Mahmoud Wahab

Government expenditure and economic growth: evidence from G7 countries

This paper examines Wagners Law of Public Expenditure, which emphasizes economic growth as the fundamental determinant of public sector growth, using time series data drawn from the G7 industrialized countries over the sample period 1960 1993. It presents evidence on both the short- and long-run effects of growth in national income on government expenditure by resorting to recent developments in the theory of cointegrated processes. An attempt is also made in this study to examine if Wagners Law holds between certain key components of government expenditure and income.

Economic growth and government expenditure: evidence from a new test specification

A new test specification of Wagners Law of Public Expenditure has been formulated. The aim is to disentangle the effects of accelerating and decelerating economic growth on growth in government expenditure. Two alternative proxies for the state of the economy are experimented with. The first defines the current state of the economy by relating it to its historical mean growth rate, while the second defines it relative to a pooled time-series/cross-sectional mean growth rate. This distinction is then explicitly incorporated into an error correction model that parameterizes the bivariate relation between government expenditure and economic growth for alternative OECD country groupings. The results suggest that government expenditure increases less than proportionately with accelerating economic growth and decreases more than proportionately with decelerating economic growth. There is only a limited support for Wagners Law.

Predictable variation and profitable trading of US equities: a trading simulation using neural networks

Abstract A switching rule conditioned on out-of-sample one-step-ahead predictions of returns is used to establish investment positions in either stocks or Treasury bills. The economic significance of any discernible patterns of predictability is assessed by incorporating transaction costs in the simulated trading strategies. We find that ANN models produce switching signals that could have been exploited by investors in an out-of-sample context to achieve superior cumulative and risk-adjusted returns when compared to either regression or a simple buy-and-hold strategy in the market indices. The robustness of these results across a large number of stock market indices is encouraging. Scope and purpose A large body of evidence has accumulated suggesting that stock returns are predictable by means of publicly available information on a number of financial and macroeconomic variables with an important business cycle component. Previous research has, for the most part, relied on standard statistical techniques (e.g., regression analysis) with unduly restrictive assumptions presumed to hold in the underlying data-generating process. This paper reexamines the evidence regarding predictable variation in US stock returns using both artificial neural network (ANN) and regression, and compares simulated trading results obtained from ANN models with those obtained from regression.

Asymmetries in the conditional relation of government expenditure and economic growth

Previous studies on the relationship between government expenditure and economic growth have, invariably, aggregated periods of strong and weak GDP growth and reported a single government expenditure response coefficient estimate. We argue that traditional test specifications of this relationship suffer from aggregation (or omitted variables) biases by failing to distinguish between diverse economic growth experiences and their impact on government expenditure. We reexamine the evidence concerning Wagners Law using a proposed conditional test specification that is capable of: (a) separating periods of strong and weak economic growth, (b) accommodating possible asymmetries in the marginal responses of government expenditure to variations in economic growth and (c) distinguishing between positive and negative asymmetries in such responses. We present evidence showing that: (a) the majority of government expenditure responses tend to occur during periods of an economic slowdown characterized by GDP growth that is below trend-growth; and (b) there is little evidence suggesting that government expenditure increases markedly during periods of an economic expansion when GDP growth is at/above trend-growth. Results from several tests of hypotheses also corroborate these findings. When we aggregate response coefficients across periods of above trend-growth and below trend-growth, we obtain an elastic aggregate response coefficient for OECD countries in line with Wagners proposition. However, the evidence seems less forthcoming for EU economies. Nonetheless, the estimated cumulative response coefficient from our conditional asymmetric specification exceeds the estimated response coefficient from a traditional symmetric test specification which appears biased against finding support for Wagners proposition due to omission of important directional asymmetry variables from the estimating equation.

Co-Movements of US and Asian Equity Markets: Evidence from Asymmetric and Time-Varying Coefficients

We examine co-movements of nine Asian equity markets with both the US and Japan with special interest in distinguishing co-movements during periods of positive returns from those during periods of negative returns. A discrete asymmetric piecewise linear conditional mean returns specification is adopted to generate asymmetric co-movement parameters for periods of positive and negative returns. Conditional heteroskedasticity is modeled using GARCH and EGARCH specifications. Predicted conditional volatilities are used to generate alternative estimates of asymmetric and time-varying co-movement parameters. Conditional mean returns from asymmetric and symmetric conditional mean return models along with GARCH and EGARCH volatilities are used to generate estimates of asymmetric and symmetric conditional (ex-ante) Sharpe ratios. Asian markets returns and volatilities show a clear tendency to move more with the US than with Japan; and their co-movements with negative US returns far exceed their co-movements with positive US returns, thereby suggesting that any diversification benefits into Asian equities are likely to manifest themselves more during periods of positive than negative US returns. Conditional asymmetric Sharpe ratios exceed conditional symmetric Sharpe ratios; however, and more importantly, performance-ranking differs depending on whether asymmetric versus symmetric conditional Sharpe ratios are used. Asymmetric conditional Sharpe ratios suggest that India (followed by Malaysia) offers the best return/risk tradeoff, with the least favorable market is South Korea (using GARCH) and Philippines (using EGARCH).