Momentum Threshold Autoregressive Research Articles

Exchange Rate, Trade Balance And Growth In Nigeria: An Asymmetric Cointegration Analysis

Background and Statement of the Problem: It has been established that countries with high political and economic risks will draws investment funds away prospective investors from other countries, thus, such countries are at greater risks of loss of confidence in her currency stability and movement of capital to more stable economies. The aforementioned problems may discourage growth, macroeconomic stability, human capital development and institutional changes. Thus, there is the need to investigate the asymmetric cointegrating relationship, if any among the rate of exchange, trade balance and growth in Nigeria. Research Methodology and Data: With the primary assumption of the likelihood of an asymmetric adjustment process in the disequilibrium, the study deployed the M-TAR (Momentum - Threshold Autoregressive) and the TAR (Threshold Autoregressive) models. Annual data on imports, exports, domestic real income, world real income, domestic consumer price index and US consumer price index were used and this comes from the World Bank Development Indicators for the period 1960–2016 and all data are denominated in US-Dollars. Research Findings: The result shows that for the TAR model, cointegration exists among the three variables (economic growth, balance of trade and real exchange rate). An asymmetric adjustment disequilibrium process also exists. The point estimates suggest that the adjustment speed is lower when the balance of trade is worsens. The asymmetric ECM suggests that trade balance, real exchange rate and growth respond to disequilibrium and that the coefficient of domestic income and exchange rate are negative and that of foreign income is positive and statistically significant. Policy Implication: Government of Nigeria should concentrate her policy efforts towards import substitution strategy that will facilitate the production of currently imported goods locally, thereby creating sustainable employment and development of industrial manufacturing sector in Nigeria.

Has the South African Reserve Bank responded to equity returns since the sub-prime crisis? An asymmetric convergence approach

The global financial crisis of 2008 sparked an ongoing debate concerning the interlink between monetary policy and equity returns. This study contributes to the debate by examining whether the South African Reserve Bank (SARB) repo rate responds asymmetrically to changes in the returns on four equity indices on the Johannesburg Stock Exchange (JSE). Our empirical model is the momentum threshold autoregressive (MTAR) model which is applied to monthly data corresponding to periods before the financial crisis (2002:01-2008:08) and periods after the crisis (2008:08-2016:12). There are three main findings which can be derived from our empirical analysis. Firstly, we find a significantly negative relationship between equity prices to the repo rate before the crisis and this relationship turns insignificant in periods after the crisis. Secondly, we find that the reserve bank mainly monitored positive disturbances to equity indices before the crisis whereas after the crisis the reserve bank appears to be more responsive to negative equity deviations. Lastly, we find significant error correcting behaviour in periods before the crisis but not afterwards. Overall, our results indicate that the SARB appears to have been responsive to equity returns prior to the crisis but not for subsequent periods.

The value of the US dollar and its impact on oil prices: Evidence from a non-linear asymmetric cointegration approach

The dynamic relationship between the real oil price and the US real effective exchange rate (REER) is one of the most important relationships for policy practitioners. But, the literature has largely disagreed on the direction of causation in cases when cointegration was found. This paper addresses this issue and provides new evidence by using an approach that accounts for the potential of asymmetric cointegration and multiple structural breaks. This was done using Threshold Autoregressive (TAR) and Momentum TAR (MTAR) models. Some key findings emerge: first, the variables are cointegrated with significant asymmetric error-correction adjustments, and the US REER is found to be weakly exogenous in this process. When exogenous shocks cause disequilibrium, then the adjustment is slower in the case of when a downward adjustment of real oil prices is needed to regain equilibrium, compared to the case of when an upward adjustment is needed. This asymmetry could be driven by downward rigidity in oil prices. Second, it follows that long-run causation is unidirectional, going from the US REER to real oil prices, however, there is bidirectional causation in the short run. The estimations accounted for four structural breaks found in the sample. Overall findings imply that countries exporting to the US may lose competitiveness in the long run not only because of an increased conversion price but also through the upward pressure on oil prices. From a US perspective, increased competitiveness leads to increased real oil prices, which may temper the gains of oil intensive exports in the long run.

Detecting speculative bubbles under considerations of the sign asymmetry and size non-linearity: New international evidence

By using the logarithms of the dividend yields of stock markets of ten European countries and nine Pacific Rime economies, this paper tends to detect speculative bubbles under considerations of the sign asymmetry and size non-linearity, respectively. The sign asymmetry and size non-linearity are theoretically explained by the multiple bubbles (or periodically collapsing bubbles) and traction costs, respectively. To this end, we adopt the right-tailed unit root test (GSADF), the momentum threshold autoregressive (MTAR) and exponential smooth transition autoregressive (ESTAR) approaches in this study. Among the main results, it is found that the results of the GSADF provide statistically significant evidence for the existence of multiple bubbles of six European countries and Malaysia and Indonesia. Second, the presence of periodically collapsing bubbles is empirically verified by the MTAR test for the Czech Republic, New Zealand and Portugal, but not for all of the Pacific Rim economies considered in this study. Third, with the exception of Malaysia, the results of the ESTAR-type tests point to the rejection of the null hypothesis of a unit root against the alternative of a globally stationary ESTAR process for all countries.

Long-run equilibrium adjustment between inflation and stock market returns in South Africa: a nonlinear perspective

Following the global financial crisis of 2007-2008, the empirical investigation into financial variables affecting the performance of stock markets gained prominence in empirical research. This study investigates the asymmetric cointegration effects of inflation on the stock market returns for the Johannesburg Stock Exchange (JSE) using monthly data collected from 2003:01 to 2014:12. The empirical model used in the study is the momentum threshold autoregressive (MTAR) model. Indeed, our results reveal a negative, nonlinear cointegration relationship between inflation and stock returns in South Africa with causality running unidirectional from inflation to stock returns. The results further suggest that investors cannot hedge against rising inflation by investing in equity stocks listed on the JSE. Second, monetary policy, through the use of inflation targets, can provide a stable financial environment for the growth of equity markets in South Africa.

Long-run equilibrium adjustment between inflation and stock market returns in South Africa: a nonlinear perspective

Following the global financial crisis of 2007-2008, the empirical investigation into financial variables affecting the performance of stock markets has gained prominence in the field of research. This study becomes the first to investigate the asymmetric cointegration effects of inflation on the stock market returns for the Johannesburg Stock Exchange (JSE) using monthly data collected from 2003:01 to 2014:12. The empirical model used in the study is the recently developed momentum threshold autoregressive (MTAR) model. Indeed, our results advocate for a negative, nonlinear cointegration relationship between inflation and stock returns in South Africa with causality running uni-directional from inflation to stock returns. Our empirical results suggest two things. Firstly, investors cannot hedge against rising inflation by investing in equity stocks listed on the JSE. Secondly, monetary policy, through the use of inflation targets, can provide a stable financial environment for the growth of equity markets in South Africa.

Cointegration and spatial price transmission among wheat and wheat-flour markets in Afghanistan

ABSTRACTThis article examines cointegration and spatial price transmission among Afghan wheat and flour markets as well as their linkages with those of supplier countries and global markets. Unit root tests, consistent momentum threshold autoregressive (M-TAR) models and vector error correction models (asymmetric and symmetric) are employed to achieve research objectives. The results suggest that provincial wheat and flour markets may have a long-run relationship with principal market of Kabul. Afghan wheat and flour markets may also be cointegrated with their respective global, Kazakh and Pakistani markets. While provincial wheat markets might adjust to divergence from their long-run equilibrium with Kabul wheat market, some of the provincial flour markets may not respond to deviation from their long-run equilibrium with Kabul flour market. The speed of adjustment towards the long-run Afghan–Pakistani and Afghan–Kazakh equilibrium may be faster for Afghan flour than wheat markets. The equilibrium adjustment coefficients are generally small and market imperfections may exist, however. A shock in Kabul wheat and flour markets may have long-lasting effect on the respective provincial markets whereas a shock in global wheat and Pakistani, and Kazakh wheat and flour markets might have transitory effect on the corresponding Afghan markets.

Fiscal sustainability in the presence of structural breaks: Does overconfidence on resource exports hurt government’s ability to finance debt? Evidence from Nigeria

AbstractThe sustainability of the Nigerian fiscal deficit along with the role of the dynamics of government revenues and spending in adjusting the size of the deficit is examined using annual data from 1961 to 2014. After allowing for structural breaks, the study finds evidence of a cointegration relation between the government revenues and spending. The results did not indicate the presence of asymmetries in either the threshold autoregression or momentum threshold autoregression specifications of the country’s budgetary adjustment process. Interestingly, the size of the long run slope parameter appears to be significantly less than one, thus offering support for the soft budget strategy, which also suggests that the government might face difficulties in financing its debts in the long run. Lastly, the short run and long run Granger causality results, while providing evidence in support of the fiscal synchronization hypothesis, also raise some important issues, particularly on the strength of budget defi...

Interest rate volatility and retail interest rate pass-through in the case of the Malaysian economy

The purpose of this study is to explore the interest rate pass-through mechanism among three interest rates (discount rate, deposit rate and lending rate) in the Malaysian economy by conducting the asymmetric threshold autoregression (TAR) and momentum threshold autoregressive (MTAR) techniques and EC-EGARCH (1,1)-M model over the period January 1990 to July 2013. Moreover, we also examine the impact of the global financial crisis of 2008-2009 on these interest rates. The existence of asymmetric threshold cointegration relationships have been found between two interest rates in TAR and MTAR models, whereas only a symmetric cointegration relationship has been found between lending and discount rate in the MTAR model. The estimation of the ECEGARCH (1,1)-M model shows that the effect of interest rates volatility (deposit rate and lending rate) on the discount rate differs in this economy. Upward rigid adjustment has been recognized in both models. In addition, leverage effect has been found visible for both models. Further, the global financial crisis of 2008-2009 does not show any significant changes in the speed and size of the pass through of different interest rates. The responses of the discount rate, to both deposit and lending shocks, are found positive, while the lending shock is found decreasing after the 6th period by using the impulse response function.

Threshold cointegration and interest rate pass-through during the pre- and post-banking consolidation in Nigeria: are there asymmetries?

This paper empirically examines the interest rate pass-through in Nigeria using the cointegration and threshold adjustment suggested by Enders and Siklos. The focus is on the pass-through of the central bank policy rates to the commercial banks' lending rates during the pre- and post-bank consolidation in the country. The estimated results indicate that, changes in the policy rate are transmitted completely to loans rate in the long run during the pre-cosolidation but incomplete during the post-consolidation period. The results also show evidence for asymmetric momentum threshold autoregression models during the both the pre-and post-consolidation periods. However, while the estimated nonlinear error correction models exhibit downward rigidity in lending rates during the pre-consolidation, a contrary finding was obtained during the post-consolidation period, which indicates upward rigidity of loans rates. Finally, the study discusses the potential implication of these findings on the banking sector and offers direction for future policy.

Performance of unit-root tests for non linear unit-root and partial unit-root processes

ABSTRACTThis paper investigates the finite-sample performance of the augmented Dickey–Fuller (ADF), Phillips–Perron (PP), momentum threshold autoregressive (M-TAR), Kapetanios–Shin–Snell (KSS), and the inf-t unit-root tests. Simulation results show that the ADF and KSS tests have better size, whereas other tests generate severe size distortions when the date-generating processes are non linear unit-root processes. In general, with regard to the combination of test powers with test sizes, the ADF and KSS tests are comparatively better than the PP, M-TAR, and inf-t tests; moreover, the inf-t test exhibits the poorest performance even for larger sample sizes.

An investigation into the dynamic relationship between international and China’s crude oil prices

ABSTRACTThis article studies the dynamic relationship between international (WTI, Brent and Dubai) and domestic (Da Qing) crude oil prices in China using threshold cointegration method. We find evidence of a long-run equilibrium relationship between each pair of international and Da Qing oil prices, favouring the market integration hypothesis. We also estimate asymmetric adjustments under the momentum threshold autoregressive (M-TAR) specification in a TVECM, and the results show that adjustments to eliminate disequilibrium happen faster when oil price spread increases than when it decreases. The long-run and short-run Granger causality tests support the notion that China has influence on the international oil markets. The results imply that China should open up its domestic and imported oil markets, and also establish a well-functioning crude oil futures market, as they are essential for arbitrage and hedging strategies.

Are international economic and financial co-movements characterized by asymmetric co-integration?

Purpose – The recent economic crises have attracted attention to the issue of international equity co-movements and correlations. Using data from 1980 to 2010, the authors examine the international co-movements of both real economic activity, as reflected in industrial production and the gross domestic product (GDP), and financial activity, as reflected in equity market returns. While classic symmetric co-integration tests do not reject the hypothesis of no co-integration, the authors find evidence of asymmetric co-integration in these three variables between the USA and the rest of the Group of Seven (G7) countries. The momentum threshold autoregressive (M-TAR) model captures the nature of the asymmetry most effectively and is the most applicable model for adjustment to long-term equilibrium. This model suggests that the path of adjustment to long-run equilibrium is somewhat different when the price differential is decreasing than when it is increasing. These findings imply that the benefits of asset diversification for investors with a long horizon might be limited in scope. Design/methodology/approach – This work is based on the theory of integrated time series. The authors use symmetric and asymmetric co-integration tests to market indices, as well as to monthly industrial production statistics and quarterly data about the GDP. In line with the financial economic literature, the authors select the GDP as a proxy that reflects the real economy and share prices to mirror the financial sector of the economy. Because no monthly data exist about GDP, the authors use instead the industrial production. Both variables cover the period from January 1980 to June 2010. Findings – The overall findings demonstrate that the USA and the rest of the G7 countries are not symmetrically co-integrated with respect to the GDP. Indeed, they are asymmetrically co-integrated. These findings may explain the additional important result that the majority of equity markets are also asymmetrically co-integrated with the USA. Research limitations/implications – The co-movements of the equity markets and real economic activity imply that the benefits of asset diversification for investors with a long horizon might be limited in scope. In the short run, however, portfolio diversification can be more beneficial due to the short-term fluctuations that may derive from the asymmetric correction process. Originality/value – Prior research on co-movements has focused mainly on studying the correlations among international equity markets by analyzing conditional correlations or using symmetric co-integration methods; the authors test the existence of a long-term relationship between economic variables with respect to the USA and the rest of the G7 countries using a threshold co-integration model.

Asymmetric cointegration and causality effects between financial development and economic growth in South Africa

Purpose – The purpose of this paper is to investigate asymmetric cointegration and causality effects between financial development and economic growth for South African data spanning over the period of 1992-2013. Design/methodology/approach – This study makes the use of the momentum threshold autoregressive (M-TAR) approach which allows for threshold error-correction (TEC) modeling and Granger causality analysis between the variables. In carrying out an empirical analysis, the author uses six measures of the financial development variables against gross domestic per capita, that is, three measures which proxy banking activity and another three proxies for stock market development. Findings – The empirical results generally indicate an abrupt asymmetric cointegration relationship between banking activity and economic growth, on the one hand, and a smooth cointegration relationship between stock market activity and economic growth, on the other hand. Moreover, causality analysis generally reveals that while banking activity tends to Granger cause economic growth, stock market activity is, however, caused by economic growth increase. Originality/value – This study contributes to the literature by examining asymmetries in the cointegration and causality relations by using both banking and stock market proxies against economic growth for the South African economy.

Dynamic Links between Exchange Rates and Stock Prices in Malaysia: An Asymmetric Cointegration analysis

Abstract. The present article used a monthly data and applied Enders and Siklos (2001) asymmetric cointegration analysis to examine the impact of exchange rates on stock prices in Malaysia for the period of 1999-2014. The result suggests that variables were cointegrated based on Engle-granger two step technique. Moving to threshold auto regressive (TAR) and momentumthreshold auto regressive (M-TAR) the finding reveals that based on the latter variables were asymmetrically cointegrated as null hypothesis of no cointegration was rejected at 1% significance level based on Enders and Siklos (2001), while the former shows that variables do not have long-run relationship and the speed of adjustment is symmetric. This signifies that increase in the prices of shares in Malaysian stock market could lead to Malaysian Ringgit appreciation over other major global currencies. The stocks will become more expensive and discourage foreign investors’ participation in the market which inhibits the influx of stable foreign capital into Malaysian financial system. The implication is that regulators should ensure that adequate and efficient policies are put in place in order to keep the Ringgit exchange rates at optimal level so as to enhance the participation of foreign investors and improve market competitiveness. Keywords. Stock prices, Exchange rates, Asymmetric, Cointegration, Malaysia. JEL. F18, F21, F23, O47.

The Environmental Kuznets Curve in Poland – Evidence from Threshold Cointegration Analysis

The article aims to look at the long-run equilibrium relationship between per capita greenhouse gas emissions and per capita real GDP (EKC hypothesis) in an asymmetric framework using the non-linear threshold cointegration and error correction methodology for Polish economy during the period 2000 to 2012 (quarterly data). To test the robustness of the results the additional explanatory variable (per capita energy consumption) is added to the EKC model. The EKC hypothesis is tested using threshold autoregressive (TAR) and momentum threshold autoregressive (MTAR) cointegration method. Moreover, the threshold error correction model (TECM) is implemented in order to examine both the short-run and the long-run Granger-causal relationship between per capita greenhouse gas emissions and per capita income. We found strong evidence in favour of the EKC hypothesis for the Polish case and additionally we confirmed that adjustment of deviations toward the long-run equilibrium is asymmetric.

Is Price Transmission in the Indian Pulses Market Asymmetric?

Pulses form an integral part of the Indian diet. In the recent past, the domestic wholesale-retail price differential has risen rapidly. The retail prices continued to increase without responding to any changes at the wholesale level. The government enquiry into the same suspected collusive behaviour amongst the major traders. This article attempts to test for asymmetric wholesale to retail price transmission in India using the threshold autoregression and momentum threshold autoregression models for four commonly consumed pulses: arhar, moong, masur and urad. We find that the asymmetric price transmission does characterize the market for pulses. The wholesale and retail prices behave independent of each other in the short-run. The results support the hypothesis of imperfect agricultural markets which lends credence to the audit report of the Comptroller and Auditor General (CAG) of India.

The Tax-Spend Nexus in Nigeria: Evidence from Asymmetric Modeling

This paper examines the relationship government expenditures and revenues in Nigeria by reposing the implicit assumption of a symmetric adjustment process underlying the standard cointegration and error correction model. The study estimates an asymmetric error correction model using the momentum threshold autoregression framework over the period 1961–2012. First, the results suggest that revenues and expenditures are cointegrated and that the adjustment process of the budgetary disequilibrium is asymmetric. Second, in the short-run there is evidence of a bi-directional causal relationship between government revenues and expenditures. Third, the long-run results show that revenues and expenditures respond to budgetary disequilibrium. The asymmetric adjustment reveals that revenues respond only to a worsening budget, and government expenditure respond to a worsening budget than for an improving budget.

Are retail prices of ethanol, gasoline and natural gas in the midwest cointegrated? An asymmetric threshold cointegration analysis

This paper examines whether there is a long run equilibrium relationship, and the short run dynamic adjustment of such a relationship between the retail prices of selected transportation fuels in the Midwest. The study uses monthly data for the period October 2006 to December 2013. The analysis involves the nonlinear Threshold Autoregressive (TAR) and the Momentum Threshold Autoregressive (M-TAR) models of threshold cointegration, and the Momentum Threshold Vector Error Correction Models (M-TVECM), after pretesting for nonlinearities. The empirical results provide an unambiguous evidence of cointegration and asymmetric adjustments to the long run equilibrium relationship following deviations from the empirically estimated thresholds. There is robust empirical evidence of bi-directional Granger causality. There is empirical evidence that shocks to ethanol have lasting effects on gasoline prices than a corresponding shock to gasoline on ethanol prices. The empirical results have huge policy implications for the current debate on the future of the Renewable Fuel Standards (RFS) mandate in the United States.

Mortgage and Short-term Interest Rate Spread: The Case of New Zealand

This paper empirically investigates whether asymmetries exist in the New Zealand mortgage and short-term interest rate spread over the period 1988:7-2010:04. Using the threshold autoregressive (TAR) and the Momentum Threshold autoregressive (M-TAR) models, this study demonstrates that the mortgage premium adjusts to the threshold faster when the official cash rates fall relative to the mortgage rates, widening their difference, than when the official cash rates move in the opposite direction. First, the estimation results indicate that the mortgage premium experienced a structural break in January 1994, corresponding to the anticipation, as well as the implementation, of the 1994 Fiscal Responsibility Act. Second, estimation results reveal that the mortgage premium adjusts to the threshold faster when the official cash rates fall relative to the mortgage rates, widening their difference, than when the official cash rates move in the opposite direction. Third, the findings also reveal the bi-directional Granger causality between the mortgage rate and the official cash rate, indicating that the mortgage rate and the official cash rate affect each other’s movement.