Testing for Breaks Using Alternating Observations

This paper proposes several new tests for structural change in the multivariate linear regression model. One of the most popular alternatives are Sup-Wald type tests along the lines of Bai, Lumsdaine and Stock (1998), which Bernard,Idoudi, Khalaf and Yélou (2007) show to have very large size distortions, especially for high dimensional systems. They propose the use of Monte Carlo type tests to control for size in finite samples. In this paper we propose several procedures that find a balance between the two previous approaches. We first estimate the break point using alternating observations, and then use the estimated breakpoint to create a test statistic either with the whole sample or with the observations not used for the breakpoint estimation. For the latter approach, it is then possible to use Monte Carlo methods to control size. In contrast to the Sup-Wald type tests, which have non-standard asymptotic distributions, we show that our tests are asymptotically distributed Chisquare using methods similar to those in Andrews (2004). Additionally, our tests stay asymptotically valid even when the distributional assumption made for the Monte Carlo adjustments is incorrect. We illustrate the new test statistics in the univariate context of discount rates and changes in the interest rates, and also in the multivariate setting of the Capital Asset Pricing Model.structural stability; structural change; multivariage linear regression model; breaks; Monte Carlo test; CAPM; discount rate

Estimation of tail thickness parameters from GJR-GARCH models

We propose a method of estimating the Pareto tail thickness parameter of the unconditional distribution of a financial time series by exploiting the implications of a GJR-GARCH volatility model. The method is based on some recent work on the extremes of GARCH-type processes and extends the method proposed by Berkes, Horváth and Kokoszka (2003). We show that the estimator of tail thickness is consistent and converges at rate ?T to a normal distribution (where T is the sample size), provided the model for conditional variance is correctly specified as a GJR-GARCH. This is much faster than the convergence rate of the Hill estimator, since that procedure only uses a vanishing fraction of the sample. We also develop new specification tests based on this method and propose new alternative estimates of unconditional value at risk. We show in Monte Carlo simulations the advantages of our procedure in finite samples; and finally an application concludes the paperPareto tail thickness parameter, GARCH-type models, Value-at-Risk, Extreme value theory, Heavy tails

MULTIVARIATE ARCH MODELS: FINITE SAMPLE PROPERTIES OF ML ESTIMATORS AND AN APPLICATION TO AN LM-TYPE TEST

At the present time, there exists an important and growing econometric literature that deals with the application of multivariate-ARCH models to a variety of economic and financial data. However, the properties of the estimation procedures that are used have not yet been fully explored. This paper provides two main new results: the first concerns the large biases and variances that can arise when the ML estimation method is employed in a simple bivariate structure under the assumption of conditional heteroscedasticity; and the second examines how to use these analytical theoretical results to improve the size and the power of a test for multivariate ARCH effects. We analyse two models: one proposed in Wong and Li (1997) (where the disturbances are dependent but uncorrelated) and another proposed by Engle and Kroner (1995) and Liu and Polasek (1999, 2000) (where conditional correlation is allowed through a diagonal representation). We prove theoretically that a relatively large difference between the intercepts in the two conditional variance equations produces, in the first model, very large variances in some of the ML estimators and, in the second, very severe biases in some of the ML estimators of the parameters. Later we use our bias expressions to propose an LM type test of multivariate ARCH effects, showing that the size and the power of the test improve when we allow for bias correction in the estimators, and that the best recommendation in practical applications is always to use the expected hessian version of the LM. We address as well some constraints that should be included in the estimation of the models but which have so far been ignored. Finally, we present a SUR (seemingly unrelated) specification in both models, that provides an alternative way to retrieve the information matrix. We also extend Lumsdaine (1995) results in multivariate framework.Multivariate GARCH, Bias evaluation.

The daily price and income elasticity of natural gas demand in Europe

Financiado para publicación en acceso aberto: Universidade da Coruña/CISUG[Abstract] Data from 15 European countries is analysed to provide novel estimates of daily own-price, cross-price and income elasticities of natural-gas-demand from 2016 to 2020. The results show that: first, there is a strong-seasonal component in the October–February period during which residential-demand has a higher share on total demand, and gas price is not a determinant factor for most of the countries. This seasonal profile makes price-based tools more effective modifying end-consumer behaviours from March to August when estimated own-price elasticities present larger values in absolute terms. Second, there are estimated positive own-price elasticities from October to February in Bulgaria, Luxemburg, Poland, the UK, and Portugal. The first four countries present natural gas prices below the EU-28 average during the analysed period and it is argued that positive elasticities may reflect a disconnection between the price traded on the organized markets and the real price perceived by end-customers. For Portugal, who is currently carrying out a very aggressive policy to become coal-free by the end of 2021, natural gas and coal are mainly consumed in power sector to provide flexibility and back up renewable generation. The limited alternatives to provide these services may explain why coal and natural gas are found to be complementary. Finally, it is found that lockdowns due to covid-19 highly impacted on natural gas demand, confirming for the first time in the literature a “double heating effect”. Our results help to find when price-based tools by policymakers will influence more effectively natural-gas-demand following economic and environmental goals.Ministerio de Ciencia e Innovación ; PGC2018-101327-B-100Xunta de Galicia ; ED431C 2020/2

Evolution over time of the determinants of preferences for redistribution and the support for the welfare state

[Abstract:] The objective of this article is to analyse the determinants of preferences for redistribution in Spain both at an aggregate and regional level. Using country level data, we put to the test the Alesina and Angeletos’ (2005) hypothesis, the strong and positive relationship between the ‘belief that luck determines income’ and the support for redistributive policies. As an innovative contribution, we contrast this hypothesis using a set of panel data models with regional and time fixed effects. Our main finding is the existence of a structural change in preferences formation for redistribution in Spain between 1995 and 2007. Furthermore, the empirical results provide some evidence suggesting that (1) the belief that society is unfair have a moderate effect on the individuals’ preferences for redistribution and (2) regional beliefs in Spanish regions are not equally important when determining demand for redistribution

Subjective wellbeing, income and relational goods: the determinants of happiness in Spain

[Resumen:] En el presente trabajo se analizan los determinantes de la felicidad, entendida esta como satisfacción subjetiva revelada. El principal objetivo tiene un doble componente: por un lado, se trata de contrastar la paradoja de Easterlin para la sociedad española (ausencia de un vínculo directo entre el incremento de la renta per capita y la evolución del bienestar subjetivo revelado a nivel agregado) y, por otro, evaluar el papel que desempeñan los bienes relacionales como determinantes de la felicidad. El marco analítico adoptado se encuadra dentro de la denominada happiness economics y la evidencia empírica se deriva de la estimación de una función microeconométrica de la felicidad aplicando un modelo Logit tanto en cortes temporales como en datos de panel. Los resultados obtenidos permiten concluir que en España el ingreso desempeña un papel secundario y subjetivo, mientras que se revelan como importantes las variables asociadas directa o indirectamente a los bienes relacionales.[Abstract:] In the present paper we analyze the determinants of happiness proxying by subjective welfare. The main objective is twofold: on the one hand, to put to the test the Easterlin’s paradox (the lack of a direct relationship between income and subjective wellbeing at aggregate level) and, on the other hand, to weight influence of relational goods in determining happiness. The analytical framework adopts the perspective of happiness economics and the empirical evidence is derived from the estimation of a microeconometric function of happiness applying a Logit model both when using cross sectional and panel data. The results show that in Spanish society income plays a secondary and subjective role, while other variables that are associated directly or indirectly to relational goods are revealed to be very important

Exchange Rate Movements, Stock Prices and Volatility in the Caribbean and Latin America

We analyse the interrelationship between stock prices and exchange rates in the only two Caribbean countries with stock market and floating exchange rates: Jamaica and Trinidad and Tobago. We also study the same four Latin American countries as in Diamandis and Drakos (2011). Using their model, our results show a very mild relationship between both variables in Jamaica, Trinidad and Tobago, Argentina and Brazil, but we cannot find any relationship in the other countries as in Diamantis and Drakos (2011). However, when we extend their model including a GARCH component to examine the impact of volatility, our results changed drastically: stock prices significantly impacted the exchange rate in the tranquil sub-period and the full period for Jamaica, over all three periods for Trinidad and Tobago and in the tranquil period for Argentina, Mexico and Chile. This shows the importance of incorporating volatility explicitly in the model. Our results have the policy implications that governments in the previous countries should try to prevent a currency crisis by stimulating economic growth and the expansion of the stock market to attract capital inflow as in Lin (2012). Keywords: exchange rates, stock prices, volatility. JEL Classifications: F31, G0

Identifying the impact of the business cycle on drug-related harms in European countries

[Abstract] Background: The evidence resulting from the analysis of the association between economic fluctuations and their impact on the substance use is mixed and inconclusive. Effects can be pro-cyclical (drug-related harms are predicted to rise when economic conditions improve), counter-cyclical (drug-related harms are predicted to rise in bad economic times) or unrelated to business cycle conditions as different transmission mechanisms could operate simultaneously. Methods: The main aim of this study is to assess, from a macroeconomic perspective, the impact of economic cycles on illegal drug-related harms in European countries over the 2000-2020 period. To this end, the regime dependent relationship between drug-related harm, proxied by unemployment, and the business cycle, proxied by overdose deaths will be identified. Applying a time dynamic linear analysis, within the framework of threshold panel data models, structural-breaks will also be tested. Results: The relationship between economic cycles (proxied by unemployment) and drug-related harms (proxied by overdose deaths) is negative, and therefore found to be pro-cyclical. One percentage point in the country unemployment rate is predicted to reduce the overdose death rate by a statistically significant percentage of 2.42. A counter-cyclical component was identified during the 2008 economic recession. The threshold model captures two effects: when unemployment rates are lower than the estimated thresholds, ranging from 3.92% to 4.12%, drug-related harms and unemployment have a pro-cyclical relationship. However, when unemployment rates are higher than this threshold, this relationship becomes counter-cyclical. Conclusions: The relationship between economic cycles and drug-related harms is pro-cyclical. However, in sit uations of economic downturns, a counter-cyclical effect is detected, as identified during the 2008 economic recession.This paper is based on work supported by the funding of the European Monitoring Centre for Drugs and Drug Addiction (EMCDDA). Contract number: CT.21.HEA.0110.1.0. Emma Iglesias has also obtained financial support from the Spanish Ministry of Science and Innovation, project PID2022-137923NB-I00, and from Xunta de Galicia, project ED431C 2020/26.European Monitoring Centre for Drugs and Drug Addiction; CT.21.HEA.0110.1.0Xunta de Galicia; ED431C 2020/2

Determinants of private investment in the countries of the Pacific Alliance

Este artículo busca evidencia empírica acerca de si un aumento de los impuestos, del gasto público y en general, un estado muy intervencionista estimula o desestimula la inversión privada en los países que conforman la Alianza del Pacífico. Realizamos el análisis de los cuatro países y los resultados a partir de nuestras elasticidades estimadas muestran evidencia consistente con tres hipótesis: (1) que la presión tributaria (impuestos sobre renta y consumo) tiene efectos significativos en la inversión privada; (2) que la inversión pública tiene un efecto de crowding out con la inversión privada; (3) y que para estimular la inversión privada, se prefiere que el gobierno sea poco intervencionista.This article seeks to empirical evidence about whether an increase in taxes, public spending and in general, a state very interventionist encourages or discourages private investment in developing countries that make up the Pacific Alliance. We did an analysis of the four countries and the results from our estimated elasticities show evidence consistent with three scenarios: (1) that the tax pressure (taxes on income and consumption) has significant effects on private investment; (2) that public investment has an effect of crowding out private investment; (3) and that in order to stimulate private investment, it is preferred that the government is little interventionist

Money Market Integration in Spain in the Ninetheen Century: The Role of the 1875-1885 Decade

Are transaction costs and half-lives between two cities the same in both directions in traditional city-based monetary systems? Market conditions and political circumstances may not justify this assumption; and we provide evidence that it does not hold in the 1825-1885 period in Spain. Moreover, we show empirical evidence that market integration in Spain from 1875 to 1885 was a slow process of monetary unification with decreasing transaction costs, and a very inefficient convergence. Therefore, full integration did not happen in the period 1875-1885 and had to wait until mid-1880s, when the Spanish money-market was unified due to financial innovations