Panel Data Tests Of PPP: A Critical Overview

This paper reviews recent developments in the analysis of non-stationary panels, focusing on empirical applications of panel unit root and cointegration tests in the context of PPP. It highlights various drawbacks of existing methods. First, unit root tests suffer from severe size distortions in the presence of negative moving average errors. Second, the common demeaning procedure to correct for the bias resulting from homogeneous cross-sectional dependence is not effective; more worryingly, it introduces cross-correlation when it is not already present. Third, standard corrections for the case of heterogeneous cross-sectional dependence do not generally produce consistent estimators. Fourth, if there is between-group correlation in the innovations, the SURE estimator is affected by similar problems to FGLS methods, and does not necessarily outperform OLS. Finally, cointegration between different groups in the panel could also be a source of size distortions. We offer some empirical guidelines to deal with these problems, but conclude that panel methods are unlikely to solve the PPP puzzl

Valuing American Put Options Using Chebyshev Polynomial Approximation

This paper suggests a simple valuation method based on Chebyshev approximation at Chebyshev nodes to value American put options. It is similar to the approach taken in Sullivan (2000), where the option`s continuation region function is estimated by using a Chebyshev polynomial. However, in contrast to Sullivan (2000), the functional is fitted by using Chebyshev nodes. The suggested method is flexible, easy to program and efficient, and can be extended to price other types of derivative instruments. It is also applicable in other fields, providing efficient solutions to complex systems of partial differential equations. The paper also describes an alternative method based on dynamic programming and backward induction to approximate the option value in each time period

Black market and official exchange rates: Long-run equilibrium and short-run dynamics

This paper provides further empirical results on the relationship between black market and official exchange rates in six emerging economies (Iran, India, Indonesia, Korea, Pakistan, and Thailand). First, it applies both time series techniques and heterogeneous panel methods to test for the existence of a long-run relation between these two types of exchange rates. Second, it tests formally the validity of the proportionality restriction implying a constant black-market premium. Third, in addition to the long-run equilibrium, it also analyses the short-run dynamic responses of both markets to shocks. Evidence of market inefficiency and incomplete (or long-lived) reversion to long-run equilibrium is found. This implies that financial managers can only partially reduce the exchange rate risk, whilst monetary authorities can effectively pursue their policy objectives by imposing foreign exchange or direct controls

Employment growth, inflation and output growth: Was phillips right? Evidence from a dynamic panel

Copyright @ 2011 Brunel UniversityIn this paper we analyse the short- and long-run relationship between employment growth, inflation and output growth in Phillips’ tradition. For this purpose we apply FMOLS, DOLS, PMGE, MGE, DFE, and VECM methods to a nonstationary heterogeneous dynamic panel including annual data for 119 countries over the period 1970-2010, and also carry out multivariate Granger causality tests. The empirical results strongly support the existence of a single cointegrating relationship between employment growth, inflation and output growth with bidirectional causality between employment growth and inflation as well as output growth, giving support to Phillips’ Golden Triangle theory

Short- and long- run linkages between employment growth, inflation and output growth: Evidence from a large panel

Copyright @ 2011 Brunel UniversityThis study examines the short- and long-run linkages between employment growth, inflation and output growth applying panel cointegration and causality tests to data for 119 countries over the period 1970-2010. We find evidence of positive Granger causality running from output growth to employment growth in the short run. Employment growth Granger causes output growth with a negative sign in the long run. Inflation Granger causes employment and output growth positively in the short run and negatively in the long run

Productivity drivers in European banking: Country effects, legal tradition and market dynamics

This paper analyses efficiency drivers of a representative sample of European banks by means of the two-stage procedure proposed by Simar and Wilson (2007). In the first stage, the technical efficiency of banks is estimated using DEA (data envelopment analysis) in order to establish which of them are most efficient. Their ranking is based on total productivity in the period 1993-2003. In the second stage, the Simar and Wilson (2007) procedure is used to bootstrap the DEA scores with a truncated bootstrapped regression. The policy implications of our findings are considered

Measuring Half-Lives Using A Non-Parametric Bootstrap Approach

In this paper we extend the Murray and Papell (2002) study by using a non-parametric bootstrap approach which allows for non-normality, and focusing on quarterly real exchange rate in twenty OECD countries in the post-1973 floating period. We run Augmented Dickey-Fuller (ADF) regressions, and estimate the half-lives (and confidence intervals) from the corresponding impulse response functions. Further, we use an approximately median-unbiased estimator of the autoregressive parameters, and report the implied point estimates and confidence intervals. We find that accounting for nonnormality results in even higher estimates of the degree of persistence of PPP deviations, but, as in Murray and Papell (2002), the confidence intervals are so wide that no strong conclusions are warranted on the existence of a PPP puzzle

The Euro changeover and price adjustments in Italy

By estimating a staggered price model over the period 1980q1-2010q2, this paper documents that, after the euro changeover, Italian retailers have increased the number of price adjustments, which has translated into a higher inflation rate, with a detrimental effect on the competitiveness of the Italian economy

Multiple cyclical fractional structures in financial time series

This paper analyses multiple cyclical structures in financial time series. In particular, we focus on the monthly structure of the Nasdaq, the Dow Jones and the Standard&Poor stock market indices. The three series are modelled as long-memory processes with poles in the spectrum at multiple frequencies, including the long-run or zero frequency

Testing Of Nonstationarities In The Unit Circle,Long Memory Processes And Day Of The Week Effects In Financial Data

This paper examines a version of the tests of Robinson (1994) that enables one to test models of the form (1-Lk)dxt = ut, where k is an integer value, d may be any real number, and ut is I(0). The most common cases are those with k = 1 (unit or fractional roots) and k = 4 and 12 (seasonal unit or fractional models). However, we extend the analysis to cover situations such as (1-L5)d xt = ut, which might be relevant, for example, in the context of financial time series data. We apply these techniques to the daily Eurodollar rate and the Dow Jones index, and find that for the former series the most adequate specifications are either a pure random walk or a model of the form xt = xt-5 + εt, implying in both cases that the returns are completely unpredictable. In the case of the Dow Jones index, a model of the form (1-L5)d xt = ut is selected, with d constrained between 0.50 and 1, implying nonstationarity and mean-reverting behaviour