VAR Techniques Research Articles

Comparing Two Methods for the Identification of News Shocks

Recent empirical literature delivered, based on different structural VAR approaches, controversial results concerning the role of anticipated technology—news—shocks in business cycle fluctuations. We deal with this controversy and investigate (i) the extent to which two prominent structural VAR approaches can be useful in recuperating news shock dynamics from artificially generated data in general and (ii) why and to what extent these SVAR approaches differ in the results they deliver in particular. Thereby, we provide several insights for the users of both VAR techniques with small samples in practice.

Aggregate Production Function, Its Determinants and Their Impacts on Aggregate Output: Case of Bahrain

Aggregate Production Function, Its Determinants and Their Impacts on Aggregate Output: Case of Bahrain Ibrahem H. Alezzee Abstract In this paper an attempt is made to examine and analyse the influence of a few determinants of the level of real output (RGDP) of Kingdom of Bahrain, using Aggregate Cobb-Douglas Production Function (APF). Besides the inputs of labor (LF) and capital accumulation (GCF), two other factors believed to have essential impacts on the level of aggregate output, namely expenditure on educating (EDUR) and life expectancy (LIFEXP) are added to the traditional Cobb-Douglas production function as determinants of real output. Time series data on all the relevant variables have been used and tested for stationarity and association among them, using Augmented Dickey-Fuller test of unit root and Co-integration test. The null hypothesis of unit root in Augmented Dickey-Fuller test is rejected and we conclude that the data are stationary at first difference. Co-integration test indicates only long-run associations amongst the variables in the analysis. VAR technique is used to examine the variability of the RGDP of Bahrain. Important finding of this analysis is that all inputs – capital accumulation (GCF), labor force LF), expenditures on education (EDUR) and life expectancy - have significant impact on the level of GDP, but in varying degrees. LF has the most powerful influence while GCF has the least as suggested by the elasticity of output with respect to labor force and capital formation. Moreover, increasing return to scale is indicated. Full Text: PDF DOI: 10.15640/jibe.v2n3a6

VaR Computation of Non-Gaussian Stochastic Model

This paper proposes the VaR computation of non-Gaussian stochastic model. The problem of the VaR evaluation comes from the fact that it is not easy to estimate volatility. We present non-Gaussian models using stochastic volatility model where volatility is governed by logarithmic Ornstein-Uhlenbeck process. First, we show how to estimate the volatility with The Kalman filter procedure, and second we show how to extend the classical VaR techniques in an operational way using the stochastic process taking into account the asymmetric and leptokurtic distributions. 

Measuring liquidity risk in Social Security using VaR technique

Article history: Received October 15, 2012 Received in revised format 4 December 2012 Accepted 8 December 2012 Available online December 9 2012 Measuring liquidity risk plays an important role on any business unit especially financial organizations. Social security systems in most countries around the world are responsible to provide necessary requirements in many countries such as health care, pension plans, etc. Therefore, it is necessary to reduce any risk associated with these systems as much as possible. In this paper, we study liquidity risk in Iranian social security using VaR technique. The proposed model of this paper uses historical information for a fiscal year of 2008-2011. We first divide the information of each year into two groups of first and second half and using VaR technique analyzed whether there was any trend change in these two groups. The results of our survey indicate that the mean of VaR in the second half of the year is greater than the first half of the year. Therefore, we can confirm that VaR maintains an increasing trend over the time horizon. We also study the trend in liquidity using regression analysis for each year, separately and the results of our survey confirm that there was an increasing trend in liquidity over time. © 2013 Growing Science Ltd. All rights reserved.

Real exchange rates, trade balance and capital flows in Africa

We analyze the intertemporal causal relationships between the real exchange rate and trade balance and cross-border capital flows in Africa. We use annual data of nine major African countries for the period 1993–2009. Through panel VAR techniques, we document some causality from real exchange rates to cross-border flows of African countries. Results however differ amongst the three kinds of flows examined and are not uniform across different country clusters. Our findings lend support to the classical balance of trade theoretical view in which the net effect of a depreciation of the domestic currency is an improvement in the domestic country's balance of payments position in the short-run.

FORECASTING THE DOW JONES RATE OF CHANGE BY USING VECTOR AUTO-REGRESSION

In this paper I used VAR Technique and estimated an equation that enables us to forecast future expected changes in the Dow Jones.Surprisingly, I found that small lags in the Dow Jones are not significant, while very distant lags are significant and can explain a large amount of the variance in the rate of change of the Dow Jones. Comparing actual to fitted values, I found that in 10 out of 11 predictions the forecasts lie within the confidence interval of the prediction.

A Causal Study Between Electricity Consumption and CO<SUB>2</SUB> Emissions in India

This study examines the causal relationships between per-capita electricity consumption and per capita Co 2 emissions for India covering the period 1971 to 2006 by using the cointegration and error correction models. Our study reveals that there exists co integration between the per capita Co 2 emissions and per-capita electricity consumption. Both the time series per capita Co 2 emissions and Electricity consumption are non stationary in level form, but are individually integrated of order one. Granger's causality test provided enough evidence of longer-term equilibrium relation between the two variables, which will attract the attention of policymakers in drawing out efficient policy making to drive the economy with less pollutant emissions. Empirical results have shown that up to lag 7, there exists a bilateral causality between the two variables that shows how these two variables are associated and there is a need for a closer look at the consumption of fossil fuels in generating and consuming the electricity in association with the environment. Further, VAR technique is used for forecasting the per capita Co2 emissions; the forecast for the future years are accurate with very mild forecast error.

Econometric Investigation Of Relationships Among Export, Fdi And Growth In India: An Application Of Toda-Yamamoto-Dolado-Lutkephol Granger Causality Test

Most of the study of causal relationship of GDP or growth with Trade and Foreign Direct Investment in the context of India rely on cross country comparisons, or simple correlations/regressions disregarding nonstationarity properties, or at most on VAR or VECM or Johansen-Juselius cointegration technique of testing for Granger causality. The potential biases, pitfalls, influence of nuisance parameters and asymptotic unreliability of these techniques have been well documented in the literature and also briefly mentioned in this paper. Therefore, this paper employs the more recent and robust Toda-Yamamoto-Dolado-Lutkephol augmented VAR(p) technique for testing Granger causality among these three time series. This technique has been shown to provide more robust and asymptotically reliable results under wide variety of situations regarding the cointegration relationships among the time series. This study also focuses on the post liberalization period and clearly shows that the post- liberalization period significantly differs from the pre-liberalization period in the GDP-Export-FDI nexus. We find strong support for Export-led and Foreign Direct Investment led growth hypotheses only in the post liberalization period.

A first look at the properties of India's volatility index

PurposeThe purpose of this paper is to examine the statistical properties of the volatility index of India, India Vix (Ivix), its relationship with the Indian stock market and its predictive power for forecasting future variance. Further, the paper examines the volatility transmission between India and developed markets.Design/methodology/approachThe study uses quantile regression and VAR techniques to examine the empirical issues.FindingsThe results of the study show that Ivix returns are negatively related to stock market returns and the leverage effect is only significant around the middle of the joint distribution. The asymmetric response of Ivix is also not observed in the left tail and is significant again around the centre of the distribution. Monthly volatility forecasts obtained from Ivix contain important information about future market volatility. Finally, overnight volatility movements from the US market have significant effect on the Indian market's volatility and transmission in opposite direction was not observed.Practical implicationsIf Ivix is included in a stock portfolio when the market moves up, Ivix may not fall significantly, consequently, the portfolio returns are not negatively effected. But, when market declines sharply, i.e. for large losses, Ivix may not move up significantly in the opposite direction, thereby not providing the much‐needed insurance to the portfolio returns. But for normal/average market declines, volatility derivatives on Ivix may be useful as portfolio insurance tools.Originality/valueThe paper is novel in employing quantile regression methodology to examine the empirical relationships of a volatility index. Volatility spillovers between emerging and developed markets are studied using volatility indices that are ex ante.

Modeling Tourist Arrivals Using Time Series Analysis: Evidence From Australia

Australian tourism has a logistic trend as Butler’s model shows. The stagnation has not been reached so opportunities exist to increase tourism. The logistic model predicts 7.2 million tourists in 2015 but time series models of ARIMA and VAR improve the prediction and explain the data. The ARIMA (2, 2, 2) fits well while the VAR lead to Granger causalities between the three data sets. A regression model (R2 = 0.99) using Australian tourist arrival as a function of Europe and World arrivals allowed to further understand the Granger causality. The ARIMA model predicts tourist numbers to be approximately 6 million in 2015. The VAR technique allowed impulse response analysis as well. A two-way causality between the tourist in Australia, Europe and World exists, while impulse response indicated different effect patterns, where tourist arrivals increase in the first period and declines in the second period but experience seasonal fluctuations in the third period. The strongest causalities in were period 1 between World and Europe; period 2-a one-way causality from Australia to World and period 3-a two-way causalities between Australia, Europe and World. The impulse responses results were aligned with the Butler theory.

VaR optimal portfolio with transaction costs

We consider the problem of portfolio optimization under VaR risk measure taking into account transaction costs. Fixed costs as well as impact costs as a nonlinear function of trading activity are incorporated in the optimal portfolio model. Thus the obtained model is a nonlinear optimization problem with nonsmooth objective function. The model is solved by an iterative method based on a smoothing VaR technique. We prove the convergence of the considered iterative procedure and demonstrate the nontrivial influence of transaction costs on the optimal portfolio weights.

Assessing the Sensitivity of Inflation to Economic Activity

A number of academic studies suggest that from the mid-1990s onwards there were changes in the link between inflation and economic activity. However, it remains unclear the extent to which this phenomenon can be ascribed to a change in the structural relationship between inflation and output, as opposed to a change in the size and nature of the shocks hitting the economy. This paper uses a suite of models, such as time-varying VAR techniques, traditional macro models, as well as DSGE models, to investigate, for various European countries as well as for the euro area, the evolution of the link between inflation and resource utilization and its dependence on the nature and size of the shocks. Our analysis suggests that the relationship between inflation and activity has indeed been changing over time, while remaining positive, with the correlation peaking during recessions. Quantitatively, the link between output and inflation is found to be highly dependent on which type of shocks hit the economy: while, in general, all demand shocks to output imply a reaction of inflation of the same sign, the latter will be less pronounced when output fluctuations are driven by supply shocks. In addition, a sharp deceleration of activity, as opposed to a subdued but protracted slowdown, results in a swifter decline in inflation. Inflation exhibits a rather strong persistence, with a negative impact still visible three years after the initial shock. JEL Classification: E31, E32, E37

The Study on the Evaluation System of Investment Value of Listed Companies on the GEM

The global financial crisis hastened the development of the Shenzhen GEM is a venture capital a key link in the chain, force the development of SME financing difficulty in resolving the issue. In view of the characteristics and specific risks of Growth Enterprise Market (GEM), this paper measures the market risk of 28 listed companies on the GEM by use of VaR techniques, and introduces VaR into the company's evaluation system of investment value, so it provides a set of effective evaluation method for investment value analysis of companies on Shenzhen GEM.

Decomposing the Relationship Between Human Capital and GDP: An Empirical Analysis of Bangladesh

This paper dissects the relationship between human capital stock and real GDP per capita in Bangladesh using VEC and VAR techniques. Results show that GDP granger causes aggregate human capital stock. This paper constructs a measure of Bangladesh's human capital stock for the period of 1973-2004 using the perpetual inventory method. Innovations in secondary and higher secondary education are found to have the greatest short to medium-term impact on the country's real GDP. Consistently this research also finds evidence that the variance of the human capital sequence is strongly influenced by shocks to the GDP sequence, whereas the evolution of GDP over the medium term is relatively unaffected by shocks to aggregate human capital stock. These results show that increases in human capital tend to follow income. The findings of this research suggest that secondary and higher secondary education should be emphasized by Bangladesh.

Transmission of Government Spending Shocks in the Euro Area: Time Variation and Driving Forces

This paper provides new evidence on the effects of government spending shocks and the fiscal transmission mechanism in the euro area for the period 1980-2008. Our contribution is two-fold. First, we investigate changes in the macroeconomic impact of government spending shocks using time-varying structural VAR techniques. The results show that the short-run effectiveness of government spending in stabilizing real GDP and private consumption has increased until the end-1980s but it has decreased thereafter. Moreover, government spending multipliers at longer horizons have declined substantially over the sample period. We also observe a weaker response of real wages and a stronger response of the nominal interest rate to spending shocks. Second, we provide econometric evidence on the driving forces behind the observed time variation of spending multipliers. We find that a higher ratio of credit to households over GDP, a smaller share of government investment and a larger share of public wages over total government spending have led to decreasing contemporaneous multipliers. At the same time, our results indicate that higher government debt-to-GDP ratios have negatively affected long-term multipliers. Keywords: Government spending shocks; Fiscal transmission mechanism; Structural change; Bayesian analysis; Structural vector autoregressions; Time-varying parameter models JEL classification: C32; E62; H30; H50

Optimal interest rate derivatives portfolio with controlled sensitivities

In the interest rate market, the use of derivatives is necessary and can significantly influence the balance sheet of a bank. Moreover, in the light of the recent crisis, it became obvious the need for portfolios with specific and known risk characteristics. This paper proposes a method for constructing optimal portfolios of derivatives with specific risk/return characteristics in the interest rate market. The portfolios can include any interest rate derivative security such as bonds, swaps, caps, floors, swaoptions, CMS, etc. The optimal portfolios will have their risk sensitivities (delta, gamma, theta, etc.) within prespecified bands. In this way, the trade-off between risk and return will be controlled through the life of the portfolio avoiding unwanted risks. The method proposed is structural and dynamic so that it can fit to trading level, risk management level and senior management level. Moreover, the method can include VAR and CVAR techniques which are currently used in risk management.

The Economic Policy of Ronald Reagan: Between Supply-Side and Keynesianism

“Reaganomics” is a popular term used to refer to the economic policies of Ronald W. Reagan, the 40th U.S. President (1981–1989), which called for widespread tax cuts, decreased social spending, increased military spending, and the deregulation of domestic markets. In this paper, we analyze American economic policy during the Eigh-ties. After a brief introduction, where a general economic context of that country is shown, we discuss and revise the economic literature about these issues. Afterwards, we present an augmented IS-LM model for Reagan years, estimated bay VAR techniques.

Reference-Dependent Preferences and the Transmission of Monetary Policy

This paper proposes a novel explanation of the vast empirical evidence showing that output and prices react asymmetrically to monetary policy innovations over contractions and expansions in the business cycle. We use VAR techniques to show that monetary policy exerts stronger effects on the U.S. GDP during contractionary phases, as compared to expansionary ones. As to prices, their response is not statistically different across different cyclical stages. We show that these facts are consistent with a New Neoclassical Synthesis model based on the assumption that households. utility partly depends on deviations of their consumption from a reference level below which aversion to loss is displayed. In line with the theory developed by Kahneman and Tversky (1979), losses in consumption utility loom larger than gains. This implies state-dependent degrees of real rigidity and elasticity of intertemporal substitution in consumption that generate competing effects on the responses of output and inflation following a monetary innovation. The key predictions of the model are in line with the data. We then explore the state-dependent trade-o¤ between inflation and output stabilization that naturally arises in this context. Greater elasticity of inflation to real activity during expansionary stages of the cycle promotes a stronger degree of policy activism in the response to the expected rate of inflation under discretion, compared to what is otherwise prescribed during contractions.

Transmission of Government Spending Shocks in the Euro Area: Time Variation and Driving Forces

This paper provides new evidence on the effects of government spending shocks and the fiscal transmission mechanism in the euro area for the period 1980-2008. Our contribution is two-fold. First, we investigate changes in the macroeconomic impact of government spending shocks using time-varying structural VAR techniques. The results show that the short-run effectiveness of government spending in stabilizing real GDP and private consumption has increased until the end-1980s but it has decreased thereafter. Moreover, government spending multipliers at longer horizons have declined substantially over the sample period. We also observe a weaker response of real wages and a stronger response of the nominal interest rate to spending shocks. Second, we provide econometric evidence on the driving forces behind the observed time variation of spending multipliers. We find that a higher ratio of credit to households over GDP, a smaller share of government investment and a larger share of public wages over total government spending have led to decreasing contemporaneous multipliers. At the same time, our results indicate that higher government debt-to-GDP ratios have negatively affected long-term multipliers. JEL Classification: C32, E62, H30, H50

Structural breaks and the expectations hypothesis of the term structure: evidence from Central European countries

The expectations hypothesis of the term structure of interest rates in the Czech Republic, Hungary, Poland and Slovakia, which joined the EU on May 2004, is investigated in this paper. Using VAR and cointegration techniques in the presence of structural breaks, I examine several testable implications of the theory: (i) cointegration of interest rates, (ii) spread stationarity, (iii) validity of the cross-equation restrictions implied by the theory and (iv) no excess volatility of the actual spread relative to the theoretical spread. The results support the expectations hypothesis for the Czech Republic and Hungary and reject it for Poland and Slovakia.