Threshold cointegration: overview and implementation in R

Purpose of this paper is twofold. It is first to offer a rough overview on the field of threshold cointegration, from the seminal paper of Balke and Fomby (1997) to the recent developments. Simultaneously, it is to describe the implementation of the main functionalities for the modelling in the open-source package tsDyn. It provides hence a unique way to get an introduction on the threshold cointegration field allowing in the same time to conduct its own analysis. Introduced by Engle and Granger (1987), the concept of cointegration became a indisensable step in the analysis of non stationary time series. The underlying idea is that even if two variables (or more) are non-stationary, there can exist a combination of them which is stationary. The interpretation of this definition is richefull as it means that the variables have a stable relationship (a long-run equilibrium), can be represented in an vector error-correction model, and share a common stochasti

Optimal index insurance and basis risk decomposition: an application to Kenya

Index insurance is a promising tool to reduce the risk faced by farmers, but high basis risk, which arises from imperfect correlation between the index and individual farm yields, has limited its adoption to date. Basis risk arises from two fundamental sources: the intrinsic heterogeneity within an insurance zone (zonal risk), and the lack of predictive accuracy of the index (design risk). Whereas previous work has focused almost exclusively on design risk, a theoretical and empirical understanding of the role of zonal risk is still lacking. Here we investigate the relative roles of zonal and design risk, using the case of maize yields in Kenya. Our first contribution is to derive a formal decomposition of basis risk, providing a simple upper bound on the insurable basis risk that any index can reach within a given zone. Our second contribution is to provide the first large-scale empirical analysis of the extent of zonal versus design risk. To do so, we use satellite estimates of yields at 10m resolution across Kenya, and investigate the effect of using smaller zones versus using different indices. Our results show a strong local heterogeneity in yields, underscoring the challenge of implementing index insurance in smallholder systems, and the potential benefits of low-cost yield measurement approaches that can enable more local definitions of insurance zones

Part II: Reproducible and Transparent Workflows

File Structure, R Markdown, Jupyter Notebooks, Stata Markdown, Docker, Githu