GMM Estimation of Affine Term Structure Models

This article investigates parameter estimation of affine term structure models by means of the generalized method of moments. Exact moments of the affine latent process as well as of the yields are obtained by using results derived for p-polynomial processes. Then the generalized method of moments, combined with Quasi-Bayesian methods, is used to get reliable parameter estimates and to perform inference. After a simulation study, the estimation procedure is applied to empirical interest rate data

The CEEC10's Real Convergence Prospects

The Central and Eastern European countries' prospects of becoming EU members depend heavily on, among other things, their per capita GDP levels. The growth prospects of these economies cannot be directly assessed, as the economic growth process in the transition countries is shown to not yet be described adequately by neoclassical growth theory. Thus, an indirect approach is taken, which maps the Western European growth experience on 10 Central and Eastern European countries (CEEC10). This indirect approach is used to project growth rates of the CEEC10 and the time required to close the income gaps to the European Union (EU). The sensitivity of the results is analyzed by presenting a wide variety of economically meaningful scenarios. Finally, possible beneficial effects of EU membership or pre-accession aids are studied. The effects on the reduction of the times to converge are computed.Transition economies, Growth and convergence, EU accession

Optimal Asset Allocation Under Linear Loss Aversion

Growing experimental evidence suggests that loss aversion plays an important role in asset allocation decisions. We study the asset allocation of a linear loss-averse (LA) investor and compare the optimal LA portfolio to the more traditional optimal mean-variance (MV) and conditional value-at-risk (CVaR) portfolios. First we derive conditions under which the LA problem is equivalent to the MV and CVaR problems. Then we analytically solve the twoasset problem, where one asset is risk-free, assuming binomial or normal asset returns. In addition we run simulation experiments to study LA investment under more realistic assumptions. In particular, we investigate the impact of different dependence structures, which can be of symmetric (Gaussian copula) or asymmetric (Clayton copula) type. Finally, using 13 EU and US assets, we implement the trading strategy of an LA investor assuming assets are reallocated on a monthly basis and find that LA portfolios clearly outperform MV and CVaR portfolios.LOss aversion, portfolio optimization, MV and CVaR portfolios, copula, investment strategy

CEEC Growth Projections: Certainly Necessary and Necessarily Uncertain

In this paper we discuss the necessity for an indirect approach to assess the growth and convergence prospects of ten Central and Eastern European countries (CEEC10). The necessity for an indirect approach arises for two reasons. First, the ongoing structural changes in the transition economies imply that their growth process is not yet adequately described by the long-run growth forces as identified by (neoclassical) growth theory. Second, their upcoming European Union membership has to be taken into account in growth projections. The indirect approach proposed in this paper is to base the growth projections for the CEEC10 on growth equations estimated for the incumbent EU member states. Thus, in effect we propose a calibration approach. Our study differs from previous studies that employ an indirect approach in two ways. First, we estimate growth equations for the EU and not for a large world-wide country data set that contains many heterogeneous countries that are essentially unrelated to the CEECs. Second, we assess the uncertainty inherent in growth projections by estimating a variety of economically meaningful equations and by specifying a variety of plausible scenarios for the explanatory variables. This results in distributions of projected growth rates, which allow for an uncertainty analysis. Besides growth rate distributions also convergence times distributions are computedReal convergence; transition economies; growth projections; uncertainty analysis

What's Really the Story with this Balassa-Samuelson Effect in the CEECs?

This paper offers a detailed assessment of the Balassa-Samuelson (BS) effect in eight Central and Eastern European countries (CEEC8). Several features distinguish this study from others: First, we investigate a variety of specifications of extended models. Non-homogeneity of wages, deviations from PPP in tradables and demand side variables are found to importantly contribute to explain inflation differentials. Second, a variety of specifications is investigated. Third, we rely upon bootstrap inference for panel unit root and panel cointegration analysis. The bootstrap results are rather clear: No evidence for cointegration remains when resorting to bootstrap inference. To quantify the bias that may arise from incorrectly using cointegration techniques, we also quantify the BS effect from equations containing (nonstationary) "cointegration" terms. Fourth, we present inflation simulations based on well specified scenarios. The results are as follows: Evidence for the BS effect is found. The BS effect is, however, rather small (around half a percent per annum) and not sufficient to explain the observed inflation differentials between the CEEC8 and the EU11. Using, despite the lacking evidence, cointegration techniques results throughout in substantially larger estimated effects. This suggests that studies relying upon cointegration may have overestimated the BS effect. The additional explanatory variables in the extended BS models allow for a satisfactory modelling of the observed inflation rates. The mean inflation simulations for the CEEC8 countries, based on the extended models, range from 2.77% for the Slovak Republic to 6.75% for Poland. These are well above the 2% inflation objective for the European Monetary UnionBalassa-Samuelson effect; Central and Eastern Europe; transition economies; non-stationary panels; bootstrapping; inflation simulations

Finite Sample Correction Factors for Panel Cointegration Tests

In this paper we present finite T mean and variance correction factors and corresponding response surface regressions for the panel cointegration tests presented in Pedroni (1999, 2004), Westerlund (2005), Larsson et al. (2001), and Breitung (2005). For the single equation tests we consider up to 12 regressors and for the system tests vector autoregression dimensions up to 12 variables. All commonly used specifications for the deterministic components are considered. The time dimension sample sizes are 10, 20, 30, 40, 50, 60, 70, 80, 90, 100, 200, 500.Panel cointegration test, correction factor, response surface, simulation

Growth Regressions, Principal Components and Frequentist Model Averaging

This paper offers two innovations for empirical growth research. First, the paper discusses principal components augmented regressions to take into account all available information in well-behaved regressions. Second, the paper proposes a frequentist model averaging framework as an alternative to Bayesian model averaging approaches. The proposed methodology is applied to three data sets, including the Sala-i-Martin et al. (2004) and Fernandez et al. (2001) data as well as a data set of the European Union member states' regions. Key economic variables are found to be significantly related to economic growth. The findings highlight the relevance of the proposed methodology for empirical economic growth research.Frequentist model averaging, Growth regressions, Principal components

The Performance of Panel Unit Root and Stationarity Tests: Results from a Large Scale Simulation Study

This paper presents results concerning the size and power of first generation panel unit root and stationarity tests obtained from a large scale simulation study, with in total about 290 million test statistics computed. The tests developed in the following papers are included: Levin, Lin and Chu (2002), Harris and Tzavalis (1999), Breitung (2000), Im, Pesaran and Shin (1997 and 2003), Maddala and Wu (1999), Hadri (2000) and Hadri and Larsson (2002). Our simulation set-up is designed to address i.a. the following issues. First, we assess the performance as a function of the time and the cross-section dimension. Second, we analyze the impact of positive MA roots on the test performance. Third, we investigate the power of the panel unit root tests (and the size of the stationarity tests) for a variety of first order autoregressive coefficients. Fourth, we consider both of the two usual specifications of deterministic variables in the unit root literaturePanel Unit Root Test; Panel Stationarity Test; Size; Power; Simulation Study

Legal Restrictions on Portfolio Holdings: Some Empirical Results

This article investigates the sensitivity analysis of mean-variance portfolio holdings to changes in the upper bounds. The optimization problem studied in this paper is, thus, constrained by a restriction that no more than certain portion of wealth can be invested in any one security. Our empirical results show that for both risk tolerant as well as for risk averse investors, the performance and expected returns of mean-variance efficient portfolios under the legal restrictions are lower and the variance are higher than the corresponding ones without the restriction.Upper bound constraint, Portfolio holdings, Parametric quadratic programming