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Article
Publication date: 10 September 2021

Pham Dinh Long, Bui Quang Hien and Pham Thi Bich Ngoc

The paper aims to shed light on the effects of inflation on gold price and exchange rate in Vietnam by using time-varying cointegration.

Abstract

Purpose

The paper aims to shed light on the effects of inflation on gold price and exchange rate in Vietnam by using time-varying cointegration.

Design/methodology/approach

Using cointegration techniques with fixed coefficient and time-varying coefficient, the study exams the impacts of inflation in models and compares the results through coefficient estimates.

Findings

A significant inflation impacts are found with the time-varying cointegration but not with the fixed coefficient cointegration models. Moreover, monetary policy affects exchange rate not only directly via its instruments as money supply and interest rate but indirectly via inflation. Also, interest rate is one of the determinants of gold price.

Originality/value

To the best of our knowledge, this paper is the first to use time-varying cointegration to analyze the impact of inflation on the gold price and exchange rate in Vietnam. Gold price and exchange rate fluctuations are always the essential and striking issues, which have been emphasized by economists and policymakers. In macroeconometric researches, cointegration models are often used to analyze the long-term relations between variables. Attentionally, applied models show a limitation when estimating coefficients are fixed. This characteristic might not really match with the data properties and the variation of the economy. Currently, time-varying cointegration models are emerging method to solve the above issue.

Details

Asian Journal of Economics and Banking, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2615-9821

Keywords

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Book part
Publication date: 1 January 2004

Helmut Lutkepohl

Abstract

Details

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

Content available
Article
Publication date: 30 July 2020

Arcade Ndoricimpa

This study reexamines the sustainability of fiscal policy in Sweden.

Abstract

Purpose

This study reexamines the sustainability of fiscal policy in Sweden.

Design/methodology/approach

To test the sustainability of fiscal policy, two approaches are used; the methodology of Kejriwal and Perron (2010), testing for multiple structural changes in a cointegrated regression model and time-varying cointegration test of Bierens and Martins (2010), and Martins (2015).

Findings

Using the first approach of testing for multiple structural changes in a cointegrated regression model, the results indicate that government spending and revenue are cointegrated with two breaks. An estimation of a two-break long-run model shows that the slope coefficient increases from 0.678 to 0.892 from the first to the second regime, implying that fiscal deficits were weakly sustainable in the first two regimes, from 1800 to 1943, and from 1944 to 1974. Further, results from time-varying cointegration test indicate that cointegration between spending and revenue in Sweden is time-varying. Fiscal deficits were found to be unsustainable for the periods 1801–1811, 1831–1838, 1853–1860 , 1872–1882, 1897–1902, 1929–1940 and 1976–1982 and weakly sustainable over the rest of the study period.

Research limitations/implications

A number of implications arise from this study: (1) Accounting for breaks in cointegration analysis and in the estimation of the level relationship between spending and revenue is very important because ignoring breaks may lead to an overestimated slope coefficient and hence a bias on the magnitude of fiscal deficit sustainability. (2) In testing for cointegration between spending and revenue, assuming a constant cointegrating slope when it is actually time-varying can also be misleading because deficits can be sustainable for a period of time and unsustainable over another period.

Originality/value

The contribution of this study is three-fold; first, the study uses a long series of annual data spanning over a period of two centuries, from 1800 to 2011. Second, because of the importance of structural change in economics, to examine the existence of a level relationship between spending and revenue, the study uses the methodology of Kejriwal and Perron (2010) to test for multiple structural changes in a cointegrated regression model, as well as time-varying cointegration of Bierens and Martins (2010) and Martins (2015).

Details

Journal of Economics and Development, vol. 23 no. 1
Type: Research Article
ISSN: 1859-0020

Keywords

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Article
Publication date: 9 May 2016

Ioannis Papantonis

The purpose of this paper is to present an alternative approach to equity trading that is based on cointegration. If there are long-run equilibria among financial assets…

Abstract

Purpose

The purpose of this paper is to present an alternative approach to equity trading that is based on cointegration. If there are long-run equilibria among financial assets, a cointegration-based trading strategy can exploit profitable opportunities by capturing mean-reverting short-run deviations.

Design/methodology/approach

First, the author introduces an equity indexing technique to form cointegration tracking portfolios that are able to replicate an index effectively. The author later enhances this tracking methodology in order to construct more complex portfolio-trading strategies that can be approximately market neutral. The author monitors the performance of a wide range of trading strategies under different specifications, and conducts an in-depth sensitivity analysis of the factors that affect the optimal portfolio construction. Several statistical-arbitrage tests are also carried out in order to examine whether the profitability of the cointegration-based trading strategies could indicate a market inefficiency.

Findings

The author shows that under certain parameter specifications, an efficient tracking portfolio is able to produce similar patterns in terms of returns and volatility with the market. The author also finds that a successful long-short strategy of two cointegration portfolios can yield an annualized return of more than 8 percent, outperforming the benchmark and also demonstrating insignificant correlation with the market. Even though some cointegration-based pairs-trading strategies can consistently generate significant cumulative profits, yet they do not seem to converge to risk-less arbitrages, and thus the hypothesis of market efficiency cannot be rejected.

Originality/value

The primary contribution of the research lies within the detailed analysis of the factors that affect the tracking-portfolio performance, thus revealing the optimal conditions that can lead to enhanced returns. Results indicate that cointegration can provide the means to successfully reproducing the risk-return profile of a benchmark and to implementing market-neutral strategies with consistent profitability. By testing for statistical arbitrage, the author also provides new evidence regarding the connection between the profit accumulation of cointegration-based pairs-trading strategies and market efficiency.

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Article
Publication date: 11 January 2016

Najla Shafighi, Abu Hassan Shaari, Behrooz Gharleghi, Tamat Sarmidi and Khairuddin Omar

The purpose of this paper is to identify whether any financial integration exists among ASEAN+5 members and some East Asian countries, including China, Japan, Korea, Hong…

Abstract

Purpose

The purpose of this paper is to identify whether any financial integration exists among ASEAN+5 members and some East Asian countries, including China, Japan, Korea, Hong Kong, and Taiwan, through interest rate, exchange rate, level of prices, and real output.

Design/methodology/approach

Therefore, the authors intend to identify any long-term relationship among these variables utilizing the data in the most efficient manner via panel cointegration and panel unit root tests. The study likewise uses a panel-based vector error correction (panel-vec) model for comparison and also short-run relationship analysis. The long-run relationship is estimated using dynamic ordinary least square technique and a panel multi-layer perceptron (MLP) neural network.

Findings

For the ten countries under consideration, the empirical result supports the long-run equilibrium relationship among real output, exchange rate, interest rate, and level of prices, and that the cointegration relationship implies unidirectional causality from exchange rate to real output. This result is favorable to a model that contains real output as a dependent variable and exchange rate, interest rate, and level of prices as explanatory variables. Panel-vec results indicate no evidence of short-run causality from exchange rate to real output. Furthermore, the comparison result of long-run equation estimation shows the superiority of neural networks over econometric models.

Originality/value

This paper adds to the literature by examining the financial cointegration using a panel model that contains real exchange rate, interest rate, real output, and inflation rate in ASEAN+5. Additionally this paper applied the MLP neural network to yield a robust estimation of the long-run equation obtained among the variables.

Details

Journal of Economic Studies, vol. 43 no. 1
Type: Research Article
ISSN: 0144-3585

Keywords

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Article
Publication date: 20 January 2012

Murali Batareddy, Arun Kumar Gopalaswamy and Chia‐Hsing Huang

The purpose of this paper is to investigate the stability of the long‐run relationships between emerging (India, China, South Korea, and Taiwan) and developed stock…

Abstract

Purpose

The purpose of this paper is to investigate the stability of the long‐run relationships between emerging (India, China, South Korea, and Taiwan) and developed stock markets (USA and Japan). The study aims at adding to the literature on market integration by investigating the hypothesis that the Asian emerging stock markets are increasingly converging with the US stock market over time.

Design/methodology/approach

The authors use time varying cointegration tests (rolling and recursive cointegration) which allow for time variation in the underlying data generating process (possible structural breaks in the long‐run relationships). Ten year index data from mid 1998 to 2008 of the respective stock markets have been used for this study.

Findings

Empirical findings support the presence of one long‐run relationship (cointegration vector) between emerging and developed stock markets. Both domestic and external forces affect stock market behavior, leading to long‐run equilibrium but the individual Asian emerging stock markets tend to display stronger linkages with the USA (developed counterpart) rather than with their neighbors. The degree of convergence among Asian emerging markets has increased over the last few years.

Originality/value

This is the first paper to study cointegration among Asian emerging stock markets namely India, China, South Korea, and Taiwan, as well as their cointegration with the developed stock markets of the USA and Japan.

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Article
Publication date: 21 September 2015

Mohamed Bilel Triki and Samir Maktouf

The purpose of this paper is to focus on whether the deviations from the cointegrating relationship possess long memory and the fractional cointegration analyses may…

Abstract

Purpose

The purpose of this paper is to focus on whether the deviations from the cointegrating relationship possess long memory and the fractional cointegration analyses may capture a wider range of mean-reversion behaviour than standard cointegration analyses.

Design/methodology/approach

This paper uses a fractional cointegration technique to test the purchasing power parity (PPP).

Findings

The authors found that PPP held, but very weakly, in the long run between the Argentine, Brazil, Chile, Colombia, Indonesia, Korea, Mexico, Thailand and Venezuela and US exchange rate during our floating exchange rate period but that the deviations from it did not follow a stationary process. Nevertheless, it is also found that the deviations from PPP exists and can be characterized by a fractionally integrated process in nine out of 13 countries studied.

Originality/value

The findings are consistent with the consensus of the empirical literature, reviewed earlier in this paper, on PPP between Argentine, Brazil, Chile, Colombia, Indonesia, Korea, Mexico, Thailand and Venezuela and the USA.

Details

International Journal of Emerging Markets, vol. 10 no. 4
Type: Research Article
ISSN: 1746-8809

Keywords

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Article
Publication date: 1 March 1991

Roger Perman

An overview of the cointegration approach to econometricspecification and estimation is provided. A non‐technical approach isadopted, and is intended to serve as an entry…

Abstract

An overview of the cointegration approach to econometric specification and estimation is provided. A non‐technical approach is adopted, and is intended to serve as an entry into this important new literature for the reader with no background knowledge of the subject but with some limited knowledge of econometrics. Particular emphases are given to the rationale for using cointegration techniques in the estimation of economic relationships, to providing intuitive explanations of the concepts and techniques, and to demonstrating their applications in practice. Reference is made throughout to other articles which explain particular methods or recent developments more formally and fully than is possible here. Finally, a simple application of cointegration techniques to the estimation of the consumption function is provided.

Details

Journal of Economic Studies, vol. 18 no. 3
Type: Research Article
ISSN: 0144-3585

Keywords

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Article
Publication date: 7 August 2017

Nisha Mary Thomas, Smita Kashiramka and Surendra S. Yadav

The purpose of this paper is to investigate the long-run equilibrium relationship between developed, emerging and frontier markets of the Asia-Pacific region during…

Abstract

Purpose

The purpose of this paper is to investigate the long-run equilibrium relationship between developed, emerging and frontier markets of the Asia-Pacific region during January 2000 to June 2016.

Design/methodology/approach

Zivot and Andrews’ unit root test is used to examine the existence of unit root in index series in the presence of a structural break. Gregory and Hansen’s test of cointegration is employed to examine the stable long-run relationship between the indices under study.

Findings

The results suggest that the emerging markets of China and Thailand and the frontier markets of Sri Lanka and Pakistan are fairly segmented from most of the markets in the Asia-Pacific region. Hence, these markets provide good diversification opportunities to global investors. Bidirectional cointegration analysis indicates that emerging and frontier markets influence developed markets. Hence, it can be inferred that the de facto position that only bigger markets influence small markets no longer holds true in the current environment.

Practical implications

The findings of this study will provide valuable inputs to global investors for creating an optimal investment portfolio.

Originality/value

This study does a comprehensive examination of market integration in the Asia-Pacific region. It also contributes to the thin body of work done on frontier markets. Unlike past studies, this paper analyzes the bidirectional cointegration relationship to examine if the notion that only bigger markets influence smaller markets holds true or not. Finally, this study employs advanced techniques of unit root test and cointegration test that consider structural breaks in the models.

Details

Journal of Advances in Management Research, vol. 14 no. 3
Type: Research Article
ISSN: 0972-7981

Keywords

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Book part
Publication date: 1 January 2004

Peter Winker and Dietmar Maringer

Abstract

Details

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

1 – 10 of over 2000