of dividends to investors have received support at one time or another according to the two most important views dividends have a neutral and a negative effect on security prices respectively miller and modigliani 1 and miller and scholes 12 13 favor complete substitutability of dividends and capital gain brennan 6 and litzenberger and ramaswamy 9 have developed models which incorporate differential taxation of income and capital gain in these models the tax disadvantage of income changes the investor s portfolio problem from one of optimization of mean and variance of portfolio before tax return to optimization in after tax terms stocks with relatively large dividend yields should provide high expected returns and so sell for low prices to compensate the investor for the tax much of the empirical evidence seems to favor the view that tax disadvantages of dividend income do not escape investors attention and that returns are higher when they include dividend income to compensate the investor for the tax liability however interpretation of the available evidence is difficult and it is significant that most of these researchers remain unconvinced that their own findings can be satisfactorily explained by tax effects ball brown finn and officer 1 interpret their estimates as being far too strong to be explained in terms of differential taxation blume 3 reaches a similar conclusion but litzenberger and ramaswamy attribute their results to the tax disadvantage of

a measure of the u s output gap abstract an autoregressive distributed lag regression of the unemployment rate on output growth is structurally stable over the 1890 1986 period inverting this equation yields a measure of the output gap which is not subject to the spurious detrending problem

the term structure of currency carry trade risk premia we nd that average returns to currency carry trades decrease signicantly as the maturity of the foreign bonds increases because investment currencies tend to have small local bond term premia the downward term structure of carry trade risk premia is informative about the temporal nature of risks that investors face in currency markets we show that long maturity currency risk premia only depend on the domestic and foreign permanent components of the pricing kernels since transitory currency risk is automatically hedged by interest rate risk for long maturity bonds our

the canadian tax reform and its effect on stock prices a note the effect of personal taxation on stock prices remains controversial while some researchers have found evidence of a tax effect in the stock market others have found evidence to the contrary this paper provides additional empirical evidence on the effect of the differential taxation of dividends and capital gains on stock prices by analyzing stock price changes around the 1971 canadian tax reform and its subsequent amendments in 1977 the results show that changes in the taxation of cash dividends and capital gains affected high yield and lowyield stocks listed on the toronto stock exchange tse differently section i of the paper describes the tax changes the method used to analyze the tax effect is described in section ii section iii reports the results and conclusions are presented in section iv

the beveridge nelson decomposition of economic time series another economical computational method abstract this note describes a simple and an economical computational procedure for generating the permanent cyclical decomposition of economic time series proposed by beveridge and nelson 1981 our procedure is a more complete alternative than the method suggested by cuddington and winters 1987

option prices for groundwater protection abstract this paper reports results from a contingent valuation study of households willingness to pay pay to prevent uncertain future nitrate contamination of a potable supply of groundwater the functional form of the corresponding logit model is derived from utility maximization theory probability of future demand change in the probability of future supply and an attitudinal score for interests in the well being of future generations are significant positive determinants of option prices several implications of these results for aquifer management policy are highlighted

money output and inflation in the longer term major industrial countries 1880 2001 i introduction the empirical role of money growth in the macroeconomy has been studied by many researchers using different data and methods the most prominent studies focusing on the quantity theory of money are those of friedman and schwartz 1963 1982 using data averaged over the phases of the business cycle in order to capture longer run movements with u s and u k data back to 1867 the study by mccandless and weber 2001 is a representative example for a different approach for 110 countries in the post wwii period longer run growth rates are approximated by growth of a variable over a 30 year period average growth rates 1 the problem with phase averaging is that it does not deal with possible nonstationarity of the data 2 the problem with growth averages over long periods while informative to a degree is that they have limitations too it is impossible to assess the timing of movements in these variables 3 in the frequency domain the long run is associated with frequency zero which in our terminology is the long run trend previous studies in the frequency domain on the long run neutrality of money at zero frequency include the studies of lucas 1980 and geweke 1986 the theory of spectral analysis provides a rigorous framework for extracting specific frequency bands from the data instead of considering only frequency zero stock and watson 1998 applied the band pass filter of baxter and king 1999 to extract cycles frequency bands for u s data and focused on the business cycle and on mostly the post wwii period christiano and fitzgerald 2003 proposed an improved band pass filter and provided an application to the longer run relation of money and inflation for bands of 8 20 years and 20 40 years in the united states from 1900 to 1997 4 the usefulness of monetary aggregates for conducting monetary policy has been seriously called into question because of the instability of money demand a prominent empirical study is that of estrella and mishkin 1997 recent mainstream new keynesian models have no explicit role for money woodford 2008 a contrasting view is that the longer term role of money is still of relevance for monetary policy the european central bank explicitly emphasizes a supporting role that monetary aggregates should play in order to provide an anchor for inflation expectations hafer haslag and jones 2007 issing 2006 king 2002 nelson 2003 christiano motto and rostagno 2007 provided a theoretical new keynesian model where inflation expectations lose their anchor unless money is monitored and reacted to also beck and wieland 2008 presented a new keynesian model where cross checking with money growth movements improves inflation control similarly assenmacher wesche and gerlach 2006 2007 found a significant role for a low frequency low pass filtered component of money in the empirical new keynesian phillips curve equation 5 in the spirit of friedman 1961 we use long time spans so that our results are unlikely to be because of a specific policy rule in place in a given period we have 122 years of annual data from 1880 to 2001 before the introduction of the euro in 2002 we have real gross domestic product gdp money and consumer price indices cpis with no gaps for 11 industrialized countries 6 the countries included in our study differ in such terms as their institutions fiscal and monetary policies and economic growth rates nonetheless at least in peace time they were similar in generally having comparatively free markets in which prices and interest rates were determined our aim is to apply analytic methods that are free from economic and statistical models as much as possible in order to explore empirical regularities or stylized facts in the data also the focus of our research is the longer run we employ band pass filters to pick out cycles from each time series that last 8 40 years that is the longer term component

forecasting output gaps in the g 7 countries the role of correlated innovations and structural breaks trend gdp and output gaps play an important role in fiscal and monetary policy formulation often including the need for forecasts in this article we focus on forecasting trend gdp and output gaps with beveridge nelson trend cycle decompositions trend cycle decompositions and investigate how these are affected by assumptions concerning correlated innovations and structural breaks we evaluate expanding window one step ahead forecasts indirectly for the g 7 countries on the basis of real gdp growth rate forecasts we find that correlated innovations affect real gdp growth rate forecasts positively while allowing for structural breaks works for some countries but not for all in the face of uncertainty the evidence supports that in making forecasts of trends and output gap policy makers should focus on allowing for the correlation of shocks as an order of priority higher than unknown structural breaks

on the credit to gdp gap and spurious medium term cycles abstract i provide empirical evidence suggesting that the credit to gdp gap is subject to spurious medium term cycles i e artificial boom bust cycles with a maximum duration of around 40 years

examining trends of criteria air pollutants are the effects of governmental intervention transitory despite its growth in other areas of economics time series econometric methods have not beenwidespread in the area of environmental andresource economics we illustrate one use oftime series methods by examining the time pathof us nitrogen oxide nox emission dataover the period 1900 1994 the analysishighlights that proper time series methods canaid in optimal regulatory policy as well asdeveloping empirical verification of theoriesput forth to explain economic phenomena inaddition several interesting results emerge first we find that the emissions seriescontains both a permanent and random component second if one attributed all of the emissionsreductions to regulatory policy interventionanalysis suggests that the 1970 clean air act caa did not merely have transitory effects but permanently influenced the noxemission path in terms of total regulatoryimpact an upper bound on the emissions saveddue to the 1970 caa is in the range of27 48

time series decomposition and measurement of business cycles trends and growth cycles abstract a study of business cycles does not require trend estimation and elimination but a study of growth cycles does major cyclical slowdowns and speedups deserve to be analyzed but the needed time series decomposition presents difficult problems mainly because trends and cycles influence each other we compare cyclical movements in levels deviations from trend and smoothed growth rates for both the quarterly real gdp and the monthly u s coincident index using the phase average trend pat then we compare alternative trend estimates deterministic and stochastic linear and nonlinear and the corresponding series of deviations from these trends we discuss how the resulting estimates differ for u s growth cycles in the post world war ii period the results of pat show great similarity to the results obtained with the hodrick prescott local linear trend band pass filtering methods

adjustment costs and pricing to market theory and evidence abstract this paper develops an adjustment cost model of pricing to market the model consists of a monopolist who supplies an identical nondurable good to two foreign markets it is shown that the degree of pricing to market increases with the relative importance of the transitory component in exchange rates customs data from 1978 through 1987 on u s and canadian imports of seven german commodities are used to estimate the model s parameters and test its over identifying restrictions

analysis of us real gnp and unemployment interactions abstract instead of the more common unemployment rate the time series data of the level of us unemployment is used together with us real gnp and later also with the us money stock to identify a bivariate and trivariate structural model the model is then used to examine the interaction of the unemployment level with the real gnp in the business cycle frequencies the commonly perceived okun s law is shown to disappear in the trivariate model

income risk the tax benefit system and the demand for children because children represent an irreversible commitment parents might hedge against higher income risk by having fewer children we show that under plausible assumptions recent increases in income risk might have reduced prudent parents desired fertility responses to this via the tax benefit system are considered introducing an expected revenue neutral transfer cum child benefit system under proportional taxation which lets the government share the household s income risk increases desired fertility for parents who would choose to have small families in this system s absence pound for pound the targeted child benefit enhances fertility more than the lump sum transfer

the prebisch singer hypothesis a reappraisal independent of stationarity hypotheses time series behaviour of the relative price of primary commodities raul prebisch i950 and hans singer i950 believed that the long term trend of primary commodity prices was negative the latter in an interesting discussion of the above quandary pp 482 3 viewed rises in primary commodity prices as purely temporary sources of surplus that offered short lived opportunities to increase industrial investment these opportunities were missed by private investors who instead increased primary sector investment in such circumstances because all private activity tends to be governed by the price

estimating long run economic equilibria with stochastic trends an asymptotic theory is provided to analyze a menu of currently existing estimators of cointegrated systems we study in detail the single equation ecm seecm approach of hendry our theoretical results lead to prescriptions for empirical work such as specifying seecm s nonlinearly and including lagged equilibrium relationships rather than lagged differences of the dependent variable as covariates simulations support these prescriptions and point to problems of overfitting not encountered in the semiparametric approach of phillips and hansen 1990

unemployment and infant health times series evidence from the state of tennessee this is the first study that decomposes unemployment into its structural and cyclical components and investigates their impact on income distribution controlling for the influence of inflation increases in structural unemployment have a substantial

emerging market business cycles learning about the trend abstract emerging market business cycles feature a higher variability of consumption relative to output and a strongly countercyclical trade balance an equilibrium business cycle model in which agents learn to distinguish between the permanent and transitory components of total factor productivity shocks using the kalman filter accounts for these features calibrated to mexico the model accounts for the behavior of consumption and the trade balance for a wide range of variability and persistence of permanent shocks relative to transitory shocks estimation for mexico and canada suggests more severe informational frictions in emerging markets than in developed economies