Common Trend Components Research Articles

An unobserved components model of total factor productivity and the relative price of investment

AbstractThis paper applies the common stochastic trends representation approach to the time series of total factor productivity (TFP) and the relative price of investment (RPI) to investigate the modeling of neutral technology (NT) and investment-specific technology (IST) and its econometric ramifications on the analysis of general equilibrium model. The permanent and transitory movements in both series are estimated efficiently via Markov chain Monte Carlo methods using band matrix algorithms. The results indicate that TFP and the RPI are, each, well represented by a differenced first-order autoregressive process. In addition, their time series share a common trend component that we interpret as reflecting changes in general purpose technology. These results are consistent with studies that suggest that (1) the traditional view of assuming that NT and IST follow independent processes is not supported by the features of the time series and (2) improper specification of secular trends may distort estimation and inference. Notably, the findings provide some guidance to minimize the effect of idiosyncratic and common trend misspecifications on the analysis of impulse dynamics and propagation mechanisms in macroeconomic models.

An Unobserved Components Model of Total Factor Productivity and the Relative Price of Investment

This paper applies the common stochastic trends representation approach to the time series of total factor productivity and the relative price of investment to investigate the relationship between neutral technology and investment-specific technology. The permanent and transitory movements in both series are estimated efficiently via MCMC methods using band matrix algorithms. The results indicate that total factor productivity and the relative price of investment are, each, well-represented by an integrated process of order one. In addition, their time series share a common trend component that we interpret as reflecting changes in General Purpose Technology. These results suggest that (1) the traditional view of assuming that neutral technology and investment-specific technology follow independent processes is not supported by the features of the time series and (2) advances in information and communication technologies are general purpose technological progress that drive the trend in aggregate TFP in the United States.

Permanent and transitory dynamics in house prices and consumption: some implications for the real effects of the financial crisis

In this article, a small-scale macroeconomic system is estimated in the framework of a common trends model, in order to explore the dynamic interactions between real house prices, consumption expenditure and output in the US and major European economies. The results point to important differences across countries, with long-run house price effects on consumption only for France, Germany and the US. However, interactions between house prices and consumption are detected in all countries at shorter horizons, with important implications of the current unwinding of the sub-prime crisis for real activity. Evidence for international comovements in the common trend component of house price dynamics is also found.

Stock Market Integration, Return Forecastability and Implications for Market Efficiency: A Panel Study

Using a panel data set for 18 stock countries, this paper finds fairly strong integration among national equity markets. A country's stock index price can be decomposed into a common trend component and a stationary country-specific component. Results show that the 18 country indexes reverse to the world trend with a speed of 18% per year, and that the Hong Kong market converges to other markets with a speed of 22% per year or a half life of around three years. The two components can be separately estimated using maximum likelihood. The country-specific component displays substantial variability and is found to have both mean reversion over the long horizon and momentum over the short horizon. A simple parametric trading strategy exploiting simultaneously mean reversion and momentum effects produces an excess return of 16.7% per year, which exceeds those of strategies based on momentum or mean reversion separately. The excess return is statistically significant, and cannot be explained by systematic risk factors or by transaction costs. The results seem to support the behavioralist overreaction view vis-a-vis an efficient markets view.

The common-trend and transitory dynamics in real exchange rate fluctuations

This study examines the behaviour of both Common Trend (CT) and transitory components of Real Exchange Rate (RER) fluctuations under the current float. The CT component is in most cases found to be sizeable, albeit its relative importance can vary considerably across major currencies and its estimate can be sensitive to whether or not long-run Purchasing Power Parity (PPP) is imposed on the data. Further analysis suggests that both CT and transitory innovations are linked much more to interest rate changes than to productivity changes. Accordingly, it is interest rate, not productivity, disturbances that drive the highly persistent RER.

Long-run implications of neoclassical growth models: empirical evidence from Australia, New Zealand, South Korea and Taiwan

Long-run implications of the one-factor neoclassical growth models are tested by using data from Australia, New Zealand, South Korea and Taiwan. Testable propositions about the long-run relations between log of real output, consumption, and investment are investigated using unit root tests and cointegration analysis. Also, common trends analysis is used to identify the sources of the permanent shocks driving the common long-run trend. Further, variance decomposition is used to examine the extent to which innovations to the common trend component are able to explain short-run fluctuations in the data. Empirical results provide limited support for the neoclassical models. In addition to productivity shocks, permanent innovations to investment are found to be important components of the long-run stochastic trend governing the dynamic behaviour of real output, consumption and investment. Variance decomposition results suggest that although innovations to common trend components are important, this is unable to explain a substantial fraction of short-run fluctuations in the data.

Trend-free block designs: existence and construction results

Designs for which treatment and block contrasts are orthogonal to specified common trend components within blocks have been called trend-free block designs. A necessary and sufficient condition for the existence of such designs was given in a reference. A matrix sum was required to have certain properties. It is shown now that the existence of a matrix with the required properties assures the existence of the necessary component matrices] The existence of trend-free block designs for specified trends in one or more dimensions is examined in a number of theorems and corollaries. Initial results are general and then trends in one dimension are considered. An alternative formulation of the necessary and sufficient condition for a trendfin one dimension are sufficient condition for a trendfree block design is given when each treatment has the same number of replications. Some special results are obtained for complete and balanced incomplete block designs. Some design construction methods are developed to esta...