Evidence Of Structural Break Research Articles

The impact of macroeconomic variables on stock market returns: Evidence from a sample of Arabic countries facing political and economic instability

The main purpose of this study is to determine the presence and timing of the structural breaks in the stock market returns and investigate their impact on the relationship between the macroeconomic variables (namely the inflation rate, the exchange rate, the oil prices) and the stock market returns of a sample of Arab countries facing political and economic instability, namely (Syria, Egypt, Tunisia and Bahrain), during the period (2010-2020). CUSUM test is performed in order to test the presence of structural breaks in stock market indexes. In case there is evidence of structural breaks, Bai and Perron Multiple Breakpoints test is used to identify points in time where significant changes may have occurred. The timing of structural breaks is used as a control variable to examine the impact of the macroeconomic variables on the stock market returns through applying Johansen cointegration test. The results provide evidence of the presence and timing of the structural breaks in the Arab stock markets under study and their role in impacting the relationship between the macroeconomic variables and stock market returns. The study concluded that the dynamics of how the macroeconomic variables affecting the stock market returns depends on the nature and timing of the structural break.

Reaffirming the Wheat Boom: New Evidence for Structural Breaks in Canadian Economic Growth

Reaffirming the Wheat Boom: New Evidence for Structural Breaks in Canadian Economic Growth

GEOPOLITICAL RISKS AND THE HIGH-FREQUENCY MOVEMENTS OF THE US TERM STRUCTURE OF INTEREST RATES

We use daily data for the period 25th November 1985 to 10th March 2020 to analyze the impact of newspapers-based measures of geopolitical risks (GPRs) on United States (US) Treasury securities by considering the level, slope and curvature factors derived from the term structure of interest rates of maturities covering 1 to 30 years. No evidence of predictability of the overall GPRs (or for threats and acts) is detected using linear causality tests. However, evidence of structural breaks and nonlinearity is provided by statistical tests performed on the linear model, which indicates that the Granger causality cannot be relied upon, as they are based on a misspecified framework. As a result, we use a data-driven approach, specifically a nonparametric causality-in-quantiles test, which is robust to misspecification due to regime changes and nonlinearity, to reconsider the predictive ability of the overall and decomposed GPRs on the three latent factors. Moreover, the zero lower bound situation, visible in our sample period, is captured by the lower quantiles, as this framework allows us to capture the entire conditional distribution of the three factors. Using this robust model, we find overwhelming evidence of causality from the GPRs, with relatively stronger effects from threats than acts, for the entire conditional distribution of the three factors, with higher impacts on medium- and long-run maturities, i.e., curvature and level factors, suggesting the predictability of the entire US term structure based on information contained in GPRs. Our results have important implications for academics, investors and policymakers.

Oil Prices and Exchange Rate Dynamics: How Important Is the Role of Asymmetry and Structural Breaks?

ABSTRACT In this paper, we model the relationship between oil price and exchange rate for Nigeria using monthly data from January 1997 to December 2019. The contributions of this paper are twofold: (i) we employ both the Symmetric ARDL and Asymmetric ARDL, and (ii) we also account for multiple structural changes in regression models. The following findings are apparent from our analyses. First, an increase in oil prices leads to depreciation of the Naira relative to the US dollar. Second, oil price asymmetries seem to matter both in the short run and in the long run. Third, the findings indicate evidence of structural breaks in the oil and exchange rate markets which coincides with the 2000 US invasion of Iraq, 2005 Asian demand soars, 2008 global financial crisis and 2015 Arab springs. Finally, we establish that disregarding the role of structural breaks and asymmetry will lead to serious biases and misleading results.

Dynamics of Volatility Spillovers with structural breaks in Indian Foreign exchange market

This research examines volatility spillovers with structural breaks in case of United States dollar (USD), Great Britain pound (GBP), Euro (EURO) and Japanese yen (JPY) of the Indian foreign exchange market from 3 January 1999 to 27 July 2018. First, the Bai and Perron test has been applied to know the structural break dates. We have found significant evidence of structural breaks in case of the respective currencies indicating one structural break in case of USD, two structural breaks in case of EURO, JPY and no structural break in case of GBP. Later on, the volatility has been checked applying the GARCH and EGARCH models on the total sample and the various sub-samples as defined by the structural breaks. In comparison to the full sample, the results of the model parameters estimates vary substantially across the various sub-samples.

Structural Breaks in U.S. Macroeconomic Time Series: A Bayesian Model Averaging Approach

We investigate the evidence for structural breaks in the parameters of autoregressive models of U.S. post-war macroeconomic time series. There is substantial model uncertainty associated with such models, including uncertainty related to lag selection, the number of structural changes, and the specific parameters that change at each break date. We develop a feasible approach to Bayesian Model Averaging (BMA), where the model space encompasses each of these sources of uncertainty. This BMA procedure performs very well in Monte Carlo simulations calibrated to match relevant macroeconomic time series. We then apply the BMA approach to a cross-section of U.S. macroeconomic variables measuring inflation, production growth, and labor market conditions, finding substantial evidence for structural breaks in all of these series. For most series there are multiple structural breaks detected. We find pervasive evidence for at least one, and often multiple, breaks in conditional variance parameters, and for price inflation series we find strong evidence of changes in persistence. We find little evidence for changes in trend growth rates of production series, or in the natural rate of unemployment. For most series there is substantial uncertainty along one or more dimension of model specification, calling into question the common practice of basing inference on a single selected structural break model.

Time series analysis of quarterly rainfall and temperature (1900–2012) in sub-Saharan African countries

In this paper, we examine the statistical properties of rainfall data and temperature in six sub-Saharan African countries in the western, eastern, and southern regions (Botswana, Ethiopia, Ghana, Nigeria, Uganda, and South Africa) using time series data spanning between 1900 and 2012. By using linear trends, seasonality, and long-range dependence models, in fractional or I(d) frameworks, the results first indicate that time trends are required in most cases to explain the time series properties of the climatic series. Evidence of anti-persistence (d 0) is found for the temperature data. Evidence of structural breaks are only found in the cases of Ethiopia, Ghana, and Uganda for the temperature data. With both series displaying significant evidence of seasonality and by working with the seasonally differenced data, the results show evidence of I(0) behavior or anti-persistence (d 0) for the temperature data. Testing the causality between the two variables, the results indicate evidence of causality in the two directions in all cases except for the case of the temperature on the rainfall in South Africa. The implication of the results obtained here is that erratic or constant rainfall is expected in Africa in the future while temperature is likely to continue to increase, and these subsequently lead to future warming experiences.

Time-varying causality between equity and currency returns in the United Kingdom: Evidence from over two centuries of data

We analyse the dynamics of the causal interaction between the stock and foreign exchange markets for the United Kingdom using monthly data going as far back as 1791. First, we consider static causality tests, yielding mixed results. Given the evidence of structural breaks in the relationship between equity and currency returns, we use next the Dynamic Conditional Correlation-Multivariate Generalised Autoregressive Conditional Heteroskedasticity time-varying tests for Granger causality. The time-varying testing strategy we implement allows us to detect whether any causal relationship exists at each point in time between stock price and exchange rates returns. We find overwhelming evidence of time-varying information spillovers between the equity and currency returns. We check the robustness of our findings by running the entire battery of tests for two emerging market economies, namely, India and South Africa starting in 1920 and 1910 respectively. On the whole, the United Kingdom results are comparable to those in India and South Africa. As such, our results encompass the fragmented findings from our static tests as well as those in the extant literature.

Random Walk and Structural Break in Exchange Rates

In this paper, our goal is to examine whether foreign exchange rate between the US and her largest trading partners (China, Canada, Mexico, Japan, Europe, South Korea, UK, India and Taiwan) follow random-walk or mean-reversion processes in the presence of sudden and gradual structural break. Our tests endogenously determined the structural swing and are more powerful than the traditional unit root tests. In all foreign exchange rates, we find strong evidence for structural breaks. Moreover, the results are consistent with the random-walk hypothesis for all trading partners except China. After due allowance is made for structural break, the Chinese yuan against the US dollar violate the random walk hypothesis.

Sanctions and the Russian stock market

The article presents the robust estimates of extreme movements and heavy-tailedness properties for Russian stock indices returns before and after sanctions were introduced. The obtained results show that almost for all sectoral indices there was a statistically significant increase in volatility. At the same time there is not enough evidence of structural breaks in heavy-tailedness, though some indications of heavier both right and left tails in the post-imposition period can be observed for some indices. However, we cannot with complete certainty directly link the increase in heavy-tailedness with the imposed sanctions. The latter to a considerable extent could be caused by higher country-specific risks due to geopolitical tensions as well as oil prices volatility. Whatever is the cause, any increases in heavy-tailedness can have grave consequences for corporate management, economic modeling and financial stability analysis.

Crude oil market and global financial crisis - structural break and market volatility analysis

This research paper aims to analyse the impact of the recent global financial crisis on the volatility of crude spot market in India. The data has been collected for the period 2005 to 2014 from Multi Commodity Exchange, India. This paper first uses Ramsay RESET test to check the linearity of the relationship between spot and futures natural log returns. For structural break analysis, tests like Chow test, Chow forecast test, recursive estimates of CUSUM test and CUSUM of squares test have been performed on the monthly data of spot and futures price return series. No evidence of structural break was found in any test except CUSUM of squares test. Using EGARCH model with a dummy, we found that there was no effect of the global financial crisis on the volatility of crude spot market. The possible reason for the volatility of crude in 2008 could be financialisation of commodity exchanges and excessive speculation in crude oil futures.

Impact of oil price fluctuations on Indian economy

AbstractIndian economy has been facing the twin issues of mounting trade imbalance and persisting inflation. Oil constitutes one‐third of the country's total imports and is considered to have wide‐ranging impact on its economy. This paper empirically examines how oil price fluctuations impact Indian economy through various channels, viz. real sector, monetary policy, external trade, exchange rate and investment. The results of cyclical correlation analysis suggest that oil is pro‐cyclical to output, price level, stock market, gold, interest rate and foreign exchange reserves, while it is counter‐cyclical to money supply, net exports and exchange rate. Also, it is found that oil Granger causes output, general price level and net exports. The study employs vector auto‐regression (VAR) analysis and examines variance decomposition to capture the linear inter‐dependencies among the variables. The structural stability tests demonstrate that there is no evidence of structural break in the VAR model, confirming the reliability of estimated relationships under the VAR model.

Business Fluctuations in Imperial Austria's Regions, 1867-1913: New Evidence

This paper presents annual estimates of total and per-capita GDP at 1910 prices for the regions of Imperial Austria from the origin of the Dual Monarchy (1867) to the eve of WWI (1913). The time paths of regional GDP are estimated from the yield of the tax on the transfer of real and financial property which is itself very highly correlated with the Schulze (2007) estimates of regional GDP for census years (1870, 1880, 1890, 1900, and 1910). The relative continuity or discontinuity of per-capita GDP growth partitions Austria's regions into two groups. Clear evidence of discontinuity (a "take-off") is present in Carniola, Carinthia, Salzburg, Styria, Littoral, Tyrol, and to some extent Moravia. In Lower and Upper Austria, Bohemia, Silesia, Galicia, Bukovina, and Dalmatia there is instead no evidence of structural break in their growth rates. Significant drops in the level of per-capita GDP do occur (as in Lower Austria and Bohemia after the 1873 financial crash) but have moderate effects on the growth of subsequent years. Regional (per-capita) inequality is also evaluated using standard measures. The coefficient of variation and Theil index follow a U-shaped curve: after a decline lasted about 15 years they both rise and point to, from ca. 1885, growing divergence.

Forecasting yield spreads under crisis-induced multiple breakpoints

We perform a real time, out-of-sample forecasting exercise concerning seven fixed income spreads sampled at weekly frequency over a sample that spans the US financial crisis. We compare the predictive accuracy obtained from univariate, mean-reverting models of spreads that ignore the evidence of structural breaks in correspondence of the crisis, with models that take estimated and exogenous break dates into account. We also benchmark these predictive performances to standard random walk models. We find little or no evidence that accounts for breaks in the conditional mean process of yield spreads that would have improved real time predictive accuracy. We speculate on the reasons of such failure and we find informal indications that poor estimation of the breakpoint and the higher variance characterizing the post-break period is responsible for our results.

Detection of anticipated structural changes in a rational expectations environment

When agents have rational expectations, anticipated changes in the structure of the economy have an immediate affect on their behaviour. In this article, we investigate the interplay between a linear rational expectation model with predictable structural changes and reduced-form evidence of structural breaks. In our study, we vary the length of time between the announcement and the implementation of an inflation target change. Using a model similar to Ireland (2007) and the method presented in Bai and Perron (1998) and Bai and Perron (2003) to estimate unknown structural breaks, Monte Carlo simulation results suggest that reduced-form evidence of structural breaks are broadly in line with what is predicted by forward-looking rational expectation models; that is, as the transition period increases, break estimates gradually move farther from the policy announcement date.

ASYMMETRY IN PRICE TRANSMISSION MECHANISM: THE CASE OF SLOVAK POTATO MARKET

This paper examines price transmission mechanism between farm and retail levels in vertical chain of potatoes. Time series analysis starting with cointegration approach is used to study price linkages between producer and consumer prices in potato market in Slovakia. We test for an existence of structural break in time series data (Gregory - Hansen test) in the observed period and allow for an existence of non-linear relationship between prices at various levels of vertical chain by using threshold autoregressive models. We found an evidence of structural break and existence of asymmetry in price transmission along the potato supply chain.

Productivity Effects on the Wage Premium of Mexican Maquiladoras

The wage premium between skilled and unskilled workers in Mexican maquiladoras has increased, from nearly 2 times in 1981 to nearly 4 or 5 times in 2006, depending on the sector. This increase favoring skilled workers is examined against relative labor supplies within a class of models estimated by dynamic panel methods. Adapting a conventional model of the skill premium to labor supply, we find strong productivity effects. Higher productivity at the maquiladora industry (assumed either exogenous or endogenous to the wage premium) or higher U.S. GDP per worker (exogenous to the industry) are shown to have positive effects on the wage premium. The elasticity of wages to relative labor supply is very stable, implying strong substitution of labor types. We find, however, evidence of structural breaks in the basic model around the start of the North American Free Trade Agreement in 1994 and 1995.

Recursive Cointegration Analysis of Purchasing Power Parity: An Application to Asian Countries

Previous studies have utilized conventional cointegration tests that are based on the assumption that the long-run purchasing power parity (PPP) relationship is stable over the sample period. This assumption can be misleading if there were significant economic and policy changes over the sample period. To allow for the possibility of instability in the long-run PPP relationship, we utilize recursive cointegration analysis to test for the stability of cointegrating ranks and parameters. The results indicate evidence of cointegration for Korea, Malaysia, and Singapore, and a short window for Thailand around the 1997/98 Asian crisis with no evidence of structural breaks in the cointegrating vectors. Evidence of turbulence is detected around the 1997/98 crisis, the 1985 Plaza Accord, and around 1978-1984. Longrun parameters appear to have been stable for Malaysia, the Philippines, and Singapore, whereas instable for Indonesia, Korea, and Thailand.

Oil prices and stock market in China: A sector analysis using panel cointegration with multiple breaks

This paper investigates the relationship between oil prices and the Chinese stock market at the sector level. In a panel cointegration and Granger causality framework, the major sectors in China are studied using data collected from July 2001 to December 2010. When the effects of cross-sectional dependence and multiple structural breaks are taken into account, the panel cointegration relationship between oil prices and stock prices is confirmed at the disaggregated sector level. The results indicate that there is some evidence of structural breaks in the interaction between oil prices and Chinese sectoral stocks. The long-run estimates suggest that the real oil price has a positive effect on sectoral stocks in the long run. The Granger causality tests demonstrate a unidirectional, short-run Granger causality relationship running from oil prices and sectoral stocks to the interest rate for 2001/07–2005/10. There is also a unidirectional, long-run Granger causality running from sectoral stocks to the interest rate for 2001/07–2005/10 and 2005/12–2007/06. However, the long-run Granger causality is bidirectional between oil prices, the interest rate and sectoral stocks for 2007/08–2008/11 and 2009/01–2010/12. Meanwhile, the short-run Granger causality is also bidirectional between the interest rate and oil prices.

Do structural breaks in exchange rate volatility matter? Evidence from Asia-Pacific currencies

Using the U.S. dollar exchange rate return series of three major Asia-Pacific currencies, this paper investigates the empirical relevance of structural breaks in exchange rate volatilities. We find significant evidence of structural breaks in the unconditional variances of all three exchange rate returns, implying unstable GARCH processes for these exchange rates. Various methods of accommodating structural breaks were considered when forecasting daily exchange rate volatility using GARCH models. In sharp contrast to previous evidence from currencies of developed countries, accommodating structural breaks, however, did not improve out-of-sample forecasts of exchange rate volatility, i.e., a simple GARCH(1,1) with expanding window model performed best in forecasting exchange rate volatilities in these emerging markets.