Presence Of Structural Change Research Articles

Modelling Mixed-Frequency Time Series with Structural Change

AbstractPredictive ability of time series models is easily compromised in the presence of structural breaks, common among financial and economic variables amidst market shocks and policy regime shifts. We address this problem by estimating a semiparametric mixed-frequency model, that incorporate high frequency data either in the conditional mean or the conditional variance equation. The inclusion of high frequency data through non-parametric smoothing functions complements the low frequency data to capture possible non-linear relationships triggered by the structural change. Simulation studies indicate that in the presence of structural change, the varying frequency in the mean model provides improved in-sample fit and superior out-of-sample predictive ability relative to low frequency time series models. These hold across a broad range of simulation settings, such as varying time series lengths, nature of structural break points, and temporal dependencies. We illustrate the relative advantage of the method in predicting stock returns and foreign exchange rates in the case of the Philippines.

Evaluating the Symmetrical and Asymmetrical Linkage Between Gold Price and Indian Stock Market in the Presence of Structural Change

This article investigates the symmetrical and asymmetrical linkage between gold prices and the Indian stock market in the presence of structural breaks. The study covers a time frame from April 1993 to December 2019. The study employs both linear autoregressive distributed lag (ARDL) and non-linear ARDL (NLARDL) models. The major findings of the study are as follows: first, both the ARDL and NLARDL models indicate the co-movement of gold prices and the Indian stock market. Second, based on the long-run parameters of both the models, the long-run relationship between the variables could not be established. Third, short-run parameters show that positive shocks in gold prices depress the Indian stock market; however, negative shocks in gold prices have a positive but insignificant relationship with the Indian stock market. The asymmetric reaction of the Indian stock market will yield new insights for investors, fund managers, and policymakers.

Solving linear rational expectations models in the presence of structural change: Some extensions

Standard solution methods for linear rational expectations models assume a time-invariant structure. Recent work has gone beyond this by formulating solution methods for linear rational expectations models subject to structural changes, such as parameter shifts and policy reforms, that are announced in advance. This paper contributes to this literature by presenting solutions for some cases – imperfectly credible policy reforms; delayed announcement to some fraction of agents; and indeterminacy of the terminal solution (multiple equilibria) – that received little attention so far. These solutions are illustrated using several applications, including a New Keynesian model in which the Taylor principle is not satisfied by the terminal structure.

The role of foreign direct investment in growth: Spain, 1964–2013

Purpose Foreign direct investment (FDI) has played a major role in the deep process of transformation experienced by the Spanish economy since the first 1960s, which even intensified, following the integration with the now European Union in 1986. This paper aims to analyse the long-run effects of FDI in Spain by estimating a production function including the foreign capital stock over the period 1964–2013. Design/methodology/approach The author estimates a production function including the foreign capital stock over the period 1964–2013, from which the contributions of the different explanatory variables on the accumulated growth of gross domestic product (GDP) are computed. Next, the author tested for the possible presence of structural change in the previously estimated equation, by means of the tests of Bai and Perron, re-estimating the production function for the different subperiods delimited by the structural breaks found. Finally, the analysis is completed by performing Granger-causality tests on the variables GDP and foreign capital stock in a multivariate setting. Findings The author finds a significant contribution of foreign capital on the accumulated growth of GDP over the period of analysis, which seems however to have been greater during the first years of the period analysed. Foreign capital can play a positive role in the economic growth of an economy, provided that FDI inflows are stable and permanent enough, but this effect on growth seems to be more important in the first stages of a growth process. Originality/value The author presents a comprehensive analysis of the relationship between FDI and growth for a particular country, which seems to be a more promising empirical approach rather than the approach based on panel regressions, where sometimes some dissimilar experiences are added together. The Spanish economy can provide a relevant case study, given the substantial process of growth it enjoyed starting from the early 1960s, characterized by the arrival of vast inflows of foreign capital.

Solving linear rational expectations models in the presence of structural change: Some refinements

Solving linear rational expectations models in the presence of structural change: Some refinements

Does Sectoral Composition of Trade Matter for Trade-Energy-Growth Nexus? A VAR/VEC Based Analysis for China in the Presence of Structural Change

This study identifies the differential effect of sectoral composition of trade on trade-energy consumption–economic growth nexus for China from 1992–2015. We divided trade into five broad sectors—high tech (HT), medium tech (MT), low tech (LT), primary products (PP), and resource-based products (RB)—based on technology intensity. VAR and VEC models are applied depending on time series properties and cointegration among the variables. The study finds that trade in different sectors has differential effects on growth and energy consumption. It is also evident that LT and PP trade do not have long-run cointegration with growth and energy consumption, whereas the opposite is true for MT, HT, and RB trade. Regarding growth-energy nexus, the study defends the conservation hypothesis for China. Growth and energy cause LT and PP trade in the short run only, whereas they only cause MT trade in the long run. Trade in HT, MT, and RB sectors strong cause growth but not energy consumption. This study inter alia suggests that to reduce energy consumption while maintaining higher economic growth China should provide greater focus on HT, MT, and RB sectors.

Forecasting retailer product sales in the presence of structural change

Grocery retailers need accurate sales forecasts at the Stock Keeping Unit (SKU) level to effectively manage their inventory. Previous studies have proposed forecasting methods which incorporate the effect of various marketing activities including prices and promotions. However, their methods have overlooked that the effects of the marketing activities on product sales may change over time. Therefore, these methods may be subject to the structural change problem and generate biased and less accurate forecasts. In this study, we propose more effective methods to forecast retailer product sales which take into account the problem of structural change. Based on data from a well-known US retailer, we show that our methods outperform conventional forecasting methods that ignore the possibility of such changes.

Testing the predictive ability of house price bubbles for macroeconomic performance: A meta-analytic approach

This paper tests for the predictive ability of bubbles in housing markets on several proxies of macroeconomic performance using a panel of eighteen advanced countries. We use robust inference methods to address the bias resulting from the unknown persistence of our house price bubble measure. Evidence of predictability is analyzed by using a meta-analytic p-value combination approach for an overall joint significance, a method that is rarely applied in the panel predictive regression framework. The advantages are that heterogeneous panels are accommodated, and one can make inference on the individual unit for which the null hypothesis of no predictability is rejected. Our findings reveal the following: First, house price bubbles consistently predict an increase in government expenditures, even in the presence of structural change, different testing horizons and sample periods, as well as the inclusion of credit bubbles as as an additional predictor. Second, we find greater evidence that house price bubbles enhance macroeconomic performance in the identified countries for which evidence of predictability exists.

The Chinese Phillips curve – inflation dynamics in the presence of structural change

This paper models inflation dynamics in China from 1987 to 2014 using a Phillips curve framework. The Phillips curve is generally estimated under the assumption of linearity and parameter constancy. The existence of structural breaks in China’s inflation dynamics make standard linear models inappropriate tools for analysis however. Our results find that the Chinese Phillips curve is characterised by a non-linear relationship. The inflation/output relationship takes the form of a concave curve. This suggests that changes in the level of output effect inflation in China more strongly in periods when output is operating below its potential but the relationship is weaker when output is operating at or above potential. Based on these findings, the People’s Bank of China (PBC) could consider output cost and policy response on a case-by-case basis depending on the level of output in relation to potential.

Factor-augmented regression models with structural change

This paper considers a factor-augmented regression model in the presence of structural change. We propose a two-step procedure to estimate the coefficients of explanatory variables. We show that when the number of units (N) and the number of periods (T) are large and comparable, the proposed two-step estimator is T-consistent and has the same limiting distribution as if the unobservable factors were observed. Monte Carlo simulations confirm our theoretical results and show good finite sample performance of the two-step estimator.

Testing for weak-form efficiency of crude palm oil spot and future markets: new evidence from a GARCH unit root test with multiple structural breaks

There is a sizeable literature that tests for weak-form efficiency in commodity and energy spot and future prices. While many studies now allow for multiple structural breaks to address the criticism that conventional unit root tests have low power to reject the unit root null in the presence of structural change, the extant literature overlooks the fact that conventional unit root tests are biased in the presence of conditional heteroscedasticity. We apply a recently developed generalized autoregressive conditional heteroscedasticity (GARCH) unit root test with multiple structural breaks to crude palm oil spot and future prices and find much more evidence against weak-form efficiency than that found using tests that fail to allow for conditional heteroscedasticity. Our results point to the importance of allowing for heteroscedasticity when testing for efficiency in commodity and energy spot and future prices.

Fixed Interest Player v/s Floating Interest Player: Tug of War

Swaps have been one of the most widely used derivatives since 1970s and for good reasons. Interest rate swap is a mutual agreement between two parties to pay each other the differential amount of up and above the fixed v/s LIBOR. This paper tries to answer the long standing question of what should have been the range around which the fixed rate should have hovered with respect to fluctuating LIBOR over the years to attain break-even and not to be worse off. This paper analyses for the difference in the average LIBOR of various periods (1 month, 3 months, 6 months and 12 months) with respect to different maturity dates (5 years, 10 years, 15 years, 20 years and 23 years). It looks for the presence of structural change in the trend of LIBOR beginning from 1990 to 2013. This paper will draw the attraction of academic as well as market participants. Fixed rate player refers to the party which agrees to pay the existing floating rate (LIBOR) in the market in exchange of an agreed upon fixed rate from the counter party and vice-versa.

Median-unbiased estimation of structural change models: an application to real exchange rate persistence

Measuring deviations from purchasing power parity has been the subject of extensive investigation. The most common practice in empirical research for measuring real exchange rate persistence is to estimate univariate autoregressive (AR) time series models and calculate the half-life, defined as the number of periods for a unit shock to a time series to decay by 50%. In the presence of structural change, there are two potential biases in the parameter estimates of AR models: (1) a downward small sample median-bias and (2) an upward bias, which occurs when structural change is present and ignored. We conduct a variety of Monte Carlo simulations and demonstrate that the existence of structural change causes a substantial increase in the small sample bias documented in Andrews (1993). We then propose an extension of median-unbiased estimation, which explicitly accounts for structural change, and apply these methods to estimate half-lives of several long-horizon real exchange rates analysed by Lothian and Taylor (1996) and Taylor (2002). The upward bias from neglecting structural change dominates the downward median-bias for these real exchange rates. When structural change is present and accounted for, the median-unbiased half-lives towards a changing mean decrease and the confidence intervals tighten.

Robust Monitoring of an Industrial IT System in the Presence of Structural Change

This paper presents original research initiated by the monitoring needs of a semiconductor production plant. The industrial operations rely on an Information Technology (IT) system, and several time series data are controlled statistically. Unfortunately, these variables often contain outliers, as well as structural changes because of external decisions in the IT activity. As a consequence, it has been observed that the monitoring results obtained with standard techniques could be severely biased.This paper attempts to overcome such difficulties. A new monitoring method is proposed, based on robust Holt–Winters smoothing algorithm, and coupled with a relearning procedure for structural break detection. Such a method is flexible enough for a large‐scale industrial application. We evaluate performance through simulation and show its usefulness in real industrial applications for univariate and multivariate time series. The scope of application deals with IT activity monitoring, but the introduced statistical methods are generic enough for being used in other industrial fields. Copyright © 2014 John Wiley & Sons, Ltd.

Electricity consumption and economic growth in Algeria: A multivariate causality analysis in the presence of structural change

This article addresses the issue of electricity consumption, petroleum price and economic growth in Algeria. The primary objective is to investigate and analyze the causal relationship between electricity consumption (EC), Brent oil price (BOP) and economic growth (GDP) for Algeria over the period of 1971–2010. To examine short-run, long-run and joint causality relationships we used a multivariate cointegration approach based on the recent advances in time series econometrics (e.g., Zivot–Andrews test; Gregory–Hansen cointegration test; Vector Error Correction Models (VECM)). The empirical results show that there is evidence of short-run and a strong long-run bi-directional causal relationship between EC and real GDP in Algeria. Findings indicate also the absence of causal relationship between BOP and EC. Our empirical findings support the idea that there a link between electricity consumption and economic growth and disproves the neo-classical assumption referred to as the “neutrality hypothesis”.

Cointegration and causal relationships among steel prices of Mainland China, Taiwan, and USA in the presence of multiple structural changes

Variation in the price of steel is an important factor to take into consideration when discussing cost control and management decisions in the construction industry. We employ various conventional and advanced econometrics methods to examine the interrelationships of steel prices in three related markets during the time period June 2002 to May 2010: Mainland China (CH), Taiwan (TW), and the United States (US). We adopt the Gregory and Hansen (GH) test and regime-switching (RS) model for cointegration, both of which accommodate endogenous structural break(s), to produce a more accurate analysis of a period in the presence of structural change(s). The empirical result of the RS cointegration test with respect to multiple structural breaks suggests a long-run equilibrium relationship among the three variables considered. This finding differs from the result of the GH test but confirms the result of the conventional Johansen test. Furthermore, the results of the Granger causality test indicate that both CH and US steel prices have great influence on the TW steel price; the Taiwanese steel market is closely linked with China and US steel markets in the long run.

Testing For Unit Roots In The Presence Of Multiple Trend Breaks: An Application To Chilean Inflation Rate Series

This paper is an application of the subject of testing for unit roots in a time series in the presence of structural change. The series used is that of the Chilean monthly inflation rate. A characteristic of this series is that, with the exception of the 1972-1977 period during which the inflation rate in Chile greatly accelerated then decelerated, the Chilean inflation rate over the 40-year period of the study stayed within a limited range. In spite of this relatively stable performance, the application of the standard unit root tests to the series results in the inability to reject the unit root. However, when a test that allows for three endogenously determined breaks in the slope of the trend function of the series is used to account for the structural change of the 1972-1977 episode; the result is a strong rejection of the unit root in favor of a, more reasonable, stationary characterization of the series.

Robust Estimation of a Spatiotemporal Model with Structural Change

A spatiotemporal model is postulated and estimated using a procedure that infuses the forward search algorithm and maximum likelihood estimation into the backfitting framework. The forward search algorithm filters the effect of temporary structural change in the estimation of covariate and spatial parameters. Simulation studies illustrate capability of the method in producing robust estimates of the parameters even in the presence of structural change. The method provides good model fit even for small sample sizes in short time series data and good predictions for a wide range of lengths of contamination periods and levels of severity of contamination.

Malaysia’s International Relations and Foreign Direct Investment (FDI): A Structural Change Analysis

This study aims to identify the effect of international relations and the presence of structural change using Analysis of Covariance (ANCOVA) and Chow test respectively. It also aims to examine the long run relationships among Malaysia’s GDP and inward FDI, as well as among Malaysia’s total FDI and inward FDI taking into consideration of international relations using Engle-Granger test. Furthermore, Error Correction Mechanism (ECM) is used to examine whether the variables are converge in the lng run. This study supports that international relation affects inwards FDI from all selected countries (Japan, United States, Singapore and Germany). In addition, inwards FDI from respective countries have long run relationship with Malaysia’s GDP and Malaysia’s total FDI. It also found that the respective variables are converging in the long run. With this finding in mind, international relations-focused policies can be created in order to boost up Malaysia’s FDI inwards and growth.

Cointegration between oil spot and future prices of the same and different grades in the presence of structural change

The purpose of this study is to examine whether crude oil spot and futures prices of the same and different grades are cointegrated using a residual-based cointegration test that allows for one structural break in the cointegrating vector and high-frequency data. We choose the US WTI and the UK Brent as the representative crudes for this analysis since these two crudes have well-established spot and futures markets. We find that spot and future prices of the same grade as well as spot and futures prices of different grades are cointegrated. We examine potential causes of structural change as revealed by the cointegration test in terms of events that have impacted on world oil markets as well as discuss the implications of the results for hedge managers, investors and regulators.