U-statistic Type Tests for Structural Breaks in Linear Regression Models

This article introduces a U-statistic type process that is based on a kernel function which can depend on nuisance parameters. It is shown here that this process can accommodate very easily anti-symmetric kernels very useful for detecting changing patterns in the dynamics of time series. This theory is applied to structural break hypothesis tests in linear regression models. In particular, the flexibility of these processes will be exploited to introduce a simultaneous and joint test that exhibit statistical power against changes in either intercept or slope. In contrast to the literature, these tests are able to distinguish between rejections due to changes in intercept from rejections due to changes in slope; allow control of global errors rate; and are explicitly designed to have power when the distribution error is asymmetric. These tests can also incorporate different weight functions devised to detect changes early as well as later on in the sample, and show very good performance in small samples. These tests, therefore, outperform CUSUM type tests widely employed in this literature

Early Detection Techniques for Market Risk Failure

The implementation of appropriate statistical techniques for monitoring conditional VaR models, i.e, backtesting, reported by institutions is fundamental to determine their exposure to market risk. Backtesting techniques are important since the severity of the departures of the VaR model from market results determine the penalties imposed for inadequate VaR models. In this paper we make six contributions to backtesting techniques. In particular, we show that the Kupiec test can be viewed as a combination of CUSUM change point tests; we detail the lack of power of CUSUM methods in detecting violations of VaR as soon as these occur; we develop an alternative technique based on weighted U-statistic type processes that have power against wrong specifications of the risk measure and early detection; we show these new backtesting techniques are robust to the presence of estimation risk; we construct a new class of weight functions that can be used to weight our processes; and our methods are applicable both under conditional and unconditional VaR settings

Detecting the Presence of Informed Price Trading Via Structural Break Tests

The occurrence of abnormal returns before unscheduled announcements is usually identified with informed price movements. Therefore, the detection of these observations beyond the range of returns due to the normal day-to-day activity of financial markets is a concern for regulators monitoring the right functioning of financial markets and for investors concerned about their investment portfolios. In this article we introduce a novel method to detect informed price movements via structural break tests for the intercept of an extended CAPM model describing the risk premium of financial returns. These tests are based on the use of a U-statistic type process that is sensitive to detecting changes in the intercept that occur very early in the evaluation period and that can be used to construct a consistent estimator of the timing of the change. As a byproduct, we show that estimators of the timing of change constructed from standard CUSUM statistics are inconsistent and therefore fail to provide useful information about the presence of informed price movements

Pollution, mortality and optimal environmental policy

We study an overlapping generations economy in which environmental degradation results from economic activity and affects agents' uncertain lifetimes. Life expectancy depends positively on economic activity and negatively on the stock of pollution. This can make the growth-survival relationship convex over some region and lead to two non-trivial steady states, with one a poverty trap. Uniform abatement taxes can cause the poverty trap to widen while increasing incomes at the high steady state. We also study the properties and dynamics of an optimal second-best abatement tax. It is non-homogeneous and increasing in the capital stock, and leads to a variety of dynamic possibilities, including non-existence and multiplicity of steady states, and cycles around some of the steady states, where there were none under exogenous taxes. Thus, optimal taxes can be an independent source of non-linearities

Pollution, Mortality and Optimal Environmental Policy

We study pollution, mortality and growth in an overlapping generations economy with uncertain lifetimes. Economic activity creates pollution: the stock of pollution has a negative effect on life expectancy while higher income (proxying either for better nutrition and immunity or for better availability of public health) has a prophylactic effect on mortality. These counteracting effects can make the growth-survival relationship non-concave and lead to multiple steady states and a poverty trap. An increase in exogenous abatement taxes can increase the basin of the poverty trap. We study a dynamically consistent sequence of secondbest abatement taxes. The optimal tax is shown to be a non-homogeneous and increasing function of the current capital stock with the optimal tax zero for low levels of capital. The feedback effect from the capital stock to the optimal tax can make optimal abatement policy an independent source of non-linearities leading to non-existence and multiplicity of steady states, as well as oscillations around some steady states when there are none under exogenous taxes

Pollution, Mortality and Time-Consistent Abatement Taxes

We study dynamically consistent policy in a neoclassical overlapping generations growth model where pollution externalities undermine health but are mitigated via tax- nanced abatement. With arbitrarily constant taxation, two steady states arise: an unstable `poverty trap' and a `neoclassical' steady state near which the dynamics might either be monotonically convergent or oscillating. When the planner chooses a time consistent abatement path that maximises a weighted intergenerational sum of expected utility, the optimal tax is zero at low levels of capital and then a weakly increasing function of the capital stock. The non-homogeneity of the tax function along with its feedback e ect on savings induces additional steady states, stability reversals and oscillations

The Interplay Between θ\theta and T

We extend a recent computation of the dependence of the free energy, F, on the noncommutative scale $\theta$ to theories with very different UV sensitivity. The temperature dependence of $F$ strongly suggests that a reduced number of degrees of freedom contributes to the free energy in the non-planar sector, $F_{\rm np}$, at high temperature. This phenomenon seems generic, independent of the UV sensitivity, and can be traced to modes whose thermal wavelengths become smaller than the noncommutativity scale. The temperature dependence of $F_{\rm np}$ can then be calculated at high temperature using classical statistical mechanics, without encountering a UV catastrophe even in large number of dimensions. This result is a telltale sign of the low number of degrees of freedom contributing to $F$ in the non-planar sector at high temperature. Such behavior is in marked contrast to what would happen in a field theory with a random set of higher derivative interactions.Comment: 14 pages, 1 eps figur

Does ESG investing pay-off? An analysis of the Eurozone area before and during the Covid-19 pandemic

We examine whether the stock return performance of 620 Eurozone companies based on their environmental, social and governance (ESG) ratings both before and during the Covid-19 pandemic on both a nominal and risk adjusted basis. We also look at how country level governance indicators interact with our samples of ESGHigh and ESGLow companies to affect both nominal and risk adjusted investment returns. We use both panel data and cross-sectional regressions as well as the difference-in-differences approach to derive the empirical results. We generally find some evidence that highly rated ESG firms performed slightly worse than lower rated ESG both overall and during the pandemic. However, once we control for governance at the country level, we find that in high governance scoring countries ESGHigh companies perform better than ESGLow companies. Finally, when we examine the relative performance of EU companies compared to companies in economies less impacted by the Covid-19 pandemic, namely South Korea and Australia, we find that during the pandemic, the South Korean and Australian companies performed much better than their counterparts in Europe

Do Actively Managed US Mutual Funds Produce Positive Alpha?

Using more general forms of equilibrium asset pricing models, we re-examine the recentliterature on actively managed US Mutual Fund performance over the period 1984-2015. Using the false discovery technique, we show that the existing literature which isbased upon unconditional versions of these models have underestimated performance ofactively managed US funds because they produce inconsistent estimates of fund alphacoefficients. Our estimations of abnormal returns using conditional models allow theparameters that underlie the equilibrium asset pricing models to change which producesconsistent estimates of funds alphas. We find that when returns are measured net ofmanagement and trading costs between 2.9% to 8.4% of US actively managed fundsprovide positive-alpha. This contrasts with existing studies that find no significantpercentage of US Mutual Funds produce positive-alpha. We also find that differentinvestment styles have significantly different percentages of positive-alpha funds

Dual Descriptions of SO(10) SUSY Gauge Theories with Arbitrary Numbers of Spinors and Vectors

We examine the low energy structure of N=1 supersymmetric SO(10) gauge theory with matter chiral superfields in N_Q spinor and N_f vector representations. We construct a dual to this model based upon an SU(N_f+2N_Q-7) x Sp(2N_Q-2) gauge group without utilizing deconfinement methods. This product theory generalizes all previously known Pouliot-type duals to SO(N_c) models with spinor and vector matter. It also yields large numbers of new dual pairs along various flat directions. The dual description of the SO(10) theory satisfies multiple consistency checks including an intricate renormalization group flow analysis which links it with Seiberg's duality transformations. We discuss its implications for building grand unified theories that contain all Standard Model fields as composite degrees of freedom.Comment: 36 pages, harvmac and tables macros, 1 figur