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| 0501 |
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The Relationship between Stock Returns
and Volatility in International Stock Markets
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Qi Li
Private Enterprise Research Center
Department of Economics
Texas A&M University
Jian Yang
Department of Accounting, Finance, and MIS
Prairie View A&M University
Cheng Hsiao
Department of Economics
University of Southern California
Young-Jae Chang
Department of Business Administration
Inje University
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This study examines the relationship between expected stock returns and volatility
in the twelve largest international stock markets during January 1980 - December
2001. Consistent with most previous studies, we find a positive but insignificant
relationship during the sample period for the majority of the markets based on parametric
EGARCH-M models. However, using a flexible semiparametric specification of conditional
variance, we find evidence of a significant negative relationship between expected
returns and volatility in six out of the twelve markets. The results lend some support
to the recent claim (Bekaert and Wu, 2000; Whitelaw, 2000) that stock market returns
are negatively correlated with stock market volatility.
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Published in Journal of Empirical Finance, 2005
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| 0502 |
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The Emerging Market Crisis and Stock Market Linkages: Further Evidence
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Qi Li
Private Enterprise Research Center
Department of Economics
Texas A&M University
Jian Yang
Department of Accounting, Finance, and MIS
Prairie View A&M University
Cheng Hsiao
Department of Economics
University of Southern California
Zijun Wang
Private Enterprise Research Center
Texas A&M University
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This study examines the long-run price relationship and the dynamic price transmission
among the U.S., Germany, and four major Eastern European emerging stock markets, with
particular attention to the impact of the 1998 Russian financial crisis. The results
show that both the long-run price relationship and the dynamic price transmission
were strengthened among these markets after the crisis. The influence of Germany
became noticeable on all the Eastern European markets only after the crisis but not
before the crisis. We also conduct a rolling generalized VAR analysis to confirm the
robustness of the main findings.
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Published in Journal of Applied Econometrics, 2006
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| 0503 |
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Transaction Tax and Stock Market Behavior: Evidence from an Emerging Market
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Badi Baltagi
Private Enterprise Research Center
Department of Economics
Texas A&M University
Qi Li
Private Enterprise Research Center
Department of Economics
Texas A&M University
Dong Li
Department of Economics
Kansas State University
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This study examines the impact of a stamp tax rate increase on market behavior, using
data from two stock exchanges in China. We find that when the tax rate increases from
0.3 to 0.5% (which implies that the transaction cost increases by about 1/3) trading
volume decreases by 1/3. This implies an elasticity of turnover with respect to a stamp
tax of -50% and an elasticity of turnover with respect to transaction cost of -100%. The
markets' volatility significantly increases after the increase in the tax rate. Furthermore,
the change in the volatility structure indicates that the markets become less efficient in
the sense that shocks are less quickly assimilated in the markets.
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Published in Empirical Economics, 2006
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| 0504 |
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Interest Rate Linkages in the Eurocurrency Market: Contemporaneous and Out-of-Sample Granger Causality Tests
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Zijun Wang
Private Enterprise Research Center
Texas A&M University
Qi Li
Private Enterprise Research Center
Department of Economics
Texas A&M University
Jian Yang
Department of Accounting, Finance, and MIS
Prairie View A&M University
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This paper examines linkages among major Eurocurrency interest rates during
1994–2002. Eurocurrency interest rate causal linkages are found to be much
stronger with additional allowance for contemporaneous causality test results
than the inference based solely on Granger causality tests. The impact of U.S.
interest rates is clearly not dominant in the Eurocurrency markets, while the
Japanese interest rates are found to be quite influential. German interest rates
both cause, and are caused by, several other Eurocurrency interest rates. By
contrast, interest rates on the new currency, the Euro, do not have a substantial
influence on other Eurocurrency interest rates, which underscores its emerging status.
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Published in Journal of International Money and Finance, 2007
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| 0505 |
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Nonparametric Estimation of Conditional CDF
and Quantile Functions with Mixed Categorical and Continuous Data
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Qi Li
Private Enterprise Research Center
Department of Economics
Texas A&M University
Jeff Racine
Department of Economics
McMaster University
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| We propose a new nonparametric conditional CDF kernel estimator that admits a mix
of discrete and categorical data along with an associated nonparametric conditional
quantile estimator. Bandwidth selection for kernel quantile regression remains an
open topic of research. We employ a conditional PDF based bandwidth selector proposed
by Hall, Racine & Li (2004) that can automatically remove irrelevant variables
and has impressive performance in this setting. We provide theoretical underpinnings
including rates of convergence and limiting distributions. Simulations demonstrate
that this approach performs quite well relative to its peers, while two illustrative
examples serve to underscore its value in applied settings.
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Forthcoming in Journal of Business and Economic Statistics
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| 0506 |
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Implementation of Marginal Cost Pricing Equilibrium Allocations with Transfers in Economies with Increasing Returns to Scale
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Guoqiang Tian
Private Enterprise Research Center
Department of Economics
Texas A&M University
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This paper considers implementation of marginal cost pricing equilibrium correspondence
with transfers, which characterizes Pareto efficient allocations for production
economies in the presence of increasing returns to scale, when production sets,
preferences and individual endowments are all unknown to the planner. We present
a generalized mechanism in which the set of social equilibrium allocations of the
generalized mechanism coincide with the set of (constrained) marginal cost pricing
equilibrium allocations with transfers for economies with increasing returns to
scale. The mechanism is elementary and natural. It has some nice properties such
as feasibility, continuity, forthrightness, and best response. It uses a finite-dimensional
message space. Furthermore, it works not only for three or more agents, but also
for two-agent economies.
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Click 0506 to view the paper in pdf format.
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| 0507 |
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On the Informational Requirements of Decentralized
Pareto-Satisfactory Mechanisms in Economies with Increasing Returns
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Guoqiang Tian
Private Enterprise Research Center
Department of Economics
Texas A&M University
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This paper investigates the dimension requirements of informationally decentralized
Pareto-satisfactory processes in production economies with increasing returns to
scale or more general types of non-convexities. We show that the marginal cost pricing
(MCP) mechanism is informationally efficient over the class of non-convex production
economies where MCP equilibrium allocations are Pareto efficient. We then discuss
the informational requirements of realizing Pareto efficient allocations for a general
class of non-convex production economies. We do so by examining the dimension of
the message space of the marginal cost pricing mechanism with transfers. Since the
set of marginal cost pricing equilibrium allocations with transfers contains Pareto
efficient allocations as a subset for every economy under consideration, Pareto
efficient allocations can be realized through the MCP mechanism with transfers,
which is informationally decentralized and has a finite-dimensional message space.
This result is sharply contrasted to the impossibility result given in Calsamigla
(1977). |
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Click 0507 to view the paper in pdf format.
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| 0508 |
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Efficiency of Thin and Thick Markets
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Li Gan
Department of Economics
University of Texas - Austin
Qi Li
Private Enterprise Research Center
Department of Economics
Texas A&M University
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| In this paper, we propose a matching model to study the efficiency of thin and thick
markets. Our model shows that the probabilities of matches in a thin market are
significantly lower than those in a thick market. When applying our results to a
job search model, it implies that, if the ratio of job candidates to job openings
remains (roughly) a constant, the probability that a person can find a job is higher
in a thick market than in a thin market. We apply our matching model to the U.S.
academic market for new PhD economists. Consistent with the prediction of our model,
a field of specialization with more job openings and more candidates has a higher
probability of matching.
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Click 0508 to view the paper in pdf format.
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| 0509 |
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A Field Test of Prospect Theory: Strategic Behavior in Major League Baseball, 1985-1992
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Asghar Zardkoohi
Private Enterprise Research Center
Department of Management
Texas A&M University
Michael W. Pustay
Department of Management
Mays Business School
Texas A&M University
Albert Cannella
Department of Management
Arizona State University
Michael Holmes
Department of Management
Mays Business School
Texas A&M University
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Much of the insights and advances in the decision making literature have been based
on lab studies. The scant literature that applies the findings of this literature
to field settings does so at the aggregate or organizational level. Since decisions
are made by individuals but not by organizations per se, research is needed to shed
light on the intricacies of individual decision making in the real world. This study
examines decision making under risk in a field setting. We compare the predictions
of prospect theory for making a risky choice with the predictions of expected utility
theory. Using a sample of Major League Baseball (MLB) teams and a decision situation
involving whether or not to attempt to steal second base, we conclude that prospect
theory provides a better explanation of the decisions that are observed. We argue
that, since decisions in the game of baseball are made under uncertainty, are complex
(i.e., rely on a number interrelated parameters), and require quick actions, our
results have important implications for decision-making in organizations, as within
a wide range of circumstances most business decisions share similar characteristics. |
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Click 0509 to view the paper in pdf format.
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| 0510 |
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From the Shadow Price of Capital to the Marginal
Cost of Funds: In Search of the Implementation of a Principle
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Liqun Liu
Private Enterprise Research Center
Texas A&M University
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The #folk principle# for multi-period project evaluation states that if all the costs and
benefits of a project are expressed as withdraws from and increments to private
consumption at different time points, then the appropriate discount rate is the
consumer's rate of interest. The shadow price of capital (SPC) approach intends to
implement this principle using the concept of SPC but faces serious practical
difficulties. By taking a utility-based perspective, this paper explains why the SPC
approach cannot fully implement the folk principle even conceptually. Then, it
derives, as a complete implementation of the folk principle, a multi-period cost-benefit
rule that is based on the concept of the marginal cost of funds (MCF). The
MCF approach also has a practical edge over the SPC approach in terms of
implementability and generalizability.
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Click 0510 to view the paper in pdf format.
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| 0511 |
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Is Value Premium a Proxy for Time-Varying
Investment Opportunities: Some Time Series Evidence
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Hui Guo
Research Division
Federal Reserve Bank of St. Louis
Robert Savickas
Department of Finance
George Washington University
Zijun Wang
Private Enterprise Research Center
Texas A&M University
Jian Yang
Department of Accounting, Finance, and MIS
Prairie View A&M University
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Campbell and Vuolteenaho (2004) and Brennan, Wang and Xia (2004) recently argue
that the value premium co-moves with investment opportunities and thus reflects
rational pricing. This paper extends their analysis by showing that the ICAPM interpretation
of the value premium also sheds light on the puzzling empirical relation between
the stock market risk and return across time. That is, in contrast with many early
authors, it is found to be positive and highly significant after controlling for
the covariance between the stock market return and the value premium. Moreover,
we also document a positive and significant relation between the value premium and
its conditional variance over the post-1963 period. Our results, which appear to
be robust using both the realized volatility model and the GARCH model, confirm
that the value premium cannot be completely attributed to data mining and irrational
pricing.
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Forthcoming in Journal of Financial and Quantitative Analysis, 2008
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| 0512 |
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International Transmission of Inflation among G-7 countries: A Data-Determined VAR Analysis
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Jian Yang
Department of Accounting, Finance, and MIS
Prairie View A&M University
Hui Guo
Research Division
Federal Reserve Bank of St. Louis
Zijun Wang
Private Enterprise Research Center
Texas A&M University
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We investigate the international transmission of inflation among G-7 countries using data-determined
vector autoregression analysis, as advocated by Swanson and Granger [Swanson, N., Granger,
C., 1997. Impulse response functions based on a causal approach to residual orthogonalization
in vector autoregressions. Journal of the American Statistical Association 92, 357–367]. Over the period
1973–2003, we find that unexpected changes in US inflation have large effects on inflation in
other countries, although they are not always the dominant international factor. Similarly, shocks
to some other countries also have a statistically and economically significant influence on US inflation.
Moreover, our evidence indicates that US inflation has become less vulnerable to foreign
shocks since the early 1990s, mainly because of the diminished influence from Germany and France.
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Published in Journal of Banking and Finance, 2006
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| 0513 |
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Evaluating the "Fed model" of Stock Price Valuation: An Out-of-Sample Forecasting Perspective
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Dennis Jansen
Private Enterprise Research Center
Department of Economics
Texas A&M University
Zijun Wang
Private Enterprise Research Center
Texas A&M University
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The "Fed Model" of stock market valuation postulates a cointegrating relationship
between the equity yield on the S&P 500 (earnings over index value) and the
bond yield. We evaluate the Fed Model as a vector error correction forecasting model
for stock prices and for bond yields, and compare out-of-sample forecasts of each
of these two variables from the Fed Model to forecasts from alternative models that
include a univariate model, a nonlinear vector error correction model, and a set
of modified vector error correction models. We find that the Fed Model does not
improve on the forecasts of the univariate models at short horizons, but that the
Fed Model is able to improve on the univariate model for longer-horizon forecasts,
especially for stock prices. The nonlinear vector error correction model performs
even better than its linear version as a multiple month ahead forecasting model
for stock prices, although this does not hold true for forecasts of the bond yield. |
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Published in Advances in Econometrics, 2006
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| 0514 |
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Regime Switching in the Dynamic Relationship Between Stock Returns and Inflation
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Dennis Jansen
Private Enterprise Research Center
Department of Economics
Texas A&M University
Dandan Liu
Department of Economics
Bowling Green State University
Qi Li
Private Enterprise Research Center
Department of Economics
Texas A&M University
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| This study examines nonlinear dynamic relationships between stock returns and inflation
in ten major stock markets. Using Hansen and Seo's (2002) threshold error correction
model to allow for possible regime shifts in the dynamic relationship between the
two variables, threshold effects are found in the adjustment towards the long-run equilibrium
relationship between stock returns and inflation for three out of the ten countries
considered in this study (France, Switzerland and the USA). Nevertheless,
the nonlinear adjustment mechanism is not uniform but rather it is country-specific.
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Published in Applied Financial Economics Letters, 2005
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| 0515 |
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The Long-Run Relationship between Gross Domestic Product Growth and Stock Returns
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Liqun Liu
Private Enterprise Research Center
Texas A&M University
Andrew J. Rettenmaier
Private Enterprise Research Center
Texas A&M University
Zijun Wang
Private Enterprise Research Center
Texas A&M University
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| A basic belief held by the opponents of personal retirement accounts is that stock
returns are fundamentally determined by the GDP growth rate. We suggest that the
GDP growth rate is related to the return on capital, but that it is also a function
of net investments. Because GDP growth is positively related to net investments,
declining net investments imply lower GDP growth even with stable returns on capital.
Critics of personal accounts argue that the lower long-run GDP growth assumptions
of the Social Security Trustees are at odds with the assumption that future stock
market returns will be as high in the future as they have been historically. An
increase in the dividend-price ratio in response to the decrease in GDP growth along
with earnings growth in excess of domestic GDP growth, given the international nature
of firms, reconciles the apparent paradox identified by the critics. |
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Click 0515 to view the paper in pdf format.
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| 0516 |
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Convergence of Productivity: A Comment
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Zijun Wang
Private Enterprise Research Center
Texas A&M University
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We find that an important programming error was made by Hobijn and Franses (2000)
in conducting multivariate stationarity tests. The empirical results in their paper
are subject to errors. Other studies that have used
the coded algorithm of Hobijn and Franses are likely to suffer the same problem. |
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Short Version Published in Journal of Applied Econometrics, 2006
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| 0517 |
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Macroeconomic Forecasting Using Structural Factor Analysis
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Dandan Liu
Department of Economics
Bowling Green State University
Dennis Jansen
Private Enterprise Research Center
Department of Economics
Texas A&M University
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| The use of several underlying factors to summarize the information from a relatively
large set of explanatory variables is the new frontier of the forecasting literature.
However, factors estimated in the previous literature usually cannot be interpreted
structurally, and the estimated factors or forecasting models are not chosen on
the basis of some standard theories. In this paper, we propose several variations
of a general structural factor forecasting model, and use these to forecast some
key macroeconomic variables. We argue that the choice of factors can be made more
structurally meaningful by choosing these factors from subsets of variables according
to widely-accepted theories, and depending on the variable to be forecasted. To analyze the advantages of the structural factor forecasting model, we compare its
forecasting performance with baseline models including the univariate AR model and
the standard VAR model, as well as some non-structural factor forecasting models.
The results indicate that our structural factor forecasting model performs significantly
better in many cases, and especially for real activity variables at short-horizons. |
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Published in International Journal of Forecasting, 2007
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| 0518 |
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Money Growth and Inflation in the United States
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Lance Bachmeier
Department of Economics
Kansas State University
Sittisak Leelahanon
Department of Economics
Thammasat University
Qi Li
Private Enterprise Research Center
Department of Economics
Texas A&M University
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| Specification tests reject a linear inflation forecasting model over the period
1959-2002. Based on this finding, we evaluate the out-of-sample inflation forecasts
of a fully nonparametric model for 1994-2002. Our two main results are that: (i)
nonlinear models produce much better forecasts than linear models, and (ii) including
money growth in the nonparametric model yields marginal improvements, but including
velocity reduces the mean squared forecast error by as much as 40%. A threshold
model fits the data well over the full sample, offering an interpretation of
our findings. We conclude that it is important to account for both nonlinearity
and the behavior of monetary aggregates when forecasting inflation. |
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Published in Macroeconomic Dynamics, 2007
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| 0519 |
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Testing for Cointegrating Rank via Model Selection: Evidence from 165 Data Sets
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Badi H. Baltagi
Department of Economics
Texas A&M University
Zijun Wang
Private Enterprise Research Center
Texas A&M University
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| The model selection approach has been proposed as an alternative to the popular
tests for cointegration such as the residual-based augmented Dickey-Fuller test and the system-based
trace test. Using information criteria, we conduct cointegration tests on 165 data
sets used in published studies. The empirical results demonstrate the usefulness
of the model selection approach for applied researchers. |
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Published in Empirical Economics, 2006
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Click 0519 to view the detailed results in xsl format.
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| 0520 |
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Higher-Order Generalizations of Arrow-Pratt and Ross Risk Aversion: A Comparative Statics Approach
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Paan Jindapon
Department of Economics
Texas A&M University
William S. Neilson
Private Enterprise Research Center
Department of Economics
Texas A&M University
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| We analyze comparative risk aversion in a new way, through a comparative statics
problem in which, for a cost, agents can shift from an initial probability distribution
toward a preferred distribution. The Ross characterization arises when the original
distribution is riskier than the preferred distribution and the cost is monetary,
and the Arrow-Pratt characterization arises when the original distribution differs
from the preferred distribution by a simple mean-preserving spread and the cost
is a utility cost. Higher-order increases in risk lead to higher-order generalizations,
and the comparative statics method yields a unified approach to the problem of comparative
risk attitudes. |
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Published in Journal of Economic Theory, 2007
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| 0521 |
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A Theory of Kindness, Reluctance, and Shame in Dictator Games
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William S. Neilson
Department of Economics
Texas A&M University
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| This paper presents a theoretical model of context-dependent behavior in dictator
games in response to recent experimental evidence suggesting that (1) although proposers
give money to receivers when they do not have the option of taking money away, they
tend not to give money away when taking is an option; and (2) many proposers are
reluctant to play the dictator game and, in order to avoid playing the game, are
willing to accept a smaller payment than they would have received had they played
the game. The model has two components: a choice correspondence that depends on
the endowed allocation and the menu of allocations available, and a preference
ordering over endowment/menu pairs. The choice correspondence governs behavior when
the proposer actually plays a dictator game, and the preference ordering governs
the proposer's willingness to play a particular dictator game. The choice correspondence
can be used to characterize kindness and the propensity to give, while the preference
ordering can be used to characterize reluctance and construct a reluctance premium.
Finally, the two components together can be used to characterize shame, which arises
when proposers wish to avoid the dictator game in order to avoid revealing how little
they would be willing to give away. |
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Click 0521 to view the paper in pdf format.
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