Does nonlinear econometrics confirm the macroeconomic models of consumption?

This article aims at checking whether the macroeconomic models of consumption are always verified to reproduce the dynamics of consumption habits. We show that even if the Keynesian theory of consumption is still checked as the disposable income is a significant explanatory variable of household consumption, the dynamics of consumption cannot be reproduced anymore through the Post-Keynesian models like that of Brown (1952). While introducing nonlinearity and using the recent developments of Smooth Transition Regression (STR) models, we propose an extension for Brown's model and develop a Nonlinear Macroeconometric Model of Consumption (NMMC). Nonlinearity is justified by the structural breaks induced by habit formation and the irregularity in the evolution of the saving ratio since the seventies. Based on American and French data, our empirical results show that our model is statistically appropriate and leads to better performance than the usual macroeconomic specification of Brown.

Nonlinear Stock Price Adjustment in the G7 Countries

This paper seeks to address the stock price adjustment toward fundamentals. Using the class of Switching Transition Error Correction Models (STECMs), we show that two regimes describe the dynamics of stock price deviations from fundamentals in the G7 countries over the period 1969-2005. Deviations appear to follow a quasi random walk in the central regime when prices are near fundamentals (i.e. transaction costs being greater than expected gains, the mean reversion mechanism is inactive), while they approach a white noise in the outer regimes (i.e. transaction costs being lower than expected gains, the mean reversion works). As expected when transaction costs are heterogeneous, the STECM shows that stock price adjustments are smooth, implying that the convergence speed is time-varying according to the size of the deviation. Finally, using appropriate indicators, both the magnitudes of under- and overvaluation of stock price and the speed of the mean reversion are exhibited per date in the G7 countries, showing that the dynamics of stock price adjustment is highly dependent on the date and on the country under consideration.Price, heterogeneous transaction costs, STECMs

Threshold Cointegration between Stock Returns : An application of STECM Models

The aim of this paper is to study the efficient capital market hypothesis by using recent developments in nonlinear econometrics. In such a context, we estimate a Smooth Transition Error Correction Model (STECM). We introduce the DowJones as an explanatory variable of the dynamics of the other stock indexes. The error correction term takes into account of the structural changes that occured progressively from both the endogenous and the DowJones series. We note that the Smooth Transition Error Correction Model, for which the dynamics of adjustment is of ESTAR type, is more adequate than the linear ECM model to represent the adjustment of the stock price to the long term equilibrium price. Estimation results reveal the nonlinearity inherent to the adjustment process. In particular, we note that the adjustment is not continuous and that the speed of convergence toward price of equilibrium is not constant but rather function of the size of the disequilibrium.Efficiency, Regime-Switching Models, Threshold Cointegration, STECM.

Threshold cointegration relationships between oil and stock markets

The aim of this paper is to study the oil price adjustment dynamics and to implicitly test the efficiency hypothesis for the oil market. Thus, we propose to study the oil price evolution in a nonlinear framework while testing the interdependence hypothesis between oil and stock markets. Four countries, the USA, France, Mexico and the Philippines are concerned by our findings which show several important results. Firstly, we show some evidence of linear linkage between stock markets and oil industry and we prove the existence of significant long-run relationships between oil and stock markets, indicating that the oil market is not efficient. Secondly, using nonlinear cointegration techniques, we propose a new nonlinear modeling to reproduce the oil price adjustment dynamics. It takes into account both stock and oil market variations. More importantly, the oil price is nonlinear, mean-reverting toward the equilibrium and with an adjustment speed that increases according to oil price deviations toward the stock market equilibrium.Oil price adjustment; stock markets; nonlinear cointegration

Nonlinear stock prices adjustment in the G7 countries

This paper aims to modeling stock prices adjustment dynamics toward their fundamentals. We used the class of Switching Transition Error Correction Models (STECM) and we showed that stock prices deviations toward fundamentals could be characterized by nonlinear adjustment process with mean reversion. First, according to Anderson (1997), De Grauwe and Grimaldi (2005) and Boswijk et al.(2006), we justify these nonlinearities by the presence of heterogeneous transaction costs, behavioural heterogeneity and the interaction between shareholders expectations. After, we present STECM specification. We apply this model to describe the G7 indexes adjustment dynamics toward their fundamentals. We showed that the G7 stock indexes adjustment is smooth and nonlinearly mean-reverting and that the convergence speeds vary according to the disequilibrium extent. Finally, using two indicators proposed by Peel and Taylor (2000), we determine phases of under- and overvaluation of stock prices and measure intensity of stock prices adjustment strengths.Stock Prices, Heterogeneous Transaction Costs, Nonlinear Adjustment

On the Impacts of Crisis on the Risk Premium: Evidence from the US Stock Market using a Conditional CAPM

This article investigates the evolution of the US risk premium in periods of crisis. First, we estimate a conditional CAPM with time-varying systematic risk and price of risk using a multivariate GARCH-in-Mean model. Second, we study the structural breaks in the US risk premium. Finally, we relate the obtained results to important facts and economic events. Our findings show that the US risk premium increased significantly during periods of crisis and that the last 2007-2009 financial crisis has had the largest impact.

Do on/off time series models reproduce emerging stock market comovements?

Using nonlinear modeling tools, this study investigates the comovements between the Mexican and the world stock markets over the last three decades. While the previous works only highlight some evidence of comovements, our paper aims to specify the different time-varying links and mechanisms characterizing the Mexican stock market through the comparison of two nonlinear error correction models (NECMs). Our findings point out strong evidence of time-varying and nonlinear mean-reversion and links between Mexico and the world stock market, which reflects the significant development of Mexican stock market during the last decades. The specification of the nature of these links is interesting for investment decisions in emerging markets.Keywords: Emerging Stock Market Links, Nonlinearity.

Structural breaks and nonlinearity in US and UK public debt

This paper investigates the short-term dynamics for public debts in the US and the UK over more than four decades. We check for structural changes in the data and assess nonlinearity and switching-regime hypotheses using several linearity tests. Our findings point to multiple structural breaks due to economic downturns, oil shocks, and financial and political instability. We also identify different regimes for which the adjustment is asymmetric and nonlinear, in particular, since 2003 and around the Great Recession.Fundação para a Ciência e a Tecnologia (FCT

Modelling money demand : further evidence from an international comparison

This paper aims at estimating money demand for the euro area, the US and the UK using a dynamic ordinary least squares estimator (DOLS). Our findings show that: (i) wealth effects on money demand are important in the euro area and the UK; (ii) the impact of changes in the interest rate on real money holdings is negative and small; (iii) goods are a reasonable alternative to money; and (iv) international currency substitution has a major influence on the behaviour of real money demand in the UK.Fundação para a Ciência e a Tecnologia (FCT