Presence Of Structural Breaks Research Articles

Systematic Risk Asymmetry of the American Real Estate Securities: Some New Econometric Evidences

In this paper we observe an increase of the systematic risk of the American real estate securities in the year 2007 which go back to the initial values in the year 2009. At the same time we observe the possible presence of structural breaks. In order to evaluate the systematic risk we chose the Fama and French three factor model and studied the relationship between the extra-return of the REIT index, used as a proxy of American real estate securities and the extra return of the S&P 500 index represented by the market portfolio return. The results confirm the presence of an “Asymmetric Beta Puzzle” in agreement with previous studies. At the same time the results show that whereas in the past the REIT securities were considered to be conservative securities, in the year of the subprime crisis, they behaved as speculative one. REIT securities in particular have amplified and almost doubled the variations of the market risk premium.

Financial Development and Income Inequality: Is There Any Financial Kuznets Curve in Iran?

This paper deals with the investigation of the relationship between financial development and income inequality in case of Iran. In doing so, we have applied the ARDL bounds testing approach to examine the long-run relationship in the presence of structural break in the series. The unit root properties have been tested by applying Zivot and Andrews (in J Bus Econ Stat 10:251–270, 1992) and Clemente et al. (in Econ Lett 59, 175–182, 1998) structural break tests. The VECM Granger causality approach is used to detect the direction of the causal relationship between financial development and income inequality. Moreover, Greenwood–Jovanovich (GJ) hypothesis has also been tested for Iranian economy. Our results confirm the long run relationship between the variables. Furthermore, financial development reduces income inequality. Economic growth worsens income inequality, but inflation and globalization improve income distribution. Finally, GJ hypothesis is found as well as U-shaped relationship between globalization and income inequality in case of Iran. This study might provide new insights for policy makers to reduce income inequality by making economic growth more fruitful for poor segment of population and directing financial sector to provide access to financial resources of poor individuals at cheaper cost.

Structural Breaks in Mortality Models: An International Comparison

In recent years the issue of life expectancy has become of upmost importance to pension providers, insurance companies and government bodies in the developed world. Significant and consistent improvements in mortality rates and hence life expectancy have led to unprecedented increases in the cost of providing for older ages. This has resulted in an explosion of stochastic mortality models forecasting trends in mortality data in order to anticipate future life expectancy and hence quantify the costs of providing for future ageing populations. Many stochastic models of mortality rates identify linear trends in mortality rates by time and forecast these trends into the future using standard statistical methods. These approaches rely on the assumption that the direction of the linear trend will not change in the future, i.e. that structural breaks in the trend do not exist or do not have a significant impact on the mortality forecasts. Recent literature has started to question this assumption. In this paper we carry out a comprehensive investigation of the presence or otherwise of structural breaks in a selection of leading mortality models using data from 30 countries and for both males and females. We aim to identify how widespread the issue of structural breaks is in these types of models and hence comment on the validity of using such time series models in forecasting mortality rates. We find that structural breaks are present in a substantial (but not majority) of cases. Specifically, we find that structural breaks are more prevalent in male data than in female data and that the introduction of additional period factors in the model leads to a reduction in the presence of structural breaks in the main period effect. Where there is a structural break present allowing for it will produce significantly different forecasts and we conclude that the use of time series extrapolative models in forecasting mortality rates must be approached with caution.

Testing Long Memory in the Presence of Structural Breaks: An Application to Regional and National Housing Markets

We use parametric and semi-parametric methods to explore the effects of structural breaks on long memory processes in nine US regional and national housing prices over the period from January 1991 to February 2014. The results reveal multiple structural breaks and differential break points across regions. The regional break points do not coincide with the national break suggesting a spatial pattern of the underlying determinants of regional housing prices. We find long memory in regional housing prices using the entire sample period, but the results are generally reversed in sub-samples (regimes) that incorporate structural breaks. Our evidence suggests that failure to account for structural breaks when testing for long memory can lead to incorrect inferences. The results, which proved robust to model specifications, have important implications for policy prescriptions, for market efficiency, and for the integration of regional housing markets.

An Econometric Analysis of Residential Electricity Demand in Ghana

The study examines the short- and long-run elasticities of residential demand for electricity in Ghana from 1970 to 2010. It employed a combinations of methodologies, namely, the autoregressive distributive lag bound, dynamic ordinary least squares (DOLS) and the fully modified ordinary least squares (FMOLS). Generally, the series indicated the presence of structural breaks and obtained stationarity after the first differencing and were cointegrated. The ARDL results revealed that both the long- and short-run elasticities were affected by structural breaks. The parameters were stable after correcting for structural breaks. Prominent among the policy recommendation, is the need to strengthen the effectiveness of educational agencies by changing behavioural attitude of residential consumers on the purchase of new and efficient appliance as well as enforce standards and labels. DOI: 10.5901/mjss.2014.v5n16p209

Economic growth, electricity consumption, urbanization and environmental degradation relationship in United Arab Emirates

The present study explores the relationship between economic growth, electricity consumption, urbanization and environmental degradation in case of United Arab Emirates (UAE). The study covers the quarter frequency data over the period of 1975–2011. We have applied the ARDL bounds testing approach to examine the long run relationship between the variables in the presence of structural breaks. The VECM Granger causality is applied to investigate the direction of causal relationship between the variables. Our empirical exercise reported the existence of cointegration among the series. Further, we found an inverted U-shaped relationship between economic growth and CO2 emissions i.e. economic growth raises energy emissions initially and declines it after a threshold point of income per capita (EKC exists). Electricity consumption declines CO2 emissions. The relationship between urbanization and CO2 emissions is positive. Exports seem to improve the environmental quality by lowering CO2 emissions. The causality analysis validates the feedback effect between CO2 emissions and electricity consumption. Economic growth and urbanization Granger cause CO2 emissions.

Transmission effects in the presence of structural breaks: Evidence from South-Eastern European countries

In this paper, we investigate the monetary transmission mechanism through interest rate and real effective exchange rate channels, for five South-Eastern European countries, namely Bulgaria, Croatia, Greece, Romania and Turkey. Recent unit root and cointegration techniques in the presence of structural breaks in the data are used in the analysis. The empirical results validate the existence of a valid long-run relationship, with parameter constancy, for each of the five sample countries. Additionally, the estimated impulse response functions regarding the monetary variables and the real effective exchange rate converge and follow a reasonable pattern in all cases.

The Long Run Relationship between Government Revenue and Expenditure in Iran: A Co integration Analysis in the Presence of Structural Breaks

The relationship between government revenue and government expenditure has been an important topic in public economics, given its relevance for policy especially with respect to the budget deficit. The main purpose of this paper is to examine the relationship between government revenue and expenditure in Iran using annual time series data spanning from 1978 to 2011. The Iranian economy has been subject to a multitude of structural changes and regime shifts during the sample period. Thus, time series properties of the data are first analysed by Zivot-Andrews (1992) model. The empirical results based on this model indicate that there is not enough evidence against the null hypothesis of unit roots for all of the variables under investigation. Taking into account the resulting endogenously determined structural breaks; the Saikkonen and Luetkephol (2000) cointegration approach is then employed to determine the long-run Relationship between Government Expenditure (GE) and Government Revenue(TR). This cointegration technique accommodates potential structural breaks that could undermine the existence of a long-run relationship between Government Expenditure and Government Revenue.

Multiple Structural Breaks and Unit Root Hypothesis: Evidence from India's Service Sector

This paper takes a comprehensive investigation into India’s service sector, the main growth engine for Indian economy over past two decades. First, the paper deals with the endogenous multiple structural break developed by Bai Perron (1998, 2003). Here both the models of pure and partial structural breaks propounded by Bai and Perron are considered. Second, using the Boyce method (1986) of estimating kinked exponential models for growth rate, the growth rates in different regimes are calculated. Third, the sequential t ratio estimation method due to Banerjee, Lumsdaine and Stock (1992), Zivot Andrews (1992) and extended by Lumsdaine and Pappel (1997) is used. This paper extends the Lumsdaine and Pappel (1997) methodology further to the consideration of three possible breaks in the series. In this paper, the data used is the components of subsector of services GDP and GDP at constant prices (at 2004-05 prices) at factor cost, for the entire period from 1950-51 to 2009-2010. Using the Bai Perron methodology, there is very little difference in the estimation of the break dates in the pure and the partial break tests. The period of growth therefore can be broadly categorized into four regimes, with the first break in India’s GDP is found at 1978-79. Using the Boyce method, the growth rates are highest mainly the third and fourth regime at the sectoral level and at the aggregate level. Using the methodology used by Banerjee Lumsdaine and Stock (1992) and the extended Lumsdaine Papell test (1997), the presence of unit root in the data, irrespective of the presence of structural break, cannot be negated. The paper concludes with broad four regimes of growth of India’s GDP and the corresponding growth of subsectors of services in its process.

Assessing the Historical Water Flow Allocation in the Lower Rio Grande between Mexico and the United States

Allocation of water resources between Mexico and the United States is a sensitive agenda in the lower Rio Grande, mainly in stages of hard drought. It has allowed surface water allocation practices to evolve and continue to be refined. This work applies the cointegration theory on historical data of water flows with the aim of showing empirical evidence on volumes of water running along the lower Rio Grande. The analysis suggests that misleading conclusions can be obtained about water distribution if the presence of structural breaks is not taken into account when assessing the fulfillment of contracts. The estimations indicate that water flows have not been constant over time; nevertheless, this pattern seems to respond to external events such as changes in the treaties, drought stages, and infrastructure conditions that possibly altered the water flows. After one structural break is controlled for, it is possible to determine that water volumes were according with the laws during 1933–2004.

Is gold investment a hedge against inflation in Pakistan? A co-integration and causality analysis in the presence of structural breaks

The last few years have witnessed overwhelming investments in the gold market. Numerous studies have discussed how investment in gold is a hedge against inflation. The current study investigates whether a gold investment is a hedge against inflation in case of Pakistan. In doing so, we have used time series data on gold prices; economic growth and inflation are used for the period of 1997Q1–2011Q4. The study has applied the ARDL bounds testing approach to co-integration for the long run, and innovative accounting approach (IAA) to examine the direction of causality in variables. Our findings reveal that “investment in gold is a good hedge against inflation” not only in the long-run but also in the short-run. The implications and applications of the study are discussed in detail.

The Contribution of Structural Break Models to Forecasting Macroeconomic Series

This paper compares the forecasting performance of models that have been proposed for forecasting in the presence of structural breaks. They differ in their treatment of the break process, the model applied in each regime and the out-of-sample probability of a break. In an extensive empirical evaluation, we demonstrate the presence of breaks and their importance for forecasting. We find no single model that consistently works best in the presence of breaks. In many cases, the formal modeling of the break process is important in achieving a good forecast performance. However, there are also many cases where rolling window forecasts perform well. Copyright © 2014 John Wiley & Sons, Ltd.

Disaggregate Energy Consumption Versus Economic Growth in Tunisia: Cointegration and Structural Break Analysis

This study investigates the causality between energy consumption and gross domestic product (GDP) in Tunisia for the period 1980–2012. The main contribution of the paper is to investigate empirically the relation of economic growth and energy consumption at both the aggregated and disaggregated levels regarding oil, natural gas, and electricity. We applied the unit root test and the cointegration approach in the presence of structural breaks. Using a vector error correction model specification, our results confirmed the existence of cointegration between the series (except for the case of electricity). The short-run dynamics of the interested variables are tested, indicating that there exists Granger causality running from oil consumption to GDP, but no Granger causality exists running in any direction between gas and GDP and between aggregate energy consumption and GDP. In the long run, our results imply that disaggregated energy consumption causes GDP and that there is a bidirectional causal relationship between aggregated energy consumption and GDP. On the other hand, GDP causes electricity consumption, using a VAR specification. Consequently, policy makers in Tunisia should give priority to the reconstruction of infrastructure development of the aggregated and disaggregated energy consumption as this would force the sustainable economic growth in Tunisia.

ASIAN REAL EXCHANGE RATES AND OIL PRICES: A COINTEGRATION ANALYSIS UNDER STRUCTURAL BREAKS

ABSTRACTWe examine the long‐run relationship between Asian real exchange rates and oil prices in the presence of structural breaks. The relevance of considering breaks is demonstrated by utilizing the Johansen et al. procedure that allows for up to two predetermined breaks. Using conventional tests that do not consider breaks reveals no evidence of cointegration. However, the Johansen et al. procedure clearly demonstrates the importance of considering breaks and provides strong support for a stable long‐run relationship in all but Japan and the Philippines. Moreover, the results suggest evidence of bi‐directional causality in Malaysia and Thailand, uni‐directional causality from exchange rates to oil prices in Korea, the Philippines, and Singapore, uni‐directional causality from oil prices to the exchange rate in Indonesia, and no evidence of causality in Japan.

Long-Horizon Returns Predictability and Structural Break in Stock Exchange of Thailand

This paper examines the effect of structural break in long-run mean of dividend-price ratio and its impact on long-horizon returns predictive regression in the Stock Exchange of Thailand from April 1975 to December 2010. The empirical results show that there exists a structural break in dividend-price ratio over the sample period confirmed by both cointegration tests that allow a presence of structural break (Gregory and Hansen (1996)) and Bai and Perron (1998)’s procedure. Once we adjust the dividend-price ratio series as suggested by Lettua and Nieuwerburgh (2008), the overall estimated coefficients from regression using adjusted dividend-price ratio are bigger as well as R-squared. Interestingly, the adjusted dividend-price ratio could be properly used to predict Thai stock returns within 3-year horizons, while the adjusted dividend-price ratio seems to better predict dividend growth in longer horizons, 4- and 5-year horizons in particular.

Persistence of volatility of sovereign credit risk in presence of structural breaks

The credit risk of a sovereign borrower is priced using bond spreads (BS) and credit default swaps (CDS). In this study, we investigate how structural breaks affect persistence of volatility of sovereign credit risk of seven countries. Using Kappa-1 and Kappa-2 tests, we identify multiple structural breaks in variance of both CDS and BS. Using exponential generalized autoregressive conditional heteroskedasticity model with and without structural breaks, we find that BS are more persistent than CDS hence informed trading takes place in sovereign bond market. The structural breaks are not only jointly significant in influencing volatility of sovereign credit but they reduce persistence of volatility and associated half-life of BS and CDS. The results have important implications on cost of borrowing of sovereigns, efficiency of CDS and BS markets as well as pricing of both credit risk measures.

Transmission Effects in the Presence of Structural Breaks: Evidence from South-Eastern European Countries

In this paper, we investigate the monetary transmission mechanism through interest rate and real effective exchange rate channels, for five South-Eastern European countries, namely Bulgaria, Croatia, Greece, Romania and Turkey. Recent unit root and cointegration techniques in the presence of structural breaks in the data are used in the analysis. The empirical results validate the existence of a valid long-run relationship, with parameter constancy, for each of the five sample countries. Additionally, the estimated impulse response functions regarding the monetary variables and the real effective exchange rate converge and follow a reasonable pattern in all cases.

10.5937/industrija42-4911 = Examination of purchasing power parity hypothesis: Evidence from unit root and cointegration analysis of dinar-euro and dinar-dollar exchange rates

The paper shows the results of an empirical analysis of the relative variant of purchasing power parity (PPP) for dinar-euro and dinar-dollar ex-change rates. The study was conducted for the period January 2007 - August 2013 and involved testing of the empirical foundation of strong and weak PPP forms. The first part of the strong PPP form testing comes down to examination of non-stationarity of dinar-euro and dinar-dollar real exchange rates by use of standard unit root tests (ADF, PP, KPSS, DF-GLS). Considering that the results obtained by different tests differ, the final conclusion about the non-stationarity of the series has been reached on the basis of their correlogram and ordinary and partial autocorrelation functions. Having in mind reduced power and bias of standard unit root tests in the presence of structural breaks, the initial findings have been checked by use of the LS (Lee and Strazicich) unit root test for models A and C with one and two structural breaks. The findings confirm the non-stationarity of the real exchange rates. Johansen and Engle-Granger cointegration tests have been used to test weak PPP form, so as to examine the presence of a long-run equilibrium relation-ship between the nominal exchange rates and inflation differentials, i.e. the corresponding price indices. The test results show that the series are not cointegrated. The non-stationarity of the real exchange rates and the lack of cointegration between the series indicate that PPP, regardless of the form, has no empirical support. Such results do not come as surprise considering that the analysis refers to a relatively short period of time, and the fact that even the strongest supporters of PPP have acknowledged that PPP is not a short-run relationship.

Business Activity And Environmental Degradation In Mexico

<p>This paper contributes to the literature by investigating the relationships between business activity, carbon dioxide (CO<sub>2</sub>) emissions, energy consumption in a developing country by taking into consideration the effects of ongoing industrialization and financial development. To do this, we introduce an innovative empirical approach based on ARDL bounds testing in the presence of structural breaks and apply it to Mexico over the period 1971-2011. We show strong evidence of cointegration between these variables. More interestingly, we find that energy is the long-run forcing variable to explain the Mexican business activity growth. This implies that energy savings policy may result in decreasing the national income or employment.</p>

Meeting Our DDStiny. A Disaggregated Euro Area Short Term Indicator Model to Forecast GDP (Y) Growth

In this paper we propose a new real-time forecasting model for euro area GDP growth, D€STINY, which attempts to bridge the existing gap in the literature between large- and small-scale dynamic factor models. By adopting a disaggregated modelling approach, D€STINY uses most of the information available for the euro area and the member countries (around 100 economic indicators), but without incurring in the nite sample problems of the large-scale methods, since all the estimated models are of a small scale. An empirical pseudo-real time application for the period 2004-2013 shows that D€STINY´s forecasting performance is clearly better than the standard alternative models and than the publicly available forecasts of other institutions. This is especially true for the period since the beginning of the crisis, which suggests that our approach may be more robust to periods of highly volatile data and to the possible presence of structural breaks in the sample.