Generalized Impulse Response Analysis Research Articles

Higher-order moment nexus between the US Dollar, crude oil, gold, and bitcoin

This paper explores the relationships between the US dollar, crude oil, gold, and bitcoin by taking into account the higher-moment linkages. Specifically, we construct robust estimators for the realized volatility, realized skewness, realized kurtosis, and jump, and study the causalities between the estimators through the Granger causality test. A generalized impulse response analysis identified by our quad-variate VAR specification is further implemented to uncover the lead-lag spillover effect across the variables of interest. We utilize high-frequency data for the chosen assets from January 3, 2016, to June 23, 2022, and observe various patterns of cross-market interconnection related to higher-order moments. These findings suggest that systematic risk factors must be considered while jointly modeling market linkages. Practical implications for investors and market regulators are also discussed.

Shadow rates as a measure of the monetary policy stance: Some international evidence

AbstractThis paper examines the usefulness of shadow rates to measure the monetary policy stance by comparing them to the official policy rates and those implied by three types of Taylor rules in both inflation‐targeting countries (the UK, Canada, Australia and New Zealand) and others that have only targeted inflation at times (the United States, Japan, the Euro Area and Switzerland) over the period from the early 1990s to December 2021. Shadow rates estimated from a dynamic factor model are shown to suggest a much looser policy stance than either the official policy rates or those implied by the Taylor rules, and generally to provide a more accurate picture of the monetary policy stance during both ZLB and non‐ZLB periods, since they reflect the full range of unconventional policy measures used by central banks. Furthermore, generalised impulse response analysis based on three alternative vector autoregression (VAR) models indicates that monetary shocks based on the shadow rates are more informative than those related to the official policy rates or to two‐ and three‐factor shadow rates, especially during the Global Financial Crisis and the recent COVID‐19 pandemic, when unconventional measures have been adopted. Finally, unconventional policy shocks seem to have less persistent effects on the economy in countries, which have adopted an inflation‐targeting regime.

The dynamic relationships between carbon prices and policy uncertainties

Using the generalized impulse response analysis, this study examines the nexus between the prices of crude oil, natural gas, and carbon emissions allowances in the EU carbon emissions trading system (CETS) and climate policy uncertainty (CPU) and global economic policy uncertainty (EPU). Additionally, we employ bootstrap rolling-window Granger causality tests to investigate the relationship between carbon price in China's national CETS and the US-specific EPU (USEPU). The results show that rising carbon and gas prices positively impact CPU, while a positive shift in oil price increases (decreases) the prices of carbon and gas (EPU). Furthermore, an increase in the CPU (EPU) positively impacts the gas price (increases the CPU but decreases the prices of carbon and oil). Finally, we find evidence of time-varied bi-directional causality between China's CETS and the USEPU. The above findings offer important implications for portfolio managers and policymakers.

The Nexus between Usd Parity and Trade Balance of BRICS-T Countries

Unlike many previous studies that focused on the link between trade balance and exchange rate parities through time series models, panel data models were applied mainly to BRICS-T countries. Comparative variances of trade balances against USD/local currency parity were revealed, and the most sensitive countries were Brazil, Turkey, and Russia. According to the panel EGLS analysis, the same parity had a non-significant negative impact on the trade balance in the short run. A significant long-term effect was found in the FMOLS analysis. Panel VAR and VECM generalized impulse response analysis revealed the negative impact of the USD/domestic currency parity on the trade balance of BRICS-T. The J-curve was observed briefly in the analyses.

WHO MOVES WESTERN EUROPE STOCK MARKETS?

This paper focuses on short- and long-term causal relationship on six major Stock Exchanges in Western Europe which actively traded, while also considering the interaction with US Stock Exchange. The observation period is separated into 3 sub-samples to represent the pre-crisis period, crisis period, and post-crisis period; while the author also distinguishes between local currency and USD denominations in stock closing price. Conversion of local currency in USD denominations shows an effect on increasing the inter-dependence shown in the pre-crisis observation while tested using Johansen test. In the whole-period sample, Belgium, Germany, and the US should be considered as dominant country to granger cause the other Western Europe. Long-term relationships were also tested by granger causality showing different characteristics in each sub-sample. Finally, Italy is the most sensitive country in the response to other Western European countries innovations while tested by Generalized Impulse Response Analysis.

Economic Policy Uncertainty Shocks and U.S. Overseas Travel

ABSTRACT Unlike previous studies, which find that economic policy uncertainty has an adverse impact on tourism flows, our results from Toda-Yamamoto long-run causality tests reveal the absence of Granger-causality from either U.S. or global economic policy uncertainty indices to U.S. overseas travel. Upon further investigation using generalized impulse response analysis, we discover that unexpected shocks to U.S. and global economic policy uncertainty indices reduce overseas travel with a greater magnitude and longer in duration for the case of a positive shock to global economic policy uncertainty.

Hisse Senedi Piyasasında Likidite ve Getiri Oynaklığı İlişkisi: Borsa İstanbul Örneği (The Relationship between Liquidity and Return Volatility in the Stock Market: The Case of Borsa İstanbul)

Purpose – The aim of this study is to empirically analyze the existence and direction of the relationship between liquidity and return volatility in Borsa Istanbul for the period of January 2008 - August 2019 using different liquidity measures. Design/methodology/approach – The relationship between liquidity level and return volatility is investigated under VAR model by using Granger (1969) causality test and generalized impulse response analysis. In this context, three liquidity measures are formed in order to represent liquidity: high-low range, Amihud illiquidity measure and volatility over volume ratio. Return volatility is estimated by GARCH (1,1) model. Findings – The findings reveal a bi-directional Granger causality relationship between all liquidity measures and the return volatility for Borsa Istanbul. Impulse response analyses show that a shock to the liquidity level increases the return volatility rapidly and this effect is long lasting. On the other hand, the findings suggest that a shock to return volatility reduces the liquidity level, but the response is less than the return volatility gives to the liquidity level. Discussion – The study supports firms and policy makers to take measures to increase liquidity. In this context, it would be useful to focus on the determinants of liquidity in the future studies.

Research on the coordinated development of green innovation, environmental pollution and energy consumption

the article from the environmental benefits of green innovation, respectively in green technology patent Numbers, unit gross industrial waste gas emissions, the unit GDP energy consumption as an index, based on the time series data of 1987-2017 multivariate VAR model, and through the granger causality test and generalized impulse response analysis and variance analysis method, to explore the green innovation and environment pollution and energy consumption in our country. The results show that green innovation can indeed improve environmental pollution and energy consumption to some extent, but due to the immature development of green innovation in China, its effect on improving environmental pollution and energy consumption is limited.

Response of scale and leverage of thermal power enterprises to renewable power enterprises in China

Power generation structures in China remain dominated by coal, despite the overwhelmingly favorable response to the poll: To resist or not to resist? Since the renewable power enterprises have to compete with thermal power enterprises in a limited incremental market, the thermal power enterprises have the motivation to develop strategic responses to protect their own interests and meet policy requirements. Previous studies on renewable energy policies may have underrated or ignored the possible responses of rivalry from thermal power enterprises to the positive shock to renewable power enterprises. Considering the adverse effects of this response on the development of renewable power enterprises, it is necessary to reveal the short-term competitive response of thermal power enterprises. This paper conducts generalized impulse response analysis to estimate the scale and leverage of the response of thermal power enterprises to the unexpected positive impact on renewable power enterprises’ scale and leverage using a VAR-based model. The results indicate that thermal power enterprises are more likely to adopt resistant strategies to the positive shock to the scale of renewable power enterprises in the first quarter, whether or not these responses are profitable. Particularly, scale strategy is preferential for thermal power enterprises, which may have negative effect on the development of renewable power enterprises and slowed renewable energy transition. We suggest that the policies should consider the possible scale expansion of thermal power enterprises and mitigate the competition between thermal and renewable energy enterprises.

Fed Rate Hikes and the Effects on Turkish Banking System. Could It Catch a Cold This Time?

Could a Fed rate hike affect Turkish banks' stock prices? Could it lead to an increase in the exposure to interest rate risk of Turkish banks, generating negative spillover effects? By means of a new data-rich environment IVAR model with both observables and latent factors for a panel of 18 countries (iDREAM), we estimate the spillover effects of a Fed rate hike on the Turkish economy through a generalized impulse response analysis with sign restrictions. Then, we use a Kalman filter to assess Turkish banks' stock log-returns sensitivities to both iDREAM variables (business cycle, prices, real effective exchange rate and monetary policy) and Nelson-Siegel latent factors of the Turkish interest rate term structure (so-called, level, slope and curvature). Finally, we investigate how the time-varying sensitivity depends on bank-level characteristics and bank-ownership over the period 2006-2017. Our preliminary findings show a strong relationship between Nelson-Siegel latent factors and banks' stock log-returns. In particular, a change in the level has significant effects on the Turkish banking sector, while the other latent factors of the yield curve have only modest effects. Moreover, banks with larger balance sheets, higher capital ratios and higher short-term debt or deposits are less sensitive to level changes.

A tale of two risks in the EMU sovereign debt markets

We introduce time-varying systematic yield risk (SYR) and systematic liquidity risk (SLR) measures for sovereign bond markets of the major European Monetary Union (EMU) country members. Using daily sovereign bond data, our analysis shows that trend components of both types of risk are strongly positively correlated. Vector auto-regression and generalized impulse response analysis reveal that shocks to the SLR has significant impact on SYR lasting up to 5 days, whereas shocks to the SYR has no significant impact on SLR. Since mid-2015, both risks are gradually increasing and as of 2018, they are at their highest levels over the last five years.

The Impact of Exchange Rate Movements on Trade Balance between Vietnam and Japan: J Curve Effect Test

The Impact of Exchange Rate Movements on Trade Balance between Vietnam and Japan: J Curve Effect Test

Modeling the Response of Gasoline-Crude Oil Price Crack Spread Macroeconomic Shocks

To date, considerable attention has been given to evaluating movements in crude oil and gasoline prices and in determining the significance of fundamental state variables that may influence these prices. This paper differs from the existing literature by identifying the response of the single-product gasoline-crude oil crack spread to unexpected changes in real output growth, inflation, the corporate default risk premium, and the stance of monetary policy utilizing the econometric techniques of vector autoregression and generalized impulse response analysis. The generalized impulse response method does not impose a priori restrictions as to the relative importance each of the state variables may play in the process of transmitting unexpected information from the macroeconomic variables to the crack spread. The results show the extent and the magnitude of the relationship between the crack spread being investigated and macroeconomic factors.

EMPIRICAL EXAMINATION OF THE TURKISH TRADE DEFICIT

The objective of this study is to investigate Turkey’s trade deficit through examining the dynamics of trade balance in order to understand which of the variables deteriorate this deficit and also in what manner these variables affect trade balance. In this respect, the real exchange rate effect on trade balance both in the short run and long run has been examined by using quarterly data set from 1992 to 2011 for Turkey. The Vector Error Correction Model (VECM) is applied with Johansen co-integration analysis, Granger causality test and generalized impulse response analysis. According to Johansen cointegration analysis, under trace and maximum eigenvalue tests variables found cointegrated which means there is long run relationship among variables. This result enables us to apply VECM.

Fossil fuel price uncertainty and feedstock edible oil prices: Evidence from MGARCH-M and VIRF analysis

This paper focuses on examining the impact of crude oil price volatility on the price changes of major edible oils (rapeseed, soybean, and sunflower), which are the main feedstock for the biodiesel industry in the European Union. For this purpose, a four-variate version of non-diagonal GARCH-in-mean model that allows for asymmetry in the variance–covariance matrix is used. An important conclusion that emerges from this study is that the crude oil price uncertainty appears to be responsible for a significant decline in price returns of major feedstock edible oils considered in this study. The volatility impulse response analyses support the conclusion that the conditional variances of both edible and crude oil and covariances between them are generally highly responsive to historical shock. However, the size of the impacts is mainly commodity specific. Finally, we investigate the causality from crude oil price volatility to edible oil prices and the effects of oil price shocks on edible oil prices by using the Granger causality test and generalized impulse response function analysis, respectively. The empirical results show that there is strong evidence of causality from crude oil price volatility to all edible oil prices under study, and generalized impulse response analysis shows that the edible oil markets significantly respond to the shocks in oil prices.

Investigation of Stock Market Integration in the Baltic Countries

Abstract Recent rapid development of the Baltic stock markets raises the question about stock market integration level in these countries. Some empirical aspects of the Baltic stock market integration have been analysed in the scientific literature, however, a comprehensive analysis on the Baltic stock market integration level is still missing. The aim of the paper is to assess the regional integration level of the Baltic stock markets. The research object is stock markets in the Baltic countries. The following research and statistical methods have been applied in this study: the systemic and comparative analysis of the scientific literature, Spearman’s correlation coefficient, dynamic conditional correlation generalized autoregressive conditional heteroskedasticity model, Granger causality test, generalized impulse response analysis, Johansen cointegration test, autoregressive distributed lag model and error correction model. The main findings of this empirical study are (a) all three Baltic stock markets are closely related markets, (b) however, the Latvian stock market is more isolated at the regional level comparing to other two Baltic stock markets (c) whereas Estonian and Lithuanian stock markets are more interrelated.

Does the relationship between small and large portfolios’ returns confirm the lead–lag effect? Evidence from the Athens Stock Exchange

This paper investigates whether lead–lag patterns exist between small and large size portfolios constructed from stocks traded in the Athens Stock Exchange (ASE). We examine this relationship in both the short-run (by using the correlation-based approach of Lo and MacKinlay, 1990 and the generalised impulse response analysis by Pesaran and Shin, 1996, 1998) and the long-run by employing the cointegration-based methodology of Kanas and Kouretas (2005). Furthermore, upon identifying that cointegration exists we then use the estimated error correction models (ECMs) to obtain out-of-sample forecasts of small-firm portfolio returns and it is shown that these ECMs have superior forecasting performance relative to models without the error correction terms. Therefore, we were able to provide a richer exploration of the lead–lag relationships than the one obtained by standard autocorrelation and cross-correlation analysis and vector autoregression analysis. The main finding of our analysis is that a lead–lag effect between small and large size portfolios was established in both the short-run and the long-run for the Athens equity market.

How interdependent are Eastern European economies and the Euro area?

Abstract This article investigates the interrelations between the Euro area and five Central and Eastern European economies. Using an open economy framework, we derive theoretical restrictions to be imposed on the cointegration space of a structural vector error correction model. We employ generalized impulse response analysis to assess the effects of shocks to output, interest rates, the exchange rate, and relative prices on both areas. The results show strong inter-regional spillovers of output shocks with the magnitude being similarly strong in both areas. Furthermore, we find multiplier effects in Central and Eastern Europe and some evidence for the European Central Bank's desire for price stability.

Improved GMM Estimation of Panel VAR Models

In this study, improved IV/GMM estimators for panel vector autoregressive models (VAR) are proposed by extending Hayakawa (2009b) (A Simple Efficient Instrumental Variable Estimator in Panel AR(p) Models When Both N and T Are Large,'' Econometric Theory, 25, 873-890) in which an alternative form of instruments is suggested. It is shown that the proposed IV estimator has the same asymptotic distribution as the bias-corrected fixed effects estimator of Hahn and Kuersteiner (2002) (Asymptotically Unbiased Inference for a Dynamic Panel Model with Fixed Effects When Both n and T Are Large,'' Econometrica, 70, 1639-1657) in the VAR(1) case when both N and T are large where N and T denote the sample sizes of cross section and time series, respectively. Since the proposed estimator is simply to change the form of instruments, it is very easy to implement in practice. As applications of the proposed estimators, we consider a panel Granger causality test and panel impulse response analysis in which the asymptotic distribution of generalized impulse response functions of Pesaran and Shin (1998) (Generalized Impulse Response Analysis in Linear Multivariate Models,'' Economics Letters, 58, 17-29) is newly derived. Monte Carlo simulation results show that the proposed estimators have comparable or better finite sample properties than the conventional IV/GMM estimators using instruments in levels for moderate or large T.

Capital flows and asset prices: Empirical evidence from emerging and developing economies

This paper aims at providing empirical evidence on the effect of capital flows on asset prices including its channel under different currency regimes. To this end, we focus, on 10 emerging and developing economies and rely on a generalized impulse response analysis under a vector auto-regression model. The main findings are as follows. Portfolio capital inflows have a significantly positive effect on stock prices in all sample economies except two transition economies, which implies that the direct channel from capital inflows into stock markets is at least working in sample economies regardless of their currency regimes. The indirect channel – the channel in which capital inflows raise share prices through an increase in domestic monetary base – works differently under different currency regimes: it works in the economies with peg regime through their intervention to foreign exchange markets, whereas the indirect channel seems to be shut down in those with floating regime probably by sterilizing the intervention.