Testing for Stationary or Persistent Coefficient Randomness in Predictive Regressions

This study considers tests for coefficient randomness in predictive regressions. Our focus is on how tests for coefficient randomness are influenced by the persistence of random coefficient. We find that when the random coefficient is stationary, or I(0), Nyblom's (1989) LM test loses its optimality (in terms of power), which is established against the alternative of integrated, or I(1), random coefficient. We demonstrate this by constructing tests that are more powerful than the LM test when random coefficient is stationary, although these tests are dominated in terms of power by the LM test when random coefficient is integrated. This implies that the best test for coefficient randomness differs from context to context, and practitioners should take into account the persistence of potentially random coefficient and choose from several tests accordingly. In particular, we show through theoretical and numerical investigations that the product of the LM test and a Wald-type test proposed in this paper is preferable when there is no prior information on the persistence of potentially random coefficient. This point is illustrated by an empirical application using the U.S. stock returns data

Modeling interest rate dynamics: an infinite-dimensional approach

We present a family of models for the term structure of interest rates which describe the interest rate curve as a stochastic process in a Hilbert space. We start by decomposing the deformations of the term structure into the variations of the short rate, the long rate and the fluctuations of the curve around its average shape. This fluctuation is then described as a solution of a stochastic evolution equation in an infinite dimensional space. In the case where deformations are local in maturity, this equation reduces to a stochastic PDE, of which we give the simplest example. We discuss the properties of the solutions and show that they capture in a parsimonious manner the essential features of yield curve dynamics: imperfect correlation between maturities, mean reversion of interest rates and the structure of principal components of term structure deformations. Finally, we discuss calibration issues and show that the model parameters have a natural interpretation in terms of empirically observed quantities.Comment: Keywords: interest rates, stochastic PDE, term structure models, stochastic processes in Hilbert space. Other related works may be retrieved on http://www.eleves.ens.fr:8080/home/cont/papers.htm

Enforcement and over-compliance

Economists generally view environmental enforcement as a tool to secure compliance with regulations. This paper demonstrates that credible enforcement significantly increases statutory over-compliance with regulations as well. We find that many plants with discharges typically below legally permitted levels reduce discharges further when regulators issue fines, even on other plants. Also, non-compliant plants often respond to sanctions by reducing discharges well beyond reductions required by law. Thus, increased enforcement generates substantial discharge reductions above and beyond those expected from simply deterring violations.Over-compliance; Fines; Compliance; Enforcement; Regulation; Pollution Policy; Environmental economics; Environmental enforcement; Water pollution; Beyond compliance

EPR Paradox,Locality and Completeness of Quantum Theory

The quantum theory (QT) and new stochastic approaches have no deterministic prediction for a single measurement or for a single time -series of events observed for a trapped ion, electron or any other individual physical system. The predictions of QT being of probabilistic character apply to the statistical distribution of the results obtained in various experiments. The probability distribution is not an attribute of a dice but it is a characteristic of a whole random experiment : '' rolling a dice''. and statistical long range correlations between two random variables X and Y are not a proof of any causal relation between these variable. Moreover any probabilistic model used to describe a random experiment is consistent only with a specific protocol telling how the random experiment has to be performed.In this sense the quantum theory is a statistical and contextual theory of phenomena. In this paper we discuss these important topics in some detail. Besides we discuss in historical perspective various prerequisites used in the proofs of Bell and CHSH inequalities concluding that the violation of these inequalities in spin polarization correlation experiments is neither a proof of the completeness of QT nor of its nonlocality. The question whether QT is predictably complete is still open and it should be answered by a careful and unconventional analysis of the experimental data. It is sufficient to analyze more in detail the existing experimental data by using various non-parametric purity tests and other specific statistical tools invented to study the fine structure of the time-series. The correct understanding of statistical and contextual character of QT has far reaching consequences for the quantum information and quantum computing.Comment: 16 pages, 59 references,the contribution to the conference QTRF-4 held in Vaxjo, Sweden, 11-16 june 2007. To be published in the Proceeding