Unit Root Properties Research Articles

Are saving and investment cointegrated: evidence from some African countries' data

Purpose– The purpose of this paper is to test the Feldstein and Horioka (FH), theory that capital mobility should be low if there is high correlation between saving and investment, in some African countries.Design/methodology/approach– This paper tests the cointegration between saving and investment using bounds testing approach to cointegration and derive the long-run elasticities using autoregressive-distributed lag (ARDL) and Phillips-Hansen fully modified OLS for African countries over the period 1960-2008. This paper conducted the test for unit root properties using Augumented Dick-Fuller procedure.Findings– Their main findings are: investment and saving are strongly cointegrated for The Gambia and Burkina Faso and marginally cointegrated for Ghana, Mali, Cote d'Ivoire and Benin when investment is the dependent variable and there is evidence of cointegration between saving and investment when saving is the dependent variable for Senegal and Niger and no evidence of cointegration for Cameroon, Chad and Togo; the long-run coefficients on saving are low or negative implying low correlation. This paper concludes that Feldstein and Horioka theory could not be ruled out in African countries investigated.Originality/value– This paper is the original paper conducted on West African countries. This study has not across any paper bearing the same title on the countries of coverage.

The effects of financial development, economic growth, coal consumption and trade openness on CO2 emissions in South Africa

This paper explores the effects of financial development, economic growth, coal consumption and trade openness on environmental performance using time series data over the period 1965–2008 in case of South Africa. The ARDL bounds testing approach to cointegration has been used to test the long run relationship among the variables while short run dynamics have been investigated by applying error correction method (ECM). The unit root properties of the variables are examined by applying Saikkonen and Lütkepohl (2002. Econometric Theory 18, 313–348) structural break unit root test. Our findings confirmed long run relationship among the variables. Results showed that a rise in economic growth increases energy emissions, while financial development reduces it. Coal consumption has significant contribution to deteriorate environment in South African economy. Trade openness improves environmental quality by reducing the growth of energy pollutants. Our empirical results also verified the existence of environmental Kuznets curve. This paper opens up new insights for South African economy to sustain economic growth by controlling environment from degrdation through efficient use of energy.

An Investigation of the Relationship between Oil Prices and Inflation in South Africa

It is widely believed that the increase in the real price of oil early 1970s was a major cause of high inflation and recession. In recent years, oil prices have been rising and its economic impact is an issue that continues to attract more attention globally and South Africa in particular. An increase in oil price and related goods causes a shift in the aggregate supply curve that results in higher price level. This paper uses Augmented Dickey-Fuller technique in testing the unit root property of the series, Johansen-Juselius Cointegration methods for testing long-run relationship between oil prices and inflation. The result showed that there is co-integrating relationship between oil price and inflation for South African data. Further effort was made to check the causality relationship that exists between the two variables by employing the Granger causality at two and four lag periods. The results showed the same at different lags. The first test was conducted using lag two (2) and in the result unidirectional causality was seen running from oil price to inflation. Further test at lag four (4) was carried out and it only supported the first by also indicating a unidirectional causality running from oil price to inflation. Policy implications and suggestion for future research are made in the paper. DOI: 10.5901/mjss.2013.v4n6p105

Arc length tests for equivalent autocovariances

This paper presents a new test for discerning whether or not two independent time series have the same dynamics. Several methods in the time and spectral domain have previously been devised to conduct such a test. Here, we explore a new approach to the problem by comparing sample arc lengths (ALs) of the two series. Because sample ALs are derived from first-order differences in the series, the proposed methods work for both stationary autoregressive moving average and non-stationary autoregressive integrated moving average processes. This robustness is advantageous when one is unsure about unit root properties in the underlying series.

Further evidence on property–casualty insurance premiums: Do multiple breaks and country characteristics matter?

This paper employs a panel data stationarity test that incorporates multiple structural breaks to investigate whether property–casualty insurance (PCI) premiums per capita among 40 countries are mean-reverting or not. The results suggest that our panel dataset is stationary after we introduce the structural breaks into the model and consider cross-sectional dependence. However, the results for the panel stationarity test vary with regard to different country characteristics. Countries in which the PCI premiums present a panel unit-root property infer that any external shocks can have a permanent effect on the insurance premiums. Accordingly, the associated insurance authorities should take possible structural breaks and cross-sectional dependence into account when implementing related policies.

Nonstationarity, cointegration and structural breaks in the Australian term structure of interest rates

This article examines the unit-root property of the Australian short- and long-term interest rates using unit-root tests that accommodate a single or two breaks under the null and/or alternative hypothesis. Two breaks in interest rates are found to coincide with the 1982/83 and 1990/91 recessions or the 1993 inflation targeting period. We further investigate the implications of these structural breaks on the cointegrating relationship implied by the single, linear expectations hypothesis of the term structure of interest rates. While there is evidence that the data are consistent with the expectations hypothesis at the shorter end of the term structure, breaks in interest rates generate a shift in the cointegrating relationship, thus altering the information content of the term structure. Failing to account for a regime shift in the cointegration regression, the data erroneously supports the expectations hypothesis at the longer end of the term structure. These results have profound implications for policy makers who may inadequately exploit the information content of the term structure to predict future changes in inflation.

Labour productivity trends in Australian manufacturing: some time series properties

Labour productivity plays a significant role in economic growth, labour demand and employment situation of a particular economy. In this light, the presence of a structural break in productivity, and its unit root property, has important consequences for the overall economy and in major sectors such as manufacturing. In this article, using some recently developed unit root tests, we examine: (i) the null hypothesis of a unit root in the log-level of labour productivity for 38 manufacturing subdivisions against the alternative of trend stationarity over a three-decade period; and (ii) the presence of a structural break in the series, and whether the break has had a permanent or a transitory effect on manufacturing labour productivity. Our main finding is that shocks to labour productivity have had a transitory effect, implying that policies are likely to have only short-term effects.

Warrant Pricing During the Financial Crisis

This study analyzes the pricing of warrants written on the Swiss Market Index (SMI) during the financial crisis. Of particular interest is how changes in warrant pricing errors, i.e. the difference in the pricing between bank-issued options and their exchange-traded counterparts, may be related to an increased awareness of issuer risk, as well as to a general sell-off of risk assets, predominantly by retail investors in the warrants market with speculative motives vs. larger, institutional investors in the traditional options market, in the wake of the market turbulences in fall 2008. We extend prior literature by studying how warrant pricing errors change over time and by analyzing a comprehensive set of factors that drive warrant overpricing to determine whether there is evidence for a decrease due to a credit risk effect. Using an event study approach, we investigate how the pricing of warrants has changed in the event window compared to the estimation period. We find that the pricing errors have in fact decreased significantly during the period of interest suggesting that warrant prices have not properly accounted for the inherent credit risk. Specifically, average abnormal pricing errors and cumulative average abnormal pricing errors across issuers and different strikes are statistically and economically significant in the event window which strongly supports the thesis of a repricing of credit risk. To validate these implications we perform regression analyses that account both for a structural break and the unit root properties of the variables and conclude that there has been a significant change in the relationship of pricing errors and credit risk post September. Also, we find that part of the decrease can be related to a sell-off of warrants by predominantly individual investors with speculative motives, while larger, institutional and more hedging-oriented clients in the options market show less activity, as evidenced by a strong increase in traded warrant contracts and a positive relationship of pricing errors to the broader Swiss equity market. Our cointegration analysis allows for a consistent estimation of the long-run relationship of pricing errors and a number of factors by properly accounting for the short-run dynamics. Overall, our results suggest that going forward pricing errors should react stronger to changes in credit risk while warrants will remain more volatile than options in general due to institutional differences and differing clientele of the two markets.

A FI-STAR Approach to the Purchasing Power Parity in the North African Countries

The main objective of this paper is to test the validity of the purchasing power parity in the North African countries. Earlier studies have used either nonlinear models or Long Memory (ARFIMA) process to look for the unit-root properties of the exchange rate behaviour. While the use of each technique independently can in some cases be favourable for the PPP hypothesis, it has failed in others. This is why recently the joint hypothesis of long memory and stochastic regime switching models has been developed. In fact, empirical evidence has shown that the two modelling techniques can be intimately linked. In this paper we will be using the FISTAR model proposed by van Dijk, Franses and Paap (2002) is order to test the validity of PPP. Several major findings have been raised from our study. The results show that the joint hypothesis of long memory and nonlinearity is not accepted in all our North African exchange rates. In fact, the behaviour is shown to be nonlinear. The results also show that the purchasing power parity could not be accepted in the case of Tunisia. We found that there is no evidence of long memory in the cases of Algeria and Egypt. Moreover, the study has shown that when using ESTAR model alone, this can lead to some misinterpretation of the real exchange rate behaviour in many cases. This is why it is necessary to use the FI-STAR model which would give more information to policy makers to face exchange rate shocks, especially, when these shocks are characterised by a long memory process.

Dividend paying assets, the unit root property, and suboptimality

We consider the stationary equilibria of one good overlapping generations (OLG) economies with a sequence of possibly incomplete asset markets and prove two results. First, we show that if some asset always pays a nonnegative dividend, then its price changes sign across states if and only if the Perron root of every agent’s matrix of intertemporal rates of substitution exceeds one. Second, we provide sufficient conditions in terms of dividends and asset prices such that, keeping asset prices fixed, a conditionally Pareto improving allocation is induced by a stationary reassignment of a single asset. When taken together the results show that when for some agent the Perron root exceeds one, the existence of an asset that pays a strictly positive dividend in every state is sufficient to induce an improvement.

Non-linear unit root properties of crude oil production

While there is good reason to expect crude oil production to be non-linear, previous studies that have examined the stochastic properties of crude oil production have assumed that crude oil production follows a linear process. If crude oil production is a non-linear process, conventional unit root tests, which assume linear and systematic adjustment, could interpret departure from linearity as permanent stochastic disturbances. The objective of this paper is to test for non-linearities and unit roots in crude oil production. To realize our objective, this study applies a threshold autoregressive model with an autoregressive unit root to monthly crude oil production for 17 OPEC and non-OPEC countries over the period January 1973 to December 2007. Specifically, first we test for the presence of non-linearities (threshold effects) in the production of crude oil in two regimes. Second, we test for a unit root against a non-linear stationary process in two regimes and a partial unit root process when the unit root is present in one regime only. We find that crude oil production is characterized by threshold effects. We find that for eleven of the countries a unit root was present in both regimes, while for the others a partial unit root was found to be present in either the first regime or second regime.

Unit root properties of crude oil spot and futures prices

In this article, we examine whether WTI and Brent crude oil spot and futures prices (at 1, 3 and 6 months to maturity) contain a unit root with one and two structural breaks, employing weekly data over the period 1991–2004. To realise this objective we employ Lagrange multiplier (LM) unit root tests with one and two endogenous structural breaks proposed by Lee and Strazicich [2003. Minimum Lagrange multiplier unit root test with two structural breaks. Review of Economics and Statistics, 85, 1082–1089; 2004. Minimum LM unit root test with one structural break. Working Paper no. 04–17, Department of Economics, Appalachian State University]. We find that each of the oil price series can be characterised as a random walk process and that the endogenous structural breaks are significant and meaningful in terms of events that have impacted on world oil markets.

Are oil shocks permanent or temporary? Panel data evidence from crude oil and NGL production in 60 countries

This paper examines the unit root properties of crude oil production for 60 countries employing a range of panel data unit root tests for the period 1971 to 2003. The study first employs a number of panel data tests that do not accommodate structural breaks and then proceeds to apply the Lagrange Multiplier (LM) panel unit root test with one structural break. The results of the panel data tests without a structural break are inconclusive with at best mixed support for joint stationarity. The findings from the LM panel unit root test with a structural break, however, are conclusive, suggesting that for a world panel and smaller regional-based panels, crude oil and NGL production are jointly stationary.

Structural Breaks and Unit Root: Evidence from Pakistani Macroeconomic Time Series

The purpose of this paper is to examine the unit root properties of eleven Pakistani macroeconomic series using annual data. Along with traditional unit root tests, we use the procedure developed by Zivot and Andrews to test the null of unit root against the break-stationary alternative. Conventional unit root tests indicate that all variable are non-stationary at the levels. Results from Zivot and Andrews test suggest that we can reject the null of unit root for CPI and WPI at 5 percent significance level while we fail to reject the unit root hypothesis for the remaining 9 series. At the same time, the Zivot and Andrews test identifies endogenously the point of the single most significant structural break in every time series examined. The results show that ten of the eleven series studied bear witness to the presence of a structural break during the period 1972 to 1976.

Robust Inference on Average Economic Growth*

AbstractWe discuss a method to estimate the confidence bounds for average economic growth, which is robust to misspecification of the unit root property of a given time series. We derive asymptotic theory for the consequences of such misspecification. Our empirical method amounts to an implementation of the subsampling procedure advocated in Romano and Wolf (Econometrica, 2001, Vol. 69, p. 1283). Simulation evidence supports the theory and it also indicates the practical relevance of the subsampling method. We use quarterly postwar US industrial production for illustration and we show that non‐robust approaches rather lead to different conclusions on average economic growth than our robust approach.

STRUCTURAL BREAKS AND UNIT ROOTS IN AUSTRALIAN MACROECONOMIC TIME SERIES

We examine the unit root properties of 16 Australian macroeconomic time series using monthly data spanning the period 1960–2004. In addition to the standard Augmented Dickey Fuller (ADF) test, we implement one- and two-break endogenous structural break ADF-type unit root tests as well as one- and two-break Lagrange multiplier (LM) unit root tests. While the ADF test provides relatively little evidence against the unit root null hypothesis, once we allow for structural breaks we are able to reject the unit root null for just under half of the variables at the 10% level or better.

The relationship between saving and investment for Japan

In this paper, we revisit the saving and investment nexus as postulated by Feldstein and Horioka (FH) [Econ. J. 90 (1980) 314]. We test for cointegration between saving and investment using the recently developed bounds testing approach to cointegration and derive the long-run elasticities using the autoregressive distributed lag modeling approach for Japan over the period 1960–1999. We establish the unit root properties of the data in the presence of structural break(s) using the Zivot and Andrews (ZA) [J. Business Econ. Stat. 10 (1992) 251] and the Lumsdaine and Papell (LP) [Rev. Econ. Stat. 79 (1997) 212] tests. Finally, we ascertain the direction of causation between saving and investment by using the bootstrap approach. Amongst our key results we find that saving and investment are cointegrated for Japan; investment causes saving and saving causes investment; shocks to saving and investment have a permanent effect; and the long-run coefficient on saving is 0.68, implying a moderate rate of correlation. From the latter finding, we believe that there is no puzzle between saving and investment in the case of Japan, a result contrary to FH (1980).

Do seasonal unit roots matter for forecasting monthly industrial production?

AbstractWe investigate the seasonal unit root properties of monthly industrial production series for 16 OECD countries within the context of a structural time series model. A basic version of this model assumes that there are 11 such seasonal unit roots. We propose to use model selection criteria (AIC and BIC) to examine if one or more of these are in fact stationary. We generally find that when these criteria indicate that a smaller number of seasonal unit roots can be assumed and hence that some seasonal roots are stationary, the corresponding model also gives more accurate one‐step‐ahead forecasts. Copyright © 2004 John Wiley & Sons, Ltd.

An Econometric Model of Credit Spreads with Rebalancing, ARCH and Jump Effects

In this paper, we examine the dynamic behavior of credit spreads on corporate bond portfolios. We propose an econometric model of credit spreads that incorporates portfolio rebalancing, the near unit root property of spreads, the autocorrelation in spread changes, the ARCH conditional heteroscedasticity, jumps, and lagged market factors. In particular, our model is the first that takes into account explicitly the impact of rebalancing and yields estimates of the absorbing bounds on credit spreads induced by such rebalancing. We apply our model to nine Merrill Lynch daily series of option-adjusted spreads with ratings from AAA to C for the period January, 1997 through August, 2002. We find no evidence of mean reversion in these credit spread series over our sample period. However, we find ample evidence of both the ARCH effect and jumps in the data especially in the investment-grade credit spread indices. Incorporating jumps into the ARCH type conditional variance results in significant improvements in model diagnostic tests. We also find that while log spread variations depend on both the lagged Russell 2000 index return and lagged changes in the slope of the yield curve, the time-varying jump intensity of log credit spreads is correlated with the lagged stock market volatility. Finally, our results indicate the ARCH-jump specification outperforms the ARCH specification in the out-of-sample, one-step-ahead forecast of credit spreads.

How Large is Average Economic Growth?

This paper puts forward a method to estimate average economic growth, and its associated confidence bounds, which does not require a formal decision on potential unit root properties. The method is based on the analysis of either difference-stationary or trend-stationary time series models, implementing the robust bootstrapping procedure advocated in Romano and Wolf (2001). Simulation evidence indicates the practical relevance of the method. It is illustrated on quarterly post-war US industrial production.