Jammie H. Penm

Using the Bootstrap as an Aid in Choosing the Approximate Representation for Vector Time Series

In this article, a procedure is presented to use the bootstrap in choosing the best approximation in terms of forecasting performance for the equivalent state-space representation of a vector autoregressive model. It is found that the proposed procedure, which uses each approximants forecasting performance, can enhance considerably an approach based simply on the estimated Hankel singular values.

A note on the sequential fitting of multichannel subset autoregressions using the prewindowed case

In this correspondence, an efficient adaptive algorithm for multichannel subset autoregression identification using the prewindowed case is developed. After the initialization is carried out by the direct method, the optimum multichannel subset autoregression at each time instant is selected by employing the proposed recursions in conjunction with a model selection criterion. >

A new approach to testing PPP: Evidence from the Yen

Conventional methods to test for long-term PPP based on the theory of cointegration are typically undertaken in the framework of vector error correction models (VECM). The standard approach in the use of VECMs is to employ a model of full-order, which assumes nonzero entries in all the coefficient matrices. But, the use of full-order VECM models may lead to incorrect inferences if zero entries are required in the coefficient matrices. Specifically, if we wish to test for indirect causality, instantaneous causality, or Granger non-causality, and employ “overparameterised” full-order VECM models that ignore entries assigned a priori to be zero, then the power of statistical inference is weakened and the resultant specifications can produce different conclusions concerning the cointegrating relationships among the variables. In this paper, an approach is presented that incorporates zero entries in the VECM analysis. This approach is a more straightforward and effective means of testing for causality and cointegrating relations. The paper extends prior work on PPP through an investigation of causality between the U.S. Dollar and the Japanese Yen. The results demonstrate the inconsistencies that can arise in the area and show that bi-directional feedback exists between prices, interest rates and the exchange rate such that adjustment mechanisms are complete within the context of PPP.

THE SEQUENTIAL ESTIMATION OF SUBSET VAR WITH FORGETTING FACTOR AND INTERCEPT VARIABLE

In this paper we propose a forward time update algorithm to recursively estimate subset vector autoregressive models (including an intercept term) with a forgetting factor, using the exact window case. The proposed recursions cover, for the first time, subset vector autoregressive models (VAR) with a forgetting factor and an intercept variable. We then present two applications. In the first application we apply the proposed estimation algorithm to the quarterly aluminium prices on the London Metal Exchange. The findings show that the proposed algorithm can improve the forecasting performance. In the second application a bivariate system investigates the relationship between the Australians All Ordinaries Share Price Index (SPI) futures and BHP share price (BHP). The proposed algorithm also introduces the Monte Carlo Integration approach into the proposed algorithm to generate error bands for the impulse responses. These results confirm that the SPI Granger causes BHP, but not vice versa.

Multivariate Subset Autoregression - Financial and Economic Forecasting (Chapter 3)

This chapter uses a modified block Choleski decomposition method and tree pruning algorithms to attain the best multivariate subset autoregression for each size (number of non-zero coefficient matrices). Model selection criteria are then employed to select the optimum multivariate subset AR. A Monte Carlo study of these techniques has been investigated to assess their performance, and comparisons of computational efficiency of the proposed procedures are also provided.

A Technical Note on the Fitting of A Multichannel Subset FIR System Within a Potentially Nonstationary Environment, Using the Prewindowed Case - Financial and Economic Forecasting (chapter 9)

The development of a recursive forward and backward time-update algorithm, together with a recursive order-update algorithm, for fitting multichannel subset FIR systems within a potentially nonstationary environment, this method is shown to be efficient and provides linkages between subset AR models and subset FIR systems at consecutive time instants.

Testing Purchasing Power Parity in the Framework of Vector Error Correction Modelling - Financial and Economic Forecasting (Chapter 14)

In this chapter, the necessary condition and the necessary and sufficient condition for purchasing power parity (PPP) are sequentially tested for fourteen bilateral exchange rates. This test is undertaken in the framework of subset vector error correction modelling (VECM) with zero coefficients. This approach is different from the unit root based methods and the results are promising. Of the fourteen exchange rates tested, we find support for the necessary condition for PPP in half of them. The necessary and sufficient condition for PPP is then tested using both a bootstrap procedure and an F test. This condition is consistently accepted for three of the seven exchange rates investigated.

Testing for Purchasing Power Parity and Efficiency in the Taiwan Foreign Exchange Market - Financial and Economic Forecasting (chapter 13)

In this chapter, the hypotheses of purchasing power parity (PPP) and market efficiency are tested for the bilateral exchange rate between the New Taiwan (N.T.) and the US dollar. Different test results lead to the conclusion that, a PPP relationship over the long term cannot be rejected confidently. Furthermore, an error correction analysis indicates that this long-term relationship may be helpful in explaining short-term movements in the exchange rate. For testing the efficiency of Taiwans foreign exchange market, the relationship between the spot rate and forward rates is examined for 10-, 30- and 90-day contracts was examined using daily observations. The forward premium is spilt into two components, one due to risk and the other due to a forecasting error. Over the two consecutive sample periods examined (1 May 1992 to 15 February 1993, and 16 February to 31 December 1993) the results are suggestive of a time-varying risk premium in the former period. However, efficiency was found to be acceptable for the 30- and 90-day contracts during the latter sample period.

A Note on the Sequential Fitting of Multichannel Subset Autoregressions Using the Prewindowed Case - Financial and Economic Forecasting (Chapter 7)

In this chapter, an efficient adaptive algorithm for multichannel subset autoregression identification using the prewindowed case is developed. After the initialization is carried out by the direct method, the optimum multichannel subset autoregression at each time instant is selected by employing the proposed recursions in conjunction with a model selection criterion.

A Re-examination of Causality Relationships in Australian Wage Inflation and Minimum Award Rates - Using Multivariate Subset Autoregressive Modelling with Constraints - Financial and Economic Forecasting (chapter 11)

In this chapter, a vector subset autoregressive process is fitted using a block modified Choleski decomposition method and a leaps-and-bounds algorithm to attain the best subset autoregression for each size (number of non-zero coefficient matrices). Model selection criteria are then employed to select the optimum subset AR. (See Penm and Terrell, 1982.) In this chapter the above approach is extended to select the optimum multivariate subset autoregression with constraints, putting the final optimal model in ideal form for detecting Granger causality patterns. The vector system comprising the variables included in the 1981 analysis by Fels and Tran Van Hoa (i.e. Average Weekly Earnings, Consumer Price Index. Index of Minimum Wage Rates, demand for labor, and a strikes variable) is re-examined for the period 1953-76 by using the proposed algorithm, and direct and indirect causal relationships are established.