Nicholas Sarantis

Modeling non-linearities in real effective exchange rates

Abstract The aim of this paper is to test for and model non-linearities in the real effective exchange rates of 10 major industrial countries (the G-10). To exploit non-linear dependencies in exchange rates, we apply the STAR (Smooth Transition Autoregressive) family of models. These non-linear models imply the existence of two distinct regimes in exchange rates, with potentially different dynamic properties, but the transition between the regimes is smooth. Tests reject linearity for eight exchange rates. The real exchange rate process is cyclical in both regimes for almost all countries, and there appears to be some evidence of asymmetry. STAR models outperform Hamiltons Markov regime-switching model in an out-of-sample forecasting contest.

Nonlinearities, cyclical behaviour and predictability in stock markets: international evidence

Abstract In this paper we employ the STAR (smooth transition autoregressive) model to investigate potential nonlinearities and cyclical behaviour in the stock prices of seven major industrial countries (the G-7). Tests reject linearity for all stock markets. The estimated nonlinear models suggest that stock price growth rates are characterised by asymmetric cycles in most countries, with the speed of transition between the expansion and contraction regimes being relatively slow for all countries. The implied transition probabilities detect satisfactorily the main contraction regimes in stock markets. STAR-based noncausality tests indicate only a small number of interactions between the stock markets. Our evidence on out-of-sample forecasting suggests that forecast gains can be made by exploiting the nonlinear structure of STAR models.

Price-Quality Relations and Hedonic Price Indexes for Cars in the United Kingdom

The main objective of this paper is to employ a complete set of panel data on UK car characteristics to estimate a hedonic car price model. This enables us to examine price differences between various car models in terms of variations in individual car characteristics.We also pay greater attention to the specification of the hedonic price model than previous studies, as shown by the wide range of diagnostics reported. A second objective of the paper is to utilise the estimates of the hedonic price model to construct a hedonic price index for cars, which allows us to investigate the increase of car prices due to quality and non-quality factors.

Liquidity constraints, precautionary saving and aggregate consumption: an international comparison

This paper has three objectives. First, to expand Halls [J. Polit. Econ. 86 (1978) 971] rational expectations permanent income/life cycle hypotheses (REPIH/RELCH) representative agent model to allow for current income consumers, the durable component of total consumer expenditures and for intertemporal substitution, which are often cited as the main reasons for the rejection of Halls model. Second, to apply this modified model to 20 OECD countries over the post-World War II period. The GMM estimation method is employed. Third, to examine the relative influence of liquidity constraints and precautionary saving on the cross-country variation in the proportion of current income consumers, using cross-country regressions and a non-linear model of panel data. The presence of current income consumers, which is primarily due to liquidity constraints and to a lesser extent to precautionary saving, is the major factor for the rejection of the basic REPIH/RELCH model in all OECD countries.

Is the consumption-income ratio stationary? Evidence from panel unit root tests

This paper provides evidence on the stationarity of the consumption–income ratio from a panel of 20 OECD countries, using recently developed panel unit root tests which avoid the problem of low power associated with conventional unit root tests. Our findings suggest that the consumption–income ratios in the OECD countries are generated by a nonstationary stochastic process.

Foreign Exchange, Fractional Cointegration and the Implied-Realized Volatility Relation

Almost all relevant literature has characterized implied volatility as a biased predictor of realized volatility. This paper provides new time series techniques to assess the validity of this finding within a foreign exchange market context. We begin with the empirical observation that the fractional order of volatility is often found to have confidence intervals that span the stationary/non-stationary boundary. However, no existing fractional cointegration test has been shown to be robust to both regions. Therefore, a new test for fractional cointegration is developed and shown to be robust to the relevant orders of integration. Secondly, employing a dataset that includes the relatively new Euro markets, it is shown that implied and realized volatility are fractionally cointegrated with a slope coefficient of unity. Moreover, the non-standard asymptotic distribution of estimators when using fractionally integrated data is overcome by employing a bootstrap procedure in the frequency domain. Strikingly, tests then show that implied volatility is an unbiased predictor of realized volatility!

Seasonality, cointegration and the long-run purchasing power parity: evidence for sterling exchange rates

The long-run purchasing power parity (PPP) hypothesis is tested for nine bilateral sterling exchange rates, using recently developed techniques on cointegration and seasonal integration. The empirical findings show that none of the exchange rates and relative prices contain seasonal unit roots, but all have an autoregressive unit root. The cointegration tests overwhelmingly reject the PPP hypothesis as a long-run equilibrium condition for all countries concerned.

A bootstrap panel unit root test under cross-sectional dependence, with an application to PPP

A bootstrap methodology for dealing with cross-sectional dependence in panel unit root tests of real exchange rates is suggested. Monte Carlo simulations are employed to investigate the size distortion and the power of the bootstrap test-statistic. It is shown that the statistic has good power and no size distortions for moderate and large samples. The panel unit root test procedure is then applied to the long-run purchasing power parity (PPP) hypothesis, using a panel of 20 OECD countries over the recent float period, and the results are compared to those obtained by other tests.

The Role of Financial Spreads in Macroeconomic Forecasting: Evidence for the UK

This paper examines the potential use of financial spreads in forecasting aggregate macroeconomic activity in the United Kingdom. The authors develop a quarterly BVAR (Bayesian vector autoregressive) macroeconomic model which is used to generate out-of-sample forecasts for GDP, prices, real effective exchange rate, interest rate and other macroeconomic variables at varying forecast horizons over the period 1989Q1-1995Q2. The forecasts are generated through sequential reestimation using the Kalman filter. Extensive experimentation is undertaken, using different priors, monetary indicators and financial spreads. The empirical results suggest that financial spreads in the United Kingdom do not contain any predictive information on future real macroeconomic activity, but they yield a significant improvement in price predictions. Copyright 1999 by Blackwell Publishers Ltd and The Victoria University of Manchester

Quality, user cost, forward-looking behavior, and the demand for cars in the UK

Abstract This paper applies an extended version of the superior goods model to the UK car market. The model involves the estimation of separate equations for the demand for new cars and the rental price of used cars. We have allowed for the direct influence of quality on car demand by using a measure derived from hedonic price equations. We have employed three measures of the user cost, reflecting different assumptions about price expectations and the depreciation rate. The empirical results reject the forward-looking model in favor of the error correction formulation. Income, wealth and price elasticities for new and used cars support the superior goods hypothesis.