Source : NEP (New Economics Papers) | RePEc

Top Management Characteristics of Foreign MNC Affiliates and Affiliate Performance in Japan : Knowledge-Based and Upper Echelon Perspectives
Date: 2008-01; By: Tomoki Sekiguchi (Graduate School of Economics, Osaka University), Ralf Bebenroth (Research Institute for Economics and Business Administration, Kobe University), Donghao Li (Wakayama University)
Drawing from the knowledge-based view of MNCs and the upper echelon perspective, we examine the relationship between top management characteristics of MNC affiliates and affiliate performance. Using a sample of 643 foreign MNC affiliates operating in Japan, we found that when the length of an affiliate operation was shorter, the affiliate performed better under the expatriate managing director rather than the Japanese manager. We also found that when the size of an affiliate was larger and the length of operation was shorter, the affiliate performed better under the larger rather than smaller proportion of expatriates in top management teams. Implications for research and practice of top management staffing of MNC foreign affiliates are discussed.

Bounded Decision Making: From Description to Improvement
Date: 2008-06; By: Dolly Chugh (New York University, Stern School of Business), Katherine Lyford Milkman (Harvard Business School), Max H. Bazerman (Harvard Business School, Negotiation, Organizations & Markets Unit)
The optimal moment to address the question of how to improve human decision making has arrived. In recent research, judgment and decision-making scholars have moved beyond the concept of bounded rationality to recognize a broader set of bounds that affect decision making. We specify a taxonomy that assembles the field’s knowledge about these decision-making bounds and organizes efforts toward deepening this knowledge and developing strategies for improvement. Specifically, we group five identified decision-making bounds into three broad categories: bounds on information processing, bounds on the optimal weighting of priorities, and bounds on noticing information. The first category encompasses bounded rationality, the first bound to be discovered and studied extensively. The second category encompasses bounded willpower and bounded self-interest. The third category encompasses two recently identified bounds: bounde d ethicality and bounded awareness. By organizing diverse theories into a clear framework, the taxonomy should aid researchers and educators in identifying new strategies for improving decision making.

Technology and development: Unpacking the relationship(s)
Date: 2008-06; By: Jan Fagerberg (Centre for Technology, Innovation and Culture, University of Oslo), Martin Srholec (Centre for Technology, Innovation and Culture, University of Oslo)
Innovation is, as Joseph Schumpeter once pointed out, above all a combinatory phenomenon. Success in accessing knowledge and exploiting it in a way that is beneficial for development depends on the ability to combine many different skills and resources, of which many will be external to the firm. Arguably, political choices, past as well as present, the quality of governance and the business environment, availability of skills, finance and broader social and cultural characteristics may all have a say for how well this combinatory dynamics works. Based on a review of the literature on how technological, economic and social factors interact in the development process this paper sets out to explore these interrelationships empirically. The results, based on data for 75 countries on different levels of development, suggest that there is a strong correlation between technological capability, (innovation-friendly) gover nance and social capital, confirming, it is suggested, the important role played by politics and deeper social and cultural factors for technological catch-up (or lack of such). This contrasts with the role played by for instance openness to trade, FDI, etc., which - according to the results presented here - hardly correlates with anything.

The Productivity Impact of R&D Investment: Evidence from European Microdata
Date: 2008-06-18; By: Raquel Ortega-Argilés (Joint Research Centre-European Commission, IPTS Seville), Lesley Potters (Joint Research Centre-European Commission and Utrecht School of Economics), Marco Vivarelli (Joint Research Centre-European Commission, Catholic University, Milan and Max Planck Institute of Economics, Jena)
The aim of this study is to investigate the relationship between a firm’s R&D activities and its productivity using a unique micro data panel dataset and looking at sectoral peculiarities which may emerge; more specifically, we used an unbalanced longitudinal database consisting of 532 top European R&D investors over the six-year period 2000-2005. Our main findings can be summarised along the following lines: knowledge stock has a significant positive impact on a firm’s productivity, with an overall elasticity of about 0.125; this general result is largely consistent with previous literature in terms of the sign, the significance and the estimated magnitude of the relevant coefficient. More interestingly, the coefficient increases monotonically when we move from the low-tech to the medium-high and high-tech sectors, ranging from a minimum of 0.05/0.07 to a maximum of 0.16/0.18. This outcome, in contrast wit h recently-renewed acceptance of low-tech sectors as a preferred target of R&D investment, suggests that firms in high-tech sectors are still far ahead in terms of the impact on productivity of their R&D investments, at least as regards top European R&D investors.
Keywords: R&D, productivity, knowledge stock, panel data, perpetual inventory method
JEL: O33

Matrices of science and technology interactions: implications for development
Date: 2008-06; By: Leonardo Costa Ribeiro (Cedeplar-UFMG), Ricardo Machado Ruiz (Cedeplar-UFMG), Américo Tristão Bernardes (UFOP), Eduardo da Motta e Albuquerque (Cedeplar-UFMG)
Scientific and other non-patent references (NPRs) in patents are important tools to analyze interactions between science and technology. This paper organizes a database with 514,894 USPTO patents granted globally in 1974, 1982, 1990, 1998 and 2006. There are 165,762 patents with at least one reference to science and engineering (S&E) literature, and there are 1,375,503 references. In 2006 there are 83 countries with USPTO patent citing S&E literature. Through a lexical analysis 71.1% of this S&E literature is classified by S&E fields. These data underscore the elaboration of global and national tri-dimensional matrices (by OST technological domains, ISI science and engineering fields and number of references). Descriptive statistics investigate how science and technology linkages differ over time across countries and across levels of development. This paper highlights how the existence (or not) of a pattern of structured growth differentiates mature and immature systems of innovation.
Keywords: science and technology linkages, stages of economic development, systems of innovation
JEL: O O3

Financially Constrained Fluctuations in an Evolving Network Economy
Date: 2008-06; By: Domenico Delli Gatti, Mauro Gallegati, Bruce C. Greenwald, Alberto Russo, Joseph E. Stiglitz
We explore the properties of a credit network characterized by inside credit - i.e. credit relationships connecting downstream (D) and upstream (U) firms - and outside credit - i.e. credit relationships connecting firms and banks. The structure of the network changes over time due to the preferred-partner choice rule: each agent chooses the partner who charges the lowest price. The net worth of D firms turns out to be the driver of fluctuations. U production, in fact, is determined by demand of intermediate inputs on the part of D firms and production of the latter is financially constrained, i.e. determined by the availability of internal finance proxied by net worth. The output of simulations shows that at the macroeconomic level a business cycle can develop as a consequence of the complex interaction of the agents’ financial conditions. We can also reproduce the main stylized facts of firms’ demography, i.e. the power law distribution of firms’ size and the Laplace distribution of firms’ growth rates.
JEL: E3

The Technology Endowments of Spin-off Companies
Date: 2008-04; By: E. VAN DE VELDE, B. CLARYSSE, M. WRIGHT
Innovative start-ups, including spin-offs from universities and companies, play a vital role in the development and growth of emerging, high-technology industries. Research attention has traditionally focused on the links between demographic, educational, psychological and financial influences on start-up activity and growth. The extent to which the characteristics of technology inherited from the parent, important for spin-offs, helps explain post start-up performance has been neglected. We analyse the scope and newness of the endowed technology as a predictor of post-spin-off growth for corporate and university spin-offs. Using a novel, hand-collected dataset, 48 corporate and 73 university spin-offs were identified, comprising the whole population of such spin-offs in Flanders over the period 1991-2002. We find that corporate spin-offs seem to benefit from a narrow scope of technology and a high level of newness of technology, while university spin-offs benefit from a broad scope of technology and a lower level of newness of technology. We conclude that the same choice of technology endowments may have a different impact on the spin-offs’ growth, since spin-offs start with different knowledge inheritance.
Keywords: technology endowment, corporate spin-offs, university spin-offs

READY OR NOT…? WHAT’S THE RELEVANCE OF A MESO LEVEL APPROACH TO THE STUDY OF READINESS FOR CHANGE
Date: 2008-04; By: D. BOUCKENOOGHE, G. DEVOS
Organizational change often yields limited success. Failure in many cases is due to the lack of motivation or readiness for change among organizational members. This study proposes and tests a meso-level model of readiness for change. More specifically this article examined the influence of organizational climate factors on readiness for change over and above the effects of their eponymous lower level psychological climate variables (i.e., trust in top management, history of change, participation in decision making, and quality of change communication). By means of a large scale survey administered in 84 Belgian companies, a total of 2543 responses were collected. HLM analyses revealed a contextual effect for quality of change communication on the three components of readiness for change (emotional, cognitive and intentional), even after controlling for psychological change climate. Furthermore, the results indicat ed that the individual perceptions of history of change, participation in decision making, and quality of change communication were positively correlated with readiness for change. These findings are discussed in relation to previous literature.
Keywords: readiness for change, meso-level perspective, history of change, trust in top management, participation in decision making, and quality of change communication

EU-US differences in the size of R&D intensive firms: Do they explain the overall R&D intensity gap?
Date: 2008-06-18; By: Raquel Ortega-Argiles (Joint Research Centre-European Commission, IPTS Seville), Andries Brandsma (Joint Research Centre-European Commission, IPTS Seville)
The average firm size of the top R&D investors among US-based companies is smaller than that of the EU-based firms. Does this help to explain why the US has a greater R&D intensity, or is the higher firm size in the EU, just as its lower R&D intensity, determined by the sectors in which the top R&D investors are operating? Using data on the top-R&D investors from the 2006 EU Industrial R&D Investment Scoreboard, the size differential between R&D performers in the EU and US is more closely examined. A first observation is that, despite great differences between sectors, the overall distribution of companies’ R&D investments in both economies is remarkably similar, as opposed to the distribution of the R&D/sales ratios of the same two sets of companies. The notion that size plays a role, independent of the sectoral composition of R&D, is then confirmed by regression analysis. I n the US as well as in the EU, smaller sized Scoreboard companies tend to spend a larger proportion of their income from sales on R&D.
Keywords: R&D intensity, firm size, panel data
JEL: L11

Source : NEP (New Economics Papers) | RePEc

Parameter Estimation in Nonlinear AR-GARCH Models
Date: 2008; By: Mika Meitz; Pentti Saikkonen
This paper develops an asymptotic estimation theory for nonlinear autoregressive models with conditionally heteroskedastic errors. We consider a functional coefficient autoregression of order p (AR(p)) with the conditional variance specified as a general nonlinear first order generalized autoregressive conditional heteroskedasticity (GARCH(1,1)) model. Strong consistency and asymptotic normality of the global Gaussian quasi maximum likelihood (QML) estimator are established under conditions comparable to those recently used in the corresponding linear case. To the best of our knowledge, this paper provides the first results on consistency and asymptotic normality of the QML estimator in nonlinear autoregressive models with GARCH errors.
Keywords: AR-GARCH, asymptotic normality, consistency, nonlinear time series, quasi maximum likelihood estimation
JEL: C13 C22

Empirical Likelihood Block Bootstrapping
Date: 2008; By: Jason Allen; Allan W. Gregory; Katsumi Shimotsu
Monte Carlo evidence has made it clear that asymptotic tests based on generalized method of moments (GMM) estimation have disappointing size. The problem is exacerbated when the moment conditions are serially correlated. Several block bootstrap techniques have been proposed to correct the problem, including Hall and Horowitz (1996) and Inoue and Shintani (2006). We propose an empirical likelihood block bootstrap procedure to improve inference where models are characterized by nonlinear moment conditions that are serially correlated of possibly infinite order. Combining the ideas of Kitamura (1997) and Brown and Newey (2002), the parameters of a model are initially estimated by GMM which are then used to compute the empirical likelihood probability weights of the blocks of moment conditions. The probability weights serve as the multinomial distribution used in resampling. The first-order asymptotic validity of the p roposed procedure is proven, and a series of Monte Carlo experiments show it may improve test sizes over conventional block bootstrapping.
Keywords: Econometric and statistical methods
JEL: C14 C22

Unit Root Testing with Unstable Volatility
Date: 2008-05-05; By: Brendan K. Beare (Nuffield College, Oxford University)
It is known that unit root test statistics may not have the usual asymptotic properties when the variance of innovations is unstable. In particular, persistent changes in volatility can cause the size of unit root tests to differ from the nominal level. In this paper we propose a class of modified unit root test statistics that are robust to the presence of unstable volatility. The modification is achieved by purging heteroskedasticity from the data using a kernel estimate of volatility prior to the application of standard tests. In the absence of deterministic trend components, this approach delivers test statistics that achieve standard asymptotics under the null hypothesis of a unit root. When the data are homoskedastic, the local power of unit root tests is unchanged by our modification. We use Monte Carlo simulations to compare the finite sample performance of our modified tests with that of existing methods o f correcting for unstable volatility.
Keywords: unit root, heteroskedasticity, nonstationary volatility.
JEL: C14 C22

Asymptotic and bootstrap properties of rank regressions
Date: 2008-03-20; By: Subbotin, Viktor
The paper develops the bootstrap theory and extends the asymptotic theory of rank estimators, such as the Maximum Rank Correlation Estimator (MRC) of Han (1987), Monotone Rank Estimator (MR) of Cavanagh and Sherman (1998) or Pairwise-Difference Rank Estimators (PDR) of Abrevaya (2003). It is known that under general conditions these estimators have asymptotic normal distributions, but the asymptotic variances are difficult to find. Here we prove that the quantiles and the variances of the asymptotic distributions can be consistently estimated by the nonparametric bootstrap. We investigate the accuracy of inference based on the asymptotic approximation and the bootstrap, and provide bounds on the associated error. In the case of MRC and MR, the bound is a function of the sample size of order close to n^{-1/6}. The PDR estimators belong to a special subclass of rank estimators for which the bound is vanishing with th e rate close to n^{-1/2}. The theoretical findings are illustrated with Monte-Carlo experiments and a real data example.
Keywords: Rank Estimators; Bootstrap; M-Estimators; U-Statistics; U-Processes
JEL: C14 C12 C15

Bayesian Covariance Matrix Estimation using a Mixture of Decomposable Graphical Models
Date: 2007-04; By: Helen Armstrong (School of Mathematics, University of New South Wales); Christopher K. Carter (School of Economics, University of New South Wales); Kevin K. F. Wong (Graduate University for Advanced Studies, Tokyo, Japan); Robert Kohn (School of Economics, University of New South Wales)
Estimating a covariance matrix efficiently and discovering its structure are important statistical problems with applications in many fields. This article takes a Bayesian approach to estimate the covariance matrix of Gaussian data. We use ideas from Gaussian graphical models and model selection to construct a prior for the covariance matrix that is a mixture over all decomposable graphs, where a graph means the configuration of nonzero offdiagonal elements in the inverse of the covariance matrix. Our prior for the covariance matrix is such that the probability of each graph size is specified by the user and graphs of equal size are assigned equal probability. Most previous approaches assume that all graphs are equally probable. We give empirical results that show the prior that assigns equal probability over graph sizes outperforms the prior that assigns equal probability over all graphs, both in identifying the c orrect decomposable graph and in more efficiently estimating the covariance matrix. The advantage is greatest when the number of observations is small relative to the dimension of the covariance matrix. The article also shows empirically that there is minimal change in statistical efficiency in using the mixture over decomposable graphs prior for estimating a general covariance compared to the Bayesian estimator by Wong et al. (2003), even when the graph of the covariance matrix is nondecomposable. However, our approach has some important advantages over that of Wong et al. (2003). Our method requires the number of decomposable graphs for each graph size. We show how to estimate these numbers using simulation and that the simulation results agree with analytic results when such results are known. We also show how to estimate the posterior distribution of the covariance matrix using Markov chain Monte Carlo with the elements of the covariance matrix integrated out and give em pirical results that show the sampler is computationally efficient an d converges rapidly. Finally, we note that both the prior and the simulation method to evaluate the prior apply generally to any decomposable graphical model.
Keywords: Covariance selection; Graphical models; Reduced conditional sampling; Variable selection

Testing for the Cointegrating Rank of a Vector Autoregressive Process with Uncertain Deterministic Trend Term
Date: 2008; By: Matei Demetrescu; Helmut Luetkepohl; Pentti Saikkonen
When applying Johansen’s procedure for determining the cointegrating rank to systems of variables with linear deterministic trends, there are two possible tests to choose from. One test allows for a trend in the cointegration relations and the other one restricts the trend to be orthogonal to the cointegration relations. The first test is known to have reduced power relative to the second one if there is in fact no trend in the cointegration relations, whereas the second one is based on a misspecified model if the linear trend is not orthogonal to the cointegration relations. Hence, the treatment of the linear trend term is crucial for the outcome of the rank determination procedure. We compare two alternative testing strategies which are applicable if there is uncertainty regarding the proper trend specification. In the first one a specific cointegrating rank is rejected if one of the two tests rejects and in the second one the trend term is decided upon by a pretest. The first strategy is shown to be preferable in applied work.
Keywords: Cointegration analysis, likelihood ratio test, vector autoregressive model, vector error correction model
JEL: C32

A Statistical Comparison of Alternative Identification Schemes for Monetary Policy Shocks
Date: 2008; By: Markku Lanne; Helmut Luetkepohl
Different identification schemes for monetary policy shocks have been proposed in the literature. They typically specify just-identifying restrictions in a standard structural vector autoregressive (SVAR) framework. Thus, in this framework the different schemes cannot be checked against the data with statistical tests. We consider different approaches how to use the data properties to augment the standard SVAR setup for identifying the shocks. Thereby it becomes possible to test models which are just identified in a standard setting. For monthly US data it is found that a model where monetary shocks are induced via the federal funds rate is the only one which cannot be rejected when the data properties are used for identification.
Keywords: Mixed normal distribution, structural vector autoregressive model, vector autoregressive process
JEL: C32

Asymptotics for LS, GLS, and Feasible GLS Statistics in an AR(1) Model with Conditional Heteroskedaticity
Date: 2008-06; By: Donald W.K. Andrews (Cowles Foundation, Yale University); Patrik Guggenberger (Dept. of Economics, UCLA)
This paper considers a first-order autoregressive model with conditionally heteroskedastic innovations. The asymptotic distributions of least squares (LS), infeasible generalized least squares (GLS), and feasible GLS estimators and t statistics are determined. The GLS procedures allow for misspecification of the form of the conditional heteroskedasticity and, hence, are referred to as quasi-GLS procedures. The asymptotic results are established for drifting sequences of the autoregressive parameter and the distribution of the time series of innovations. In particular, we consider the full range of cases in which the autoregressive parameter rho_n satisfies (i) n(1 - rho_n) -> infinity and (ii) n(1 - rho_n) -> h_1 < infinity as n -> infinity, where n is the sample size. Results of this type are needed to establish the uniform asymptotic properties of the LS and quasi-GLS statistics.
Keywords: Asymptotic distribution, Autoregression, Conditional heteroskedasticity, Generalized least squares, Least squares
JEL: C22

Model Averaging in Risk Management with an Application to Futures Markets
Date: 2008-01; By: Pesaran, M.H.; Schleicher, C.; Zaffaroni, P.
This paper considers the problem of model uncertainty in the case of multi-asset volatility models and discusses the use of model averaging techniques as a way of dealing with the risk of inadvertently using false models in portfolio management. Evaluation of volatility models is then considered and a simple Value-at-Risk (VaR) diagnostic test is proposed for individual as well as `average’ models. The asymptotic as well as the exact ¯nite-sample distribution of the test statistic, dealing with the possibility of parameter uncertainty, are established. The model averaging idea and the VaR diagnostic tests are illustrated by an application to portfolios of daily returns on six currencies, four equity indices, four ten year government bonds and four commodities over the period 1991-2007. The empirical evidence supports the use of `thick’ model averaging strategies over single models or Bayesian type model averaging procedures.
Keywords: Model Averaging, Value-at-Risk, Decision Based Evaluations.
JEL: C32 C52 C53 G11

Further results on bias in dynamic unbalanced panel data models with an application to firm R&D investment
Date: 2008; By: Lokshin, Boris (UNU-MERIT, and Maastricht University)
This paper extends the LSDV bias-corrected estimator in [Bun, M., Carree, M.A. 2005. Bias-corrected estimation in dynamic panel data models, Journal of Business and Economic Statistics, 23(2): 200-10] to unbalanced panels and discusses the analytic method of obtaining the solution. Using a Monte Carlo approach the paper compares the performance of this estimator with three other available techniques for dynamic panel data models. Simulation reveals that LSDV-bc estimator is a good choice except for samples with small T, where it may be unpractical. The methodology is applied to examine the impact of internal and external R&D on labor productivity in an unbalanced panel of innovating firms.
Keywords: Bias Correction, Unbalanced Panel Data, GMM, Dynamic Models
JEL: C23

Dynamic Factors in the Presence of Block Structure
Date: 2008; By: Marc Hallin; Roman Liska
Macroeconometric data often come under the form of large panels of time series, themselves decomposing into smaller but still quite large subpanels or blocks. We show how the dynamic factor analysis method proposed in Forni et al (2000), combined with the identification method of Hallin and Liska (2007), allows for identifying and estimating joint and block-specific common factors. This leads to a more sophisticated analysis of the structures of dynamic interrelations within and between the blocks in such datasets, along with an informative decomposition of explained variances. The method is illustrated with an analysis of the Industrial Production Index data for France, Germany, and Italy.
Keywords: Panel data; Time series; High dimensional data; Dynamic factor model; Business cycle; Block specific factors; Dynamic principal components; Information criterion.

Modeling Expectations with Noncausal Autoregressions
Date: 2008; By: Markku Lanne; Pentti Saikkonen
This paper is concerned with univariate noncausal autoregressive models and their potential usefulness in economic applications. We argue that noncausal autoregressive models are especially well suited for modeling expectations. Unlike conventional causal autoregressive models, they explicitly show how the considered economic variable is affected by expectations and how expectations are formed. Noncausal autoregressive models can also be used to examine the related issue of backward-looking or forward-looking dynamics of an economic variable. We show in the paper how the parameters of a noncausal autoregressive model can be estimated by the method of maximum likelihood and how related test procedures can be obtained. Because noncausal autoregressive models cannot be distinguished from conventional causal autoregressive models by second order properties or Gaussian likelihood, a detailed discussion on their specific ation is provided. Motivated by economic applications we explicitly use a forward-looking autoregressive polynomial in the formulation of the model. This is di¤erent from the practice used in previous statistics literature on noncausal autoregressions and, in addition to its economic motivation, it is also convenient from a statistical point of view. In particular, it facilitates obtaining likelihood based diagnostic tests for the specified orders of the backward-looking and forward-looking autoregressive polynomials. Such test procedures are not only useful in the specification of the model but also in testing economically interesting hypotheses such as whether the considered variable only exhibits forward-looking behavior. As an empirical application, we consider modeling the U.S. in.ation dynamics which, according to our results, is purely forward-looking.

Forecasting Economic and Financial Variables with Global VARs
Date: 2008-01; By: Pesaran, M.H.; Schuermann, T.; Smit, L.V.
This paper considers the problem of forecasting real and financial macroeconomic variables across a large number of countries in the global economy. To this end a global vector autoregressive (GVAR) model previously estimated over the 1979Q1-2003Q4 period by Dees, de Mauro, Pesaran, and Smith (2007), is used to generate out-of-sample one quarter and four quarters ahead forecasts of real output, inflation, real equity prices, exchange rates and interest rates over the period 2004Q1-2005Q4. Forecasts are obtained for 134 variables from 26 regions made up of 33 countries covering about 90% of world output. The forecasts are compared to typical benchmarks: univariate autoregressive and random walk models. Building on the forecast combination literature, the effects of model and estimation uncertainty on forecast outcomes are examined by pooling forecasts obtained from different GVAR models estimated over alternative sa mple periods. Given the size of the modeling problem, and the heterogeneity of economies considered — industrialised, emerging, and less developed countries — as well as the very real likelihood of possibly multiple structural breaks, averaging forecasts across both models and windows makes a significant difference. Indeed the double-averaged GVAR forecasts performed better than the benchmark competitors, especially for output, inflation and real equity prices.
Keywords: Forecasting using GVAR, structural breaks and forecasting, average forecasts across models and windows, financial and macroeconomic forecasts.
JEL: C32 C51 C53

Extracting the Cyclical Component in Hours Worked: a Bayesian Approach
Date: 2008-05; By: Bernardi, Mauro; Della Corte, Giuseppe; Proietti, Tommaso
The series on average hours worked in the manufacturing sector is a key leading indicator of the U.S. business cycle. The paper deals with robust estimation of the cyclical component for the seasonally adjusted time series. This is achieved by an unobserved components model featuring an irregular component that is represented by a Gaussian mixture with two components. The mixture aims at capturing the kurtosis which characterizes the data. After presenting a Gibbs sampling scheme, we illustrate that the Gaussian mixture model provides a satisfactory representation of the data, allowing for the robust estimation of the cyclical component of per capita hours worked. Another important piece of evidence is that the outlying observations are not scattered randomly throughout the sample, but have a distinctive seasonal pattern. Therefore, seasonal adjustment plays a role. We ¯nally show that, if a °exible seasonal mode l is adopted for the unadjusted series, the level of outlier contamination is drastically reduced.
Keywords: Gaussian Mixtures; Robust signal extraction; State Space Models; Bayesian model selection; Seasonality
JEL: E32 C52 C22 C11

Multiple Sample Selection in the Estimation of Intergenerational Occupational Mobility
Date: 2008-05; By: Cheti Nicoletti (Institute for Social and Economic Research)
The estimation of occupational mobility across generations can be biased because of different sample selection issues as, for example, selection into employment. Most empirical papers have either neglected sample selection issues or adopted Heckman-type correction methods. These methods are generally not adequate to estimate intergenerational mobility models. In this paper, we show how to use new methods to estimate linear and quantile intergenerational mobility equations taking account of multiple sample selection.
Keywords: intergenerational links, sample selection

Properties of etimated characteristic roots
Date: 2008-05-30; By: Bent Nielsen (Nuffield College, Oxford University); Heino Bohn Nielsen (University of Copenhagen)
Estimated characteristic roots in stationary autoregressions are shown to give rather noisy information about their population equivalents. This is remarkable given the central role of the characteristic roots in the theory of autoregressive processes. In the asymptotic analysis the problems appear when multiple roots are present as this imply a non-differentiability so the d-method does not apply, convergence rates are slow, and the asymptotic distribution is non-normal. In finite samples this has a considerable influence on the finite sample distribution unless the roots are far apart. With increasing order of the autoregressions it becomes increasingly difficult to place the roots far apart giving a very noisy signal from the characteristic roots.
Keywords: Autoregression; Characteristic root.
JEL: C22

Bridging Economic Theory Models and the Cointegrated Vector Autoregressive Model
Date: 2008; By: Framroze Moller, Niels
Examples of simple economic theory models are analyzed as restrictions on the Cointegrated VAR (CVAR). This establishes a correspondence between basic economic concepts and the econometric concepts of the CVAR: The economic relations correspond to cointegrating vectors and exogeneity in the economic model implies the econometric concept of strong exogeneity for â. The economic equilibrium corresponds to the so-called long-run value (Johansen 2005), the comparative statics are captured by the long-run impact matrix, C; and the exogenous variables are the common trends. Also, the adjustment parameters of the CVAR are shown to be interpretable in terms of expectations formation, market clearing, nominal rigidities, etc. The general-partial equilibrium distinction is also discussed.
Keywords: Cointegrated VAR, unit root approximation, economic theory models, expectations, general equilibrium, DSGE models
JEL: C32

Modeling the Phillips curve with unobserved components
Date: 2008-01; By: Harvey, A.
The relationship between in.ation and the output gap can be modeled simply and effectively by including an unobserved random walk component in the model. The dynamic properties match the stylized facts and the random walk component satisfies the properties normally required for core in.ation. The model may be generalized to as to include a term for the expectation of next period’s output, but it is shown that this is difficult to distinguish from the original specification. The model is fited as a single equation and as part of a bivariate model that includes an equation for GDP. Fitting the bivariate model highlights some new aspects of unobserved components modeling. Single equation and bivariate models tell a similar story: an output gap two per cent above trend is associated with an annual inflation rate that is one percent above core inflation.
Keywords: Cycle; hybrid new Keynesian Phillips curve; inflation gap; Kalman filter, output gap.

Datapedia: a Yellow Brick Roadmap
Date: 2008-06-08; By: Freeman, Alan
This note lays out a roadmap to Datapedia: the goal is to share numbers with the same power and ease that the Wiki has delivered for documents. This would transform the quality and usability of economic data. The goal is a system which, by analogy with Wikipedia can establish a world resource for reliable data. The paper discusses a process by which data providers and users can evolve a new set os systems for exchanging, describing and interacting with data to bring this about. The proposal centres on the metadata – additional descriptive data – that is associated with numeric data, and suggests how, in two cases – World GDP and Creative Industry Employment – data could be mapped in such a way that viable Datawiki platforms can be built. The proposal also allows existing communities of users to start reshaping the way they exchange and handle data, to permit, and also to improve existing standards for colla borative use of data. The first step would be Datawiki: an opensource system for recording revisions, changes and sources of data, allowing users to compare different revisions and versions of data with each other. It would be a set of protocols, and simple web tools, to help data researchers pool, compare, scrutinise, and revise datasets from multiple sources. The first step towards Datawiki is Wikidata: rethinking the way that data itself is transmitted between people that collaborate on it a platform-independent standard for exchanging specifically numeric data. I show that the ubiquitous standard for exchanging data – the spreadsheet – is not up to the task of serving as a platform for Datawiki, and assess how alternatives can be developed.
Keywords: Creative Industries; Economic statistics; Datapedia; Wikipedia; Wiki
Keywords: data, wikipedia, creative industries, macroeconomics
JEL: Z1 E01 C8

Likelihood-based Analysis for Dynamic Factor Models
Date: 2008-01-17; By: Borus Jungbacker (VU University Amsterdam); Siem Jan Koopman (VU University Amsterdam)
We present new results for the likelihood-based analysis of the dynamic factor model that possibly includes intercepts and explanatory variables. The latent factors are modelled by stochastic processes. The idiosyncratic disturbances are specified as autoregressive processes with mutually correlated innovations. The new results lead to computationally efficient procedures for the estimation of the factors and parameter estimation by maximum likelihood and Bayesian methods. An illustration is provided for the analysis of a large panel of macroeconomic time series.
Keywords: EM algorithm; Kalman Filter; Forecasting; Latent Factors; Markov chain Monte Carlo; Principal Components; State Space
JEL: C33 C43

Garch Parameter Estimation Using High-Frequency Data
Date: 2008-06-10; By: Visser, Marcel P.
Estimation of the parameters of Garch models for financial data is typically based on daily close-to-close returns. This paper shows that the efficiency of the parameter estimators may be greatly improved by using volatility proxies based on intraday data. The paper develops a Garch quasi maximum likelihood estimator (QMLE) based on these proxies. Examples of such proxies are the realized volatility and the intraday high-low range. Empirical analysis of the S&P 500 index tick data shows that the use of a suitable proxy may reduce the variances of the estimators of the Garch autoregression parameters by a factor 20.
Keywords: volatility estimation; quasi maximum likelihood; volatility proxy; Gaussian QMLE; log-Gaussian QMLE; autoregressive conditional heteroscedasticity
JEL: C51 G1 C14 C22

Parameter Driven Multi-state Duration Models: Simulated vs. Approximate Maximum Likelihood Estimation
Date: 2008-02-27; By: André A. Monteiro (VU University Amsterdam, and University of Western Australia)
Likelihood based inference for multi-state latent factor intensity models is hindered by the fact that exact closed-form expressions for the implied data density are not available. This is a common and well-known problem for most parameter driven dynamic econometric models. This paper reviews, adapts and compares three different approaches for solving this problem. For evaluating the likelihood, two of the methods rely on Monte Carlo integration with importance sampling techniques. The third method, in contrast, is based on fully deterministic numerical procedures. A Monte Carlo study is conducted to illustrate the use of each method, and assess its corresponding finite sample performance.
Keywords: Multi-state Duration models; Parameter Driven models; Simulated Maximum Likelihood; Importance Sampling
JEL: C15 C32 C33 C41

Forecasting Random Walks Under Drift Instability
Date: 2008-03; By: Pesaran, M.H.; Pick, A.
This paper considers forecast averaging when the same model is used but estimation is carried out over different estimation windows. It develops theoretical results for random walks when their drift and/or volatility are subject to one or more structural breaks. It is shown that compared to using forecasts based on a single estimation window, averaging over estimation windows leads to a lower bias and to a lower root mean square forecast error for all but the smallest of breaks. Similar results are also obtained when observations are exponentially down-weighted, although in this case the performance of forecasts based on exponential down-weighting critically depends on the choice of the weighting coefficient. The forecasting techniques are applied to monthly inflation series of 21 OECD countries and it is found that average forecasting methods in general perform better than using forecasts based on a single estimat ion window.
Keywords: Forecast combinations, averaging over estimation windows, exponentially down-weighting observations, structural breaks.
JEL: C22 C53

An Hourly Periodic State Space Model for Modelling French National Electricity Load
Date: 2008-01-17; By: V. Dordonnat (VU University Amsterdam); S.J. Koopman (VU University Amsterdam); M. Ooms (VU University Amsterdam); A. Dessertaine (Electricité de France, Clamart, France); J. Collet (Electricité de France, Clamart, France)
We present a model for hourly electricity load forecasting based on stochastically time-varying processes that are designed to account for changes in customer behaviour and in utility production efficiencies. The model is periodic: it consists of different equations and different parameters for each hour of the day. Dependence between the equations is introduced by covariances between disturbances that drive the time-varying processes. The equations are estimated simultaneously. Our model consists of components that represent trends, seasons at different levels (yearly, weekly, daily, special days and holidays), short-term dynamics and weather regression effects including nonlinear functions for heating effects. The implementation of our forecasting procedure relies on the multivariate linear Gaussian state space framework and is applied to national French hourly electricity load. The analysis focuses on two hours, 9 AM and 12 AM, but forecasting results are presented for all twenty-four hours. Given the time series length of nine years of hourly observations, many features of our model can be readily estimated including yearly patterns and their time-varying nature. The empirical analysis involves an out-of sample forecasting assessment up to seven days ahead. The one-day ahead forecasts from fourty-eight bivariate models are compared with twenty-four univariate models for all hours of the day. We find that the implied forecasting function strongly depends on the hour of the day.
Keywords: Kalman filter; Maximum likelihood estimation; Seemingly Unrelated Regression Equations; Unobserved Components; Time varying parameters; Heating effect
JEL: C22 C32 C52 C53

MDL Mean Function Selection in Semiparametric Kernel Regression Models
Date: 2008-05-07; By: Jan G. De Gooijer (University of Amsterdam); Ao Yuan (Howard University, Washington DC, USA)
We study the problem of selecting the optimal functional form among a set of non-nested nonlinear mean functions for a semiparametric kernel based regression model. To this end we consider Rissanen’s minimum description length (MDL) principle. We prove the consistency of the proposed MDL criterion. Its performance is examined via simulated data sets of univariate and bivariate nonlinear regression models.
Keywords: Kernel density estimator; Maximum likelihood estimator; Minimum description length; Nonlinear regression; Semiparametric model
JEL: C14

Speed of Adjustment in Cointegrated Systems
Date: 2007-06; By: Fanelli, Luca; Paruolo, Paolo
This paper considers the speed of adjustment to long-run equilibria, in the context of cointegrated Vector Autoregressive Processes (VAR). We discuss the definition of multivariate p-lives for any indicator of predictive ability, concentrating on cumulated interim multipliers which converge to impact factor for increasing forecasting horizon. Interim multipliers are related to autoregressive Granger-causality coefficients, structural or generalized cumulative impulse responses. We discuss the relation of the present definition of multivariate p-lives with existing definitions for univariate time series and for nonlinear multivariate stationary processes. For multivariate (possibly cointegrated) VAR systems, p-lives are functions of the dynamics of the system only,and do not depend on the history path on which the forecast is based. Hence one can discuss inference on p-lives as (discrete) functions of parameters in the VAR model. We discuss a likelihood-based approach, both for point estimation and for confidence regions. An illustrative application to adjustment to purchasing-power parity (PPP) is presented.
Keywords: p-life; speed of adjustment; impact factors; vector equilibrium correction; shock absorption.
JEL: C32 C52 F31

Confidence sets based on penalized maximum likelihood estimators
Date: 2008-06; By: Pötscher, Benedikt M.; Schneider, Ulrike
The finite-sample coverage properties of confidence intervals based on penalized maximum likelihood estimators like the LASSO, adaptive LASSO, and hard-thresholding are analyzed. It is shown that symmetric intervals are the shortest. The length of the shortest intervals based on the hard-thresholding estimator is larger than the length of the shortest interval based on the adaptive LASSO, which is larger than the length of the shortest interval based on the LASSO, which in turn is larger than the standard interval based on the maximum likelihood estimator. In the case where the penalized estimators are tuned to possess the `sparsity property’, the intervals based on these estimators are larger than the standard interval by an order of magnitude. A simple asymptotic confidence interval construction in the `sparse’ case, that also applies to the smoothly clipped absolute deviation estimator, is also discussed.
Keywords: penalized maximum likelihood; Lasso; adaptive Lasso; hard-thresholding; confidence set; coverage probability; sparsity; model selection.
JEL: C13 C01

Testing for Granger (non)-Causality in a Time Varying Coefficient VAR Model
Date: 2008-01; By: Dimitris K. Christopoulos; Miguel Leon-Ledesma
In this paper we propose Granger (non-)causality tests based on a VAR model allowing for time-varying coefficients. The functional form of the time-varying coefficients is a Logistic Smooth Transition Autoregressive (LSTAR) model using time as the transition variable. The model allows for testing Granger non-causality when the VAR is subject to a smooth break in the coefficients of the Granger causal variables. The proposed test then is applied to the money-output relationship using quarterly US data for the period 1952:2-2002:4. We find that causality from money to output becomes stronger after 1978:4 and the model is shown to have a good out of sample forecasting performance for output relative to a linear VAR model.
Keywords: Granger causality; Time-varying coefficients; LSTAR models
JEL: C51 C52

“Bayesian Estimation of Demand Functions under Block Rate Pricing”
Date: 2008-06; By: Koji Miyawaki (Graduate School of Economics, University of Tokyo); Yasuihro Omori (Faculty of Economics, University of Tokyo); Akira Hibiki (cNational Institute for Environmental Studies and Department of Social Engineering, Tokyo Institute of Technology)
This article proposes a Bayesian estimation method of demand functions under block rate pricing, focusing on increasing one. Under this pricing structure, price changes when consumption exceeds a certain threshold and the consumer faces a utility maximization problem subject to a piecewise-linear budget constraint. We apply the so-called discrete/continuous choice approach to derive the corresponding demand function. Taking a hierarchical Bayesian approach, we implement a Markov chain Monte Carlo simulation to estimate the demand function. Moreover, a separability condition is explicitly considered to obtain proper estimates. We find, however, that the convergence of the distribution of simulated samples to the posterior distribution is slow, requiring an additional scale transformation step for parameters to the Gibbs sampler. The model is also extended to allow random coefficients for panel data and spatial corre lation for spatial data. These proposed methods are applied to estimate the Japanese residential water and electricity demand function.

Instrumental Variable Estimation for Duration Data
Date: 2008-03-27; By: Govert E. Bijwaard (Erasmus University Rotterdam)
In this article we develop an Instrumental Variable estimation procedure that corrects for possible endogeneity of a variable in a duration model. We assume a Generalized Accelerated Failure Time (GAFT) model. This model is based on transforming the durations and assuming a distribution for these transformed durations. The GAFT model encompasses two competing approaches to duration data; the (Mixed) Proportional Hazard (MPH) model and the Accelerated Failure Time (AFT) model. The basis of the Instrumental Variable Linear Rank estimator (IVLR) is that for the true GAFT model the instrument does not influence the hazard of the transformed duration. The inverse of an extended rank test provide the estimation equations the IVLR estimation procedure is based on. We discuss the large sample properties and the efficiency of this estimator. We discuss the practical issues of implementation of the estimator. We apply the IV LR estimation approach to the Illinois re-employment bonus experiment. In this experiment individuals who became unemployed were divided at random in three groups: two bonus groups and a control group. Those in the bonus groups could refuse to participate in the experiment. It is very likely that this decision is related to the unemployment duration. We use the IVLR estimator to obtain the effect of these endogenous claimant and employer bonuses on the re-employment hazard.
Keywords: Endogenous Variable; Duration model; Censoring; Instrumental Variable
JEL: C21 C41 J64

Model-based Estimation of High Frequency Jump Diffusions with Microstructure Noise and Stochastic Volatility
Date: 2008-01-22; By: Charles S. Bos (VU University Amsterdam)
When analysing the volatility related to high frequency financial data, mostly non-parametric approaches based on realised or bipower variation are applied. This article instead starts from a continuous time diffusion model and derives a parametric analog at high frequency for it, allowing simultaneously for microstructure effects, jumps, missing observations and stochastic volatility. Estimation of the model delivers measures of daily variation outperforming their non-parametric counterparts. Both with simulated and actual exchange rate data, the feasibility of this novel approach is shown. The parametric setting is used to estimate the intra-day trend in the Euro/U.S. Dollar exchange rate.
Keywords: High frequency; integrated variation; intra-day; jump diffusions; microstructure noise; stochastic volatility; exchange rates
JEL: C11 C14 D53 E44

Early Detection Techniques for Market Risk Failure
Date: 2008-05; By: Jose Olmo (Department of Economics, City University, London); William Pouliot (Department of Economics, City University, London)
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.
Keywords: Asymmetries, crises; Extreme values; Hypothesis testing; Leverage effect; Nonlinearities; Threshold models

Optimal Asset Allocation with Factor Models for Large Portfolios
Date: 2008-03; By: Pesaran, M.H.; Zaffaroni, P.
This paper characterizes the asymptotic behaviour, as the number of assets gets arbitrarily large, of the portfolio weights for the class of tangency portfolios belonging to the Markowitz paradigm. It is as- sumed that the joint distribution of asset returns is characterized by a general factor model, with possibly heteroskedastic components. Under these conditions, we establish that a set of appealing properties, so far unnoticed, characterize traditional Markowitz portfolio trading strategies. First, we show that the tangency portfolios fully diversify the risk associated with the factor component of asset return innovations. Second, with respect to determination of the portfolio weights, the conditional distribution of the factors is of second-order importance as compared to the distribution of the factor loadings and that of the idiosyncratic components. Third, although of crucial importance in forecasting asse t returns, current and lagged factors do not enter the limit portfolio returns. Our theoretical results also shed light on a number of issues discussed in the literature regarding the limiting properties of portfolio weights such as the diversi¯ability property and the number of dominant factors.
Keywords: Asset allocation, Large Porftolios, Factor models, Diversi¯cation.
JEL: C32 C52 C53 G1

A New Procedure to Monitor the Mean of a Quality Characteristic
Date: 2008; By: Kiani, Mehdi; Panaretos, John; Psarakis, Stelios
The Shewhart, Bonferroni-adjustment and analysis of means (ANOM) control chart are typically applied to monitor the mean of a quality characteristic. The Shewhart and Bonferroni procedure are utilized to recognize special causes in production process, where the control limits are constructed by assuming normal distribution for known parameters (mean and standard deviation), and approximately normal distribution regarding to unknown parameters. The ANOM method is an alternative to the analysis of variance method. It can be used to establish the mean control charts by applying equicorrelated multivariate non-central t distribution. In this paper, we establish new control charts, in phases I and II monitoring, based on normal and t distributions having as a cause a known (or unknown) parameter (standard deviation). Our proposed methods are at least as effective as the classical Shewhart methods and have some advantage s.
Keywords: Shewhart; Bonferroni-adjustment; Analysis of means; Average run length; False alarm probability
JEL: C10

Old and new spectral techniques for economic time series
Date: 2008-05; By: Sella Lisa (University of Turin)
This methodological paper reviews different spectral techniques well suitable to the analysis of economic time series. While econometric time series analysis is generally yielded in the time domain, these techniques propose a complementary approach based on the frequency domain. Spectral decomposition and time series reconstruction provide a precise quantitative and formal description of the main oscillatory components of a series: thus, it is possible to formally identify trends, lowfrequency components, business cycles, seasonalities, etc. Since recent developments in spectral techniques allow to manage even with short noisy dataset, nonstationary processes, non purely periodic components these tools could be applied on economic datasets more widely than they nowadays are.

Short-term forecasting of GDP using large monthly datasets - a pseudo real-time forecast evaluation exercise
Date: 2008-04; By: Karim Barhoumi; Szilard Benk; Riccardo Cristadoro; Ard Den Reijer; Audrone Jakaitiene; Piotr Jelonek; António Rua; Gerhard Rünstler (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Karsten Ruth; Christophe Van Nieuwenhuyze
This paper evaluates different models for the short-term forecasting of real GDP growth in ten selected European countries and the euro area as a whole. Purely quarterly models are compared with models designed to exploit early releases of monthly indicators for the nowcast and forecast of quarterly GDP growth. Amongst the latter, we consider small bridge equations and forecast equations in which the bridging between monthly and quarterly data is achieved through a regression on factors extracted from large monthly datasets. The forecasting exercise is performed in a simulated real-time context, which takes account of publication lags in the individual series. In general, we find that models that exploit monthly information outperform models that use purely quarterly data and, amongst the former, factor models perform best. JEL Classification: E37, C53.
Keywords: Bridge models, Dynamic factor models, real-time data flow.

Analysis of the dependence structure in econometric time series
Date: 2008-06-05; By: Aurélien Hazan (IBISC - Informatique, Biologie Intégrative et Systèmes Complexes - CNRS : FRE2873 - Université d’Evry-Val d’Essonne); Vincent Vigneron (CES - Centre d’économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, SAMOS - Statistique Appliquée et MOdélisation Stochastique - Université Panthéon-Sorbonne - Paris I)
The various scales of a signal maintain relations of dependence the on es with the others. Those can vary in time and reveal speed changes in the studied phenomenon. In the goal to establish these changes, one shall compute first the wavelet transform of a signal, on various scales. Then one shall study the statistical dependences between these transforms thanks to an estimator of mutual information. One shall then propose to summarize the resulting network of dependences by a graph of dependences by thresholding the values of the mutual information or by quantifying its values. The method can be applied to several types of signals, such as fluctuations of market indexes for instance the S&P 500, or high frequency foreign exchange (FX) rates.
Keywords: wavelet, dependence; mutual information; financial; time-series; FX

Incorporating judgement with DSGE models
Date: 2008-06; By: Jaromír Beneš; Andrew Binning; Kirdan Lees (Reserve Bank of New Zealand)
Central bank policymakers often cast judgement about macroeconomic forecasts in reduced form terms, basing this on off-model information that is not easily mapped to a structural DSGE framework. We show how to compute forecasts conditioned on policymaker judgement that are the most likely conditional forecasts from the perspective of the DSGE model, thereby maximising the influence of the model structure on the forecasts. We suggest using a simple implausibility index to track the magnitude and type of policymaker judgement. This is based on the structural shocks required to return policymaker judgement. We show how to use the methods for practical use in the policy environment and also apply the techniques to condition DSGE model forecasts on: (i) the long history of published forecasts from the Reserve Bank of New Zealand; (ii) constant interest rate forecasts; and (iii) inflation forecasts from a Bayesian VAR cu rrently used in the policy environment at the Reserve Bank of New Zealand.
Keywords: DSGE models; monetary policy; conditional forecasts
JEL: C51 C53

Rational Forecasts or Social Opinion Dynamics? Identification of Interaction Effects in a Business Climate Survey
Date: 2008-06; By: Thomas Lux
This paper develops a methodology for estimating the parameters of dynamic opinion or expectation formation processes with social interactions. We study a simple stochastic framework of a collective process of opinion formation by a group of agents who face a binary decision problem. The aggregate dynamics of the individuals’ decisions can be analyzed via the stochastic process governing the ensemble average of choices. Numerical approximations to the transient density for this ensemble average allow the evaluation of the likelihood function on the base of discrete observations of the social dynamics. This approach can be used to estimate the parameters of the opinion formation process from aggregate data on its average realization. Our application to a well-known business climate index provides strong indication of social interaction as an important element in respondents’ assessment of the business climate
Keywords: business climate, business cycle forecasts, opinion formation, social interactions
JEL: C42 D84 E37

The Information Content of a Stated Choice Experiment
Date: 2008-05-22; By: Jan Rouwendal (VU University Amsterdam); Arianne de Blaeij (LEI, The Hague); Piet Rietveld (VU University Amsterdam); Erik Verhoef (VU University Amsterdam)
This paper presents a method to assess the distribution of values of time, and values of statistical life, over participants to a stated choice experiment, that does not require the researcher to make an a priori assumption on the type of distribution, as is required for example for mixed logit models. The method requires a few assumptions to hold true, namely that the valuations to be determined are constant for each individual, and that respondents make choices according to their preferences. These assumptions allow the derivation of lower and upper bounds on the (cumulative) distribution of the values of interest over respondents, by deriving for each choice set the value(s) for which the respondent would be indifferent between the alternatives offered, and next deriving from the choice actually made the respondent’s implied minimum or maximum value(s). We also provide an extension of the method that incorpora tes the possibility that errors are made. The method is illustrated using data from an experiment investigating the value of time and the value of statistical life. We discuss the possibility to improve the information content of stated choice experiments by optimizing the attribute levels shown to respondents, which is especially relevant because it would help in selecting the appropriate distribution for mixed logit estimates for the same data.
Keywords: stated preferences; value of a statistical life
JEL: C81 D12 D61 R41

Bad Luck When Joining the Shortest Queue
Date: 2008; By: Blanc, J.P.C. (Tilburg University, Center for Economic Research)
A frequent observation in service systems with queues in parallel is that customers in other queues tend to be served faster than those in one?s own queue. This paper quantifies the probability that one?s service would have started earlier if one had joined another queue than the queue that was actually chosen, for exponential multiserver systems with queues in parallel in which customers join one of the shortest queues upon arrival and in which jockeying is not possible.
Keywords: Queueing;Join-the-shortest-queue; Probability of bad luck; Power-series algorithm; Overtaking customers; Dedicated customers.
JEL: C44 C60

Source : NEP (New Economics Papers) | RePEc

Hedge Fund Contagion and Liquidity
Date: 2008-06; By: Nicole M. Boyson; Christof W. Stahel; Rene M. Stulz
Using hedge fund indices representing eight different styles, we find strong evidence of contagion within the hedge fund sector: controlling for a number of risk factors, the average probability that a hedge fund style index has extreme poor performance (lower 10% tail) increases from 2% to 21% as the number of other hedge fund style indices with extreme poor performance increases from zero to seven. We investigate how changes in funding and asset liquidity intensify this contagion, and find that the likelihood of contagion is high when prime brokerage firms have poor performance (which would be expected to affect hedge fund funding liquidity adversely) and when stock market liquidity (a proxy for asset liquidity) is low. Finally, we examine whether extreme poor performance in the stock, bond, and currency markets is more likely when contagion in the hedge fund sector is high. We find no evidence that contagion in the hedge fund sector is associated with extreme poor performance in the stock and bond markets, but find significant evidence that performance in the currency market is worse when hedge fund contagion is high, consistent with the effects of an unwinding of carry trades.
JEL: G11 G12 G18 G23

Model Averaging in Risk Management with an Application to Futures Markets
Date: 2008-01; By: Pesaran, M.H.; Schleicher, C.; Zaffaroni, P.
This paper considers the problem of model uncertainty in the case of multi-asset volatility models and discusses the use of model averaging techniques as a way of dealing with the risk of inadvertently using false models in portfolio management. Evaluation of volatility models is then considered and a simple Value-at-Risk (VaR) diagnostic test is proposed for individual as well as `average’ models. The asymptotic as well as the exact ¯nite-sample distribution of the test statistic, dealing with the possibility of parameter uncertainty, are established. The model averaging idea and the VaR diagnostic tests are illustrated by an application to portfolios of daily returns on six currencies, four equity indices, four ten year government bonds and four commodities over the period 1991-2007. The empirical evidence supports the use of `thick’ model averaging strategies over single models or Bayesian type model averaging procedures.
Keywords: Model Averaging, Value-at-Risk, Decision Based Evaluations.
JEL: C32 C52 C53 G11

Momentum and Contrarian Stock-Market Indices
Date: 2008-05; By: Jon Eggins (Russell Investment Group); Robert J. Hill (School of Economics, University of New South Wales)
We propose a new class of investable momentum and contrarian stock-market indices that partition a benchmark index, such as the Russell 1000. Our momentum indices overweight stocks that have recently outperformed, while our contrarian indices underweight these same stocks. Our index construction methodology is extremely flexible, and allows the index provider to trade-off the distinctiveness of the momentum/contrarian strategies with portfolio turnover. Momentum investment styles in particular typically entail a high level of turnover, and hence high associated transaction costs. The creation of momentum and contrarian indices and exchange traded funds (ETFs) based on our methodology would allow investors to access these styles at lower cost than is currently possible. Our indices also provide performance benchmarks for momentum/contrarian investment managers, and good proxies for a momentum factor. Over the period 1995- 2007 we find that short term momentum and long term contrarian indices outperform the reference Russell 1000 index. We also document the changing interaction between the momentum/contrarian and value/growth styles.
Keywords: Momentum index; Contrarian index; Performance measurement; Turnover; Momentum factor; Behavioral finance
JEL: C43 G11 G23

Private Equity and Regulatory Capital
Date: 2008; By: Bongaerts, D.; Charlier, E. (Tilburg University, Center for Economic Research)
Regulatory Capital requirements for European banks have been put forward in the Basel II Capital Framework and subsequently in the Capital Requirements Directive (CRD) of the EU. We provide a detailed discussion of the capital requirements for private equity investments under the simple risk weight approach, the PD/LGD approach and the internal model approach. For the latter we present a structural model for which we calibrate the parameters from a proprietary dataset. We modify the standard Merton structural model to make it applicable in practice and to capture stylized facts of these investments. We also show how to implement the early default features of our model in a simulation algorithm with very low computational costs. Our results support capital requirements lower than in Basel II, but not as low as in CRD. A sensitivity analysis shows that this finding is robust to parameter uncertainty and stress scenar ios. This is likely to give adverse incentives to banks for using advanced risk models.
Keywords: Private Equity;Regulatory Capital;Risk Management
JEL: G21 G28 G32

Asymptotic Maturity Behavior of the Term Structure
Date: 2008-06; By: Klaas Schulze
Pricing and hedging of long-term interest rate sensitive products require to extrapolate the term structure beyond observable maturities. For the resulting limiting term structure we show two results by postulating no arbitrage in a bond market with infinitely increasing maturities: long zero-bond yields and long forward rates (i) are monotonically increasing and (ii) equal their minimal future value. Both results constrain the asymptotic maturity behavior of stochastic yield curves. They are fairly general and extend beyond semimartingale modeling. Hence our framework embeds arbitrage-free term structure models and imposes restrictions on their specification.
Keywords: bond markets, yield curve, long forward rates, no arbitrage, asymptotic maturity
JEL: G10 G12 E43

Real Exchange Rate Behavior: New Evidence with Linear and Non-linear Endogenous Break(s)
Date: 2008-04-28; By: Chan, Tze-Haw; Chong, Lee Lee; Khong, Wye Leong Roy
Using monthly frequency data from 1981 to 2005, we test for the potential mean reversion of Japan-US real exchange rates using newly improved unit root tests allowing for endogenous (unknown) break(s) in the linear as well as non-linear manner. Both countries have contributed vital proportion in global trading on top of being the major trading partner to each other since 1960s. We identify structural breaks in 1985 and 1994 respectively via the Lumsdaine and Papell (1997)’s linear test, but the results were against the PPP hypothesis. The Saikkonen and LÄutkepohl, (2002)’s test, however, provides sufficient supports for non-linear adjustment of real exchange towards long run PPP. In addition, stronger evidence for PPP is found in the post-1994 period, in conjunction with the small persistence of real exchange deviations (half-life less than a year). Also, the exchange rate misalignment is less evident after th e Plaza Accord 1985. In brief, our findings reveal that the Japanese authority has shown some form of PPP-oriented rule as a basis for their exchange rate policies, in the presence of structural break(s) and non-linearity.
Keywords: Real Exchange Rates; Endogenous Breaks; Non-linearity; Half-life
JEL: C52 C12 N15 F31

Exchange Rate Volatility and Exports: New Empirical Evidence from the Emerging East Asian Economies
Date: 2008-03; By: Chit, Myint Moe; Rizov, Marian; Willenbockel, Dirk
This paper examines the impact of bilateral real exchange rate volatility on real exports of five emerging East Asian countries among themselves as well as to thirteen industrialised countries. We explicitly recognize the specificity of the exports between the emerging East Asian and industrialised countries and employ a generalized gravity model that combines a traditional long-run export demand model with gravity type variables. In the empirical analysis we use a panel comprising 25 years of quarterly data and perform unit-root and cointegration tests to verify the long-run relationship among the regression variables. The results provide strong evidence that exchange rate volatility has a negative impact on the exports of emerging East Asian countries. These results are robust across different estimation techniques and do not depend on the variable chosen to proxy exchange rate uncertainty.
Keywords: Trade; uncertainty; exchange rate fluctuations; East Asia;
JEL: O53 O24 F14 F31

A Methodological Note on Measuring the Functional Efficiency of Capital Markets
Date: 2008-06-09; By: Eklund, Johan E (JIBS and CESIS); Desai, Sameeksha (Max Planck Institute of Economics)
We apply the accelerator principle to measure the functional efficiency of capital markets. We estimate the elasticity of capital with respect to output using a panel of firms across 44 countries, and compare the results with existing approaches. Furthermore, we correlate our measure with corporate governance institutions.
Keywords: Allocation of capital; accelerator principle; functional efficiency
JEL: C00 G32 P00

A new Model for Stock Price Movements
Date: 2007-08-10; By: Venier, Guido
A new alternative diffusion model for asset price movements is presented. In contrast to the popular approach of Brownian motion it proposes deterministic diffusion for the modelling of stock price movements. These diffusion processes are a new area of physical research and can be created by the chaotic behaviour of rather simple piecewise linear maps, but can also occur in chaotic deterministic systems like the famous Lorenz system. The reason for the investigation on deterministic diffusion processes as suitable model for the behaviour of stock prices is, that their time series can obey certain stylized facts of real world stock market time series. For example they can show fat tails of empirical log returns in union with varying volatility i.e. heteroscedacity as well as slowly decaying autocorrelations of squared log returns. These phenomena could not be explained by a simple Brownian motion and have been the m ost criticism to the lognormal random walk. The scope is to show that deterministic diffusion models can explain the occurrence of those empirical observed stylized facts and to discuss the implications for economic theory with respect to market efficiency and option pricing.
Keywords: stock pricing;chaos theory;deterministic diffusion; heteroscedasticity;fat tails;long range dependence;stylized facts of economic time series;fractional brownian motion;levy stable distributions;brownian motion;black scholes;option pricing;CAPM;market efficiency
JEL: G14 D58 G13 C32 D53 G12 Z0 D79

Stochastic Behavioral Asset Pricing Models and the Stylized Facts
Date: 2008-06; By: Thomas Lux
High-frequency financial data are characterized by a set of ubiquitous statistical properties that prevail with surprising uniformity. While these ’stylized facts’ have been well-known for decades, attempts at their behavioral explanation have remained scarce. However, recently a new branch of simple stochastic models of interacting traders have been proposed that share many of the salient features of empirical data. These models draw some of their inspiration from the broader current of behavioral finance. However, their design is closer in spirit to models of multi-particle interaction in physics than to traditional asset-pricing models. This reflects a basic insight in the natural sciences that similar regularities like those observed in financial markets (denoted as ’scaling laws’ in physics) can often be explained via the microscopic interactions of the constituent parts of a complex system. Since these emerge nt properties should be independent of the microscopic details of the system, this viewpoint advocates negligence of the details of the determination of individuals’ market behavior and instead focuses on the study of a few plausible rules of behavior and the emergence of macroscopic statistical regularities in a market with a large ensemble of traders. This chapter will review the philosophy of this new approach, its various implementations, and its contribution to an explanation of the stylized facts in finance
Keywords: Agent-based models, speculation, stylized facts, group dynamics
JEL: C15 D84 G12

Model-based Estimation of High Frequency Jump Diffusions with Microstructure Noise and Stochastic Volatility
Date: 2008-01-22; By: Charles S. Bos (VU University Amsterdam)
When analysing the volatility related to high frequency financial data, mostly non-parametric approaches based on realised or bipower variation are applied. This article instead starts from a continuous time diffusion model and derives a parametric analog at high frequency for it, allowing simultaneously for microstructure effects, jumps, missing observations and stochastic volatility. Estimation of the model delivers measures of daily variation outperforming their non-parametric counterparts. Both with simulated and actual exchange rate data, the feasibility of this novel approach is shown. The parametric setting is used to estimate the intra-day trend in the Euro/U.S. Dollar exchange rate.
Keywords: High frequency; integrated variation; intra-day; jump diffusions; microstructure noise; stochastic volatility; exchange rates
JEL: C11 C14 D53 E44

The forint interest rate swap market and the main drivers of swap spreads
Date: 2008; By: Csaba Csávás (Magyar Nemzeti Bank); Lóránt Varga (Magyar Nemzeti Bank); Csaba Balogh (Magyar Nemzeti Bank)
In our paper we present the most important characteristics of the forint interest rate swap market, as well as examine the determinants and the information content of the forint interest rate swap spreads. The turnover of the forint interest rate swap market has grown dynamically in recent years, and now it may reach, or even exceed, the turnover of the government bond market. Due to the hedging activity of interest rate swap market makers, there is a close linkage between the forint interest rate swap market and the government bond market. In terms of investors, the interest rate swap and government bond markets are strongly segmented. Consequently, the spillover from one market segment to the other is not perfect. Our analyses suggest that long-term forint interest rate swap spreads are exposed to the common impact of several factors. The strongest effects are attributed to government bond purchases by residents, the Maggie A spread, the slope of the yield curve and the forint/euro forward yield spread. In the developments of swap spreads, the impact of those trading strategies employing interest rate swaps can be detected. These are widespread in the domestic market, as is confirmed by anecdotal information. The results indicate that in certain cases the swap yields, while at other times the government bond yields carry additional information about long-term yield expectations. The values of the 5-year HUF/EUR forward spread 5 years ahead calculated from the swap yields and from the treasury yields differ markedly, and this difference is driven practically by the same factors that influence the interest rate swap spreads.
Keywords: forint interest rate swap market, government securities market, interest rate swap spread, swap spread model.
JEL: G12 G14 G15

ABS, MBS AND CDO COMPARED: AN EMPIRICAL ANALYSIS
Date: 2008-06-02; By: Vink, D.; Thibeault, A. (Vlerick Leuven Gent Management School)
The capital market in which the asset-backed securities are issued and traded is composed of three main categories: ABS, MBS and CDOs. We were able to examine a total number of 3,951 loans (worth €730.25 billion) of which 1,129 (worth €208.94 billion) have been classified as ABS. MBS issues represent 2,224 issues (worth €459.32 billion) and 598 are CDO issues (worth €61.99 billion). We have investigated how common pricing factors compare for the main classes of securities. Due to the differences in the assets related to these securities, the relevant pricing factors for these securities should differ, too. Taking these three classes as a whole, we have documented that the assets attached as collateral for the securities differ between security classes, but that there are also important univariate differences to consider. We found that most of the common pricing characteristics between ABS, MBS and CDO diffe r significantly. Furthermore, applying the same pricing estimation model to each security class revealed that most of the common pricing characteristics associated with these classes have a different impact on the primary market spread exhibited by the value of the coefficients. The regression analyses we performed demonstrated econometrically that ABS, MBS, and CDOs are in fact different financial instruments.
Keywords: asset securitization, asset-backed securitisation, bank lending, default risk, risk management, spreads, leveraged financing
JEL: G21 G24 G32

Estimating yield curves from swap, BUBOR and FRA data
Date: 2008; By: Zoltán Reppa (Magyar Nemzeti Bank)
In this paper we estimate yield curves from Hungarian interest rate swap and money market data. Following general practice, we experiment with several models-differing in the functional form and objective function-and chose the model which performs best according to standard evaluation criteria. We find that the methods perform equally well in terms of residuals and out-of-sample fit; however, the smoothing spline method stands out when we consider the ability to fit the short end of the maturity spectrum, stability of estimation and plausibility of the estimated curves.
Keywords: yield curve, interest rate swaps.
JEL: E43 G12

The Anatomy of Banking Crises
Date: 2008-04-22; By: Paul Cashin; Rupa Duttagupta
This paper uses a Binary Classification Tree (BCT) model to analyze banking crises in 50 emerging market and developing countries during 1990-2005. The BCT identifies key indicators and their threshold values at which vulnerability to banking crisis increases. The three conditions identified as crisis-prone-(i) very high inflation, (ii) highly dollarized bank deposits combined with nominal depreciation or low liquidity, and (iii) low bank profitability-highlight that foreign currency risk, poor financial soundness, and macroeconomic instability are key vulnerabilities triggering banking crises. The main results survive under alternative robustness checks, confirming the importance of the BCT approach for monitoring banking system vulnerabilities.

Do IMF Programs Improve Economic Governance?
Date: 2008-05-05; By: Jiro Honda
This paper examines the effects of IMF financial assistance on economic governance in developing countries, based on panel data analyses of perceived governance indicators. It uses a two-stage approach to address possible endogeneity issues. The results show that successful implementation of IMF programs is associated with improvements in the quality of economic governance. Specifically, the paper finds statistically robust results that IMF concessional programs through the Poverty Reduction and Growth Facility tend to enhance the rule of law and strengthen control of corruption. Through this exercise, however, no statistically significant effect is observed for assistances under the General Resource Account.

An eclectic third generation model of financial and exchange rate crises
Date: 2008; By: Joaquin Novella Izquierdo; Joan Ripoll i Alcon (Universitat de Barcelona)
This paper presents an eclectic model that systematizes the dynamics of self-fulfilling crises, using the main aspects of the three typologies of third generation models, to describe the stylized facts that hasten the withdrawal of a pegged exchange rate system. The most striking contributions are the implications for economic policy as well the vanishing role of exchange rate as an instrument of macroeconomic adjustment, when balance-sheet effects are a real possibility.
Keywords: speculative attack, financial liberalization, financial panic, financial and exchange rate crisis
JEL: F41 F43 E44 F31 F32 F34 F36 E52

Real exchange rate volatility and disconnect: an empirical investigation
Date: 2008-04; By: Riccardo Cristadoro (Bank of Italy, Economic Outlook and Monetary Policy Research Department); Andrea Gerali (Bank of Italy, Economic Outlook and Monetary Policy Research Department); Stefano Neri (Bank of Italy, Economic Outlook and Monetary Policy Research Department); Massimiliano Pisani (Bank of Italy, Economic Outlook and Monetary Policy Research Department)
A two-country model that incorporates many features proposed in the New Open Economy Macroeconomics literature is developed in order to replicate the volatility of the real exchange rate and its disconnect with macroeconomic variables. The model is estimated using data for the euro area and the U.S. and Bayesian methods. The analysis delivers the following results: (a) international price discrimination, home bias and shocks to the uncovered interest rate parity (UIRP) condition are key features to replicate the variance of the real exchange rate; (b) home bias, shocks to the UIRP condition and to production technologies help replicating the disconnect;(c) distribution services intensive in local nontradeables are an important source of international price discrimination.
Keywords: International business cycle, Exchange rate volatility, Exchange rate pass-through, International transmission.
JEL: F32 F33 F41 C11

Exchange Rate Regimes and Capital Mobility: How Much of the Swoboda Thesis Survives?
Date: 2008-06; By: Eichengreen, Barry
Alexander Swoboda is one of the originators of the bipolar view that capital mobility creates pressure for countries to abandon intermediate exchange rate arrangements in favor of greater flexibility and harder pegs. This paper takes another look at the evidence for this hypothesis using two popular de facto classifications of exchange rate regimes. That evidence supports the bipolar view for the advanced countries, the sample for which it was originally developed, but not obviously for emerging markets and other developing countries. One interpretation of the contrast is that there is a tendency to move away from intermediate regimes in the course of economic and financial development, implying that emerging markets and other developing countries will eventually abandon intermediate regimes as well. Another interpretation is that the advanced countries have been faster to abandon soft pegs because they have been f aster to develop attractive alternatives, notably Europe’s monetary union. In this view, other countries are unlikely to abandon soft pegs because of the absence of the distinctive political conditions that have made the European alternative feasible. A final interpretation is that the advanced countries have been able to abandon soft peg because of their success in substituting inflation targeting for exchange rate targeting as the anchor for monetary policy. The paper presents some evidence for this view, which suggests the feasibility of further movement by emerging markets and developing countries in the direct of greater exchange rate flexibility.
Keywords: exchange rate regimes; exchange rates
JEL: F30 F31

What are borders made of? An analysis of barriers to European banking integration
Date: 2008-04; By: Massimiliano Affinito (Banca d’Italia); Matteo Piazza (Banca d’Italia)
Linguistic and cultural differences, different legal and supervisory frameworks, relationship lending have been repeatedly mentioned as barriers to European retail banking integration. We investigate whether these barriers have affected integration within national boundaries, using an index of localism of regional banking systems as a measure of market integration. If local banks are established and flourish because asymmetric information makes entry difficult for non-incumbents (DellÂ’Ariccia, 2001) or regulatory and governance rules prevent entry from outside (Berger et al., 1995), we should find a significant relationship between indicators of these barriers and measures of the localism of banking systems. Our results show that this is indeed the case for asymmetric information, while findings are more blurred for supervisory practices.
Keywords: banking integration, barriers, asymmetric information
JEL: G21 G28

The Procyclical Effects of Basel II
Date: 2008-06; By: Repullo, Rafael; Suarez, Javier
We analyze the cyclical effects of moving from risk-insensitive (Basel I) to risk-sensitive (Basel II) capital requirements in the context of a dynamic equilibrium model of relationship lending in which banks are unable to access the equity markets every period. Banks anticipate that shocks to their earnings as well as the cyclical position of the economy can impair their capacity to lend in the future and, as a precaution, hold capital buffers. We find that the new regulation changes the behavior of these buffers from countercyclical to procyclical. Yet, the higher buffers maintained in expansions are insufficient to prevent a significant contraction in the supply of credit at the arrival of a recession. We show that cyclical adjustments in the confidence level behind Basel II can reduce its procyclical effects without compromising banks’ long-run solvency.
Keywords: banking regulation; Basel II; business cycles; capital requirements; credit crunch; loan defaults; relationship banking
JEL: E43 G21 G28

The Rise and Fall of the Dollar, or When did the Dollar Replace Sterling as the Leading Reserve Currency?
Date: 2008-06; By: Eichengreen, Barry; Flandreau, Marc
We present new evidence on the currency composition of foreign exchange reserves in the 1920s and 1930s. Contrary to the presumption that the pound sterling continued to dominate the U.S. dollar in central bank reserves until after World War II, we show that the dollar first overtook sterling in the mid-1920s. This suggests that the network effects thought to lend inertia to international currency status and to create incumbency advantages for the dominant international currency do not apply in the reserve currency domain. Our new evidence is similarly incompatible with the notion that there is only room in the market for one dominant reserve currency at a point in time. Our findings have important implications for our understanding of interwar monetary history but also for the prospects of the dollar and the euro as reserve currencies.
Keywords: international currency; international reserves; reserve currency
JEL: F31 F33

The Effect of Exchange Rate Volatility on International Trade: The Implication for Production Networks in East Asia
Date: 2008-05; By: Hayakawa, Kazunobu; Kimura, Fukunari
This paper is an empirical investigation of the relationship between exchange rate volatility and international trade, focusing on East Asia. It finds that intra-East Asian trade is discouraged by exchange rate volatility more seriously than trade in other regions because intermediate goods trade in production networks, which is quite sensitive to exchange rate volatility compared with other types of trade, occupies a significant fraction of trade. In addition, this negative effect of volatility is mainly induced by the unanticipated volatility and has an even greater impact than that of tariffs.
Keywords: Exchange rate volatility, Trade, East Asia, International trade, Foreign exchange
JEL: F10 F31 N75

Source : NEP (New Economics Papers) | RePEc

Folk theorems with Bounded Recall under(Almost) Perfect Monitoring
Date: 2008-03; By: George Mailath; Wojciech Olszewski
A strategy profile in a repeated game has bounded recall L if play under the profile after two distinct histories that agree in the last L periods is equal. Mailath and Morris (2002, 2006) proved that any strict equilibrium in bounded-recall strategies of a game with full support public monitoring is robust to all perturbations of the monitoring structure towards private monitoring (the case of almost-public monitoring), while strict equilibria in unbounded-recall strategies are typically not robust. We prove that the perfect-monitoring folk theorem continues to hold when attention is restricted to strategies with bounded recall and the equilibrium is essentially required to be strict. The general result uses calendar time in an integral way in the construction of the strategy profile. If the players’ action spaces are sufficiently rich, then the strategy profile can be chosen to be independent of calendar time. Either result can then be used to prove a folk theorem for repeated games with almost-perfect almost-public monitoring.
Keywords: Repeated games, bounded recall strategies, folk theorem, imperfect monitoring
JEL: C72 C73

A communication equilibrium in English auctions with discrete bidding
Date: 2008-06; By: Ricardo Gonçalves (Faculdade de Economia e Gestão - Universidade Católica Portuguesa (Porto))
This paper analyses a model of a common value English auction with discrete bidding. In this model, we show that there exists a communication equilibrium in which the high signal bidder strategically chooses his first bid so as to maximise his expected utility. Straightforward bidding, or increasing the bid by the minimum amount possible, is the equilibrium strategy for both bidders in all other auction rounds. We relate this result to recent research on English auctions with discrete bidding and auctions where bidders may have noisy information about their opponent’s signals.
Keywords: English Auctions, discrete bidding, communication equilibrium
JEL: D44

Stochastic Stability for Roommate Markets
Date: 2008; By: Klaus Bettina; Klijn Flip; Walzl Markus (METEOR)
We show that for any roommate market the set of stochastically stable matchings coincideswith the set of absorbing matchings. This implies that whenever the core is non-empty (e.g.,for marriage markets), a matching is in the core if and only if it is stochastically stable, i.e., stochastic stability is a characteristic of the core. Several solution concepts have beenproposed to extend the core to all roommate markets (including those with an empty core).An important implication of our results is that the set of absorbing matchings is the onlysolution concept that is core consistent and shares the stochastic stability characteristic withthe core.
Keywords: Economics (Jel: A)

Strategic Use of Trust
Date: 2008-05-15; By: Maroš Servátka (University of Canterbury); Steven Tucker (University of Canterbury); Radovan Vadovic
While most of the previous literature interprets trust as an action, we adopt a view that trust is represented by a belief that the other party will return a fair share. The agent’s action is then a commitment device that signals this belief. In this paper we propose and test a conjecture that economic agents use trust strategically. That is, the agents have incentives to inflate the perceived level of trust (the signal) in order to induce a more favorable outcome for themselves. In the experiment we study the behavior of subjects in a modified investment game which is played sequentially and simultaneously. While the sequential treatment allows for strategic use of trust, in the simultaneous treatment the first mover’s action is not observed and hence does not signal her belief. In line with our prediction we find that first movers send significantly more in the sequential treatment than in simultaneous. Moreo ver, second movers reward trusting action, but only if it is maximal. We also find that signaling with trust enhances welfare.
Keywords: Experimental Economics; Trust; Beliefs
JEL: C70 C91

Peer Effects and Peer Avoidance: Epidemic Diffusion in Coevolving Networks
Date: 2008; By: Constanza Fosca; Matteo Marsili; Fernando Vega-Redondo
We study the long-run-emergency of behavioral patterns in dynamic complex networks. Individuals display two kinds of behavior: G(”good”) or B (”bad”). We assume that agents have an innate tendency towards G, but can also be led towards B though the influence of peer bad behavior. We model the implications of those peer effects as an epidemic process in the standard SIS (Susceptible-Infected-Susceptible) framework. The key novelty of our model is that, unlike in received epidemic literature, the network is taken to change over time within the same time scale as behavior. Specifically, we posit that links connecting two G agents last longer, reflecting the idea that B agents tend to be avoided. The main concern of the paper is to understand the extent to which such biased network turnover may play a significant role in supporting G behavior in a social system. And indeed we find that network coevolution has nontrivia l and interesting effects on long-run behavior. This yields fresh insights on the role of (endogenous) peer pressure on the diffusion of (a)social behavior as well as on the traditional study of disease epidemics.
Keywords: Coevolutionary networks, diffusion of behavior, social dilemma, epidemics
JEL: C71 D83 D85

An Agent Based Simulation Of Smart Metering Technology Adoption
Date: 2007-09; By: Zhang, T.; Nuttall, W.J.
Based on the classic behavioural theory “the Theory of Planned Behaviour”, we develop an agent-based model to simulate the diffusion of smart metering technology in the electricity market. We simulate the emergent adoption of smart metering technology under different management strategies and economic regulations. Our research results show that in terms of boosting the take-off of smart meters in the electricity market, choosing the initial users on a random and geographically dispersed basis and encouraging meter competition between energy suppliers can be two very effective strategies. We also observe an “S-curve” diffusion of smart metering technology and a “lock-in” effect in the model. The research results provide us with insights as to effective policies and strategies for the roll-out of smart metering technology in the electricity market.
Keywords: Agent-based simulation, smart metering technology, the Theory of Planned Behaviour, technology diffusion.
JEL: C63 C73 D78 O33

Bayesian games: games of incomplete information
Date: 2008-06-09; By: Shmuel Zamir

Cooperative games in Strategic Form
Date: 2008-06-09; By: Sergiu Hart; Andreu Mas-Colell

Some Characterizations of Convex Interval Games
Date: 2008; By: Branzei, R.; Tijs, S.H.; Alparslan-Gok, S.Z. (Tilburg University, Center for Economic Research)
This paper focuses on new characterizations of convex interval games using the notions of exactness and superadditivity. We also relate big boss interval games with concave interval games and obtain characterizations of big boss interval games in terms of exactness and subadditivity.
Keywords: cooperative interval games;convex games;big boss games;superadditive games;marginal games;exact games
JEL: C71

A Value for Directed Communication Situations
Date: 2008-01-17; By: Enrique González-Arangüena (Universidad Complutense de Madrid); Conrado Manuel (Universidad Complutense de Madrid); Daniel Gomez (Universidad Complutense de Madrid); René van den Brink (VU University Rotterdam)
In this paper we introduce an extension of the model of restricted communication in cooperative games as introduced in Myerson (1977) by allowing communication links to be directed and the worth of a coalition to depend on the order in which the players enter the coalition. Therefore, we model the communication network by a directed graph and the cooperative game by a generalized characteristic function as introduced in Nowak and Radzik (1994). We generalize the Myerson value for undirected (or standard) communication situations to the context of directed communication and provide two axiomatizations of this digraph Myerson value using component efficiency and either fairness or the balanced contributions property.
Keywords: Myerson value; Digraph communication situations
JEL: C71

Simultaneous Pooled Auctions with Multiple Bids and Preference Lists
Date: 2008-03-28; By: Maarten C.W. Janssen (Erasmus University Rotterdam); Vladimir A. Karamychev (Erasmus University Rotterdam); Emiel Maasland (Erasmus University Rotterdam)
A simultaneous pooled auction with multiple bids and preference lists is a way to auction multiple objects, in which bidders simultaneously express a bid for each object and a preference ordering over which object they would like to get in case they have the highest bid on more than one object. This type of auction has been used in the Netherlands and in Ireland to auction available spectrum. We show that this type of auction does not satisfy elementary desirable properties such as the existence of an efficient equilibrium.
Keywords: Simultaneous pooled auctions; Multi-object sealed-bid auctions; Multiple bids; Single-object demand; Preference lists
JEL: C72 D44

An Ascending Multi-Item Auction with Financially Constrained Bidders
Date: 2008-02-15; By: Gerard van der Laan (VU University Amsterdam); Zaifu Yang (Yokohama National University)
A number of heterogeneous items are to be sold to a group of potential bidders. Every bidder knows his own values over the items and his own budget privately. Due to budget constraint, bidders may not be able to pay up to their values. In such a market, a Walrasian equilibrium usually fails to exist and also the existing auctions might fail to allocate the items among the bidders. In this paper we first introduce a rationed equilibrium for a market situation with financially constrained bidders. Succeedingly we propose an ascending auction mechanism that always results in an equilibrium allocation and price system. By starting with the reservation price of each item, the auctioneer announces the current prices of the items in each step and the bidders respond with their demand sets at these prices. As long as there is overdemand, the auctioneer adjusts prices upwards for overdemanded items until a price system is r eached at which either there is an underdemanded set, or there is neither overdemand nor underdemand anymore. In the latter case the auction stops. In the former case, precisely one item will be sold, the bidder buying the item leaves the auction and the auction continues with the remaining items and the remaining bidders. We prove that the auction finds a rationed equilibrium in a finite number of steps. In addition, we derive various properties of the allocation and price system obtained by the auction.
Keywords: Ascending auction; multi-item auction; financial constraint
JEL: D44

Naked Exclusion: An Experimental Study of Contracts with Externalities
Date: 2007-12-11; By: Landeo, Claudia M.; Spier, Kathryn E.
This paper reports the results of an experiment designed to assess the ability of an incumbent seller to profitably foreclose a market with exclusive contracts. We use the strategic environment described by Rasmusen, Ramseyer, and Wiley (1991) and Segal and Whinston (2000) where entry is unprofitable when sufficiently many downstream buyers sign exclusive contracts with the incumbent. When discrimination is impossible, the game resembles a stag-hunt (coordination) game in which the buyers’ payoffs are endogenously chosen by the incumbent seller. Exclusion occurs when the buyers fail to coordinate on their preferred equilibrium. Two-way non-binding pre-play communication among the buyers lowers the power of exclusive contracts and induces more generous contract terms from the seller. When discrimination and communication are possible, the exclusion rate rises. Divide-and-conquer strategies are observed more frequent ly when buyers can communicate with each other. Exclusion rates are significantly higher when the buyers’ payoffs are endogenously chosen rather than exogenously given. Finally, secret offers are shown to decrease the incumbent’s power to profitably exclude.
Keywords: Bargaining with Externalities; Contracting with Externalities; Experiments; Exclusive Dealing; Antitrust; Discrimination; Endogenous Payoffs; Communication; Coordination Games; Equilibrium Selection
JEL: D86 C9 L0 K0 K21 D4 L1 L4 C72

Determinants of In-group Bias: Group Affiliation or Guilt-aversion?
Date: 2008-06-10; By: Werner Güth (Max Planck Institute of Economics, Strategic Interaction Group, Jena, Germany); Matteo Ploner (Max Planck Institute of Economics, Strategic Interaction Group, Jena, Germany); Tobias Regner (Friedrich Schiller University, Jena, Germany)
In-group favoritism in social dilemma situations is one of the main findings of studies in Social Identity Theory. We investigate what causes the in-group bias: is it due to mere group affiliation or, alternatively, is guilt-aversion a possible explanation? We induce group membership in a minimal group setting, observe in-/out-group transfers and elicit re- spective beliefs. We ?nd that mere group affiliation affects beliefs and explains a substantial part of the bias, but we also ?nd evidence in favor of guilt-aversion as a source of motivation.
Keywords: social preferences, experiments, social dilemma, group identity, guilt aversion
JEL: C72 D01 C91 C92 D84

A Model-to-Model Analysis of The Repeated Prisoners’ Dilemma: Genetic Algorithms vs. Evolutionary Dynamics
Date: 2008-06-11; By: Xavier Vilà
We study the properties of the well known Replicator Dynamics when applied to a finitely repeated version of the Prisoners’ Dilemma game. We characterize the behavior of such dynamics under strongly simplifying assumptions (i.e. only 3 strategies are available) and show that the basin of attraction of defection shrinks as the number of repetitions increases. After discussing the difficulties involved in trying to relax the ’strongly simplifying assumptions’ above, we approach the same model by means of simulations based on genetic algorithms. The resulting simulations describe a behavior of the system very close to the one predicted by the replicator dynamics without imposing any of the assumptions of the analytical model. Our main conclusion is that analytical and computational models are good complements for research in social sciences. Indeed, while on the one hand computational models are extremely useful to ex tend the scope of the analysis to complex scenar
Keywords: Agent-Based Computational Economics, Evolutionary Game Theory, Replicator Dynamics, Model-to-Model Analysis, Repeated Prisoners’ Dilemma
JEL: C63 C72 D82

Robust Implementation in General Mechanisms
Date: 2008-06; By: Dirk Bergemann (Cowles Foundation, Yale University); Stephen Morris (Dept. of Economics, Princeton University)
A social choice function is robustly implemented if every equilibrium on every type space achieves outcomes consistent with it. We identify a robust monotonicity condition that is necessary and (with mild extra assumptions) sufficient for robust implementation. Robust monotonicity is strictly stronger than both Maskin monotonicity (necessary and almost sufficient for complete information implementation) and ex post monotonicity (necessary and almost sufficient for ex post implementation). It is equivalent to Bayesian monotonicity on all type spaces.
Keywords: Mechanism design, Implementation, Robustness, Common knowledge, Interim equilibrium, Dominant strategies
JEL: C79 D82

Social Effects in a Multi-Agent Investment Game. An Experimental Analysis
Date: 2008; By: Luigi Mittone; Matteo Ploner
We experimentally investigate social effects in a principal-agent setting with incomplete contracts. The strategic interaction scheme is based on the Investment Game (Berg et al., 1995). In our setting four trustees and one trustor are interacting and the access to choices of peers in the group of trustees is experimentally manipulated. We find that when the trust- worthiness of some participants is made available to peers, the high levels of trustworthiness displayed by those being observed tend to negatively impact on the trustworthiness of those observing them.

From Overt to Tacit Collusion
Date: 2008-06-09; By: Jeroen Hinloopen (University of Amsterdam); Adriaan Soetevent (University of Amsterdam)
Recent laboratory experiments support the popular view that the introduction of corporate leniency programs has significantly decreased cartel activity. The design of these repeated game experiments however is such that engaging in illegal price discussions is the only way for subjects to avoid the one-shot competitive equilibrium. Subjects in the experiment of this paper have multiple feasible Nash equilibrium strategies to avoid the competitive equilibrium. These strategies differ in the difficulty of the coordination problem they have to solve. The experimental results show that if the efforts of the antitrust authority and the leniency program are directed exclusively to the most straightforward collusive scheme, subjects manage to switch to a more intricate form of coordination. This shift from overt collusion to tacit collusion questions the acclaimed success of corporate leniency programs.
Keywords: overt collusion; tacit collusion; corporate leniency program; antitrust policy
JEL: C72 C92 L41