A dynamic contracting model for wages and employment in three European economies

We present a structural dynamic non-linear model for an efficient contracting between a firm facing adjustment costs on labour and a union having preferences which are subject to habit formation. The model's first-order necessary conditions are estimated for the French, the Dutch and the Belgian labour market. The estimation results turned out to be remarkably similar for the three countries. Two alternative hypotheses are also investigated: (i) a myopic behaviour of the union and (ii) a competitive labour market. The performance of the efficient contract model with a forward-looking union is found to be superior to that of the neo-classical model in explaining the dynamics of employment and wages in the three countries

Switching-regime regression for modeling and predicting a stock market return

It has been observed that certain economic and financial variables commonly exhibit switching behavior depending on their magnitude. This phenomenon in general cannot be naturally captured by the linear regression (LR), which assumes a linear relationship between the dependent and explanatory variables. To decipher investor behavior more appropriately by accounting for this observation, a switching-regime regression (SRR) is proposed and applied to the S&P 500 market return with respect to seven explanatory variables. It is shown that, compared with LR, the new regression results in a significantly improved adjusted R2, increasing from less than 4 % to over 50 %. In addition, SRR yields better out-of-sample forecasting performance, besides that the fitted values from the new regression even resemble the dip during the 2008 financial crisis, while those from LR do not. The study thus indicates that the switching-regime regression improves significantly the statistical properties including the goodness of fit as well as conforms more to investor behavior theory