A Resolution of the Fisher Effect Puzzle: A Comparison of Estimators

This paper attempts a resolution of the Fisher effect puzzle in terms of estimator choice. Using both short-term and long-term interest rates for 14 OECD countries, we find ample evidence supporting the existence of a long-run Fisher effect in which interest rates move oneto- one with inflation. Our results suggest that the reason why the Fisher effect has not found support internationally lies on the estimation method. When the hypothesis of a unit coefficient relating interest rates to expected inflation is tested within the Autoregressive Distributed Lag (ADL) framework, which is invariant to the integration properties of the data, the Fisher effect easily survives the empirical evidence. Similar, but less robust, results are reached on the grounds of the Pre-Whitened Fully Modified Least Squares (PW-FMLS) or the Johansen’s (JOH) estimators.Cointegration Estimators; Fisher Effect; ADL; DOLS; Small-sample properties

PPP over a century: Co-integration and structural change

The purpose of this paper is to investigate the ability of parameter instability tests in regressions with 1(1) processes to discriminate between changes in the cointegrating relationship and changes in the marginal distribution of the regressors. Using annual data for the G-7 countries and the Purchasing Power Parity, we conclude that the regression coefficient between the price level differential and the exchange rate has indeed remained stable during the 20th century and find ample evidence supporting the PPP.

Speculative behaviour and oil price predictability

We develop two- and three-state regime switching models and test their forecasting ability for oil prices. We use the deviations of market oil price from fundamental values as the main explanatory variable in our models, while additional potential predictors enrich our specification. Our findings suggest that the regime-switching models are, in general, more accurate than the Random Walk model in terms of both statistical and economic evaluation criteria for oil price forecasts

International Portfolio Diversification and Market Linkages in the presence of regime-switching volatility

We examine if the benefits of international portfolio diversification are robust to time-varying asset return volatility. Since diversified portfolios are subject to common cross-country shocks, we focus on the transmission mechanism of such shocks in the presence of regime-switching volatility. We find little evidence of incresaed market interdependence in turbulent periods. Furthermore, for the vast majority of time, we show that risk reduction is delivered for the US investor who holds foreign equitMarket comovement, International portfolio diversification, Financial market crises, Regime switching

On the robustness of international portfolio diversification benefits to regime-switching volatility

We examine if the benefits of international portfolio diversification are robust to time-varying asset return volatility. Since diversified portfolios are subject to common cross-country shocks, we focus on the transmission mechanism of such shocks in the presence of regime-switching volatility. Generally, market linkages are stable with little evidence of increased market interdependence in turbulent periods. Furthermore, risk reduction is consistently delivered for the US investor who holds foreign equity.Market comovement; Shift contagion; Financial market crises; International portfolio diversification; Regime switching

Shift versus traditional contagion in Asian markets

We test for shift contagion between pairs of East Asian equity markets over a sample including the financial crisis of the 1990’s. Employing the methodology of Gravelle et al. (2006), we find little evidence of change in the mechanism by which common shocks are transmitted between countries. Furthermore, we analyze the effects of idiosyncratic shocks and generate time-varying conditional correlations. While there clearly is significant time variation in the pair wise correlations, this is not more pronounced during the Asian crisis than it had been historically.Shift contagion; Financial market crises; Regime switching; Structural transmission; Emerging markets

International Portfolio Diversification and Market Linkages in the presence of regime-switching volatility

We examine if the benefits of international portfolio diversification are robust to time-varying asset return volatility. Since diversified portfolios are subject to common cross-country shocks, we focus on the transmission mechanism of such shocks in the presence of regime-switching volatility. We find little evidence of increased market interdependence in turbulent periods. Furthermore, for the vast majority of time, we show that risk reduction is delivered for the US investor who holds foreign equity.Market comovement; International portfolio diversification; Financial market crises; Regime switching.

Club Convergence in Carbon Dioxide Emissions

We examine convergence in carbon dioxide emissions among 128 countries for the period 1960-2003 by means of a new methodology introduced by Phillips and Sul (Econometrica, 2007). Contrary to previous studies, our approach allows us to examine for evidence of club convergence, i.e. identify groups of countries that converge to different equilibria. Our results suggest convergence in per capita CO2 emissions among all the countries under scrutiny in the early years of our sample. However, there seems to be two separate convergence clubs in the recent era that converge to different steady states. Interestingly, we also find evidence of transitioning between the two convergence clubs suggesting either a slow convergence between the two clubs or a tendency for some countries to move from one convergence club to the other.

Detecting shift and pure contagion in East Asian equity markets: A Unified Approach.

We test for contagion between pairs of East Asian equity markets over the period 1990-2007.We develop an econometric methodology that allows us to test for both 'shift'and 'pure' contagion within a unified framework. Using both Hong Kong and Thailand as potential shock sources, we find strong evidence of both types of contagion. Therefore during episodes of high-volatility, equity returns are influenced by changes in the transmission of common shocks and additionally by the diffusion of idiosyncratic shocks through linkages which do not exist during normal times.Shift contagion; Pure contagion; Financial market crises; Regime switching