Conditional Error Correction Model Research Articles

Discovering the fundamentals of Turkish housing market: a price convergence framework

PurposeThe purpose of this study is to determine the Turkish housing price and rent dynamics among seven big cities with a unique monthly data set over 2003–2019. The secondary purpose is to examine bubble dynamics within the price convergence framework through alternative tests.Design/methodology/approachThe paper conducts two autoregressive distributed lag (ARDL) cointegration estimates for housing prices and rents and applies conditional error correction model to investigate the long-run drivers of the Turkish housing market. The authors compare ARDL cointegration in-sample forecasts and discounted cash flow (DCF) estimates with actual prices to determine the timing, magnitude and collapse period(s) of bubbles within the price convergence framework. In particular, the generalized sup augmented Dickey–Fuller (GSADF) approach time stamps multiple explosive price behaviors.FindingsThe ARDL results confirm the theory of investment value by addressing mortgage rates, the price-to-rent ratio and rents as the fundamental factors of house prices. The price-to-rent ratio offers a comparison mechanism among houses deciding to buy a new house in which rents increase monthly real estate investment returns, and mortgage rates act as the discount rate. One key finding is that these dynamics have a greater impact on house prices than mortgage rates. Furthermore, the ARDL, DCF and GSADF findings exhibit temporal overvaluations rather than bubble signals, implying that housing price appreciations, including explosive behaviors, are consistent with fundamental advances.Originality/valueThis paper is considered to be innovative in determining housing market dynamics through two different ARDL estimates for the Turkish housing price index and rents in real terms as dependent variables. The authors compare the boom and collapse periods of the real housing price index and its fundamentals via the GSADF test. A final key feature of this research is its extensive data set, with 11 different regressors between 2003 and 2019.

Is there a pass-through from the international coff ee price to the Mexican coff ee market?

We estimate the transmission of coff ee prices from the international market to the Mexican market for the period 2004-2019. Our estimates are obtained from a single equation conditional Error Correction Model (ECM). We estimate our proposed model for two overlapping periods: before a hypothesised break (2004-2013), and full sample (2004-2019). The results of the first estimation suggest that given a 1% increase in the international price of coff ee, the Mexican price increases by 0.9%, which is larger than previous estimates in the literature, but a finding which is consistent with the idea of more market integration due to free trade agreements. Furthermore, we find that Mexican coff ee production has no eff ect in the determination of local coff ee prices. Our model also implies a previously undocumented break in the long-run relationship between international and national prices, which started in 2015 but was statistically significant until 2017. This latter finding suggests that the international coff ee price pass-through to the Mexican economy has come to an end.

Similarity evidence between the country risk and the idiosyncratic risk: An empirical study of the Brazilian case

Purpose - This paper estimates the idiosyncratic risk (IDR) time series in the Brazilian economy and verifies its interaction with the Brazilian country risk indicators, measured by the EMBI+ (the Emerging Markets Bond Index).Methods - This paper estimates various regression models to capture the dynamic nature of the variables. The models include the heteroscedastic conditional autoregressive models and vector error correction models (VECM). Findings - The results show similarities or associations between the two indicators with interactions in the short and long run. The idiosyncratic risk proves to be a relevant indicator of the risk of economic activities implemented within the scope of the Brazilian economy and can help evaluate investments in related projects. This results also provide evidence of cointegration between the EMBI+ and IDR variations.Implication - This result suggests an alternative way for obtaining estimates of the expected return required by economic agents in financing and investing in productive and infrastructure projects necessary for developing the Brazilian economy that provides greater employability and good social welfare.Originality - This paper provides an alternative estimate of the time series proxy of idiosyncratic risk in the Brazilian economy. It also compares the results with the time series results obtained from the country risk measure EMBI+, widely used among resource managers in the international markets.

Impact of Exchange Rate Volatility on Inflation in Nigeria

This study examined the effect of exchange rate volatility on inflation in Nigeria using annual time series data covering the period 1986-2019. To achieve this objective, the study employed the generalized autoregressive conditional heteroskedasticity (GARCH) and vector error correction model (VECM) to ascertain the long-run impact of exchange rate volatility on inflation . The study used consumer price index as a proxy for inflation being the dependent variable while nominal exchange rate (NER), money supply (MS) import (IMP) and export (EPT) were used as the independent variables. The results of stationarity test indicated that the variables have mixed order of integration and bounds test for co-integration confirmed the existence of a long-run relationship among the variables. Findings showed that money supply (MS) and nominal exchange rate(NER) had positive and significant effect on consumer price index, meaning that inflation in Nigeria is caused by exchange rate fluctuations as well as increase in money supply. Based on the findings, the study recommended that growth of money supply should be controlled by the central bank in order to reduce inflation to the barest minimum.

Relações entre índices preço-lucro e retornos dos títulos públicos

Os índices P/E1 e P/E10 ou Índice Preço-lucro Ciclicamente Ajustado foram amplamente disseminados na literatura que tem como contexto o mercado de ações americano. Este artigo traz um método de construção de índices P/E para o mercado de ações brasileiro. Seu objetivo é analisar as relações de longo prazo entre tanto o P/E1 quanto o P/E10 e as taxas de juros correspondentes aos retornos de títulos públicos, de modo a testar a relação referente ao Modelo Fed. No geral, o período considerado foi de dezembro de 2004 a junho de 2018. Foram estimados modelos Autorregressivos de Defasagens Distribuídas, os quais podem ser representados como Modelos de Correção de Erros Condicionais. Os resultados evidenciaram relações de longo prazo significativas entre tanto o P/E1 quanto P/E10 e as referidas taxas de juros, sugerindo que o Modelo Fed está em linha com o comportamento do mercado financeiro brasileiro.

Model Empiris Impor Garam Indonesia

Indonesia is the fourth longest coastal country in the world, so it has the potential to become a salt exporting country. But appareantly, Indonesia has very high salt imports. This paper seeks to raise the irony bya modeling Indonesian salt imports. Based on various theories and result of previous studies, this paper proposes the price of imported salt, the real exchange rate, the need for salt, and domestic production as an independent variable. The sample used stretches from 2001 to 2018. This paper uses a time series model to analyze data. With the conditional ECM (error correction model), this paper finds that in the short or long term, all selected independent variables have a significant effect on the volume of salt imports, although the exchange rate requires lag to influence the import. This paper suggests increasing the education of salt farmers related to the salt content desired by industry.

Globalization, energy use, and environmental degradation in South Africa: Startling empirical evidence from the Maki-cointegration test

This study investigates whether the dynamic effects of globalization and energy consumption can lead to a significant rise in South Africa's environmental degradation. Specifically, the study investigates which among the combinations of the variable of globalization, energy use, and economic growth is possessive with the dynamics of influencing upward or downward movement of South Africa's environmental degradation and hence Environmental Kuznets Curve (EKC). To ensure robust and parsimonious result, time series data from 1971 to 2014 was used. The structural breaks from the Maki cointegration tests were incorporated in the FMOLS and CRR models for the dynamic long-run estimates while the short-run estimates were obtained from the conditional Error Correction Model (ECM) regression. The direction of causality was investigated using the Toda-Yamamoto causality test. The finding from this test was validated using the innovation accounting analysis and the impulse response function. The results established the existence of an upward EKC dynamics, which bear a major linkage from the excessive fossil fuel energy use in South Africa. While globalization, was detected to condense environmental degradation in the short-run irrespective of the degree of economic growth attained by the country. Complementing this finding was the Toda-Yamamoto test, which established the existence of a one-way causality running from energy use to environmental degradation and again, a two-way causality between economic growth and globalization. The innovation accounting test revealed that 7.96% and 0.80% of energy use and globalization could lead to corresponding environmental degradation of 72.52% and 1.39% respectively. The study, therefore, advocates the need for conservative energy policies and pollution-free energy mix. How to achieve these are carefully outlined by the present study.

Unearthing Valuable Macro Level Insights from Medical Data Using Time Series Methodologies

This study applies time series methodologies, such as the Autoregressive Conditional Heteroscedasticity (ARCH) or Vector Error Correction (VEC) models to medical data for unearthing of valuable insights into trends in medical welfare of a population. Using data from the Centers for Disease Control and Prevention (CDC), study findings show three out of the four fastest growing cancers in the United States are cancers of the digestive system. These cancers are not the glamorously discussed cancers, such as lung cancer, or breast cancer. These are thyroid cancer, liver cancer, and pancreas cancer, cancers of the digestive system. ARCH models show the fastest growing cancer, thyroid cancer possesses characteristics of a progressive, yet randomly occurring series, a finding that ought to be worrying to policy makers, medical personnel, and researchers in realm of medicine. Application of VEC models to the data show incidence of thyroid cancer increases probability of each of lung cancer, and cancer of the uterus. In absence of a cointegration relation, this causal relation is shown to be unidirectional, with outcome risks of lung cancer cannot be dissociated from the digestive system. Study findings reveal cancers that are glamorized in the media have some of the lowest growth rates of all cancers, and perhaps are not the cancers deserving of the most attention. Regardless of demonstrated importance of micro level control studies for improvements to health outcomes, study findings provide evidence that studies of macro level data can yield valuable insights for policy initiatives, and directionality of micro level studies.

Dynamic Reflections of Crimes, Quasi Democracy and Misery Index in Pakistan

Massive increase in crimes has coexisted with rising inflation and high unemployment for the last couple of decades especially during democratic governments in Pakistan. In this paper, we explore the relationship between crime rate, misery index and democracy in Pakistan from 1975 to 2013. Granger causality test proposed the unidirectional causality running from misery index to crime rate in Pakistan. Estimating the crime function via Pasaran’s conditional error correction model, we found the significant long run equilibrium relationship between Okun’s misery index and crime rate which implies that rising inflation and unemployment rate are the major driving forces towards increasing crime rates in Pakistan. Finally, empirical evidence from Okun’s misery index suggested that people are three times more miserable in quasi democratic periods than that of dictatorship. The Barrow’s misery index model verifies that people are twice worsening in quasi democratic periods. Likewise, reported crimes are nearly twice during quasi democracy than quasi dictatorship. The crime model provided the evidence that people during quasi democratic governments are more likely tending towards crime as compared to quasi dictatorship during the study period in Pakistan. This implicitly advocates the fact that half hearted efforts and ill structured apparatus of democracy can augment the tendency of crime and misery rather than solution of such concerns of the economy.

Interactions between energy consumption, international trade, and real income in Canada: An empirical investigation from a new version of the Solow growth model

ABSTRACTThis study investigates the empirical relationship between energy consumption, international trade, and real income in Canada which has an important role in global energy and trade. It employs bound tests to level relationships and conditional error correction models through ARDL specification to a new version of the Solow Growth model. Using annual data of the 1960–2010 period, results reveal a long-term relationship between energy consumption, international trade, and real income in Canada. It is also found that energy exporting activity is the determinant (driver) of energy consumption through the channel of real income and energy consumption is the determinant (driver) of exports through the channel of real income in the long term of the Canadian economy. Exports and energy use are the determinants (drivers) of real income in the long term of the Canadian economy; therefore, as conditional Granger causality tests suggest there is feedback relationship between energy consumption, international trade, and real income in the long term of the Canadian economy. The present study suggests that any energy conservation policies are likely to have negative influence on output and international trade in Canada.

Growth impact of CO2emissions caused by tourist arrivals in Turkey

Purpose– The purpose of this study is to analyze the determinants of changes in carbon dioxide (CO2) emissions for Turkey by utilizing the autoregressive distributed lag approach to investigate the long-run equilibrium relationships of CO2emissions between foreign tourist arrivals (FTAs) and electricity consumption (ELC). The results reveal that foreign tourists and ELC are significant determinants of a long-run equilibrium relationship with CO2emissions from electricity and heat production and CO2emissions from transport for Turkey, respectively. The results of the conditional error correction models (CECM) confirm that there are long-run causal relationships from the growing number of foreign tourist arrivals and the increase of ELC toward the growth of CO2emissions during 1960-2010. The results of autoregressive distributed lag (ARDL) error correction models for CO2emissions also validate significant dynamic relationships between CO2emissions, ELC and tourist arrivals in the short run.Design/methodology/approach– ARDL modeling and Bounds test approach were used in this study.Findings– Rapid tourism development in Turkey has triggered CO2emissions. The growth of CO2emissions in Turkey threatens sustainability. The hypothesis of “The growth of CO2emissions in Turkey” is validated. Tourist arrivals, ELC and CO2emissions are co-integrated. CECMs confirm the growth of CO2emissions during 1960-2010. ARDL modeling shows significant relationships between CO2emissions and other variables.Originality/value– Results of ARDL error correction models for CO2emissions validate the hypothesis that there are significant dynamic relationships between CO2emissions, ELC and tourist arrivals in Turkey for the short run.

The impact of biomass consumption on CO2emissions

Purpose– The purpose of this study is to investigate the long-term equilibrium relationship between carbon dioxide (CO2) emissions and total biomass consumption (BC) in Turkey, which has a rich diversity of ecological conditions prevailing throughout its regions.Design/methodology/approach– Bounds tests and conditional error correction models under the autoregressive distributed lag approach have been applied to annual data that cover the 1980-2010 period.Findings– Results suggest that CO2emissions are in a long-term equilibrium relationship with total BC in Turkey. BC has a negative effect on CO2emissions; 1 per cent increase in total BC would lead to 0.029 per cent reduction in CO2emissions. Long-term coefficient of fossil fuel consumption for CO2emissions is positive and elastic, 1.247. Finally, conditional error correction model of the present study reveals that CO2emission in Turkey converges to its economic long-term equilibrium very quickly by 93.7 per cent speed of adjustment through the channel of BC and fossil fuel consumption.Originality/value– Although there have been a considerable number of studies investigating the link between total energy consumption and CO2emissions in the literature, searching the contribution of components of energy to CO2emissions deserves attention. Therefore, this study contributes to the literature by investigating the effect of BC on CO2emissions in the case of Turkey.

Big Fish: Oil Markets and Speculation

The role of speculators in the oil markets has been vastly investigated during the last few years. Several authors focused on the definition of speculation while others examined the relationship between oil prices and the behavior of trading actors. In this paper, we formulate a new theory able to describe “hedging needs” as well as the role of speculators in the crude oil market. According to our model, the different strategies of producers and consumers aimed at defending themselves against abrupt oil price changes can be satisfied only if speculators play a very active role. Due to the rapid growth in shale oil production, the importance of speculation in ensuring an equilibrium in the U.S. crude oil market has consequently grown noticeably. We estimate an econometric conditional Error Correction Model (ECM) applying Pesaran’s bound tests, over the sample February 2000 November 2014, using WTI and CFTC data. Our theory is well supported by econometric evidence. In other words, our model is suitable to demonstrate how commercial operators act on the market. In addition, the increasing importance of future contracts (also known as financialisation of crude oil market) helps in reaching a level of prices close to the equilibrium one. Finally, we are able to find evidence of a positive impact of the action of speculators on the efficiency of oil markets as they help stabilizing prices.

Energy consumption, international trade, and real income in the USA: An empirical investigation using conditional error correction models

This study investigates the empirical relationship between energy consumption, international trade, and real income in the USA, which is the second largest energy consuming country following China. It employs bounds tests to level relationships and conditional error correction models through Auto-Regressive Distributed Lag specification. Using annual data from the 1960 to 2010 period, the results reveal a long-term relationship between energy consumption, international trade, and real income in the USA. It is also found that energy consumption is determinant of exports, imports, and real income. Conditional Granger causality tests suggest that there is a feedback relationship between energy consumption, international trade, and real income in the long-term for the USA economy.

Modeling Energy Consumption for Growth in an Open Economy: ARDL and Causality Analysis for Turkey

In a growing open economy, energy consumption plays a critical role. Insufficient energy may constrain output, while exogenous factors, such as shocks in world price, may limit the aggregate growth rate of the economy. This study investigates the long-run equilibrium of energy consumption in Turkey from a unique perspective, taking tourism expansion as a proxy for exogenous growth. The paper uses the Autoregressive Distributed Lag (ARDL) model to determine an econometric relationship between electricity consumption, foreign tourist arrivals, and the economic growth using data during 1960–2010. Granger causality test determines the direction of causality among these variables under conditional error correction model (CECM) supplemented, whenever required, by the Bounds test. Results reveal that foreign tourist arrivals and real gross domestic product (GDP) are significant determinants of a long-run equilibrium relationship with electricity consumption for Turkey. A positive significant relationship has been found between electricity consumption, foreign tourist arrivals, and economic growth in the long run. The estimated ARDL elasticity coefficients indicate that a 1% increase in the number of foreign tourist arrivals and GDP growth cause 0.045% and 0.74% increase in the total electricity consumption of Turkey, respectively, after adjustments consistent with standard procedures.

Interactions between energy and imports in Singapore: Empirical evidence from conditional error correction models

This study empirically tests for long-run equilibrium relationship and the direction of causality between imports and energy consumption in Singapore. The results of the present study reveal that a long-run equilibrium relationship exists between import growth and energy consumption growth in Singapore by using bivariate systems. Imports of Singapore converge to long-term equilibrium levels by 79.9 percent speed of adjustment through the channel of energy growth. Furthermore, the major finding of this study is that there are long- and short-term undirectional causalities that run from energy growth to import growth in Singapore, which denote that energy consumption in Singapore is a catalyst for importing.

Estimating long-run equilibrium real exchange rates: short-lived shocks with long-lived impacts on Pakistan

The purpose of this study is to investigate the factors that affect real exchange rate volatility for Pakistan through the co-integration and error correction model over a 30-year time period, i.e. between 1980 and 2010. The study employed the autoregressive conditional heteroskedasticity (ARCH), generalized autoregressive conditional heteroskedasticity (GARCH) and Vector Error Correction model (VECM) to estimate the changes in the volatility of real exchange rate series, while an error correction model was used to determine the short-run dynamics of the system. The study is limited to a few variables i.e., productivity differential (i.e., real GDP per capita relative to main trading partner); terms of trade; trade openness and government expenditures in order to manage robust data. The result indicates that real effective exchange rate (REER) has been volatile around its equilibrium level; while, the speed of adjustment is relatively slow. VECM results confirm long run convergence of real exchange rate towards its equilibrium level. Results from ARCH and GARCH estimation shows that real shocks volatility persists, so that shocks die out rather slowly, and lasting misalignment seems to have occurred.Electronic supplementary materialThe online version of this article (doi:10.1186/2193-1801-2-292) contains supplementary material, which is available to authorized users.

Foreign aid and economic growth in South Africa: An empirical analysis using bounds testing

South Africa is classified as one of the wealthiest countries in Africa, yet half of its population lives below the poverty line and over a quarter of its labour force is unemployed. Foreign aid was one of the major sources of capital for the country. It poured in from many developed countries and it was very successful in promoting a stable society, especially during the first few years after apartheid ended in 1994. Thus, South Africa is a good case study for determining the relationship between and the effect of foreign aid on growth. The data on aid flow as a percentage of gross domestic product (GDP) in South Africa was only available from 1980, thus limiting the data from 1980 to 2009. Given the limitations in the data, a co-integration analysis of the autoregressive distributed lag (ARDL) was adopted, using the method of the conditional unrestricted error correction model (UECM), which accommodates small samples. The result shows that the relationship between aid and growth is negative both in the short and the long run.

Regional Growth and Unemployment: The Validity of Okun's Law for the Finnish Regions

This paper offers a concise critical overview of Okun's Law, with particular attention for its relevance in open economic systems of regions. Based on an extensive set of economic data for Finnish regions, the existence of cointegration is tested using alternative statistical methods, viz. the residual-based test and the conditional error correction model. A novelty of the paper is to combine a method of hidden cointegrations with a method of removing cross-sectional dependence. After correcting for hidden cointegrations and cross-sectional dependence, both statistical methods used yield almost similar results and confirm the presence of cointegration for the relevant data on Finnish regions. The long-run Okun relationship for regions in Finland appears to confirm results found elsewhere in the literature on countries as a whole, although the coefficients tend to be smaller. RÉSUMÉ Cette communication présente un aperçu critique concis de la loi d'Okun, et se penche tout particulièrement sur sa pertinence éventuelle pour les systèmes économiques ouverts dans les régions. Sur la base d'un ensemble de données économiques approfondies concernant les régions finnoises, on procède à des essais de l'existence d'une co-intégration, en appliquant des méthodes statistiques alternatives, à savoir les essais à base résiduelle et le modèle de correction des erreurs conditionnelles. Une nouveauté contenue dans cette communication est la combinaison d'une méthode de co-intégrations cachées avec une méthode d’élimination de la dépendance transversale. Après des corrections tenant compte des co-intégrations cachées et de la dépendance transversale, les deux méthodes statistiques utilisées produisent des résultats similaires, et confirment la présence d'une co-intégration pour les données relatives aux régions finnoises. Les rapports de longue durée de la loi d'Okun appliquée aux régions de la Finlande semblent confirmer les résultats relevés ailleurs dans la documentation générale sur les pays, même si les coefficients ont tendance à être plus petits. EXTRACTO Este estudio ofrece una perspectiva general concisa y crítica de la ley de Okun, prestando particular atención a su relevancia en sistemas económicos abiertos regionales. En base a un conjunto amplio de datos económicos sobre regiones finlandesas, se pone a prueba la existencia de cointegración utilizando métodos estadísticos alternativos, tales como, el ensayo basado en residuales y el modelo condicional de corrección de errores. Una de las novedades del estudio es que combina un método de cointegraciones ocultas con un método de eliminación de dependencia cruzada. Después de hacer correcciones para las cointegraciones ocultas y la dependencia cruzada, ambos métodos estadísticos producen resultados casi similares y confirman la presencia de cointegración en los datos oportunos sobre regiones finlandesas. La relación Okun a largo plazo de regiones en Finlandia parece confirmar los resultados encontrados en otras partes de la bibliografía sobre países enteros, aunque los coeficientes tienden a ser menores.

ARDL bounds tests and robust inference for the long run relationship between real stock returns and inflation in Australia

This paper conducts an empirical investigation into the long run relationship between real stock returns and inflation in Australia by employing the ARDL bounds tests. There exists a stock return–inflation long run relationship, and the long run parameters are non-linear functions of those of the conditional error correction model. The OLS estimates of the latter model constitute the long run parameter estimates and their standard errors are estimated by delta methods. The long run model estimates so constructed can be biassed and inconsistent, and the delta method is derived assuming asymptotic normality, which does not hold in this investigation. In this paper, to overcome these limitations of the traditional methods, we employ the bias-corrected bootstrap method. As a consequence, the robust and reliable statistical inference can be made on the long run return–inflation relationship. The empirical results show that the expected inflation had no significant effect on real stock returns, while the observed inflation had a significant and negative effect. Furthermore, the data generating process of the returns–inflation relationship was not affected by the change in monetary policy regime in the early 1990s. These findings imply that Australian stocks have been very effective instruments for hedging against expected inflation. Because of the resilience of Australian economy to the current global financial and economic crisis, this finding has implications for long term domestic and foreign investors in Australia.