Presence Of Structural Breaks Research Articles

A long-memory analysis for the CBOE Brazil ETF volatility index

PurposeThe main goal of this paper is to investigate whether there is long-memory behavior in the CBOE Brazil ETF volatility index (named here VIXBR). As structural breaks may create a spurious long-range dependence, the presence of structural breaks is also gauged.Design/methodology/approachThe study considers the period from October 2011 to March 2021, using daily data. To test the long-memory behavior, three empirical approaches are adopted: GPH, ELW and robust GPH (RGPH) estimator. To estimate the structural break points adopted to date the subsamples, the ICSS algorithm is used.FindingsResults considering the total period (TP) and subsamples show that the breaks did not create a spurious long-memory behavior and together with the rolling estimation, reveal strong evidence of the long-range dependence in the CBOE Brazil ETF volatility index. The higher degree of persistent of the VIXBR series suggests an extended period of increased uncertainty that agents need consider when making their investment decision.Research limitations/implicationsAs possible extension of this study is to investigate the behavior of long memory and structural breaks for different frequencies (weekly, monthly, among others).Practical implicationsThe presence of long-range dependence in the CBOE Brazil ETF volatility index reveals that the past information is important for the predictability of risks, and therefore, can help to protect against market risks, which has important implications regarding the future decisions of economic agents (for example, policy makers and investors).Originality/valueBrazil is an emerging capital market (ECM) that has attracted a great deal of attention from investors and investment funds seeking to diversify its assets. This paper contributes to the empirical financial literature, by studying the long-memory behavior of the CBOE Brazil ETF volatility index, considering possible structural breaks. To the best of knowledge, this has not been done so far.

Tourism Development and Economic Growth in Southeast Asian Countries under the Presence of Structural Break: Panel Kink with GME Estimator

This study examines the nonlinear impact of tourism development on economic growth in Southeast Asian countries using the panel kink regression model. Due to the paucity of Southeast Asian data, we may face the overparameterization problem in our model. To deal with this problem, this study proposes the Generalized Maximum Entropy (GME) estimator to estimate the unknown parameters in this nonlinear model. Several important tourism development indicators consisting of the total international arrivals, international tourism expenditure, and tourism receipts are considered. In addition, we also consider the gross capital formation and real effective exchange rate as a control variable in our nonlinear model. Our findings show that the effect of international tourist arrivals on economic growth should be separated into two regimes, while other factors do not exhibit a nonlinear relationship with Southeast Asian economic growth. Thus, we construct the empirical model with the kink effect in the variable of international tourist arrivals. To confirm the performance of the GME estimator, we compare it to the ordinary least squares and the fixed effect estimators. According to the mean squared and root means squared errors, we find that our GME estimator performs better than the ordinary least squares and the fixed effect estimators. This indicates that GME estimation is an applicable method for estimating the nonlinear effect of tourism growth on economic growth. Our empirical results show that there are positive impacts of tourism growth on economic growth for regime 1 (low tourism demand) and regime 2 (high tourism demand) with the effect of the low tourist arrivals regime being relatively larger. We also find a positive influence of gross capital formation, real effective exchange rate, international tourism expenditure, and tourism receipts on Southeast Asian economic growth.

Fourier DF unit root test for R&D intensity of G7 countries

ABSTRACT According to the Schumpeterian endogenous growth theory, the efficacy of R&D is lowered by the proliferation of products. To be consistent with empirical data, the ratio between innovative activity and product variety (also called R&D intensity) must be stationary. From this perspective, our contribution investigates whether the R&D intensity series is stationary when structural breaks are considered. Our sample of G7 countries is examined over the period spanning from 1870 to 2016. Our results indicate that traditional unit root tests (ADF, DF-GLS and KPSS) conclude that the R&D intensity series are non-stationary, in contradiction with the Schumpeterian endogenous growth theory. The conclusions of these traditional unit root tests may be misleading, as they ignore the presence of structural breaks. Indeed, we use several types of Fourier Dickey-Fuller tests to consider the presence of structural breaks. In the Fourier Dickey-Fuller unit root tests using double frequency and fractional frequency, the R&D intensity is significantly stationary at least at the 5% level for Canada, France, Germany, Italy and Japan when a deterministic trend is included in the tests. Nevertheless, the R&D intensity is non-stationary for the US, even when we consider structural breaks.

Monetary pressure, inflation dynamics and structural shocks in Pakistan

The objective of the study was to analyze whether the changes in money supply can account for variations in inflation dynamics in the presence of structural breaks by using data for the period 1970-2019. Zivot Andrews (one break) and Lee and Strazicich (two breaks) unit root tests were used to detect the structural shocks. To determine the long run relationship in the presence of structural shocks, Gregory & Hansen (1996) Cointegration test was used. Results show a robust long-run relationship between inflation, money supply, interest rate, and output. The empirical evidence show that monetary pressure has a significant role in the inflation dynamics of Pakistan, especially in the presence of structural shocks. As a policy measure, a tight monetary policy with increasing interest rates should help reduce the growth of money supply and moderate the inflation dynamics in Pakistan.

Can gold hedge against inflation in the UAE? A nonlinear ARDL analysis in the presence of structural breaks

Purpose The purpose of this study is to explore the role of gold as a hedge against inflation in the case of the United Arab Emirates. Design/methodology/approach The study utilizes monthly data on the local sharia-compliant spot gold contract traded on the Dubai Gold and Commodity Exchange (DGCX) and the corresponding consumer price index series over the period December 2015 to January 2021. The econometric approach employed by the study involves a unit root testing procedure that allows the timing of significant breaks to be estimated. A cointegration analysis is then conducted using a nonlinear autoregressive distributed lag (NARDL) model, taking into consideration the presence of structural breaks in addition to short- and long-run asymmetries. Findings The results reveal that consumer and gold prices are cointegrated, which implies that investing in gold can hedge against inflation in the long run. No sufficient evidence, nonetheless, is found in support of the ability of gold to serve as a hedge against inflation in the short run. Originality/value The findings have several important policy implications for policymakers and investors that are further discussed in the study.

Measuring volatility persistence in leveraged loan markets in the presence of structural breaks

This paper examines volatility persistence in leverage loan market price series for Australia, Canada, Europe, Japan, Singapore, UK and USA in the presence of structural breaks. To the best of our knowledge, this is the first empirical study to examine volatility persistence in the leveraged loan markets. To this end, using fractional integration methods, the results indicate that both absolute and squared returns display long memory features, with orders of integration confirming the long memory hypothesis. However, after accounting for structural breaks, we find a reduction in the degree of persistence in the leveraged loan market. The evidence of persistence in volatility implies that market participants who want to make gains across trading scales need to factor the persistence properties of leveraged loan price series in their valuation and forecasting models since that will help improve long-term volatility market forecasts and optimal hedging decisions.

Price and volatility persistence of the US REITs market

This study revisits the issue of REITs market efficiency for the US having discovered two notable gaps. Noting the complexities, structural changes and nonlinearities in modern financial markets, we employ the fractional integration technique which performs better than other commonly used techniques in the presence of structural breaks, fractional integration, trend-stationarity and regime switching in time series. Summarizing our results, we find that the US REITs market is efficient in the overall sample. However, when the data are splitted, market efficiency only occurs in the pre-crisis period, but becomes less so during the crisis and post-crisis periods. In addition, evidence of mean reverting long-memory behavior is established for REITs volatility, although mean reversion is slower during and after the crisis. These results are robust to different data measurement and have crucial policy implications for potential investors and relevant policy makers.

International Financial Integration and Stock Market in Developing Countries

Objective - This study examines the relation between stock market capitalization and international financial integration for 23 developing countries during 1996 - 2018. Methodology/Technique - By using recently developed econometric panel techniques. The present paper takes into consideration cross section and structural breaks. Findings - Our findings show several interesting results. First, the existence of a long run relationship between the stock market and financial integration, particularly when private capital flows are included. Second, with the presence of structural breaks the result shows that international financial integration has a negative impact on stock market, which means that financial integration loses its explanatory power over the crisis period. Novelty - There is no applied study on the verification of the volatility of international capital flows (foreign direct investments and remittances) in the analysis of the relationship between international financial integration and stock markets. Type of Paper - Empirical Keywords: Cointegration, Cross-Section, International Financial Integration, Panel Unit Root, Structural Breaks, Stock Market. JEL Classification: C23, C51, C58, F02, F21, F24, G01.

The Impacts of Agricultural Trade on Economic Growth and Environmental Pollution: Evidence from Bangladesh Using ARDL in the Presence of Structural Breaks

Agricultural trade significantly promotes the economic boom in developing countries. Extensive traditional agricultural production methods have increased the pressure on the agricultural environment by expanding agricultural trade, which has attracted the attention of many scholars. This study aims to empirically examine the impacts of agricultural trade on economic growth and agricultural environmental pollution in Bangladesh from 1972 to 2019, using an Auto Regressive Distributed Lag (ARDL) model with a structural break to examine the long-run and short-run determinants of agricultural environmental pollution in Bangladesh. The ARDL bounds analysis methodology showed that it does not support the hypothesis that agricultural trade led to environmental pollution in the long-run. The results suggest a relationship between economic growth, energy, and FDI towards agricultural environmental pollution, indicating a positive long-run relationship. Furthermore, in the short run, agricultural trade indicates positive drivers towards agricultural environmental pollution. Therefore, it is recommended that the enhancement of trade liberalization policies should ensure cleaner technologies and products that could help reduce environmental pollution.

Drop‐in ready jet biofuel from carinata: A real options analysis of processing plant investments

AbstractA promising feedstock for large‐scale production of sustainable jet biofuel is the inedible oilseed Brassica carinata (referred to simply as “carinata”), but transitioning to large‐scale fuel production entails significant economic uncertainty and requires substantial up‐front capital requirements for biorefinery construction. Furthermore, for carinata and other feedstocks attempting to compete within the established fossil jet fuel market, historically volatile aviation fuel prices affect the economic feasibility and return of biorefinery investments. In this study, we assess the impact of jet fuel price volatility on the return on investment in a carinata biorefinery employing a real options analysis (ROA). The key advantage of ROA over traditional net present value (NPV) analysis is that it simultaneously assesses the optimal timing for investments and the impact of jet fuel price dynamics on the likelihood of positive economic returns from investments in processing plants. Given the nonstationary nature of jet fuel prices and the presence of structural breaks, the price series are modeled as a geometric Brownian motion. Taking into account the volatility of jet fuel price, the ROA price threshold for a profitable investment is 45% greater than the NPV threshold. The ROA model identifies the necessary market conditions for a profitable investment and highlights the importance of considering market price dynamics before making substantial capital investments in a carinata biorefinery.

Environmental Effects of Trade Openness in the Presence of Structural Breaks: New Insights from 5-ASEAN Developing Countries

Environmental Effects of Trade Openness in the Presence of Structural Breaks: New Insights from 5-ASEAN Developing Countries

Real Interest Rate Behaviour and Monetary Policy in Myanmar:Based on Financial Libralisation Hypothesis

McKinnon’s complementarity hypothesis articulates that money and physical capital complements each other instead of substituting under a repressed financial sector. In spite of various economic and financial reforms in Myanmar, the financial sector of Myanmar is lagging behind international standards. Thus, this study is designed to test McKinnon’s complementarity hypothesis in case of Myanmar. Time series studies has been analyzed for said purpose. This study not only determines unit root problem but also tests unit root problem in presence of structural break. Long run relationship is testified through bounds test in presence of structural break. Long run and short run estimates are determined in order to check McKinnon’s complementarity hypothesis in static and dynamic setting as bounds testing approach distinguish feature is to provide static long run estimates along with dynamic short run estimates. Moreover, this study applies innovative accounting approach to determine strength of casual relationship between variables of the study. Results of the study confirms McKinnon’s complementarity hypothesis in long run and no evidence is found in case of short run. Thus, it can be deduced that investment is restricted due to availability of finance rather than cost of capital in Myanmar.

Revisiting the Environmental Kuznets Curve Hypothesis in Pakistan

A number of studies have already determined the existence of inverted U-shaped environmental Kuznets curve in Pakistan however the role of structural breaks in determining the relationship is yet to be investigated. The objective of this study was to determine if the presence of possible structural breaks explain the existence of environmental Kuznets curve type relationship in Pakistan for the period 1980-2016 by using data of total energy consumption, Real GDP per capita, foreign direct investment and trade openness. For the analysis the study first used the conventional time series econometric methods to determine the order of integration and Cointegration in the model. Second; as it is evident from the literature that presence of structural break in the model can have a significant impact, so the study used the Zivot and Andrews unit root test with one structural break to determine the order of integration in the model and Gregory-Hansen -Cointegration method to determine the presence of structural break within Cointegration framework. The results of the study not only confirm the existence of environmental Kuznets curve in the model, it also confirms the presence of structural break in the model.

Non-linearities and persistence in US long-run interest rates

ABSTRACT This note examines the stochastic behaviour of US monthly 10-year government bond yields. Specifically, it estimates a fractional integration model suitable to capture both persistence and non-linearities, these being two important properties of interest rates. Two series are analysed, one from Bloomberg including end-of-the-month values over the period January 1962-August 2020, the other from the ECB reporting average monthly values over the period January 1900-August 2020. The estimation results indicate that both are highly persistent and exhibit non-linearities, the latter being more pronounced in the case of the ECB series. Also, there is no conclusive evidence of the presence of structural breaks.

Variable Selection and Forecasting in High Dimensional Linear Regressions with Structural Breaks

This paper is concerned with the problem of variable selection and forecasting in the presence of parameter instability. There are a number of approaches proposed for forecasting in the presence of breaks, including the use of rolling windows and exponential down-weighting. However, these studies start with a given model specification and do not consider the problem of variable selection, which is complicated by time variations in the effects of signal variables. In this study we investigate whether or not we should use weighted observations at the variable selection stage in the presence of structural breaks, particularly when the number of potential covariates is large. Amongst the extant variable selection approaches we focus on the recently developed One Covariate at a time Multiple Testing (OCMT) method. This procedure allows a natural distinction between the selection and forecasting stages. We establish three main theorems on selection, estimation post selection and in-sample fit. These theorems provide justification for using the full (not down-weighted) sample at the selection stage of OCMT and down-weighting of observations only at the forecasting stage (if needed). The benefits of the proposed method are illustrated by empirical applications to forecasting output growths and stock market returns.

The environmental issue facing asymmetric oil price shocks and renewable energy challenges: evidence from Tunisia

The present paper investigates the environmental issue in Tunisia when considering both renewable energy challenges and asymmetric oil prices shocks. The nonlinear ARDL (NARDL) approach to cointegration of Shin et al. (2014) in the presence of structural breaks is used to study the environmental Kuznets inverted U-curve in Tunisia over the period 1976-2014. The EKC hypothesis is found to be confirmed in Tunisia in the short and long terms. The nonlinear turning point is found to take place before the linear one suggesting that considering oil price asymmetrically allows accelerating the EKC assumption in Tunisia to reach the turning point more rapidly. Our finding reflects the necessity of an asymmetric energy price reform in Tunisia respecting the asymmetric nature itself of environmental and economic implications of oil price shocks. By switching from the linear to the nonlinear model, renewable energy consumption is found to exert almost the same and effective role as reducer of CO2 emissions. The energy transition process is found to be triggered in Tunisia but at a slow pace. Policy implications have been implemented in terms of environmental, social equity, and energy transition strategies. The issues raised are multidimensional including regulatory, institutional, financial, and governance reforms.

The Australian Stock Market’s Reaction to the First Wave of the COVID-19 Pandemic and Black Summer Bushfires: A Sectoral Analysis

In this study, we investigated the impact of the first wave of the COVID-19 pandemic on various sectors of the Australian stock market. Market capitalization and equally weighted indices were formed for eleven Australian sectors to examine the influence of the pandemic on them. First, we examined the financial contagion between the Chinese stock market and Australian sector indices through the dynamic conditional correlation fractionally integrated generalized autoregressive conditional heteroskedasticity (DCC-FIGARCH) model. We found high time-varying correlations between the Chinese stock market and most of the Australian sector indices, with the financial, health care, information technology, and utility sectors displaying a decrease in co-movements during the pandemic. The Modified Iterative Cumulative Sum of Squares (MICSS) analysis results indicated the presence of structural breaks in the volatilities of most of the sector indices around the end of February 2020, but consumer staples, industry, information technology and real estate indices did not display any break. Markov regime-switching regression analysis depicted that the pandemic has mainly affected three sectors: consumer staples, industry, and real estate. When we considered the firm size, we found that smaller companies in the energy sector exhibited gradual deterioration, whereas small firms in the consumer staples sector experienced the largest positive impact from the pandemic.

Effects of biomass energy consumption on environmental quality: The role of education and technology in Asia-Pacific Economic Cooperation countries

Rising concern regarding traditional non-renewable energy consumption has led policymakers to explore the potential of economical renewable energy sources. In this regard, biomass energy has received considerable attention because previous studies have found mixed results regarding the effect of biomass energy on environmental quality. Together with modern technology, biomass energy may significantly influence environmental quality. This study investigates the impact of biomass energy consumption, education, and technological innovation on environmental quality by controlling for the role of economic growth and financial development in the function of environmental quality. Second-generation econometric methods were used to solve the issues of heterogeneity and cross-sectional dependence in the study variables. The Westerlund and Edgerton (2008) cointegration technique confirmed the existence of a long-run equilibrium among the variables in the presence of structural breaks. The panel quantile regression results indicate that biomass energy use and technological innovation reduce environmental quality. Similarly, economic growth increases carbon emissions in the environment. Education and financial development contribute to reduce carbon emissions.

Environmental Kuznets curve in the presence of structural breaks: new evidence for individual European Countries.

This study explores the relationships between carbon emissions and their main determinants such as energy consumption, real income and international trade, in 15 European countries, employing data for the period 1960-2015, and in Germany, for that of 1970-2015. The purpose of this paper is to examine the environmental Kuznets curve in subregimes in the presence of structural shifts. Two complementary unit root tests are employed to examine the stationarity of employed variables. The Ng and Perron Econometrica 69: 1519-1554 (2001) and the Zivot and Andrews J Bus Econ Stat, 10(3), 251-270 (1992) unit root tests, both allow for a structural break. To estimate the parameters of the regression model and to detect structural breaks in the model, the Kejriwal and Perron J Econ, 146(1), 59-73, (2008), J Bus Econ Stat, 28(4), 503-522, (2010a), J Time Ser Anal, 31, 305-328, (2010b)) structural break test is employed. When structural breaks are allowed in estimations, the empirical results provide strong evidence of fluctuating relationships between CO2 emissions and income expressed by the U-shape in every subregime, which contradicts early findings in the literature of inverse U-shape environmental Kuznets curve.

Does crime-tourism nexus hold for Pakistan?

PurposeThe primary objective of this study is to investigate the linkage of tourism and crime for Pakistan along with exchange rates, terrorism and domestic prices in the presence of structural breaks over the period 1984–2017.Design/methodology/approachThe order of integration is tested through ADF and PP unit root tests. The robustness of unit root test is testified via structural break unit root test. Furthermore, the authors use Bayer and Hanck (2013) combined cointegration test to confirm the existence of a long-term theoretical relationship among the variables. For the robustness of cointegration analysis, the authors also employ ARDL bound testing in the presence of structural break years. Moving forward, the authors apply VECM Granger causality to find out the direction of causality. Subsequently, variance decomposition approach and impulse response function are used to distinguish leader from the followers.FindingsThe unit root test shows that the order of integration is one, I(1). The cointegration analysis confirms the long-run relationship between underlying variables. The authors find inverse and significant impact of crime and exchange rate on tourism in the long run. On contrary, domestic prices play a positive and significant role to determine tourism in short and long run. Also, terrorism is found to be insignificant with negative impact. Further, the bidirectional causality between crime and tourism is observed in the long run. Similarly, unidirectional causality from terrorism to exchange and exchange rate to domestic price is observed in the short run.Originality/valueThe contemporary studies on crime-tourism nexus offer limited evidence, as they frequently suffer from omitted variable bias and ignore possible endogeneity issues. This study uses vector autoregressive models to overcome these biases. Similarly, the authors accommodate the role of structural break years through their analysis. Hence, the results offer more credible evidence. Moreover, the authors contribute to the existing tourism demand literature by adding crime as a potential determinate in case of Pakistan.