Cross-sectional Heterogeneity Research Articles

Time-varying unobserved heterogeneity in earnings shocks

This paper considers the transitory-permanent model for the earnings process, and allows for time-varying individual-specific unobserved heterogeneity in each shock. The cross-sectional heterogeneity in each shock is drawn from an unknown distribution at each time period. Sufficient conditions for the nonparametric identification of the cross-sectional density functions of the heterogeneity are provided, under different assumptions on the time series behavior of the transitory shock. The method proposed is then applied to earnings data to document a high degree of cross-sectional heterogeneity in each shock.

Children’s internalizing behavior development is heterogeneously associated with the pace of epigenetic aging

BackgroundInternalizing behaviors are an indicator of children’s psychological and emotional development, predicting future mental disorders. Recent studies have identified associations between DNA methylation (DNAm) and internalizing behaviors. This prospective study aimed at exploring the associations between pace of biological aging and the developmental trajectories of internalizing behaviors. MethodsParticipants were children from the Avon Longitudinal Study of Parents and Children (ALSPAC) cohort (N = 974). Measures of DNA methylation were collected at birth, age 7 and ages 15–17. The pace of aging was estimated using the DunedinPoAm algorithm (PoAm). Internalizing behaviors reported by caregivers between ages 4 and 16 using the Strengths and Difficulties Questionnaire. To explore heterogeneity in the association between PoAm and internalizing behaviors we use Poisson quantile regression in cross-section heterogeneity and longitudinal latent class analysis over the childhood and adolescence. ResultsInternalizing behavior trajectories were identified: low-risk, childhood limited, late onset and early onset (persistent). Accelerated aging at birth was negatively associated with internalizing behaviors in early childhood but positively correlated during adolescence. Higher PoAm at birth increased chance of low-risk profile, while decreasing likelihood of childhood limited trajectory. PoAm at age 15 was negatively associated with childhood limited profile and positively linked to late onset trajectories. Associations were larger at higher values of internalizing symptoms. ConclusionsThe heterogeneity in the association between biological age acceleration and internalizing behaviors suggests a complex dynamic relationship, particularly in children with high or increased risk of adverse mental health outcomes.

Effects of Ordered Position on Stock Liquidity: New Nonlinear Evidence from Japanese REITs

Wide-ranging research identifies ordered position bias and shows that alphabetical name ordering is advantageous to those at the beginning of an alphabetical listing. This study examines the impact of ordered position on stock liquidity, focusing on the Japanese language’s unique structure, which does not have a strict ordering system. The study documents a nonlinear, two-dimensional ordered position effects of Japanese real estate investment trusts (J-REITs) names on stock liquidity. We also find weak evidence that the length of company names matters to stock liquidity but is of secondary importance and works only through the ordered position effect. Our results cannot be fully explained by the traditional factors of stock liquidity, such as firm size, age, leverage, and volatility. Nor can they be fully explained by the differences in ownership structure or the main bank (or Keiretsu) effect. Given the relative homogeneity of investment and regulatory constraints, our results are unlikely to be driven by cross-sectional heterogeneity of investment styles or payout policy. Our findings are consistent with the notion that investors are subject to cognitive biases.

Your mileage may vary: Have road-fuel demand elasticities changed over time in middle-income countries?

This paper determines whether road-fuel (gasoline plus diesel) income and price elasticities have changed over time in middle-income countries. To do so, the paper considers a balanced panel of 26 countries that spans 1990–2019. Also, the paper employs two methods that fully allow for cross-sectional heterogeneity, but vary to the extent that they allow for temporal heterogeneity: rolling window, mean group regressions and mean observation OLS, which estimates coefficients for each cross-section and each time period. While the elasticities demonstrate some temporal heterogeneity, such variances are less pronounced than the corresponding country-level heterogeneity. At any point in time, for middle-income countries, the average road-fuel income elasticity is between 1 and 0.8, and the average road-fuel price elasticity is very near −0.2. Lastly, we find no strong evidence that road-fuel demand has become saturated or that efficiency improvements have made consumers less price sensitive in middle-income countries.

Revisiting the bank lending channel in Turkey under the unconventional monetary policy framework

This paper provides empirical evidence regarding the bank lending channel under Turkey's unconventional monetary policy framework. Towards this end, the impact of changes in monetary policy stance on bank credit growth is investigated using a dynamic panel data modelling approach between 2011 and 2019. The empirical results reveal cross-sectional heterogeneity in the loan supply of Turkish banks following a change in monetary policy, which implies an operative bank lending channel in the post-2010 period of the policy mix. Small, liquidity-constrained, and inadequately capitalized banks tend to experience sharper contractions in their lending during monetary policy tightening episodes. Besides, in terms of bank-specific characteristics, the findings demonstrate that larger bank size and capital is associated with a higher loan supply. On the contrary, liquidity is found to harm bank lending.

Do Multi-Market Institutions and Renewable Energy Matter for Sustainable Development: A Panel Data Investigation.

This paper measures the impact of multi-market institutions, renewable energy consumption, and infrastructure on sustainable development in 76 selected countries over the period 2000–2015. To this end, we applied a dynamic Ordinary Least Square method with fixed effects, which has the advantage of further addressing cross-section heterogeneity in the sample. Our findings contribute two significant findings to the literature. First, we point to the importance of multi-market institutions in driving sustainable development. Second, we find that renewable energy, economic and social infrastructure can boost sustainable development, while financial infrastructure has a reverse effect. This finding is useful to target the most effective drivers for sustainable development.

Retail investor attention and corporate green innovation: Evidence from China

This paper investigates whether retail investor attention promotes or inhibits corporate green innovation. Using Chinese nonfinancial public listed firms from 2011 to 2020, we find that retail investor attention significantly positively impacts corporate green innovation. This finding still holds after a series of robustness tests for possible endogeneity concerns, alternative explanatory variables, and regression methods. We further verify that retail investor attention increases corporate green innovation by increasing information transparency, alleviating financing constraints and deterring agency costs. Cross-sectional heterogeneity analysis further supports our channel test, in which our results are pronounced for firms with less information asymmetry, higher reputation capital and better corporate governance characteristics. Our results shed essential insight into sustainable and green growth from a micro enterprise perspective in the digital economic era.

The Unintended Consequences of Employer Credit Check Bans for Labor Markets

Abstract Over the past fifteen years, eleven states have restricted employers' access to the credit reports of job applicants. We estimate that county-level job vacancies have fallen by 5.5% in occupations affected by these laws relative to exempt occupations in the same counties and national-level vacancies for the same occupations. Cross-sectional heterogeneity suggests that employers use credit reports as signals of a worker's ability to perform the job: vacancies fall more in counties with a large share of subprime residents and less for occupations with other commonly available signals. Vacancies fall most for occupations involving routine tasks, suggesting that credit reports contain information relevant for these types of jobs.

Capital Account Openness and Financial Stability in Asian Emerging Markets

Post the Global Financial Crisis (GFC) of 2008, there has been an increased focus on financial stability along with the growth objectives. The role of capital flow measures like capital controls and macroprudential regulations has gained prominence in increasing the resilience of the financial system of an economy. In this context, this paper examines the ramification of capital account openness on the financial stability indicators with controls for macroeconomic fundamentals, for the Asian Emerging Markets using the annual data of seven economies from 1980 to 2019. The methodology in the paper employs panel data cointegration techniques along with Augmented Mean Group (AMG) estimation to control for cross-sectional dependence, cross-sectional heterogeneity, and nonstationarity. The results indicate that capital account openness and trade openness increase financial instability in the economy while global risk shows mixed results. The economic development of the country, proxied by the size of the economy has a mitigating effect by reducing volatility in the financial sector.

The Real Effects of Judicial Enforcement

This article shows that judicial enforcement has substantial effects on firms’ decisions with regard to their employment policies. To establish causality, I exploit a reorganization of the court districts in Italy involving judicial district mergers as a shock to court productivity. I find that an improvement in enforcement, as measured by a reduction in average trial length, has a large, positive effect on firm employment. The cross-sectional heterogeneity of the results suggests that stronger enforcement reduces financing constraints, boosting employment as a result, especially in firms characterized by higher complementarity between labor and capital. Moreover, in the presence of stronger enforcement, firms can raise more debt to dampen the impact of negative shocks and, in this way, reduce employment fluctuations. Consistent with this result, worker-level evidence shows that strong enforcement reduces the likelihood of unemployment.

Monetary policy, investment and firm heterogeneity

This paper provides new evidence on the channels of monetary policy transmission combining 9 million observations on firm level investment and high-frequency identified monetary policy shocks. We show that the reaction of firms’ investment to a monetary policy shock is heterogeneous along dimensions that correspond to the two main channels of monetary policy transmission. First, we show that young firms are more sensitive to monetary policy shocks and that high leverage amplifies the effects, supporting the existence of a credit channel of monetary policy. Second, we document large cross-sectional heterogeneity related to the industry the firm operates in. We find that firms producing durable goods react more than others, which is consistent with traditional interest rate channel effects of monetary policy. Furthermore, this sectoral effect is longer lived. In line with the demand effects of the interest rate channel, we also provide evidence that sales growth of durables producing firms reacts stronger to a monetary policy shock.

Obesity and labour market outcomes in Italy: a dynamic panel data evidence with correlated random effects.

This paper investigates the effects of obesity, socio-economic variables, and individual-specific factors on work productivity across Italian regions. A dynamic panel data with correlated random effects is used to jointly deal with incidental parameters, endogeneity issues, and functional forms of misspecification. Methodologically, a hierarchical semiparametric Bayesian approach is involved in shrinking high dimensional model classes, and then obtaining a subset of potential predictors affecting outcomes. Monte Carlo designs are addressed to construct exact posterior distributions and then perform accurate forecasts. Cross-sectional Heterogeneity is modelled nonparametrically allowing for correlation between heterogeneous parameters and initial conditions as well as individual-specific regressors. Prevention policies and strategies to handle health and labour market prospects are also discussed.

Natural Resource Dependence, Corruption, and Tax Revenue Mobilization

This paper explores the dynamic interactions between natural resource dependence, corruption, and tax revenue mobilization worldwide. The empirical analysis used a cross-section augmented autoregressive distributed lag (CS-ARDL) approach that accounts for time dynamics, cross-sectional heterogeneity, and cross-sectional dependence. The results show that the interaction between natural resource dependence, corruption, and tax revenue mobilization is complex and depends on the type of tax revenue. For example, reducing corruption stimulates non-resource tax revenue mobilization compared to total tax revenue; however, tax revenue mobilization is sometimes a source of corruption and evasion of natural resource rents. The results suggest that tax administration institutions need to be strengthened to limit predatory and rent-seeking behavior.

Impact of Remittances on Economic Growth: Empirical Evidence from South-East European Countries

AbstractSouth-East European (SEE) countries are experiencing high emigration, resulting in a significant increase in remittance inflows, exceeding FDI flows. Today the most important challenge facing SEE countries is how to grow at a higher speed to achieve faster economic convergence with the EU. The objective of the paper is to empirically examine the relevance of remittances as a factor of economic growth, using quarterly balanced panel data set of six SEE countries: Albania, Bosnia and Herzegovina, Croatia, Montenegro, the Republic of North Macedonia, and Serbia (SEE6) over 2008q1-2020q2. Panel regression with the fixed-effects model is employed to account for potential cross-section heterogeneity. This study provides original econometric evidence that remittances have a significant positive impact on economic growth in our panel of SEE6. Those results will be useful both to scholars and policymakers in the process of the creation of policies that will direct remittances into investments in the economy.

Default risk premium and asset prices

We estimate a standard structural model of credit risk to draw insights about the premium demanded by investors for bearing default risk, using data on credit default swaps and market capitalization. We pin down the daily market value of assets for a set of non-financial firms and uncover cross-sectional heterogeneity in terms of the magnitude and time variation of the premium. By exploring the link between asset and default risk premia, we show that this heterogeneity closely depends on the relationship between the firm-specific market value of the assets and the business cycle.

Green energy, non-renewable energy, financial development and economic growth with carbon footprint: heterogeneous panel evidence from cross-country

This study examines the relationship between green energy, non-renewable energy, financial development, and economic growth with carbon footprint by using panel data from 63 emerging and developed economies for the time period from 1990 to 2020. The study utilises second-generation panel data econometrics techniques to investigate cross-section independence and adjust for cross-section heterogeneity. The studies also used the CIPS and CADF unit root tests, Wester Lund bootstrap cointegration techniques, and AMG and CCEMG heterogeneous panel causality techniques. The findings show that, over the long run, all variables are cointegrated. Additionally, the data indicate that non-renewable energy consumption leads to carbon footprint, whereas green energy reduces environmental degradation and supports the reduction of environmental hazards. Likewise, financial development has a considerable negative effect on environmental degradation. A statistically significant bidirectional correlation is found between green energy, nonrenewable energy, financial development, economic growth, and carbon footprint according to the Dumitrescu-Hurlin causality test. Finally, according to the findings of the study, the economies that were examined should use more green energy in order to reduce their carbon footprint.

Risk Price Variation: The Missing Half of Empirical Asset Pricing

Abstract Equal compensation across assets for the same risk exposures is a bedrock of asset pricing theory and empirics. Yet real-world frictions can violate this equality and create apparently high Sharpe ratio opportunities. We develop new methods for asset pricing with cross-sectional heterogeneity in compensation for risk. We extend k-means clustering to group assets by risk prices and introduce a formal test for whether differences in risk premiums across market segments are too large to occur by chance. We find significant evidence of cross-sectional variation in risk prices for almost all combinations of test assets, factor models, and time periods considered.

Environmental Kuznets curve for CO2 emissions in Baltic countries: an empirical investigation

Recognizing the factors responsible for the gradual increase in greenhouse gas [e.g. carbon dioxide (CO2)] emissions is crucial to reduce the detrimental consequences on environmental sustainability and human life. Accordingly, spotting the sectors which contribute the most to CO2 emissions and dampen economic growth have become one of the major concerns for policymakers around the globe. Against this background, this paper examines the nexus between economic growth and CO2 emissions in three Baltic countries namely Estonia, Latvia and Lithuania. Thus, the study basically checks the validity of the environmental Kuznets curve (EKC) hypothesis by taking into account the role of energy consumption and financial development over the period of 1990–2018. This type of study is highly important for the region in order to comply with the commitments of the Paris Agreement and Sustainable Development Goals of the United Nations. The study first employs appropriate testing procedures and second-generation panel data methods to account for cross-sectional dependency and slope heterogeneity among countries. Applying unit roots and cointegration tests, the study then employed different mean group estimation models and heterogeneous panel causality methods suitable for cross-sectionally dependent and heterogeneous panels. The results of the econometric analyses reveal that the inverted U-shaped EKC hypothesis does not hold in the Baltic countries. But the pollution haven hypothesis is evidenced to hold for these nations. By boosting the CO2 emissions figures, again, the study also revealed that higher levels of energy consumption exhibit adverse environmental consequences. Financial development is found to be effective in explaining the variations in the CO2 emission figures of the selected countries as well. Causality test results confirm bi-directional causality between economic growth and CO2 emissions, energy use and CO2 emissions, CO2 emissions and financial development, energy use and economic growth as well as between energy use and financial development. Furthermore, country-specific impacts are found to be similar to the corresponding panel estimates. Consistent with the findings, the study finally puts forward some policy-level suggestions. Accordingly, it is recommended that the Baltic countries need to move away from fossil-fuel dependent energy consumption growth policies to mitigate environmental degradation.

Frontiers: Impact of Stay-at-Home-Orders and Cost-of-Living on Stimulus Response: Evidence from the CARES Act

During the 2020 COVID-19 epidemic, the U.S. Congress passed the CARES Act that (among other measures) provides direct payments to households. Using a large debit cards database, we analyze consumer expenditures following the stimulus payments. We observe zip code level daily transactions (approximately 12 million cards) before and immediately following the disbursements of stimulus checks. Empirical analysis exploits geographical variation in timing of federal deposits to identify marginal propensity to consume (MPC) for stimulus payments. We estimate between 0.29 (excluding banking) and 0.51 (all spend) of the rebate is spent within a few days of receipt. We find large cross-sectional heterogeneity with MPC estimates that are three times higher in magnitude in the most densely populated urban areas with higher cost-of-living. In areas with more restricted movement during the pandemic (as measured by Google workplace mobility), MPC estimates are approximately 60% higher. We reanalyze data from previous fiscal initiatives (2001 tax rebates and the 2008 fiscal stimulus) and find similar geographical differences. Collectively our results highlight an important shortcoming in fiscal policies that ignore local environment, particularly cross-sectional differences in cost-of-living across the United States.

Credit availability and classification shifting: based on the quasi-natural experiment of the bank lending interest rate ceiling deregulation

ABSTRACT Based on the exogenous shock of the bank lending interest rate ceiling deregulation in China, this paper uses a difference-in-differences model and studies how credit availability affects classification shifting from the perspective of formal debt contract formation. We find that high-risk firms’ classification shifting degree is higher after the bank lending interest rate ceiling deregulation. Cross-sectional heterogeneity tests show that the impact of the deregulation on classification shifting is stronger when the level of financing constraints is higher, the diversity of financing channels is lower, the bank’s need for information is higher, and the bank’s monitoring is higher. Mechanism tests further show that the deregulation enables high-risk firms to increase borrowing through classification shifting. We use the unique setting of China interest rate liberalisation to scientifically identify the debt financing motivation for classification shifting. This study expands and enriches the institutional determinants of accounting information production.