JAE

NEWSLETTER Issue 14

Spring 2013

From the Editor This year the JAE Annual Meeting will take place at the University of Rotterdam, during the Conference on Forecasting Structure and Time Varying Patterns in Economics and Finance, May 24-25, 2013. Professor Adrian Pagan (a previous co-editor and a current Advisory Board member) will be presenting the 2013 JAE Lecture on “Patterns and Their Uses” at the Conference. Those interested in attending the JAE Lecture are encouraged to approach Professor Herman van Dijk who is a co-organizer of the Conference. An abstract of the talk is provided below. It is also a real pleasure for me to welcome Professor Denise Osborn and Professor Richard Paap as 2013 JAE Distinguished Authors. They join a long list of highly accomplished researchers and I would like to congratulate them on their achievements. Finally, I would like to take this opportunity and remind you of the JAE Dissertation Prize which is open to PhD students in economics writing a dissertation with a substantive empirical application. Nomination deadline is July 15, 2013. So there is ample time to prepare and apply.

M. Hashem Pesaran The Editor

2013 JAE Lecture to be delivered by Adrian Pagan School of Economics, University of Sydney Melbourne Institute of Applied Economic and Social Research, University of Melbourne on

Patterns and Their Uses Three major themes have emerged in the literature on patterns. These involve pattern recognition, pattern matching (do a set of observations match a particular pattern?) and pattern formation ( how does a pattern emerge?). The talk takes up each of these themes, presenting some economic examples of where a pattern has been of interest, how it has been measured (section 2), some issues in checking whether a given pattern holds (section 3), what theories might account for a particular pattern (section 4), and the predictability of patterns ( section5). Most attention is paid to judging macroeconomic models based on their ability to generate macroeconomic and financial patterns, and some simple tests are suggested to do this. Because sentiment and the origins of patterns are so inextricably linked in macroeconomics and finance we will spend some time looking at the literature which deals with the interaction of series representing sentiment with those representing macroeconomic and financial outcomes.

In this issue: Abstracts of Forthcoming Articles Most Downloaded Papers from ‘Early View’ Most Downloaded Published Articles Conferences Sponsored by JAE Distinguished Authors Journal of Applied Econometrics Dissertation Prize Journal of Applied Econometrics Data Archive How to publish in JAE Aims and Scope of JAE Free Content Alerting! Top↑ Abstracts of Forthcoming Articles Reverse Regressions and Long-Horizon Forecasting by Min Wei and Jonathan Wright Long-horizon predictive regressions in finance pose formidable econometric problems when estimated using available sample sizes. Hodrick in 1992 proposed a remedy that is based on running a reverse regression of short-horizon returns on the long-run mean of the predictor. Unfortunately, this only allows the null of no predictability to be tested, and assumes stationary regressors. In this paper, we revisit long-horizon forecasting from reverse regressions, and argue that reverse regression methods avoid serious size distortions in long-horizon predictive regressions, even when there is some predictability and/or near unit roots. Meanwhile, the reverse regression methodology has the practical advantage of being easily applicable when there are many predictors. We apply these methods to forecasting excess bond returns using the term structure of forward rates, and find that there is indeed some return forecastability. However, confidence intervals for the coefficients of the predictive regressions are about twice as wide as those obtained with the conventional approach to inference. We also include an application to forecasting excess stock returns. Euro Corporate Bond Risk Factors by Carolina Castagnetti and Eduardo Rossi This paper investigates the determinants of credit spread changes in euro-denominated bonds. We adopt a factor model framework, inspired by the credit risk structural approach, as credit spread changes can be easily viewed as an excess return on corporate bonds over Treasury bonds. We try to assess the relative importance of market and idiosyncratic factors as an explanation of movements in credit spreads. We adopt a heterogeneous panel with a multifactor error model and propose a two-step estimation procedure, which yields consistent estimates of unobserved factors. The analysis is carried out with a panel of monthly redemption yields on a set of corporate bonds for a time span of 3 years. Our results suggest that the euro corporate market is driven by observable and unobservable factors. The unobservable factors are identified through a consistent estimation of individual and common observable effects. The empirical results suggest that an unobserved common factor

has a significant role in explaining the systematic changes in credit spreads. However, in contrast to evidence regarding US credit spread changes, it cannot be identified as a market factor. Pooling Versus Model Selection for Nowcasting with Many Predictors: An Application to German GDP by Vladimir Kuzin, Massimiliano Marcellino and Christian Schumacher This paper discusses pooling versus model selection for nowcasting with large datasets in the presence of model uncertainty. In practice, nowcasting a low-frequency variable with a large number of high-frequency indicators should account for at least two data irregularities: (i) unbalanced data with missing observations at the end of the sample due to publication delays; and (ii) different sampling frequencies of the data. Two model classes suited in this context are factor models based on large datasets and mixed-data sampling (MIDAS) regressions with few predictors. The specification of these models requires several choices related to, amongst other things, the factor estimation method and the number of factors, lag length and indicator selection. Thus there are many sources of misspecification when selecting a particular model, and an alternative would be pooling over a large set of different model specifications. We evaluate the relative performance of pooling and model selection for nowcasting quarterly GDP for six large industrialized countries. We find that the nowcast performance of single models varies considerably over time, in line with the forecasting literature. Model selection based on sequential application of information criteria can outperform benchmarks. However, the results highly depend on the selection method chosen. In contrast, pooling of nowcast models provides an overall very stable nowcast performance over time. The Growth Aftermath of Natural Disasters by Thomas Fomby, Yuki Ikeda and Norman Loayza This paper traces the yearly response of gross domestic product growth—both aggregated and disaggregated into its agricultural and non-agricultural components—to four types of natural disasters: droughts, floods, earthquakes, and storms. The paper uses a methodological approach based on pooling the experiences of various countries over time. It consists of vector autoregressions in the presence of endogenous variables and exogenous shocks (VARX), applied to a panel of cross-country and time series data. The analysis finds heterogeneous effects on a variety of dimensions. First, the effects of natural disasters are stronger on developing than on advanced countries. Second, not all natural disasters are alike in terms of the growth response they induce, and some can even have positive effects on economic growth. Third, severe disasters often carry much worse effects than moderate effects do. Fourth, the timing of the growth response varies with both the type of natural disaster and the sector of economic activity.

An Empirical Growth Model for Major Oil Exporters by Hadi Salehi Esfahani, Kamiar Mohaddes, M. Hashem Pesaran

This paper develops a long-run output relation for a major oil-exporting economy where the oil income-to-output ratio remains sufficiently high over a prolonged period. It extends the stochastic growth model developed in Binder and Pesaran (1999) by including oil exports as an additional factor in the capital accumulation process. The paper distinguishes between the two cases where the growth of oil income, go, is less than the natural growth rate (the sum of the population growth, n, and the growth of technical progress, g), and when go ≥ g + n. Under the former, the effects of oil income on the economy's steady growth rate will vanish eventually, while under the latter oil income enters the long-run output equation with a coefficient which is equal to the share of capital if it is further assumed that the underlying production technology can be represented by a Cobb–Douglas production function. The long-run theory is tested using quarterly data on nine major oil economies. Overall, the test results support the long-run theory, with the existence of long-run relations between real output, foreign output and real oil income established for six of the nine economies considered. The Role of Time-Varying Price Elasticities in Accounting for Volatility Changes in the Crude Oil Market by Christiane Baumeister, Gert Peersman There has been a systematic increase in the volatility of the real price of crude oil since 1986, followed by a decline in the volatility of oil production since the early 1990s. We explore reasons for this evolution. We show that a likely explanation of this empirical fact is that both the short-run price elasticities of oil demand and of oil supply have declined considerably since the second half of the 1980s. This implies that small disturbances on either side of the oil market can generate large price responses without large quantity movements, which helps explain the latest run-up and subsequent collapse in the price of oil. Our analysis suggests that the variability of oil demand and supply shocks actually has decreased in the more recent past, preventing even larger oil price fluctuations than observed in the data. Long-Run Risks in the Term Structure of Interest Rates: Estimation by Taeyoung Doh This paper estimates a model in which persistent fluctuations in expected consumption growth, expected inflation, and their time-varying volatility determine asset price variation. The model features Epstein–Zin recursive preferences, which determine the market price of macro risk factors. Analysis of the US nominal term structure data from 1953 to 2006 shows that agents dislike high uncertainty and demand compensation for volatility risks. Also, the time variation of the term premium is driven by the compensation for inflation volatility risk, which is distinct from consumption volatility risk. The central role of inflation volatility risk in explaining the time-varying term premium is consistent with other empirical evidence including survey data. In contrast, the existing long-run risks literature emphasizes consumption volatility risk and ignores inflation-specific time-varying volatility. The estimation results of this paper suggest that inflation-specific volatility risk is essential for fitting the time series of the US nominal term structure data.

Time-Varying Dynamics of the Real Exchange Rate. An Empirical Analysis by Haroon Mumtaz and Laura Sunder-Plassmann We use a time-varying structural vector autoregression to investigate evolving dynamics of the real exchange rate for the UK, euro area and Canada. We show that demand and nominal shocks have a substantially larger impact on the real exchange rate after the mid 1980s. Real exchange rate volatility, relative to fundamentals, also shows a marked increase after this point in time. However, there is some evidence suggesting a closer business cycle co-movement of the real exchange rate and fundamentals. Simulations from an open-economy DSGE model show that these results are consistent with a decline in exchange rate pass-through.

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Most Downloaded Papers from ‘Early View’ in the last 6 months Title

Authors

First Published Online

Generalized Autoregressive Score Models with

Drew Creal, Siem Jan Koopman,

Applications

André Lucas

The Effect of Parental Employment on Child

John Ermisch, Marco

Schooling

Francesconi

The Growth Aftermath of Natural Disasters Estimation of Treatment Effects without an Exclusion Restriction: with an Application to the Analysis of the School Breakfast Program

Thomas Fomby, Yuki Ikeda, Norman V. Loayza Daniel L. Millimet, Rusty Tchernis

How Puzzling is the PPP Puzzle? An Alternative

Georgios Chortareas, George

Half-Life Measure of Convergence to PPP

Kapetanios

Time-Varying Dynamics of the Real Exchange

Haroon Mumtaz, Laura

Rate: An Empirical Analysis

Sunder-Plassmann

Categorical Semiparametric Varying Coefficient

QI Li, Desheng Ouyang, Jeffrey

Models

S. Racine

Multivariate Volatility Modeling of Electricity

Luc bauwens, Christian M.

Futures

Hafner, Diane Pierret

Spatial Filtering, Model Uncertainty and the

Jesús Crespo Cuaresma, Martin

Speed of Income Convergence in Europe

Feldkircher

How

Patrick Arni, Rafael Lalive, Jan

Effective are Unemployment Benefit

Sanctions? Looking Beyond Unemployment Exit

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3,*

C. Van Ours

20 January 2012

20 January 2012

28 October 2011

28 May 2012

20 January 2012

2 May 2012

4 August 2011

17 May 2012

14 May 2012

19 June 2012

Most Downloaded Published Articles in the last 6 months Title

Authors

First Published Online

Bounds testing approaches to the analysis of

M. Hashem Pesaran, Yongcheol

level relationships

Shin, Richard J. Smith

22 June 2001

Eric A. Hanushek, John F. Kain, Does peer ability affect student achievement?

Jacob M. Markman, Steven G.

30 September 2003

Rivkin Multivariate GARCH models: a survey Computation and analysis of multiple structural change models Counterfactual decomposition of changes in wage distributions using quantile regression A forecast comparison of volatility models: does anything beat a GARCH(1,1)?

Luc Bauwens, Sébastien Laurent, Jeroen V. K. Rombouts

16 February 2006

Jushan Bai, Pierre Perron

8 October 2002

José A. F. Machado, José Mata

31 March 2005

Peter R. Hansen, Asger Lunde

30 March 2005

Jeffrey M. Wooldridge

3 February 2005

Simple solutions to the initial conditions problem in dynamic, nonlinear panel data models with unobserved heterogeneity Exploring the international linkages of the euro area: a global VAR analysis A simple panel unit root test in the presence of cross-section dependence Estimating an economic model of crime using panel data from North Carolina

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Stephane Dees, Filippo di Mauro, M. Hashem Pesaran, L.

14 March 2007

Vanessa Smith M. Hashem Pesaran

18 April 2007

Professor Badi H. Baltagi

1 June 2006

Conferences Sponsored by JAE in 2013 More than just an outlet for innovative and quantitative research in the application of econometric techniques to a wide variety of problems in economic and related fields, the Journal of Applied Econometrics also offers financial support (up to $5,000) towards the cost of organizing conferences to promote research in applied econometrics.

Conference (website)

Venue

Dates

Society for Nonlinear Dynamics and Econometrics Symposium

University of Milan-Bicocca

28-29 March 2013

New York Camp Econometrics VIII

New York

5-7 April 2013

Conference Forecasting Structure and Time Varying Patterns in Economics and Finance

Erasmus School of Economics Rotterdam

24-25 May 2013

Middle East and North Africa (MENA) Economies Conference

Istanbul Bilgi University

21-22 June 2013

19th International Panel Data Conference

Cass Business School City University London

4-5 July 2013

Conference in Honour of Ken Wallis

University of Warwick

11-12 July 2013

Netherlands Econometrics Study Group (NESG)

Tinbergen Institute, Amsterdam

15 July 2013

Econometrics of Human Capital Accumulation and Earnings Dynamics

ENSAE-Paris

September 2013

Canadian Econometrics Study Group (CESG)

Waterloo, Ontario

19-21 October 2013

Midwest Econometrics Group Meeting (MEG)

Indiana University

25-26 October 2013

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DISTINGUISHED AUTHORS ANNOUNCEMENT In recognition of the authors who have made significant contributions to this Journal, the Editorial Committee introduced in 1999 a scheme to honour those authors who have published the equivalent of three single-author articles by naming them Journal of Applied Econometrics Distinguished Authors. Distinguished Authors are given a one-year free subscription to the Journal to mark the award, and receive a personal invitation to the Journal's Annual Lecture Series and to its Annual Dinner. The list of Distinguished Authors is published regularly in the Journal. The Journal of Applied Econometrics is pleased to welcome the following as Distinguished Authors in 2013: Professor Denise R. Osborn University of Manchester Denise R. Osborn has published the following articles in the Journal of Applied Econometrics: 1.

“Seasonality and Habit Persistence in a Life Cycle Model of Consumption” by Denise R. Osborn, JAE, 1988, Vol. 3, pp. 255-266

2.

“Business cycle non-linearities in UK consumption and production” by Nadir Öcal and Denise R. Osborn, JAE, 2000, Vol. 15, pp. 27–43

3.

“Nonlinearity in the Fed's monetary policy rule” by Dong Heon Kim, Denise R. Osborn and Marianne Sensier, JAE, 2005, Vol. 20, pp. 621-639

4.

“The effect of seasonal adjustment on the properties of business cycle regimes” by Antonio Matas-Mir, Denise R. Osborn and Marco J. Lombardi , JAE, 2008, Vol. 23, pp. 257-278

5.

“Weighted Smooth Transition Regressions” by Ralf Becker and Denise R. Osborn, JAE, 2012, Vol. 27, pp. 795-811 Professor Richard Paap Erasmus University, Rotterdam

Richard Paap has published the following articles in the Journal of Applied Econometrics: 1.

“A dynamic multinomial probit model for brand choice with different long-run and short-run effects of marketing-mix variables” by Richard Paap and Philip Hans Franses , JAE, 2000, Vol. 15, pp. 717–744

2.

“Censored latent effects autoregression, with an application to US unemployment” by Philip Hans Franses and Richard Paap, JAE,

3.

2002, Vol. 17, pp. 347–366

“Modelling and forecasting level shifts in absolute returns” by Philip Hans Franses, Marco Van Der Leij and Richard Paap, JAE, 2002, Vol. 17, pp. 601–616

4.

“Deriving target selection rules from endogenously selected samples” by Antonio Matas-Mir, Bas Donkers, Richard Paap, Jedid-Jah Jonker and Philip Hans Franses, JAE, 2006, Vol. 21, pp. 549-562

5.

“A rank-ordered logit model with unobserved heterogeneity in ranking capabilities” by Dennis Fok, Richard Paap and Bram Van Dijk, JAE, 2012, Vol. 27, pp. 831–846

Past Distinguished Authors are: 2011 - Professor Fabio Canova (Pompeu Fabra University, Barcelona), Professor Lutz Kilian (University of Michigan) and Professor Myoung-Jae Lee (Korea University) 2010 - Professor Francis Vella (Georgetown University) 2009 - Professor Philippe J. Deschamps (Fribourg University) 2008 - Professor Badi Baltagi (Syracuse University), Professor Michael P. Clements (University of Warwick), Professor Peter Kooreman (Tilburg University) and Professor Justin Tobias (Purdue University) 2007 - Professor Pravin Trivedi (Indiana University) 2005 - Professor Gary Koop (University of Strathclyde), and Professor Zacharias Psaradakis and Professor Martin Sola (both of Birkbeck College, University of London) 2004 - Professor Gordon Anderson (University of Toronto) and Professor Stephen Pudney (University of Essex) 2003 - Professor Adrian R. Pagan (Australian National University) 2002 - Professor Philip Hans Franses (Erasmus University) and Professor Clive W.J. Granger (University of California at San Diego) 2001 - Professor Peter Phillips (Yale University) and Professor Geert Ridder (University of Southern California) 2000 - Professor Timo Teräsvirta (Stockholm School of Economics) 1999 - Professor Stephen Hall (Imperial College London) Distinguished Author points are awarded as follows: 1 author: 2 authors: 3 authors: 4+ authors:

12 points 8 points 6 points 4 points

36 points are required to become a Journal of Applied Econometrics Distinguished Author.

Read a selection of articles by all the Distinguished Authors here. M. Hashem Pesaran Editor

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Journal of Applied Econometrics Dissertation Prize

The Journal of Applied Econometrics wishes to draw your attention to its Dissertation Prize, launched in 2002, and invites submission of nominations. The Prize is open to PhD students in economics writing a dissertation with a substantive empirical application. Students who are still working on their dissertation, or who complete their dissertation in the period September 2012 – August 2013, qualify as suitable candidates. The empirical application may be in any field, such as labour economics, monetary economics, empirical finance, business cycle, international trade, public economics, and applied topics in the field of microeconomics. Nominations must be submitted by 15 July 2013, and must include a draft dissertation chapter or other paper taken from the dissertation, and two covering letters: one from a faculty member with knowledge of the dissertation work, and one from the student. Nominations should be sent to by e-mail to [email protected], or by mail to the JAE Editorial Office, Department of Economics, University of Southern California, KAP 300 Los Angeles, California 90089-0253, U.S.A. In the evaluation of nominations, the emphasis will be on the careful and rigorous application of econometric techniques and the appropriate interpretation of the results. The economic content of the nominated chapter or paper will be stressed. Clear expression and good use of English are important. Successful applicants will be selected and notified by 30 September 2013 and will receive a prize of $2,500 each for research support. It is a condition of the prize that the Journal of Applied Econometrics is given first refusal to publish the dissertation supported by the award. Top↑

Journal of Applied Econometrics Data Archive The JAE Data Archive is a very important feature of the Journal of Applied Econometrics, making it possible for other researchers to replicate results of papers published in the Journal, or to evaluate alternative models. Hosted by a server belonging to the Economics Department of Queen's University, it contains data for all papers accepted after January 1994, with the exception of a growing number of papers for which the data are confidential. There are some data for a few papers accepted earlier than January 1994, but Volume 10, No. 1 (1995) is the first issue in which all papers were accepted subject to the proviso that data be provided.

For some papers, especially more recent ones, the Data Archive also contains programs and supplementary material, such as technical appendices and additional graphs. There are currently directories for 800 papers in the archive. It is still the case that, if you enter any of the following search terms into Google, the first hit you encounter is the main page of the JAE Data Archive: econometrics data, applied econometrics data, econometrics data archive, JAE data, JAE archive. Top↑ How to publish in JAE The Journal of Applied Econometrics is published by John Wiley & Sons Ltd. EDITORS: M. Hashem Pesaran; Tim Bollerslev; Fabio Canova; Frank Diebold; Thierry Magnac; Herman K. van Dijk; Edward Vytlacil; Badi H. Baltagi; Marcelle Chauvet; James G. MacKinnon;

Electronic submissions of papers are to be made online at http://editorialexpress.com/jae Please send letters and other ideas for the Journal to: Editorial Office JAE Editorial Office Department of Economics University of Southern California KAP 300 Los Angeles, California 90089-0253 U.S.A. Tel: +1 213 740 6017 or +1 213 740 6017 Fax: +1 213 740 8543 E-mail: [email protected] Website: http://jae.wiley.com/jae/

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Aims and Scope of JAE The Journal of Applied Econometrics (published in seven issues per year) is a bi-monthly international journal which aims to publish articles of high quality dealing with the application of existing as well as new econometric techniques to a wide variety of problems in economics and related subjects, covering topics in measurement, estimation, testing, forecasting, and policy analysis. The emphasis is on the careful and rigorous application of econometric techniques and the appropriate interpretation of the results. The economic content of the articles is stressed. The intention of the Journal of Applied Econometrics is to provide an outlet for innovative, quantitative research in economics which cuts across areas of specialization, involves transferable techniques, and is easily replicable by other researchers. Contributions that introduce statistical methods that are applicable to a variety of economic problems are actively encouraged. The Journal also aims to publish review and survey articles that make recent developments in the field of theoretical and applied econometrics more readily accessible to applied economists in general. Top↑

Wiley Online Library New Content Alerts Receive the table of contents of the Journal of Applied Econometrics as soon as it publishes online. Sign up for free at wileyonlinelibrary.com/journal/jae – simply sign in to Wiley Online Library in the top right and then click on ‘Get New Content Alerts in the left hand menu. (If you do not have an account with Wiley Online Library, you can register here for free) Top↑