GMM estimation with noncausal instruments under rational expectations

There is hope for the generalized method of moments (GMM). Lanne and Saikkonen (2011) show that the GMM estimator is inconsistent, when the instruments are lags of noncausal variables. This paper argues that this inconsistency depends on distributional assumptions, that do not always hold. In particular under rational expectations, the GMM estimator is found to be consistent. This result is derived in a linear context and illustrated by simulation of a nonlinear asset pricing model.generalized method of moments, noncausal autoregression, rational expectations

Noncausality and Asset Pricing

Misspecification of agents' information sets or expectation formation mechanisms maylead to noncausal autoregressive representations of asset prices. Annual US stock prices are found to be noncausal, implying that agents' expectations are not revealed to an outside observer such as an econometrician observing only realized market data. A simulation study shows that noncausal processes can be generated by asset-pricing models featuring heterogeneous expectations.noncausal autoregressions, stock prices, heterogeneous expectations

Graphs with specified degree distributions, simple epidemics and local vaccination strategies

Consider a random graph, having a pre-specified degree distribution F but other than that being uniformly distributed, describing the social structure (friendship) in a large community. Suppose one individual in the community is externally infected by an infectious disease and that the disease has its course by assuming that infected individuals infect their not yet infected friends independently with probability p. For this situation the paper determines R_0 and tau_0, the basic reproduction number and the asymptotic final size in case of a major outbreak. Further, the paper looks at some different local vaccination strategies where individuals are chosen randomly and vaccinated, or friends of the selected individuals are vaccinated, prior to the introduction of the disease. For the studied vaccination strategies the paper determines R_v: the reproduction number, and tau_v: the asymptotic final proportion infected in case of a major outbreak, after vaccinating a fraction v.Comment: 31 pages, 3 figure

Essays on expectations and the econometrics of asset pricing

The way in which market participants form expectations affects the dynamic properties of financial asset prices and therefore the appropriateness of different econometric tools used for empirical asset pricing. In addition to standard rational expectations models, this thesis studies a class of models in which boundedly rational agents may switch between various simple expectation rules. A well-known specific example features fundamentalists, who target the fundamental value of the asset, and chartists, who try to exploit recent trends in price movements. A crucial feature of these models is that not all agents have to follow the same expectation rule, but are allowed to form heterogeneous beliefs. Chapters 2 and 3 present empirical estimations of two specific heterogeneous agent models. Since the data generating processes are assumed to be nonlinear, due to the agents' switching between expectation rules, nonlinear regression models are applied. By framing the empirical results in a heterogeneous agent framework, these chapters provide an alternative view on important topics in asset pricing, such as the prevalence of excess volatility and the relation between financial markets and the macro-economy. The final two chapters deal with noncausal, or forward-looking, autoregressive models. Chapter 4 shows that US stock prices are better described by noncausal autoregressions than by their causal counterparts. This implies that agents' expectations are not revealed to an outside observer such as an econometrician observing only realized market data. Simulation results show that heterogeneous agent models are able to generate noncausal asset prices. Chapter 5 considers the estimation of a class of standard rational expectations models. It is shown that noncausality of the instrumental variables does not have an impact on the consistency of the generalized method of moments (GMM) estimator, as long as agents form rational expectations.Ei saatavill

Heterogeneity in Stock Pricing : A STAR Model with Multivariate Transition Functions

Stock prices often diverge from measures of fundamental value, which simple present value models fail to explain. This paper tries to find causes for these long-run price movements and their persistence by estimating a STAR model for the price-earnings ratio of the S&P500 index for 1961Q1 - 2009Q3, with a transition function that depends on a wider set of exogenous or predetermined transition variables. Several economic, monetary and financial variables, as well as linear combinations of these, are found to have nonlinear effects on stock prices. A two-step estimation procedure is proposed to select the transition variables and estimate their weights. This STAR model can be interpreted as a heterogeneous agent asset pricing model that makes a distinction between chartists and fundamentalists, where the set of transition variables is included in the agents’ information set

GMM Estimation with Noncausal Instruments under Rational Expectations

There is hope for the generalized method of moments (GMM). Lanne and Saikkonen (2011) show that the GMM estimator is inconsistent, when the instruments are lags of noncausal variables. This paper argues that this inconsistency depends on distributional assumptions, that do not always hold. In particular under rational expectations, the GMM estimator is found to be consistent. This result is derived in a linear context and illustrated by simulation of a nonlinear asset pricing model

Noncausality and Asset Pricing

Misspecification of agents' information sets or expectation formation mechanisms maylead to noncausal autoregressive representations of asset prices. Annual US stock prices are found to be noncausal, implying that agents' expectations are not revealed to an outside observer such as an econometrician observing only realized market data. A simulation study shows that noncausal processes can be generated by asset-pricing models featuring heterogeneous expectations