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Consumption, Aggregate Wealth, and Expected Stock Returns
 THE JOURNAL OF FINANCE • VOL. LVI, NO. 3 • JUNE 2001
, 2001
"... This paper studies the role of fluctuations in the aggregate consumption–wealth ratio for predicting stock returns. Using U.S. quarterly stock market data, we find that these fluctuations in the consumption–wealth ratio are strong predictors of both real stock returns and excess returns over a Treas ..."
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Cited by 159 (17 self)
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This paper studies the role of fluctuations in the aggregate consumption–wealth ratio for predicting stock returns. Using U.S. quarterly stock market data, we find that these fluctuations in the consumption–wealth ratio are strong predictors of both real stock returns and excess returns over a Treasury bill rate. We also find that this variable is a better forecaster of future returns at short and intermediate horizons than is the dividend yield, the dividend payout ratio, and several other popular forecasting variables. Why should the consumption–wealth ratio forecast asset returns? We show that a wide class of optimal models of consumer behavior imply that the log consumption–aggregate wealth ~human capital plus asset holdings! ratio summarizes expected returns on aggregate wealth, or the market portfolio. Although this ratio is not observable, we provide assumptions under which its important predictive components for future asset returns may be expressed in terms of observable variables, namely in terms of consumption, asset holdings and labor income. The framework implies that these variables are cointegrated, and
Exchange Rates and Fundamentals
 Journal of Political Economy
, 2005
"... We show analytically that in a rational expectations presentvalue model, an asset price manifests near–random walk behavior if fundamentals are I(1) and the factor for discounting future fundamentals is near one. We argue that this result helps explain the wellknown puzzle that fundamental variabl ..."
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Cited by 153 (7 self)
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We show analytically that in a rational expectations presentvalue model, an asset price manifests near–random walk behavior if fundamentals are I(1) and the factor for discounting future fundamentals is near one. We argue that this result helps explain the wellknown puzzle that fundamental variables such as relative money supplies, outputs, inflation, and interest rates provide little help in predicting changes in floating exchange rates. As well, we show that the data do exhibit a related link suggested by standard models—that the exchange rate helps predict these fundamentals. The implication is that exchange rates and fundamentals are linked in a way that is broadly consistent with assetpricing models of the exchange rate. I.
An autoregressive distributed lag modelling approach to cointegration analysis
 Cambridge University
, 1999
"... This paper examines the use of autoregressive distributed lag (ARDL) models for the analysis of longrun relations when the underlying variables are I(1). It shows that after appropriate augmentation of the order of the ARDL model, the OLS estimators of the shortrun parameters are p Tconsistent wi ..."
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Cited by 85 (3 self)
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This paper examines the use of autoregressive distributed lag (ARDL) models for the analysis of longrun relations when the underlying variables are I(1). It shows that after appropriate augmentation of the order of the ARDL model, the OLS estimators of the shortrun parameters are p Tconsistent with the asymptotically singular covariance matrix, and the ARDLbased estimators of the longrun coe¢cients are superconsistent, and valid inferences on the longrun parameters can be made using standard normal asymptotic theory. The paper also examines the relationship between the ARDL procedure and the fully modi…ed OLS approach of Phillips and Hansen to estimation of cointegrating relations, and compares the small sample performance of these two approaches via Monte Carlo experiments. These results provide strong evidence in favour of a rehabilitation of the traditional ARDL approach to time series econometric modelling. The ARDL approach has the additional advantage of yielding consistent estimates of the longrun coe¢cients that are asymptotically normal irrespective of whether the underlying regressors are I(1) or I(0).
Testing for cointegration when some of the cointegrating vectors are prespecified, Econometric Theory
, 1995
"... Many economic models imply that ratios, simple differences, or "spreads " of variables are I(O). In these models, cointegrating vectors are composed of l's, O's, and l's and contain no unknown parameters. In this paper, we develop tests for cointegration that can be applied when some of the cointeg ..."
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Cited by 45 (1 self)
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Many economic models imply that ratios, simple differences, or "spreads " of variables are I(O). In these models, cointegrating vectors are composed of l's, O's, and l's and contain no unknown parameters. In this paper, we develop tests for cointegration that can be applied when some of the cointegrating vectors are prespecified under the null or under the alternative hypotheses. These tests are constructed in a vector error correction model and are motivated as Wald tests from a Gaussian version of the model. When all of the cointegrating vectors are prespecified under the alternative, the tests correspond to the standard Wald tests for the inclusion of error correction terms in the VAR. Modifications of this basic test are developed when a subset of the cointegrating vectors contain unknown parameters. The asymptotic null distributions of the statistics are derived, critical values are determined, and the local power properties of the test are studied. Finally, the test is applied to data on foreign exchange future and spot prices to test the stability of the forwardspot premium. 1.
The OutofSample Success of Term Structure Models as Exchange Rate Predictors: A Step Beyond
, 2001
"... ..."
The Monetary Exchange Rate Model as a LongRun Phenomenon
 Journal of International Economics
, 1998
"... Pure time seriesbased tests fail to nd empirical support for monetary exchange rate models. In this paper we apply pooled time series estimation on a forwardlooking monetary model, resulting in parameter estimates which are in compliance with the underlying theory. Based on a panel version of th ..."
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Cited by 36 (4 self)
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Pure time seriesbased tests fail to nd empirical support for monetary exchange rate models. In this paper we apply pooled time series estimation on a forwardlooking monetary model, resulting in parameter estimates which are in compliance with the underlying theory. Based on a panel version of the Engle and Granger (1987) twostep procedure we nd that the residuals of the panelbased estimated monetary model are stationary. This indicates that on a pooled time series level there is cointegration between the exchange rate and the macroeconomic fundamentals of this monetary model. Keywords: monetary exchange rate models, nominal exchange rates, cointegration, panel data. JEL classication: C23, F30, G15. This paper has beneted from helpful comments by Charles Engel (the coeditor), two anonymous referees, Frank de Jong, Richard Paap, and seminar participants at the Erasmus University Rotterdam, the NAKE annual meeting in Amsterdam, the 1998 ESRC Econometric Study Group c...
Monetary Shocks And Real Exchange Rates
 Journal of International Economics
, 1998
"... : Many explanations of the stylized facts concerning real exchange rate movements focus on monetary shocks, but it is often found empirically that monetary shocks are unimportant. I provide evidence that is contrary to this empirical finding. Using over 100 years of data, I estimate the contribution ..."
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Cited by 34 (8 self)
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: Many explanations of the stylized facts concerning real exchange rate movements focus on monetary shocks, but it is often found empirically that monetary shocks are unimportant. I provide evidence that is contrary to this empirical finding. Using over 100 years of data, I estimate the contribution of various shocks to explaining variation in the real pounddollar exchange rate. Monetary shocks consist of both monetary base and money multiplier shocks; real shocks include fiscal, productivity, and preference shocks. Estimates of several alternative VAR specifications provide a range for the contribution of the various shocks: from 19 to 60 percent in the shortrun for monetary shocks and 4 to 26 percent for fiscal and productivity shocks combined. My modeling strategy and results are compared directly to related work. The results lend empirical support to the convention in recent quantitative general equilibrium modeling of focusing on monetary shocks. Keywords: exchange rates, moneta...
Longrun purchasing power parity during the recent float, Working paper 215
, 1990
"... This paper examines the relevance of longrun purchasing power parity (PPP). which allows for measurement errors. during the recent floating exchange rate period. Previous empirical studies generally fail to find support for longrun PPP over this period. In this paper the cointegration property of ..."
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Cited by 32 (3 self)
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This paper examines the relevance of longrun purchasing power parity (PPP). which allows for measurement errors. during the recent floating exchange rate period. Previous empirical studies generally fail to find support for longrun PPP over this period. In this paper the cointegration property of exchange rates and prices is examined using a maximum likelihood procedure, and we find significant evidence favorable to longrun PPP. Further tests for symmetry and proportionality indicate that these two conditions are not generally consistent with the data. The results support the hypothesis of longrun PPP with measurement errors in prices. 1.
Testing for the Cointegrating Rank of a VAR Process with a Time Trend
 DISCUSSION PAPER 51, SFB 373, HUMBOLDTUNIVERSITAT ZU
, 1997
"... Standard tests for the cointegrating rank of a vector autoregressive (VAR) process have nonstandard limiting distributions which depend on the characteristics of intercept terms and time trends in the system. In practice these characteristics are often unknown. Therefore modified tests are proposed ..."
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Cited by 28 (3 self)
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Standard tests for the cointegrating rank of a vector autoregressive (VAR) process have nonstandard limiting distributions which depend on the characteristics of intercept terms and time trends in the system. In practice these characteristics are often unknown. Therefore modified tests are proposed with limiting distributions which do not depend on the characteristics of deterministic terms under the null hypothesis. One type of tests makes use of lag augmentation, that is, a VAR process of order p + 1 is fitted when the true order is p while the tests are based on the coefficient matrices of the first p lags only. It is shown that Ø 2 limiting distributions are obtained in this way. The price for this simplicity will be reduced power, however. Therefore, we also consider LM (Lagrange multiplier) type tests. These tests are shown to have nonstandard limiting distributions which do not depend on deterministic terms and have better local power than competing LR (likelihood ratio) test...