VAR Methodology Research Articles

The dynamics of Greek public debt – evidence from simultaneous and structural VAR models

The goal of the present article was to investigate not only the dynamics of the Greek public debt, but also the appropriate measures required for achieving fiscal consolidation. The empirical estimation is carried out using a macroeconomic data set spanning the period 1980–2008 and both the three-stage least squares (3SLS) methodological approach on a theoretical model and the structural VAR methodology to perform forecast tests and to calibrate the future paths of the public debt variable up to 2020. The results suggest that only a restrictive fiscal policy that simultaneously increases government revenues and reduces government expenditure could permit the country to achieve debt sustainability. The results also suggest that debt sustainability can be achieved faster when tax revenue policies are intensified. The results are expected to have important implications to policymakers for designing effective macroeconomic policy in terms of achieving sustainable levels of public debt.

Investigation of Causal Relationship between Stock Prices and Trading Volume using Toda and Yamamoto Procedure

The present study probes the relationship between the stock prices and trading volume. For achieving this purpose, daily data of adjusted closing stock prices, trading volume of 39 individual securities and S&P CNX Nifty from January 1, 1998 to May 31, 2013 have been used. In this study, instead of applying ordinary Granger causality test to investigate the relationship between stock prices and trading volume, Toda and Yamamoto (1995) procedure has been applied for analyzing the data. Lag length chosen by AIC and FPE criterion has been insured by running Lagrange Multiplier (LM) test and causality determined by Toda and Yamamoto test has also been confirmed by using VAR methodology. Although, Toda and Yamamoto and VAR test produced little dissimilar results, nevertheless, the empirical analysis provides sufficient grounds to declare the presence of interaction between stock prices and trading volume.

Modelos Multivariados na Previsão do Valor em Risco de Carteiras de Investimento: da crise das empresas tecnológicas à crise financeira global

This study analyzed market risk of an internationalinvestment portfolio by means of a newmethodological proposal based on Value-at-Risk, using the covariance matrix of multivariateGARCH-type models and the extreme valuetheory to realize if an international diversificationstrategy minimizes market risk, and to determineif the VaR methodology adequately capturesmarket risk, by applying Backtesting tests. Tothis end, we considered twelve internationalstock indexes, accounting for about 62% of theworld stock market capitalization, and chose theperiod from the Dot-Com crisis to the currentglobal financial crisis. Results show that theproposed methodology is a good alternative toaccommodate the high market turbulence andcan be considered as an adequate portfolio riskmanagement instrument.

Gauging the impact of climate change on food crops production in Mauritius

Purpose – The purpose of this paper is to delve into an extensive analysis of different food crops, ranging from bananas, beans, brinjals, cabbages, chillies, creepers, groundnuts, mixed vegetables, pineapples and tomatoes, over three decades. To maintain an ever-increasing population level, much stress is exerted on the production of food crops. However, till date, very little is known about how climate change is influencing the production of food crops in Mauritius, an upper-income developing country found in the Indian Ocean and highly vulnerable to climate risks. Design/methodology/approach – Based on the interactions between production of crops, harvest area for crops and weather metrics, a vector autoregressive model (VAR) system is applied comprising production of each crop with their respective harvest area. Weather metrics are then entered into as exogeneous components of the model. The underlying rationale is that weather metrics are not caused by production or harvest area and should thereby be exogeneously treated. Should there be cointegration between the endogenous components, the vector error correction model (VECM) will be used. Diagnostic tests will also be entertained in terms of ensuring the endogeneity states of the presumed variables under investigation. The impact of harvest area on product is plain, as higher the harvest area, the higher is the production. However, a bi-directional causality can also manifest in the case that higher production leads towards lower harvest area in the next period as land is being made to rest to restore its nutrients to enable stable land productivity over time. Other dynamics could also be present. In case cointegration prevails, VECM will be used as the econometric model. The VAR/VECM approach is applied by virtue of the fact that traditional ordinary least squares (OLS) estimation approach will be biased and susceptible to trigger off unreliable results. Recourse is made towards the Johansen and Juselius (1990) technique. The Johansen and Juselius approach is based on the following VAR specification-bivariate VAR methodology. X1,t = A0 + A1,1X1,t – 1 + A1,2X1,t – 2+ […] .+ A1,p X1,t – p + A2,1X2,t – 1 + A2,2X2,t – 2+ […] .+ A2,pX2,t – p + ßjW + e1,t […] […]..(1) X2,t = B0 + B2,1X2,t – 1 + B2,2X2,t – 2+ […] .+ B2,p X2,t – p + B1,1X1,t – 1 + B1,2X2,t – 2+ […] .+ B1,pX2,t – p + ajW + e2,t […] […] […](2) X1,t is defined as the food crops production, while X2,t pertains to harvest area under cultivation for a given crop under consideration, both constituting the endogeneous components of the VAR. The exogeneous component is captured by W which consists of the nine aforementioned weather metrics, including the cyclone dummy. The subscript j under equation (1) and (2) captures these nine distinct weather metrics. In essence, the aim of this paper is to develop an econometric-based approach to sieve out the impacts of climate metrics on food crops production in Mauritius over three decades. Findings – Results show weather metrics do influence the production of crops in Mauritius, with cyclone being particularly harmful for tomatoes, chillies and creepers. Temperature is found to trail behind bearish impacts on tomatoes and cabbages production, but positive impacts in case of bananas, brinjals and pineapples productions, whereas humidity enhances production of beans, creepers and groundnuts. Evidence is found in favour of production being mainly governed by harvest area. Overall, the study points out the need of weather derivatives in view of hedging against crop damages, let alone initiation of adaptation strategies to undermine the adverse effects of climate change. Originality/value – To the best of the author’s knowledge, no study has been undertaken in Mauritius, let alone developing of an econometric model that properly integrates production, harvest area and weather metrics. Results show weather metrics do influence the production of crops in Mauritius, with cyclone being particularly harmful for tomatoes, chillies and creepers. Temperature is found to trail behind bearish impacts on tomatoes and cabbages production, but positive impacts in case of bananas, brinjals and pineapples productions, whereas humidity enhances production of beans, creepers and groundnuts. Evidence is found in favour of production being mainly governed by harvest area. Overall, the study points out the need of weather derivatives in view of hedging against crop damages, let alone initiation of adaptation strategies to undermine the adverse effects of climate change.

Some Particularities of the Monetary Transmission Channels in Romania

In the last decade the monetary policy from Romania was deeply changed. The inflation decreased considerably in comparison with the 1990s. From a few years National Bank of Romania adopted the inflation targeting strategy that implied a careful use of the monetary instruments. The success of the Central Bank depends greatly on understanding the monetary transmission mechanism. Using the VAR methodology, we analyze in this article the particularities of the monetary transmission mechanism in Romania.

Transmission of U.S. Stock Market ImpliedVolatility to Equity Markets of Emerging Countries

This article examines the predictive power of the implied volatility originating in the U.S. stock market (USVIX) on returns of Brazil, Russia, India, and China (BRIC nations). By means of VAR and GARCH methodology, we model the relationship of USVIX, a probabilistic interpretation concerning the near-term implied volatility of Standard &amp; Poor’s 500 Index and the market returns of Brazil, Russia, India, and China. Results from this study show that returns of all BRIC nations in our sample are negatively and significantly impacted by USVIX, albeit with varying degree and magnitude. We also find evidence of volatility spillover from the USVIX to the market returns of BRIC nations. <b>TOPICS:</b>Security analysis and valuation, emerging, statistical methods, performance measurement

FDI in Greenfield Investment vs M&amp;A : its Impact on GD : a Comprehensive Analysis of Developed, BRICS &amp; East Asian Economies

Capital formation is an important determinant of economic growth. While domestic investments add to the capital stock in an economy, FDI plays a complementary role in overall capital formation and in filling the gap between domestic savings and investment. This paper attempts to examine the effect of two modes of FDI - Mergers &Acquisitions (M&As) and Greenfield FDI on GDP of a nation in different categories of countries - Developed Economies, BRICs and the 5 South East Asian (A5) nations. Using the VAR methodology, it was found that the GDP, cross border M&A and Greenfield FDI impact each other to some extent. There is a link between cross border M&A, Greenfield FDI and GDP. The extent varies according to the type of the country.

Crash Coefficients: A Faster and More Reliable Way to Compute Parametric VaR

The purpose of this work is to combine classical parametric VaR methodologies with Crash Coefficients. Parametric VaR is the first application of Value at Risk concept as thought by J.P Morgan RiskMetrics and, despite its flaws, is still widely used, also in its Beta VaR methodology. Here we are going to exploit Paul Wilmott's idea of CrashMetrics and to substitute Betas in classical parametric VaR with Crash Coefficients in order to obtain a more reliable VaR approach in crash conditions. We show that this correction could be really useful when we need huge amounts of VaR estimations for multitudes of simple retail portfolios.

Intra-Regional Trade and Sectoral Performances

This article examined whether Nigeria’s major sectors, that is, manufacturing, agricultural, oil and services have responded significantly to trade between the country and other Economic Community of West African States (ECOWAS) countries. Outputs of these sectors were used as their measures while intra-regional trade was captured using Nigeria’s export to and imports from the rest of ECOWAS. Using data for the period 1996 to 2008 and employing (vector autoregression) VAR methodology, the impulse response functions show that the country’s services sector had a significant positive response to her intra-regional import and export. Agricultural sector conversely had a significant negative response to import. Oil sector responded significantly to export up to midway into our sample space. But generally, Nigerian sectors have not responded significantly to intra-ECOWAS trade. Based on this finding, we therefore recommend that ECOWAS authorities should ensure comprehensive implementation of the region’s trade liberalization scheme (ETLS). This will enhance trade within the region.

Fiscal Multipliers During the Global Financial Crisis: Fiscal and Monetary Interaction Matters

This study investigates the fiscal multipliers of 21 OECD countries during the global financial crisis using panel VAR methodology. Our findings suggest that the 1-year fiscal multiplier was greater than 1 during the crisis, whereas it was smaller than 1 before the crisis because of different fiscal and monetary interactions. The combination of expansionary monetary and fiscal policies during the crisis boosted GDP more effectively through internal and external transmissions: investment crowding-out was limited, and net exports were spurred by the policy interaction. In addition, our results are robust to various specifications.

Assessing Foreign Exchange Risk Associated to a Public Debt Portfolio in Ghana Using the Value at Risk Technique

VaR is a potential loss. The VaR methodology gives the definition to risk-based capital, or economic capital and confidence level reflects the risk appetite of the bank. This work is a delta-normal VaR application in the case of the Ghanaian economy. It assesses the exchange risk associated to the Ghana public debt portfolio. We used daily spot exchange rates of the Ghana cedi against the three main currencies, the dollar, the euro and the pound. We are interested in the period from 04/01/2000 to 31/12/2009. We demonstrated that the VaR result is very high and that there is a need for the government to also trade in a currency that can serve as a potential hedge against risk.

Un análisis VAR estructural de política monetaria en Colombia

&lt;p&gt;Este trabajo utiliza la metodología VAR estructural, con restricciones de corto plazo impuestas por el modelo macroeconómico de comportamiento AD-AS, para identificar las relaciones contemporáneas entre las variables endógenas del sistema que imponen las curvas oferta agregada, la LM y la MP. También se analizan los efectos dinámicos de choques en la tasa de intervención del Banco de la República sobre el crecimiento económico y la inflación. Los resultados de las curvas contemporáneas MP indican que hay una relación estadísticamente significativa y positiva contemporánea entre las variables tasa de intervención del Banco de la República y la inflación. El análisis dinámico vía respuesta impulso indica que solamente los choques positivos de las diferencias de la tasa de intervención tienen efectos negativos rezagados y cíclicos sobre la inflación. Choques positivos de política monetaria tienen efectos negativos y significativos sobre el crecimiento económico. A través de la descomposición de varianza se encontró que ante choques de política monetaria se presentan mayores efectos acumulados en el crecimiento económico que en la inflación, y en esta última solamente cuando la tasa de intervención está en diferencias.&lt;/p&gt;

Assessing the sensitivity of consumption expenditure to inflation sentiment in post-communist economies

The aim of this article is to examine the influence of inflation sentiment on aggregate consumption. The study adds to the existing literature by i) emphasising the role of inflation perceptions and expectations in determining consumption patterns, ii) using structural VAR methodology that has not yet been applied in consumer studies, iii) employing an extensive dataset of eight individual post-communist countries (Czech Republic, Estonia, Hungary, Lithuania, Poland, Romania, Slovakia and Slovenia). Using innovation analysis it is shown that the theoretically expected conclusions are valid: consumers instantaneously decrease their consumption expenditure in response to shocks in perceived inflation, while their reaction to shocks in near-term inflation expectations is an abrupt (but temporary) consumption boost.

Interakcje między wskaźnikami makroekonomicznymi a indeksami giełdowymi w wybranych krajach

The paper presents an empirical verification of selected macroeconomic variables interacting with stock index. Estimations were made using two econometric techniques. On the one hand the VAR methodology was used here, standard for this class of research, on the other hand a novel approach was used with panel data regression. The study was conducted in seven selected capital markets, which are at different stages of development. Due to the fact this gave an interesting range of results i.a. different signs of coefficients obtained for inflation, the exchange rate, depending on the range of markets for which estimates were made.

ESTIMATION OF MARKET RISK IN UKRAINE USING VAR METHODOLOGY

The emergence of a market risk due to performing operations with currency can result insubstantial financial losses. That is why such situations require carrying out of profoundanalysis and management of respective risks. The market risk of this kind is characterized withpossible losses of financial resources due to incorrectly performed operations with currency.The paper considers the possibility of application of the VaR methodology to the bank currencyportfolio using the following methods: delta-normal, as well as the methods of historicalmodeling and Monte-Carlo simulation. While performing the computing experiments actualdata used from the currency market of Ukraine. Quite acceptable results of forecasting possiblelosses were received by making use of Monte-Carlo simulation that hypothetically can takeinto account possible variations of the market exchange rates. It was established that the riskforecasting errors appear only due to non-predictable abrupt changes of exchange rates.

Evaluating the Mechanism of Oil Price Shocks and Fiscal Policy Responses in the Malaysian Economy

The paper aims to explore the symmetric impact of oil price shock on economy, to understand its mechanism channel and how fiscal policy response towards it. The Generalized Impulse Response Function and Variance Decomposition under the VAR methodology were employed. The empirical findings suggest that symmetric oil price shock has a positive and direct impact on oil revenue and government expenditure. However, the real GDP is vulnerable in a short-term but not in the long term period. These results would confirm that fiscal policy is the main mechanism channel that mitigates the adverse effects oil price shocks to the economy.

Another Look at the Stock Return Response to Monetary Policy Actions*

I analyze the effect of monetary policy actions on the cross-section of equity returns. Based on earlier theoretical work for the monetary transmission mechanism one can argue that changes in monetary policy should produce differentiated effects on firms and stocks with different characteristics. By using different portfolio sorts the results show that the impact of monthly changes in the Federal funds rate is greater for the returns of more financially constrained stocks (e.g., small and value stocks) than on the returns of stocks with a more favorable financial position (e.g., large and growth stocks). By using a VAR methodology, the results indicate that the negative effect of Fed funds rate shocks on stock returns comes from a corresponding negative effect on future expected cash flows (cash-flow news), which is stronger than the impact on future equity risk premia (discount rate news). Thus, cash-flow news is the main return component affected by changes in the Fed funds rate. These results are reasonably robust to different VAR specifications. Moreover, the dispersion in return responses to monetary shocks across stocks is explained by a similar dispersion in the effects into cash-flow news, which outweighs the dispersion in discount rate news betas. These results represent new evidence on the effect of monetary policy on stock prices and on the monetary transmission mechanism.

Forecasting Fiscal Variables: Only a Strong Growth Plan Can Sustain the Greek Austerity Programs - Evidence from Simultaneous and Structural Models

The goal of the present paper is to investigate not only the dynamics of the Greek public debt, but also the appropriate measures required for achieving fiscal consolidation. The empirical estimation is carried out using a macroeconomic dataset spanning the period 1980-2008 and both the 3SLS methodological approach on a theoretical model and the structural VAR methodology to perform forecast tests and to calibrate the future paths of the public debt variable up to 2020. The results suggest that only an aggressive growth policy could permit the country to achieve debt sustainability. The results are expected to have important implications to policy makers for designing effective macroeconomic policy in terms of achieving sustainable levels of public debt.

La brecha del producto y el producto potencial en Venezuela: una estimación SVAR

This paper estimates the GDP gap in Venezuela by means of the structural VAR methodology and the Blanchard and Quah decomposition for the period 1999:1-2010:4. We use quarterly data for the inflation rate, real GDP, unemployment rate, and oil prices. We identify fiscal and monetary innovations on the demand side and technological and labor market disturbances on the supply side. Empirical results reveal that even though there is a wide gap between real and potential GDP at the beginning of the period, it tends to narrow towards the end of the period as a result of the rise in oil prices. The GDP sample forecast shows that this gap, eventually, could fall as a result of the contraction in economic activity during 2009 and 2010.

Fossil fuel prices, exchange rate, and stock market: A dynamic causality analysis on the European market

The article investigates causality between fossil fuel prices, exchange rates and the German Stock Index (DAX). The analysis is conducted dynamically with the use of rolling VAR methodology on the basis of weekly data from the period October 2001–June 2012. The results obtained show that the relationship between the variables changed over time depending on the level of volatility in financial markets.