5,140 research outputs found

    Nonparametric estimation of first passage time distributions in flowgraph models

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    Statistical flowgraphs represent multistate semi-Markov processes using integral transforms of transition time distributions between adjacent states; these are combined algebraically and inverted to derive parametric estimates for first passage time distributions between nonadjacent states. This dissertation extends previous work in the field by developing estimation methods for flowgraphs using empirical transforms based on sample data, with no assumption of specific parametric probability models for transition times. We prove strong convergence of empirical flowgraph results to the exact parametric results; develop alternatives for numerical inversion of empirical transforms and compare them in terms of computational complexity, accuracy, and ability to determine error bounds; discuss (with examples) the difficulties of determining confidence bands for distribution estimates obtained in this way; develop confidence intervals for moment-based quantities such as the mean; and show how methods based on empirical transforms can be modified to accommodate censored data. Several applications of the nonparametric method, based on reliability and survival data, are presented in detail

    Forecasting Exchange Rates: The Multi-State Markov-Switching Model with Smoothing

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    This paper presents an exchange rate forecasting model which combines the multi-state Markov-switching model with smoothing techniques. The model outperforms a random walk at short horizons and its superior forecastability appears to be robust over different sample spans. Our finding hinges on the fact that exchange rates tend to follow highly persistent trends and accordingly, the key to beating the random walk is to identify these trends. An attempt to link the trends in exchange rates to the underlying macroeconomic determinants further reveals that fundamentals-based linear models generally fail to capture the persistence in exchange rates and thus are incapable of outforecasting the random walk.Exchange Rate, Forecasting, Markov-Switching, Smoothing, HP-Filter

    Unit Root Tests With Markov-Switching

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    Diba and Grossman (1988) and Hamilton and Whiteman (1985) recommended unit root tests for rational bubbles. They argued that if stock prices are not more explosive than dividends, then it can be concluded that rational bubbles are not present. Evans (1991) demonstrated that these tests will fail to detect the class of rational bubbles which collapse periodically. When such bubbles are present, stock prices will not appear to be more explosive than the dividends on the basis of these tests, even though the bubbles are substantial in magnitude and volatility. Hall et al. (1999) show that the power of unit root test can be improved substantially when the underlying process of the sample observations is allowed to follow a first-order Markov process. Our paper applies unit root tests to the property prices of Hong Kong and Seoul, allowing for the data generating process to follow a three states Markov chain. The null hypothesis of unit root is tested against the explosive bubble or stable alternative. Simulation studies are used to generate the critical values for the one-sided test. The time series used in the tests are the monthly price and rent indices of Seoul’s housing (1986:1 to 2003:6) and Hong Kong’s retail premise (1980:12 to 2003:1). The investigations show that only one state appears to be highly likely in all series under investigation and the switching unit root procedure failed to find explosive bubbles in both prices.unit root, bootstrap, Markov-Switching

    Heavy-tails and regime-switching in electricity prices

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    In this paper we first analyze the stylized facts of electricity prices, in particular, the extreme volatility and price spikes which lead to heavy-tailed distributions of price changes. Then we calibrate Markov regime-switching (MRS) models with heavy-tailed components and show that they adequately address the aforementioned characteristics. Contrary to the common belief that electricity price models ‘should be built on log-prices’, we find evidence that modeling the prices themselves is more beneficial and methodologically sound, at least in case of MRS models.Electricity spot price, Heavy-tails, Spikes, Markov regime-switching, Pareto distribution

    Do Individual Index Futures Investors Destabilize the Underlying Spot Market?

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    This paper investigates the impact of introducing index futures trading on the volatility of the underlying stock market. We exploit a unique institutional setting in which presumably uninformed individuals are the dominant trader type in the futures markets. This enables us to investigate the destabilization hypothesis more accurately than previous studies do and to provide evidence for or against the in uence of individuals trading in index futures on spot market volatility. To overcome econometric shortcomings of the existing literature we employ a Markov-switching-GARCH approach to endogenously identify distinct volatility regimes. Our empirical evidence for Poland surprisingly suggests that the introduction of index futures trading does not destabilize the spot market. This nding is robust across 3 stock market indices and is corroborated by further analysis of a control group.Individual Investors, Uninformed Trading, Stock Index Futures, Emerging Capital Markets, Stock Market Volatility, Markov-Switching-GARCH Model

    Unemployment, Hysterisis and Transition

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    We quantify the degree of persistence in the unemployment rates of transition countries using a variety of methods benchmarked against the EU. In doing so, we will also characterize the dynamic behavior of unemployment in the CEECs during the past decade. In part of the paper, we will work with the concept of linear ÒHysteresisÓ as described by the presence of unit roots in unemployment as in most empirical research on this area. Given that this is potentially a rather narrow definition, we will also take into account the existence of structural breaks and non-linear dynamics in unemployment in order to allow for a richer set of dynamics. Finally, we examine whether CEECsÕ unemployment presents features of multiple equilibria, that is, if it remains locked into a new level whenever a structural change occurs. Our findings show that, in general, we can reject the unit root hypothesis after controlling for structural changes and business cycle effects, but we can observe the presence of a high and low unemployment equilibria. The speed of adjustment is faster for CEECs than the EU, although CEECs tend to move more frequently between equilibria.unemployment, hysterisis, unit root, transition
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