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130
Monetary and Fiscal Policy Switching
 Journal of Money, Credit and Banking
, 2007
"... Abstract. A growing body of evidence finds that policy reaction functions vary substantially over different periods in the United States. This paper explores how moving to an environment in which monetary and fiscal regimes evolve according to a Markov process can change the impacts of policy shocks ..."
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Cited by 38 (17 self)
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Abstract. A growing body of evidence finds that policy reaction functions vary substantially over different periods in the United States. This paper explores how moving to an environment in which monetary and fiscal regimes evolve according to a Markov process can change the impacts of policy shocks. In one regime monetary policy follows the Taylor principle and taxes rise strongly with debt; in another regime the Taylor principle fails to hold and taxes are exogenous. An example shows that a unique bounded nonRicardian equilibrium exists in this environment. A computational model illustrates that because agents ’ decision rules embed the probability that policies will change in the future, monetary and tax shocks always produce wealth effects. When it is possible that fiscal policy will be unresponsive to debt at times, active monetary policy (like a Taylor rule) in one regime is not sufficient to insulate the economy against tax shocks in that regime and it can have the unintended consequence of amplifying and propagating the aggregate demand effects of tax shocks. The paper also considers the implications of policy switching for two empirical issues. 1.
Real Exchange Rates Over the Past Two Centuries: How Important is the HarrodBalassaSamuelson Effect?
, 2003
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An Investigation of the Risk and Return Relation at Long Horizons
, 1998
"... This paper examines the relation between expected stock returns and their conditional volatility over different holding periods and across different states of the economy. Seminonparametric density estimation and Monte Carlo integration are used to obtain the expected returns and conditional volatil ..."
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Cited by 35 (2 self)
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This paper examines the relation between expected stock returns and their conditional volatility over different holding periods and across different states of the economy. Seminonparametric density estimation and Monte Carlo integration are used to obtain the expected returns and conditional volatility at various holding intervals. We uncover a significantly positive risk and return relation at long holding intervals, such as one and two years, which is nonexistent at short holding periods such as one month. We also show that the existing finding in the literature of a negative risk and return relation may be attributable to misspecification. J.E.L. E32, E44, G12 1. Introduction Existing empirical work on the time series risk and return relation has drawn conflicting conclusions. Campbell and Hentschel (1992) and French, Schwert, and Stambaugh (1987) find the expected excess return positively related to its conditional variance. On the other hand, Breen, Glosten, and Jagannathan (1...
The Long Range Dependence Paradigm for Macroeconomics and Finance
, 2002
"... The long range dependence paradigm appears to be a suitable description of the data generating process for many observed economic time series. This is mainly due to the fact that it naturally characterizes time series displaying a high degree of persistence, in the form of a long lasting effect of ..."
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Cited by 35 (1 self)
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The long range dependence paradigm appears to be a suitable description of the data generating process for many observed economic time series. This is mainly due to the fact that it naturally characterizes time series displaying a high degree of persistence, in the form of a long lasting effect of unanticipated shocks, yet exhibiting mean reversion. Whereas linear long range dependent time series models have been extensively used in macroeconomics, empirical evidence from financial time series prompted the development of nonlinear long range dependent time series models, in particular models of changing volatility. We discuss empirical evidence of long range dependence as well as the theoretical issues, both for economics and econometrics, such evidence has stimulated.
Persistence in Intertrade Durations
 Finance
, 1999
"... This paper examines longterm dependence in times between trades on financial markets. The autocorrelation functions of several intertrade duration series show a slow, hyperbolic rate of decay typical for long memory processes. For example, a shock to times between trades of the Alcatel stock on ..."
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Cited by 28 (1 self)
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This paper examines longterm dependence in times between trades on financial markets. The autocorrelation functions of several intertrade duration series show a slow, hyperbolic rate of decay typical for long memory processes. For example, a shock to times between trades of the Alcatel stock on the Paris Stock Exchange (SBF Paris Bourse) may persist in the transactions time for a long period of 1000 or 2000 ticks. With an average duration of 52 seconds between transactions this may amount to sixteen or thirty two hours in calendar time. This paper introduces a fractionally integrated autoregressive conditional duration (FIACD) model for intertrade duration series. It also examines transformed duration processes representing times between consecutive returns to states of null, positive or negative returns. This approach captures the relationship between the duration persistence and return dynamics. The times elapsed between returns to various states feature very similar auto...
Timedependent diffusion models for term structure dynamics
 STATISTICA NEERLANDICA
, 2003
"... In an effort to capture the time variation on the instantaneous return and volatility functions, a family of timedependent diffusion processes is introduced to model the term structure dynamics. This allows one to examine how the instantaneous return and price volatility change over time and price ..."
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Cited by 27 (8 self)
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In an effort to capture the time variation on the instantaneous return and volatility functions, a family of timedependent diffusion processes is introduced to model the term structure dynamics. This allows one to examine how the instantaneous return and price volatility change over time and price level. Nonparametric techniques, based on kernel regression, are used to estimate the timevarying coefficient functions in the drift and diffusion. The newly proposed semiparametric model includes most of the wellknown shortterm interest rate models, such as those proposed by Cox, Ingersoll and Ross (1985) and Chan, Karolyi, Longstaff and Sanders (1992). It can be used to test the goodnessoffit of these famous timehomogeneous short rate models. The newly proposed method complements the timehomogeneous nonparametric estimation techniques of Stanton (1997) and Fan and Yao (1998), and is shown through simulations to truly capture the heteroscedasticity and timeinhomogeneous structure in volatility. A family of new statistics is introduced to test whether the timehomogeneous models adequately fit interest rates for certain periods of the economy. We illustrate the new methods by using weekly threemonth treasury bill data.
Modelling and Forecasting Stock Returns: Exploiting the Futures Market, Regime Shifts and International Spillovers
, 2001
"... A large empirical literature has reported that the futures market contains valuable information for explaining stock returns and that stock returns display significant crosscorrelations internationally. A parallel literature has recorded evidence that the distribution of stock returns is close to a ..."
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Cited by 27 (3 self)
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A large empirical literature has reported that the futures market contains valuable information for explaining stock returns and that stock returns display significant crosscorrelations internationally. A parallel literature has recorded evidence that the distribution of stock returns is close to a mixture of normal distributions and that Markov switching models may therefore provide an adequate characterization of stock returns data. This paper ties together these strands of research in that we propose a vector equilibrium correction model of stock returns that exploits the information in the futures market, while also allowing for regimeswitching behavior and international spillovers across stock market indices. Using data for three major stock market indices since 1988, we ¯nd that our model significantly outperforms a number of alternative models in sample on the basis of standard statistical criteria. In an outofsample forecasting exercise, the model produces some of the highest R² hitherto recorded in the literature and beats all of the competing models considered on the basis of density forecast accuracy.
2009, Pitfalls in estimating asymmetric effects of energy price shocks, Mimeo
"... Abstract: A common view in the literature is that the effect of energy price shocks on macroeconomic aggregates is asymmetric in energy price increases and decreases. We show that widely used asymmetric vector autoregressive models of the transmission of energy price shocks are misspecified, resulti ..."
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Cited by 26 (8 self)
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Abstract: A common view in the literature is that the effect of energy price shocks on macroeconomic aggregates is asymmetric in energy price increases and decreases. We show that widely used asymmetric vector autoregressive models of the transmission of energy price shocks are misspecified, resulting in inconsistent parameter estimates, and that the implied impulse responses have been routinely computed incorrectly. As a result, the quantitative importance of unanticipated energy price increases for the U.S. economy has been exaggerated. In response to this problem, we develop alternative regression models and methods of computing responses to energy price shocks that yield consistent estimates regardless of the degree of asymmetry. We also introduce improved tests of the null hypothesis of symmetry in the responses to energy price increases and decreases. An empirical study reveals little evidence against the null hypothesis of symmetry in the responses to energy price shocks. Our analysis also has direct implications for the theoretical literature on the transmission of energy price shocks and for the debate about policy responses to energy price shocks.
Volume, volatility, and leverage: A dynamic analysis
 Journal of Econometrics
, 1996
"... This paper uses dynamic impulse response analysis to investigate the interrelationships among stock price volatility, trading volume, and the leverage effect. Dynamic impulse response analysis is a technique for analyzing the multistepahead characteristics of a nonparametde estimate of the oneste ..."
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Cited by 25 (4 self)
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This paper uses dynamic impulse response analysis to investigate the interrelationships among stock price volatility, trading volume, and the leverage effect. Dynamic impulse response analysis is a technique for analyzing the multistepahead characteristics of a nonparametde estimate of the onestep conditional density of a strictly stationary process. The technique is the generalization to a nonlinear process of Simsstyle impulse response analysis for linear models. In this paper, we refine the technique and apply it to a long panel of daily observations on the price and trading volume of four stocks actively traded on the NYSE: Boeing, CocaCola, IBM, and MMM.