Transitory Components Research Articles

An empirical investigation of health dynamics of elders in China

Using data from the China Health and Nutrition Survey (CHNS), an index of health frailty is developed for individuals ages fifty-five and older. The evolution of the Frailty Index with age is first contrasted with self-reports of health. Then the temporal moments of the data are examined by considering the covariance structure of shocks that arrive at different ages with frailty in subsequent years. Then a formal model is estimated that incorporates both age-dependent auto-regressive and transitory components. The covariance structure of frailty is found to be convex in age. Larger shocks arrive as the sample ages but they decline rapidly. The evolutions of shocks beyond a specific age are modestly persistent (auto-regressive). The initial age-dependent transitory shocks become a larger portion of the total health risk as age increases.

Assessing time-varying risk in China’s GDP growth

This paper employs a novel approach to model the conditional distribution of China’s GDP growth with time-varying location, scale, and shape parameters. By decomposing the parameters into permanent and transitory components and introducing a series of macroeconomic variables, this study examines the factors that influence the time-varying risks of China’s GDP growth. The findings suggest a significant difference between permanent and transitory changes in the Chinese economy and show that macroeconomic variables impact all three moments. Despite being occasionally susceptible to adverse downside risks, China’s economy exhibits strong resilience and rapid recovery.

Income and consumption inequality trends: a comparative analysis between paid employees and the self-employed

This paper aims to analyze trends in income and consumption inequality for paid and self-employed households and examine to what extent changes in aggregate consumption and income inequality can be explained by changes in their permanent and transitory components over time using data from the Italian Survey of Household Wealth (SHIW) covering the period 1989-2016. The results obtained from the Generalized Method of Moments (GMM) analysis reveal differences in consumption and income inequality, as well as their permanent and transitory components, between self-employed and payroll households. In particular, self-employed households experience higher levels of both income and consumption inequality, the increase in total income and consumption inequality is mainly driven by an increase in its transitory component. Furthermore, findings from other descriptive measures of inequality, such as the Gini coefficient, the variance of the log, 90th/10th, and 50th/10th percentile ratios, support the notion that income inequality is higher than consumption inequality across all groups, with self-employed households exhibiting a more pronounced difference.

Modeling sovereign credit default swaps volatility at different tenures: An application for Latin American countries

Assessing the dynamics of risk premium measures and their relationship with macroeconomic fundamentals is essential for macroeconomic policymakers and market practitioners. This study analyzes the main determinants of sovereign credit default swaps (SCDS) in Latin America at different tenures, focusing on their volatility. Using a component generalized autoregressive conditional heteroskedasticity model, it decomposes volatility into permanent and transitory components. It finds that the permanent component of SCDS volatility in all tenures was higher and more persistent during the Global Financial Crisis than during the recent coronavirus shock.

Transitory shocks, limited attention, and a firm’s decision to exit

This paper investigates the incidence of limited attention in a high-stakes business setting: a bar owner may be unable to purge transitory shocks from noisy profit signals when deciding whether to exit. Combining a 24-year monthly panel on the alcohol revenues from every bar in Texas with weather data, we find suggestive evidence that inexperienced, distantly located owners may overreact to the transitory component of revenue relative to the persistent component. This apparent asymmetric response is muted under higher revenue fluctuations. We formulate and estimate a structural model to endogenize attention allocation by owners with different thinking cost. Under the assumptions of the model, we find that 3.9% bars make incorrect exit decisions due to limited attention. As exits are irreversible, permanent decisions, small mistakes at the margin interpreting profit signals can lead to large welfare losses for entrepreneurs.

Impacto do surto de COVID-19 nos ratings de crédito: aplicação da abordagem through-the-cycle

Abstract The objective of this study was to analyze how the COVID-19 crisis has affected the determinants and predictability of the domestic credit rating issued by Fitch Ratings in Argentina. Additionally, it aims to evaluate the effects of credit rating agencies using the through-the-cycle method. Given the subjective nature of credit rating categorization, researchers have developed models for explaining and predicting credit ratings. This subjectivity is significant during economic events. Therefore, it is important to investigate whether the factors that determine and predict credit ratings remained consistent before and during the COVID-19 crisis. This paper contributes significantly to understanding how the application of the through-the-cycle method affects the determinants and predictability of credit ratings in economic crises. Theapplication of the through-the-cycle method by credit rating agencies as a criterion during the COVID-19 crisis resulted in a breakdown of the usual correlation between determinants and credit rating. Understanding whether variables are permanent or transitory components is crucial for investors and borrowers to anticipate credit rating changes during economic downturns. The dependent variables are the long-term domestic credit rating categories. The independent variables are derived from the Fitch Ratings credit rating methodology and the literature, which includes quantitative and qualitative variables. The statistical methods used are ordinal logistic regression, generalized ordinal logistic regression, and support vector machines. The COVID-19 crisis was considered a transitory event due to the application of the through-the-cycle approach by rating agencies. During the pandemic, specific determinants of credit ratings are not considered due to their transitory nature. The study identifies interest coverage ratio and competitive position as transitory components. This approach led to less predictability but a more stable credit rating.

The Transitory Component of Health Care Employment

The Transitory Component of Health Care Employment

An Econometric Analysis of Volatility Discovery

We investigate information processing in the stochastic process driving stock’s volatility (volatility discovery). We apply fractionally cointegration techniques to decompose the estimates of the market-specific integrated variances into an estimate of the common integrated variance of the efficient price and a transitory component. The market weights on the common integrated variance of the efficient price are the volatility discovery measures. We relate the volatility discovery measure to the price discovery framework and formally show their roles on the identification of the integrated variance of the efficient price. We establish the limiting distribution of the volatility discovery measures by resorting to both long span and in-fill asymptotics. The empirical application is in line with our theoretical results, as it reveals that trading venues incorporate new information into the stochastic volatility process in an individual manner and that the volatility discovery analysis identifies a distinct information process than that based on the price discovery analysis.

Determinants of commodity market liquidity

AbstractUsing positions data for 18 commodity futures during 2001–2020, we examine systematic and idiosyncratic determinants of Amihud price impact and microstructure noise proxying for permanent and transitory components of commodity futures liquidity. Idiosyncratic factors have the largest economic impact: while excess hedging demand increases PI and noise, active position‐taking (by market‐makers) in excess of the hedging demand reduces noise. Systematic factors, including the lack of competition among liquidity providers, adversely impact liquidity, but this effect is mitigated if liquidity providers are well‐capitalized. Supplementary leverage ratio (SLR) makes holding inventory costlier and is associated with lower liquidity.

고령층 소득의 비선형적 지속성 분석

This study estimates income risk observed among the elderly using the Korean Retirement and Income Study data. In order to decompose household income into permanent and transitory components, the quantile-based panel data framework is employed. The permanent component is assumed to follow a first-order Markov process, and the transitory component is assumed to be independent over time and also independent of the persistent components. I estimate the income persistence from the estimated permanent income component, and analyze the dynamic effects of permanent income shocks on income through simulations. The results show the presence of nonlinear persistence in the household income of the elderly. Furthermore, it is observed that the dynamic effects of permanent income shocks vary depending on the past income history. These findings differ from studies focused on the age groups participating in the labor market. In particular, the permanent income shocks have a significant impact on the income of elderly households. In particular, the permanent income shocks have a significant impact on the income of elderly households.

Commodity price shocks: Order within chaos?

The prices of 27 internationally traded commodities are decomposed into transitory and permanent components by applying an ideal band-pass filter to monthly data during 1970–2022. The two components account roughly equally to price variations, but with wide heterogeneity. The permanent component accounts for two-thirds of the variability in agricultural prices but less than 30 percent in energy prices. The transitory component revealed three medium-term cycles. The first (from the early 1970s to the mid-1980s) and third (from the early 2000s to 2020) exhibit similar duration and involve almost all commodities, while the second (spanning the 1990s) is mostly applicable to metals, with the notable absence of energy. The permanent component differs across commodities, with an upward trend for most industrial commodities and downward trend for agriculture. Moreover, the permanent component of commodities in which investment is irreversible (including energy, metals, and tree crops) exhibits a high degree of nonlinearity, most likely reflecting less flexibility in investment allocation and input use of these commodities. Prices of commodities subjected to widespread policy interventions, such as internationally-coordinated supply management schemes, exhibit persistent deviations from linear trends.

Work-limiting disabilities and earnings volatility

This paper examines how the onset of a work-limiting disability influences male earnings volatility as measured by the variance of transitory earnings. Using data from the 1970 to 2013 survey waves of the Panel Study of Income Dynamics and a semi-parametric error components model, we decompose annual earnings into its permanent and transitory components. Results show that the variance of transitory earnings of disabled and non-disabled men is similar before onset of a work-limiting health condition. Upon onset, earnings volatility increases significantly, and does not return to pre-onset levels until at least five years after the last reported disability. Additional results show that earnings volatility has increased since 1970 for both disabled and non-disabled men. However, the trend in volatility is steeper for those who suffer from a disability. Despite this steeper trend, disability's contribution to the total variance of earnings has remained constant over time at roughly 15%.

Which stock price component drives the Amihud illiquidity premium?

We examine the components of stock prices that play a key role in the pricing of the Amihud (2002) illiquidity measure. We first decompose the stock price series into permanent and transitory components and then construct the half-Amihud illiquidity measures on the days of positive and negative permanent price returns. We find that the transitory half-Amihud measure on the days of negative permanent price returns plays an important role in pricing the Amihud illiquidity even after controlling for the turnover ratio. This finding contrasts with that of Lou and Shu (2017) in that both the trading volume component and transitory price impact, drive the Amihud illiquidity premium.

Credit constraints in Colombia: evidence from the use of credit cards among low- and middle-income individuals

PurposeThe authors estimate the determinants of the value of purchases of semi-durable goods using permanent and transitory income, and the demographic characteristics of customers. The purpose is to identify whether individuals face remaining liquidity constraints, and how this friction affects their purchases.Design/methodology/approachThis study uses anonymized data of 516,525 credit card holders, with more than 7,501,065 records of purchases between 2010 and 2015. The authors decompose the income of individuals into permanent and transitory components to test the prevalence of the life cycle–permanent income hypothesis (LC–PIH). Determinants of the value of purchases for constrained and unconstrained consumers are estimated, considering the period in which individual characteristics are valid, the decisions not to make purchases in some months, and the potential endogeneity of the interest rate and the transitory component of income.FindingsThe authors present evidence of liquidity constraints for individuals who have used a high percentage of the credit limit on their cards. For these restricted customers, the value of purchases is inelastic to the interest rate, whereas the response is sizable for customers who are less restricted. The restricted customers increase the value of purchases when faced with increases in their credit limit. The elasticity of the value of purchases of semi-durable goods to permanent income is less than that for transitory income; regardless of the constraints, this still supports the LC–PIH.Research limitations/implicationsThis credit card is targeted at low- and middle-income individuals in Bogotá. Although the results might be considered as indicative of the behavior of those with similar characteristics in Colombia, the authors regard this work as the study of a particular case. A limitation of this work is that the authors do not have alternative sources of credit at an individual level.Practical implicationsThe broad credit channel of monetary policy does not apply to the restricted customers. This should be considered not only by the monetary authority, to understand the true extent of this policy, but also by the financial institutions that use this business model. The monetary authority should be cautious not to overreact when intervening in the money market to try to prompt an adequate consumer response.Social implicationsFinancial institutions have the policy of modifying the credit limits of their customers' credit cards which affects the well-being of restricted customers. Given that the card is aimed at low and middle income individuals, the credit limits of customers who use a high percentage of their credit limit might be increased.Originality/valueThis is the first paper to study liquidity restrictions with a retail credit card in Colombia and Latin America using information on customers' characteristics. The results are highly relevant for the implementation of monetary policy.

Dynamics and synchronization of global equilibrium interest rates

ABSTRACT Empirical estimates of equilibrium real interest rates are so far mostly limited to advanced economies, since no statistical procedure suitable for a larger set of countries is available. This is surprising, as equilibrium rates have strong policy implications in emerging markets and developing economies as well. Current estimates of the global equilibrium rate rely on only a few countries but estimates for a more diverse set of countries can improve understanding of its dynamics and drivers. This paper uses a model and estimation strategy that decompose ex-ante real interest rates into permanent and transitory components even with short samples and high volatility. This is done with an unobserved component local level stochastic volatility model, which is used to estimate equilibrium rates for 50 countries with Bayesian methods. Equilibrium rates were lower in emerging markets and developing economies than in advanced economies in the 1980s, similar in the 1990s, and have been higher since 2000. In line with economic integration and rising global capital markets, synchronization has been rising over time and is higher among advanced economies. Equilibrium rates of countries with stronger trade linkages and similar demographic and economic trends are more synchronized.

Assessing the effects of fiscal policy news under imperfect information

Abstract We study the transmission of fiscal policy under imperfect information where government spending is composed of permanent and transitory components. Agents learn about the previous processes by only observing overall public spending and a noisy signal. Under this theoretical setting, we construct a novel measure of fiscal policy news and show that the estimated variable agrees with the historical narrative evidence for the US economy. Our measure captures sluggish information shocks rather than revisions with the benefit of being generated by a theoretical model. We then document the effects of this proxy on economic activity by using local projection methods. The results indicate that real activity indicators exhibit delayed positive effects. We also notice that public debt shrinks and tax revenues increase after 2 years due to the delayed output expansion in the aftermath of the fiscal news shock.

Permanent and Transitory Components of Volatility following the 2008-Financial Crisis: Investigation on Dow Jones Sukuk Index

The global financial crisis of 2008 was sukuk's first actual test. The crisis had a negative impact on the nascent sukuk market, and several issuances reached new lows during the crisis. The sukuk investment universe, on the other hand, has made a strong comeback since 2009 and is now fully recovered. The sukuk market's performance has proven to be resilient due to this. The Dow Jones Sukuk Index (DJSI) has fully recovered from the crisis after a period of underperformance. The performance of the sukuk index is judged on both return and risk. Lower volatility and a higher Sharpe ratio further enhance its superior performance. The Sukuk investors during the COVID-19 pandemic have also referred to this situation of the 2008 global financial crisis to seek chances and confidence to issue and invest in Islamic bonds (Rahim and Othman, 2021). According to Ghassan, Balli and Aljeefri (2021), a crisis has little impact on the volatility of sukuk spreads. The result is due to market participants' belief in sukuk as an important asset class in their investment portfolios. This research aims to address this problem. Keywords: Financial crisis, Sukuk, CGARCH, components, DJSI

Are ESG-committed hotels financially resilient to the COVID-19 pandemic? An autoregressive jump intensity trend model.

Given that the United Nations views environmental, social, and governance (ESG) as a practical framework for anchoring responsible corporate behavior to achieve its sustainable development goals, this study constructs an autoregressive jump intensity trend (ARJI-trend) model to determine if ESG can improve future resilience and create crisis-resilient value for chained-brand hotel corporations from the effects of COVID-19. The findings indicate that the ARJI-trend model indeed captures both the permanent and transitory components of the hotel corporation's ESG performance related to stock return dynamics. When ESG rating is taken into account, the following conclusions emerge: 1) the transitory component of time-varying return variance decreases but the permanent component does not; 2) the hotel corporation portfolios with a lower transitory component experiences a higher return, implying that the hotel corporations with a higher ESG rating appear to be more defensiveness; and 3) with proper asset reallocation, a portfolio centered on strong ESG-conscious hotel corporations is a safe-haven asset during market turmoil.

Innovation of the Component GARCH Model: Simulation Evidence and Application on the Chinese Stock Market

The component GARCH model (CGARCH) was among the first attempts to split the conditional variance into a permanent and transitory component. With the application to economic and finance data, it helps investigate the long- and short-run movements of volatility affecting securities. Like all GARCH-type models, the innovation series of the CGARCH are usually assumed to follow a Normal distribution, which cannot accommodate fat-tailed properties commonly present in empirical data. The resulting estimates are not efficient when a Normal assumption is employed. In this paper, we consider the tempered stable distribution, which has the attractive stability under aggregation property missed in other popular fat-tailed distributions such as Student’s t-distribution and General Error Distribution (GED). Through systematically designed simulation studies, our results demonstrate that a CGARCH model with tempered stable distribution uniformly outperforms those with Normal, Student’s t-distribution and GED. Our empirical study on the Shanghai Stock Exchange index also leads to the same conclusions. Therefore, we argue that the CGARCH model with tempered stable distribution could be widely used to model economic and financial data in general contexts, focusing on both the long- and short-run volatility behaviours.

Comparing Results from Unobserved Components Model and Hodrick-Prescott Filter of Output-Gap in Barbados

An important macro-economic issue of developed and developing countries is how best to decompose an economic time series into permanent (trend) and transitory (cycle) components. The issue is vital in empirical macroeconomics since, among other things, it relates to how one can estimate the output gap-the deviation of an economy's output from its potential or trend output. This paper considers how well the unobserved components model and the Hodrick Prescott (HP) filter decomposes real gross domestic product (GDP) in a small island developing state, the state of Barbados. The correlated unobserved components model for Barbados studied in the Agbeyegbe (2020) is modified to allow a second-order Markov trend. The effect of this modification is to make it possible to recover the HP trend as a particular case. The paper then compares several methods useful for trend decomposition of real GDP in Barbados. The competing methods are variants of two widely used trend-cycle decompositions of GDP that give markedly different estimates. Namely, methods based on the unobserved components model (UC) and the HP filter. The correlated unobserved components model produces smaller output gaps in amplitude, whereas the HP filter generates significant and persistent cycles. More specifically, the methods are: (i) the HP filter; (ii) an augmented HP filter (HP-AR), that allows for cyclical components to be serially correlated, introduced by Grant and Chan (2017b); (iii) the correlated unobserved components model (UCUR), without a break; (iv) the correlated unobserved components model (UCUR-t), with a break at time t; and (v) a correlated unobserved components model that allows for a second-order Markov trend process UCUR-2M. The result shows that for Barbados, with data covering the period 1967-2017, the correlated unobserved components model that allows for a break in trend fits the data better than the HP specification. These results are significant from a policy perspective. Knowing the correct duration of the business cycle is essential to providing appropriate recommendations; the result argues against the use of HP-filter in analyzing Barbados' business cycle. The result also finds that for Barbados, it is empirically important to correlate permanent and transitory shocks. By ignoring this correlation, researchers risk providing a misleading analysis of how the Barbadian economy works.