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Book part
Publication date: 13 December 2013

Kirstin Hubrich and Timo Teräsvirta

This survey focuses on two families of nonlinear vector time series models, the family of vector threshold regression (VTR) models and that of vector smooth transition…

Abstract

This survey focuses on two families of nonlinear vector time series models, the family of vector threshold regression (VTR) models and that of vector smooth transition regression (VSTR) models. These two model classes contain incomplete models in the sense that strongly exogeneous variables are allowed in the equations. The emphasis is on stationary models, but the considerations also include nonstationary VTR and VSTR models with cointegrated variables. Model specification, estimation and evaluation is considered, and the use of the models illustrated by macroeconomic examples from the literature.

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VAR Models in Macroeconomics – New Developments and Applications: Essays in Honor of Christopher A. Sims
Type: Book
ISBN: 978-1-78190-752-8

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Article
Publication date: 9 February 2015

Angela J. Black, David G. McMillan and Fiona J. McMillan

This paper aims to empirically test for multiple cointegrating vectors in a holistic manner. Theoretical developments imply bivariate cointegration among stock prices…

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Abstract

Purpose

This paper aims to empirically test for multiple cointegrating vectors in a holistic manner. Theoretical developments imply bivariate cointegration among stock prices, dividends, output and consumption where independent models identify key theoretical cointegration vectors.

Design/methodology/approach

This paper considers both Johansen and Horvath–Watson testing approaches for cointegration. This paper also examines the forecasting power of these cointegrating relationships against alternate forecast variables.

Findings

The results suggest evidence of a long-run cointegrating relationship between stock prices, dividends, output and consumption, although not necessarily linked by a single common stochastic trend; each series responds to disequilibrium with greater evidence of a reaction from dividends and consumption – of note, output responds to changes in stock market equilibrium; and there is forecast power from the joint stock market–macro cointegrating vector for stocks returns and consumption growth over the historical average. Of particular note, other forecast models that include consumption perform well and suggest a key role for this variable in stock return and consumption growth forecasts.

Originality/value

This is the first paper to combine the cointegrating relationships between stocks, dividends, output and consumption. Thus, the empirical validity of stated theoretical hypotheses can be analysed. The forecast results also demonstrate the usefulness of this. They also show that forecast models that include consumption perform well and suggest a key role for this variable in stock return and consumption growth forecasts.

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Review of Accounting and Finance, vol. 14 no. 1
Type: Research Article
ISSN: 1475-7702

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Book part
Publication date: 24 March 2006

Dennis W. Jansen and Zijun Wang

The “Fed Model” postulates a cointegrating relationship between the equity yield on the S&P 500 and the bond yield. We evaluate the Fed Model as a vector error correction

Abstract

The “Fed Model” postulates a cointegrating relationship between the equity yield on the S&P 500 and the bond yield. We evaluate the Fed Model as a vector error correction forecasting model for stock prices and for bond yields. We compare out-of-sample forecasts of each of these two variables from a univariate model and various versions of the Fed Model including both linear and nonlinear vector error correction models. We find that for stock prices the Fed Model improves on the univariate model for longer-horizon forecasts, and the nonlinear vector error correction model performs even better than its linear version.

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Econometric Analysis of Financial and Economic Time Series
Type: Book
ISBN: 978-1-84950-388-4

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Article
Publication date: 28 October 2014

Abdul Rashid and Zainab Jehan

This paper aims to empirically examine how shocks to monetary policy measures (the short-term nominal interest rate and broad money supply) affect macroeconomic…

Abstract

Purpose

This paper aims to empirically examine how shocks to monetary policy measures (the short-term nominal interest rate and broad money supply) affect macroeconomic aggregates, namely, output growth of the economy, national price levels and the nominal exchange rate.

Design/methodology/approach

Johansen’s (1995) cointegration technique and error correction models are used to explore the long-run relationship among variables. To investigate how macroeconomic aggregates respond to a one-standard deviation shock to the underlying monetary measures, the authors estimate impulse response functions based on error correction models. The study uses quarterly data covering the period 1980-2009.

Findings

The results provide evidence that there is a long-run stable relationship between the authors' monetary measures and the underlying macroeconomic aggregates. They also find that the industrial production adjusts at a faster speed relative to commodity prices and the exchange rate over the examined period. Further, they show that the short-term interest rate has relatively stronger effects on output as compared to broad money supply, whereas prices and exchange rates adjust more quickly to their long-run equilibrium when money supply is used as a measure of monetary policy. Finally, the authors find significant evidence of a price puzzle regardless of whether they consider a closed or an open economy case. However, an initial appreciation of exchange rate is observed in response to a one-standard deviation shock to money supply, indicating the overshooting hypothesis phenomenon.

Practical implications

The findings of the analysis suggest that the interest rate-oriented monetary policy is more effective when the monetary authorities’ objective is to enhance the output growth of the economy. However, in case of inflation targeting, the broad money supply seems a more appropriate instrument. Our findings also suggest that the monetary policy has a significant role in stabilizing both real and nominal sectors of the economy.

Originality/value

The main value of this paper is to examine the significance of monetary policy for a developing and relatively small open economy, namely, Pakistan. The authors use the error correction model, which improves the estimation by accounting for the long-run association. They also take into account the world oil prices by including the world commodity price index as a control variable in their empirical investigation. Finally, they utilize quarterly data rather than annual, and they cover a relatively recent sample period.

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Journal of Financial Economic Policy, vol. 6 no. 4
Type: Research Article
ISSN: 1757-6385

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Book part
Publication date: 6 January 2016

Anindya Banerjee, Massimiliano Marcellino and Igor Masten

The Factor-augmented Error-Correction Model (FECM) generalizes the factor-augmented VAR (FAVAR) and the Error-Correction Model (ECM), combining error-correction

Abstract

The Factor-augmented Error-Correction Model (FECM) generalizes the factor-augmented VAR (FAVAR) and the Error-Correction Model (ECM), combining error-correction, cointegration and dynamic factor models. It uses a larger set of variables compared to the ECM and incorporates the long-run information lacking from the FAVAR because of the latter’s specification in differences. In this paper, we review the specification and estimation of the FECM, and illustrate its use for forecasting and structural analysis by means of empirical applications based on Euro Area and US data.

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Article
Publication date: 29 July 2014

Kim Hin David Ho, Satyanarain Rengarajan and John Glascock

The purpose of this paper is to examine the structure and dynamics of Singapore's Central Area office market. A long-run equilibrium relationship is tested and a short-run…

Abstract

Purpose

The purpose of this paper is to examine the structure and dynamics of Singapore's Central Area office market. A long-run equilibrium relationship is tested and a short-run adjustment error correction model are estimated, incorporating appropriate serial error correction. The long-run equation is estimated for office rent, with office employment and available stock.

Design/methodology/approach

With the vector error correction model (VECM), the lagged rent, available stock, office employment, vacancy and occupied stock (OS) can impact the rental adjustment process. Equilibrium rent on the whole reacts positively to lagged rents, available stock, office employment, OS and negatively to vacancy rates (VC). Past levels of positive change in VC and rental growth can have negative effects on current OS.

Findings

While good economic conditions signaled by increases in rents increase the supply of new stock (available space), higher rents and VC dampen the long-term occupied space (space absorption) in accordance with economic theory. Available stock can be forecasted by past rent and absorption levels owing to the developer's profit-driven nature.

Research limitations/implications

An understanding of the interaction between the macroeconomic variables and the Central Area office market is useful to domestic and foreign investors and developers, who then can better evaluate their decision making in commercial real estate investment and development projects.

Practical implications

It is implicit that the Singapore Central Area office market requires at least a year before any rental increase can potentially dampen the space demanded. Firms are attracted to locate there owing to agglomeration economies and they are willing to pay premium office rents in conjunction with office space intensification in the Central Area. Newly built space is positively affected by past rents. Urban Redevelopment Authority and private real estate developers should be wary of excess office sector vacancies by avoiding over supply, even though an increase in the supply of office space in the Central Area can have a positive impact on office rent in the longer term. Most of the office space development would tend to meet the demand in the long run. Rental stickiness is exemplified as rental changes are affected by lagged rent.

Social implications

Policy makers are better enabled to stabilize the office sectors of the real estate market if so required.

Originality/value

The paper adopts the VECM and validated by empirical evidence, to investigate the long-run equilibrium relationship and short-term corrections underlying the dynamics of the Singapore Central office market. Delay in the restoration of equilibrium in real estate markets is attributed to factors like lease terms and supply lags.

Details

Journal of Property Investment & Finance, vol. 32 no. 5
Type: Research Article
ISSN: 1463-578X

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Book part
Publication date: 1 January 2004

Helmut Lutkepohl

Abstract

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New Directions in Macromodelling
Type: Book
ISBN: 978-1-84950-830-8

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Article
Publication date: 1 June 2015

Mark J. Holmes and Nabil Maghrebi

The purpose of this study is to investigate nonlinearities in the behavior of investment expenditure. Conventional wisdom suggests that Tobin’s Q criterion is an important…

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1961

Abstract

Purpose

The purpose of this study is to investigate nonlinearities in the behavior of investment expenditure. Conventional wisdom suggests that Tobin’s Q criterion is an important explanation of investment behaviour that bridges the financial and real sides of the economy. However, the empirical evidence in support of Q as a means of explaining aggregate business investment is rather weak. We answer a number of questions about the relationship between investment expenditure and Q. In particular, is the relationship governed by non-linearities? If so, what is the nature of the non-linearities present?

Design/methodology/approach

The rationale for paying closer attention to non-linearities is based on the presence of information asymmetries and possible dependence of adjustments on non-linearities with respect to factors such as fixed costs, threshold effects and irreversibility, which are entertained in the investment literature. Using the non-linear vector error-correction model procedure advocated by Hansen and Seo, we show that in the context of the US economy, investment has a long-run relationship with Q that is based on threshold error correction.

Findings

There are asymmetries present with respect to error correction or the speed of adjustment towards long-run equilibrium. We find that investment expenditure only responds significantly to long-run disequilibrium from Q during a particular regime. Such a regime is characterised by long-run disequilibrium based on high or rising investment expenditure compared with a relatively weak stock market.

Originality/value

The authors provide new insights into the relationship between Tobin’s Q and real investment. In contrast to previous work, they find that error correction based on the adjustment of real investment is regime-specific and function of the size of departures from long-run equilibrium. The tests also allow for the identification of periods when error correction has occurred. Not only are these insights significant for future research on financial crises, market volatility and the impact of debt, but for policymaking purposes as well.

Details

Studies in Economics and Finance, vol. 32 no. 2
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 26 July 2011

Palamalai Srinivasan, M. Kalaivani and P. Ibrahim

This paper aims to investigate the causal nexus between foreign direct investment (FDI) and economic growth in SAARC countries.

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2789

Abstract

Purpose

This paper aims to investigate the causal nexus between foreign direct investment (FDI) and economic growth in SAARC countries.

Design/methodology/approach

Johansen's cointegration test was employed to examine the long‐run relationship between foreign direct investment and economic growth in SAARC countries. Besides, the vector error correction model (VECM) was employed to examine the causal nexus between foreign direct investment and economic growth in SAARC countries for the years 1970‐2007. Finally, the impulse response function (IRF) has been employed to investigate the time paths of log of foreign direct investment (LFDI) in response to one‐unit shock to the log of gross domestic product (LGDP) and vice versa.

Findings

The Johansen cointegration result establishes a long‐run relationship between foreign direct investment and gross domestic product (GDP) for the sample of SAARC nations, namely, Bangladesh, India, Maldives, Nepal, Pakistan and Sri Lanka. The empirical results of the vector error correction model exhibit a long‐run bidirectional causal link between GDP and FDI for the selected SAARC nations except India. The test results show that there is a one‐way long‐run causal link from GDP to FDI for India.

Research limitations/implications

This paper employed annual data to examine the causal nexus between FDI and economic growth. Therefore, researchers are encouraged to test the FDI‐growth relationship further by using quarterly data.

Practical implications

The SAARC nations should adopt effective policy measures that would substantially enlarge and diversify their economic base, improve local skills and build up a stock of human capital recourses capabilities, enhance economic stability and liberalise their market in order to attract as well as benefit from long‐term FDI inflows.

Originality/value

This paper would be immensely helpful to the policy makers of SAARC countries to plan their FDI policies in a way that would enhance growth and development of their respective economies.

Details

Journal of Asia Business Studies, vol. 5 no. 2
Type: Research Article
ISSN: 1558-7894

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Article
Publication date: 6 June 2008

Christos Floros and Dimitrios V. Vougas

The paper's objectives are: to address the issue of cointegration (efficient market hypothesis) between Greek spot and futures markets over the period of the crisis…

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2365

Abstract

Purpose

The paper's objectives are: to address the issue of cointegration (efficient market hypothesis) between Greek spot and futures markets over the period of the crisis, 1999‐2001; to investigate the short‐run and long‐run efficiency of the FTSE/ASE‐20 stock index futures contract and FTSE/ASE Mid 40 stock index futures contract traded on the Athens Derivatives Exchange (ADEX).

Design/methodology/approach

This paper examines efficiency of the Greek stock index futures market from 1999 to 2001. A variety of econometric models are employed to test for cointegration between prices. The paper uses daily data from the Athens Stock Exchanges (ASEs) and the ADEX. A more detailed discussion on the causal relationship between spot and futures price in ADEX is obtained by using the impulse response functions of the vector errorcorrection model (to study the behaviour of series from real shocks).

Findings

The results show that the Greek futures and spot prices form a stable long‐run relationship. For both FTSE/ASE‐20 and FTSE/ASE Mid 40, futures markets play a price discovery role, implying that futures prices contain useful information about spot prices. Futures markets are informationally more efficient than underlying stock markets in Greece.

Practical implications

The results have important implications for both traders and speculators. The findings are strongly recommended to financial managers dealing with Greek stock index futures.

Originality/value

The contribution of this paper is to provide evidence using data from the early stage of the ADEX (started its official operation on 27 August 1999). It also investigates whether the hypotheses exist after the dramatic rise of ASE stock prices.

Details

Managerial Finance, vol. 34 no. 7
Type: Research Article
ISSN: 0307-4358

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