Testing Affine Term Structure Models in Case of Transaction Costs

In this paper we empirically analyze the impact of transaction costs on the performance of affine interest rate models. We test the implied (no arbitrage) Euler restrictions, and we calculate the specification error bound of Hansen and Jagannathan to measure the extent to which a model is misspecified. Using data on T-bill and bond returns we find, under the assumption of frictionless markets, strong evidence of misspecification of one- and two-factor affine interest rate models. This is in line with earlier research. However, we show that the pricing errors of these models are reduced considerably, if relatively small transaction costs are taken into account. The average transaction costs for T-bills, due to the bid-ask spread, are around 1.5 basis points. At this size of transaction costs and for monthly holding periods, the misspecification of one- and two-factor affine interest rate models becomes statistically insignificant and economically very small. For quarterly holding periods, higher transaction costs of around 3 basis points are required to avoid misspecification.

Testing predictive performance of binary choice models

Binary choice models occur frequently in economic modeling. A measure of the predictive performance of binary choice models that is often reported is the hit rate of a model. This paper develops a test for the outperformance of a predictor for binary outcomes over a naive prediction method, which predicts the outcome that is most often observed. This is done for a general class of prediction models, including the well known Probit and Logit models. In many cases the test is easy to compute. The test is then applied and compared to a general test of Pesaran and Timmermann (1992) for dependence between predictors and realizations

Firm Level Productivity under Imperfect Competition in Output and Labor Markets

This article examines the role of the interaction between product market and labor market imperfections in determining total factor productivity growth (TFPG). Embedding Dobbelaere and Mairesse’s (2009) generalization of Hall’s (1990) approach, allowing for the possibility that wages are determined according to an efficient bargaining process between employers and employees, we correct estimated TFPG for possible biases arising from labor market imperfections. Our analysis contributes to the literature in a number of ways. First, we propose a new empirical measure of TFPG which takes into account possible biases coming from imperfect competition on both labor and output markets, whereas Dobbelaere and Mairesse (2009) focus on the decomposition of the Solow residual. Second, in contrast to most of the literature following Hall’s approach, we estimate market power including the user cost of capital stock. Third, we measure the sensitivity of TFPG to an alternative specification of competition based on relative profits. Using a large Dutch firm-level panel database over the period 1989-2005, we find that workers’ unions power, and in general rigidities of the labor market, affect firms’ marginal cost, and, consequently, the markups. Moreover, taking into account variable returns to scale and imperfect competition in the output market translate into increased TFPG, while accounting for labor market bargaining power leads to lower TFPG. Next, the investigation of our empirical relationship between the price-cost margin and an alternative specification of imperfect competition of the output market (profit elasticity) as a sensitivity analysis of the TFPG shows that adding more structure to the competition measure does not affect the level of productivity change.

Semi-parametric models for satisfaction with income

An overview is presented of some parametric and semi-parametric models, estimators, and specification tests that can be used to analyze ordered response variables. In particular, limited dependent variable models that general- ize ordered probit are compared to regression models that generalize the linear model. These techniques are then applied to analyze how self-reported satisfac- tion with household income relates to household income, family composition, and other background variables. Data are drawn from the 1998 wave of the German Socio-Economic Panel. The results are used to estimate equivalence scales and the cost of children. We find that the standard ordered probit model is rejected, while some semi-parametric specifications survive specification tests against nonpara- metric alternatives. The estimated equivalence scales, however, are often similar for the parametric and semi-parametric specifications.info:eu-repo/semantics/publishedVersio

The institutional choice of refuse collection: Determining variables in the Netherlands

General empirical evidence suggests that contracting out refuse collection results in a cost decrease in the order of 20%. However, although the method of contracting out refuse collection has become more popular, it is still less common than in-house provision. This paper investigates the reasons behind this phenomenon. Recently, L?pez-de-Silanes et al. (1997) tried to explain the reservedness of local authorities towards contracting out with US-data and show that political patronage is an important explanation. In this article we give such an empirical assessment using Dutch data. We base our empirical research on the combination of the theories around efficiency, interest group influence and ideology. To test these theories we model the choice between private and public provision of refuse collection on the one hand side and the choice between in-house and out-house provision on the other side. Data are available for nearly all Dutch municipalities. A most striking conclusion is that nearly all political parties in the Netherlands do have a preference for public and in-house provision of refuse collection. We find only modest evidence for the hypothesis that a high level of real estate tax (proxy for the soundness of municipal financial affairs, the efficiency argument) or a low leve

Identifying Reduced-Form Relations with Panel Data

The literature that tests for U-shaped relationships using panel data, such as those between pollution and income or inequality and growth, reports widely divergent (parametric and non-parametric) empirical findings. We explain why lack of identification lies at the root of these differences. To deal with this lack of identification, we propose an identification strategy that explicitly distinguishes between what can be identified on the basis of the data and what is a consequence of subjective choices due to a lack of identification. We apply our methodology to the pollution-income relationship of both CO2- and SO2-emissions. Interestingly, our approach yields estimates of both income (scale) and time (composition and/or technology) effects for these reduced-form relationships that are insensitive to the required subjective choices and consistent with theoretical predictions

Estimating the joint survival probabilities of married individuals

We estimate the joint survival probability of spouses using a large random sample drawn from a Dutch census. As benchmarks we use two bivariate Weibull models. We consider more flexible models, using a semi-nonparametric approach, by extending the independent Weibull distribution using squared polynomials. Also based on a nonparametric comparison, we find that extending the independent Weibull distribution by a squared third order polynomial shows the best performance. We illustrate our model by calculating remaining life expectancies and annuity values. We find that the husbands life expectancy at birth is generally increasing with his wifes age of death and the wifes life expectancy at birth is generally increasing with her husbands age of death. Ignoring the dependence between the remaining lifetimes of spouses may lead to an underestimation of the value of a joint annuity and an overestimation of the value of a single-life annuity, but less than suggested on the basis of the previous literature