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Articles 1741 - 1770 of 2930
Full-Text Articles in Social and Behavioral Sciences
Band Spectral Regression With Trending Data, Dean Corbae, Sam Ouliaris, Peter C.B. Phillips
Band Spectral Regression With Trending Data, Dean Corbae, Sam Ouliaris, Peter C.B. Phillips
Cowles Foundation Discussion Papers
Band spectral regression with deterministic and stochastic trends is considered. It is shown that conventional trend removal by regression in the time domain prior to band spectral regression leads to biased and inconsistent estimates of the parameters in a model with frequency dependent coefficients. Time domain and frequency domain procedures for dealing with this problem are examined. Trend removal in the frequency domain produces unbiased estimates and is recommended. An asymptotic theory is developed and the two cases of stationary data and cointegrated nonstationary data are compared. Efficient band spectral regression estimators and associated inferential methods are provided for models …
A Multifractal Model Of Asset Returns, Benoit Mandelbrot, Adlai Fisher, Laurent Calvet
A Multifractal Model Of Asset Returns, Benoit Mandelbrot, Adlai Fisher, Laurent Calvet
Cowles Foundation Discussion Papers
This paper presents the multifractal model of asset returns (“MMAR”), based upon the pioneering research into multifractal measures by Mandelbrot (1972, 1974). The multifractal model incorporates two elements of Mandelbrot’s past research that are now well-known in finance. First, the MMAR contains long-tails, as in Mandelbrot (1963), which focused on Lévy-stable distributions. In contrast to Mandelbrot (1963), this model does not necessarily imply infinite variance. Second. the model contains long-dependence, the characteristic feature of fractional Brownian Motion (FBM), introduced by Mandelbrot and van Ness (1968). In contrast to FBM, the multifractal model displays long dependence in the absolute value of …
Large Deviations And The Distribution Of Price Changes, Laurent Calvet, Adlai Fisher, Benoit Mandelbrot
Large Deviations And The Distribution Of Price Changes, Laurent Calvet, Adlai Fisher, Benoit Mandelbrot
Cowles Foundation Discussion Papers
The Multifractal Model of Asset Returns (“MMAR,” see Mandelbrot, Fisher, and Calvet, 1997) proposes a class of multifractal processes for the modelling of financial returns. In that paper, multifractal processes are defined by a scaling law for moments of the processes’ increments over finite time intervals. In the present paper, we discuss the local behavior of multifractal processes. We employ local Hölder exponents, a fundamental concept in real analysis that describes the local scaling properties of a realized path at any point in time. In contrast with the standard models of continuous time finance, multifractal processes contain a multiplicity of …
Multifractality Of Deutschemark/Us Dollar Exchange Rates, Adlai Fisher, Laurent Calvet, Benoit Mandelbrot
Multifractality Of Deutschemark/Us Dollar Exchange Rates, Adlai Fisher, Laurent Calvet, Benoit Mandelbrot
Cowles Foundation Discussion Papers
This paper presents the first empirical investigation of the Multifractal Model of Asset Returns (“MMAR”). The MMAR, developed in Mandelbrot, Fisher, and Calvet (1997), is an alternative to ARCH-type representations for modelling temporal heterogeneity in financial returns. Typically, researchers introduce temporal heterogeneity through time-varying conditional second moments in a discrete time framework. Multifractality introduces a new source of heterogeneity through time-varying local regularity in the price path. The concept of local Hölder exponent describes local regularity. Multifractal processes bridge the gap between locally Gaussian (Itô) diffusions and jump-diffusions by allowing a multiplicity of Hölder exponents. This paper investigates multifractality in …
Simple Counterexample To The Bootstrap, Donald W.K. Andrews
Simple Counterexample To The Bootstrap, Donald W.K. Andrews
Cowles Foundation Discussion Papers
The bootstrap of the maximum likelihood estimator of the mean of a sample of iid normal random variables with mean µ and variance one is not asymptotically correct to first order when the mean is restricted to be nonnegative. The problem occurs when the true value of the mean µ equals zero. This counterexample to the bootstrap generalizes to a wide variety of estimation problems in which the true parameter may be on the boundary of the parameter space. We provide some alternatives to the bootstrap that are asymptotically correct to first order. We consider two types of bootstrap percentile …
A Stochastic Infinite-Horizon Economy With Secured Lending, Or Unsecured Lending And Bankruptcy, Ioannis Karatzas, Martin Shubik, William D. Sudderth
A Stochastic Infinite-Horizon Economy With Secured Lending, Or Unsecured Lending And Bankruptcy, Ioannis Karatzas, Martin Shubik, William D. Sudderth
Cowles Foundation Discussion Papers
Modeling problems for a monetary economy are discussed and some examples are presented in the context of an infinite-horizon economy with one or two types of traders, who use fiat money to buy a single perishable consumption good. Three instances are considered, all with transactions in fiat money. The first model has no borrowing or lending. The second model permits both borrowing and lending, but all loans are secured. The third model has borrowing and unsecured lending, and takes into account the presence of debtors who are unable to honor their debts and go bankrupt. Borrowing and depositing take place …
A Model Of A Predatory State, Boaz Moselle, Ben Polak
A Model Of A Predatory State, Boaz Moselle, Ben Polak
Cowles Foundation Discussion Papers
We provide a model of a primitive state whose rulers extort taxes for their own ends. This ‘predatory’ state can result in lower levels of both output and popular welfare than either organized banditry or anarchy. The predatory state may provide public goods, such as protection or irrigation, and hence may superficially resemble a contractual state. But, the ability to provide such goods can actually reduce popular welfare after allowing for tax changes. We compare the revenues raised by taxation with those from banditry to get an idea when primitive states are likely to emerge. We then consider interactions between …
The Experiment In Applied Econometrics, James Tobin
The Experiment In Applied Econometrics, James Tobin
Cowles Foundation Discussion Papers
No abstract provided.
Model Selection In Partially Nonstationary Vector Autoregressive Processes With Reduced Rank Structure, John C. Chao, Peter C.B. Phillips
Model Selection In Partially Nonstationary Vector Autoregressive Processes With Reduced Rank Structure, John C. Chao, Peter C.B. Phillips
Cowles Foundation Discussion Papers
The current practice for determining the number of cointegrating vectors, or the cointegrating rank, in a vector autoregression (VAR) requires the investigator to perform a sequence of cointegration tests. However, as was shown in Johansen (1992), this type of sequential procedure does not lead to consistent estimation of the cointegrating rank. Moreover, these methods take as given the correct specification of the lag order of the VAR, though in actual applications the true lag length is rarely known, Simulation studies by Toda and Phillips (1994) and Chao (1993), on the other hand, have shown that test performance of these procedures …
Estimation When A Parameter Is On A Boundary: Theory And Applications, Donald W.K. Andrews
Estimation When A Parameter Is On A Boundary: Theory And Applications, Donald W.K. Andrews
Cowles Foundation Discussion Papers
This paper establishes the asymptotic distribution of extremum estimators when the true parameter lies on the boundary of the parameter space. The boundary may be linear, curved, and/or kinked. The asymptotic distribution is a function of a multivariate normal distribution in models without stochastic trends and a function of a multivariate Brownian motion in models with stochastic trends. The results apply to a wide variety of estimators and models. Examples treated explicitly in the paper are: (1) quasi-ML estimation of a random coefficients regression model with some coefficient variances equal to zero, (2) LS estimation of a regression model with …
The Significance Of The Market Portfolio, Stefano G. Athanasoulis, Robert J. Shiller
The Significance Of The Market Portfolio, Stefano G. Athanasoulis, Robert J. Shiller
Cowles Foundation Discussion Papers
The market portfolio (world portfolio) is in one sense a least important portfolio to provide to investors; there is always a better portfolio for social planners to make available to them. In a J -agent one-period stochastic endowment economy, where preferences are quadratic, the market portfolio is never spanned by the optimal markets a social planner would create. With identical preferences, the market portfolio is orthogonal to all J - 1 portfolios which achieve a first best solution. These conclusions rely on the assumption that the social planner has perfect information about agents’ utilities. We also show that as the …
Beyond The Cpi: An Augmented Cost Of Living Index (Acoli), William D. Nordhaus
Beyond The Cpi: An Augmented Cost Of Living Index (Acoli), William D. Nordhaus
Cowles Foundation Discussion Papers
This note examines the question of calculating an augmented cost of living index (ACOLI). The ACOLI is the appropriate deflator to apply to pretax market incomes when calculating economic well-being. Well-being includes, not only conventional consumer purchases, but also goods and services provided by employers, by mandated social regulations, and by tax-financed public goods. Because such augmented consumption is often provided in ways that raise prices but not market incomes, deflating with conventional price indexes may understate real income growth. An application of the ACOLI approach to the United States during the 1960-1994 period indicates that the conventional consumer price …
Second Order Approximation In A Linear Regression With Heteroskedasticity For Unknown Form, Oliver B. Linton
Second Order Approximation In A Linear Regression With Heteroskedasticity For Unknown Form, Oliver B. Linton
Cowles Foundation Discussion Papers
We develop stochastic expansions with remainder o P ( n –2µ ), where 0 < µ < 1/2, for a standardised semiparametric GLS estimator, a standard error, and a studentized statistic, in the linear regression model with heteroskedasticity of unknown form. We calculate the second moments of the truncated expansion, and use these approximations to compare two competing estimators and to define a method of bandwidth choice.
Can We Grow Faster?, James Tobin
Can We Grow Faster?, James Tobin
Cowles Foundation Discussion Papers
It is essential to distinguish between limits on national output and limits on its rate of growth. In the short run if output is below potential, demand stimulus can temporarily increase output and employment, with growth rates that cannot be sustained once the economy reaches full employment, potential output. This barrier is commonly called the NAIRU. The paper discusses the possibility that the economy can reach lower unemployment rates than previously thought, without increasing inflation. As to raising the sustainable rate of growth of potential output, the paper discusses skeptically various proposals: fiscal austerity, tax cuts, downsizing government. Many proposals …
Supply Constraints On Employment And Output: Nairu Versus Natural Rate, James Tobin
Supply Constraints On Employment And Output: Nairu Versus Natural Rate, James Tobin
Cowles Foundation Discussion Papers
NAIRU and NATURAL RATE are not synonymous. NAIRU is a macro outcome of an economy with many labor markets in diverse states of excess demand and excess supply. NAIRU represents an overall balance between the inflation-increasing pressures from excess-demand markets and the inflation-decreasing pressures from excess-supply markets. The natural rate, as described by Friedman, is a feature of walrasian market-clearing general equilibrium. While the NAIRU fits into a Keynesian model, the natural rate is an aspect of a New Classical model. The determinants of the two are theoretically different, and so are their implications for policy. The NAIRU varies from …
Asset Markets And Investment Decisions, A. De Waegenaere, Heracles M. Polemarchakis, L. Ventura
Asset Markets And Investment Decisions, A. De Waegenaere, Heracles M. Polemarchakis, L. Ventura
Cowles Foundation Discussion Papers
In an incomplete asset market, firms assign values to investment plans by projecting their payoffs on the span of the payoffs of marketed assets; equivalently, firms employ the Capital Asset Pricing Model. This is a criterion that does not require firms to possess information, such as the marginal valuation of revenue across date – events by shareholders, which is not observable; rather, it is based on information revealed by the prices and payoffs of marketed assets. Under standard assumptions, competitive equilibria exist. But, competitive equilibrium allocations need not satisfy a condition of constrained pareto optimality that recognizes the incompleteness of …
Some Higher Order Theory For A Consistent Nonparametric Model Specification Test, Yanqin Fan, Oliver B. Linton
Some Higher Order Theory For A Consistent Nonparametric Model Specification Test, Yanqin Fan, Oliver B. Linton
Cowles Foundation Discussion Papers
We provide second order theory for a smoothing-based model specification test. We derive the asymptotic cumulants and justify an Edgeworth distributional approximation valid to order close to n -1 . This is used to define size-corrected critical values whose null rejection frequency improves on the normal critical values. Our simulations confirm the efficacy of this method in moderate sized samples
Expanding The Scope Of Individual Risk Management: Moral Hazard And Other Behavioral Considerations, Robert J. Shiller
Expanding The Scope Of Individual Risk Management: Moral Hazard And Other Behavioral Considerations, Robert J. Shiller
Cowles Foundation Discussion Papers
There is a large potential for improving individual risk management through new risk management contracts and associated new index-settled derivatives. However, there are some difficult problems in designing contracts so that they will be used effectively. Individuals have idiosyncratic individual risks that can be hedged only at some real resource cost due to moral hazard. Individuals seem to exhibit behavior indicative of lack of appreciation of the principles of risk management. These problems are discussed, and some potential new risk management contracts that would make improvements in the management of major income risks are proposed
Stochastic Algorithms For Dynamic Models: Markov Perfect Equilibrium, And The ‘Curse’ Of Dimensionality, Ariel Pakes, Paul Mcguire
Stochastic Algorithms For Dynamic Models: Markov Perfect Equilibrium, And The ‘Curse’ Of Dimensionality, Ariel Pakes, Paul Mcguire
Cowles Foundation Discussion Papers
This paper provides an algorithm for computing policies for dynamic economic models whose state vectors evolve as ergodic Markov processes. The algorithm can be described as a simple learning process (one that agents might actually use). It has two features which break the relationship between its computational requirements and the dimension of the model’s state space. First the integral over future states needed to determine policies is never calculated; rather it is estimated by a simple average of past outcomes. Second, the algorithm never computes policies at all points. Iterations are defined by a location and only policies at that …
Consistent Moment Selection Procedures For Generalized Method Of Moments Estimation, Donald W.K. Andrews
Consistent Moment Selection Procedures For Generalized Method Of Moments Estimation, Donald W.K. Andrews
Cowles Foundation Discussion Papers
This paper considers a generalized method of moments (GMM) estimation problem in which one has a vector of moment conditions, some of which are correct and some incorrect. The paper introduces several procedures for consistently selecting the correct moment conditions. The procedures also can consistently determine whether there is a sufficient number of correct moment conditions to identify the unknown parameters of interest. The paper specifies moment selection criteria that are GMM analogues of the widely used BIC and AIC model selection criteria. (The latter is not consistent.) The paper also considers downward and upward testing procedures. All of the …
The Generalized War Of Attrition, Jeremy I. Bulow, Paul D. Klemperer
The Generalized War Of Attrition, Jeremy I. Bulow, Paul D. Klemperer
Cowles Foundation Discussion Papers
We generalize the War of Attrition model to allow for N + K firms competing for N prizes. Two special cases are of particular interest. First, if firms continue to pay their full costs after dropping out (as in a standard-setting context), each firm’s exit time is independent both of K and of the actions of other players. Second, in the limit in which firms pay no costs after dropping out (as in a natural-oligopoly problem), the field is immediately reduced to N + 1 firms. Furthermore, we have perfect sorting, so it is always the K -1 lowest-value players …
Promises Promises, John Geanakoplos
Promises Promises, John Geanakoplos
Cowles Foundation Discussion Papers
In the classical general equilibrium model, agents keep all their promises, every good is traded, and competition prevents any agent from earning superior returns on investments in financial markets. In this paper I introduce the age-old problem of broken promises into the general equilibrium model, and I find that a new market dynamic emerges. Given the legal system and institutions, market forces of supply and demand will establish the collateral levels which are required to secure promises. Since physical collateral will typically be scarce, these collateral levels will be set so low that there is bound to be some default. …
Prices, Asset Markets And Indeterminacy, Heracles M. Polemarchakis, P. Siconolfi
Prices, Asset Markets And Indeterminacy, Heracles M. Polemarchakis, P. Siconolfi
Cowles Foundation Discussion Papers
Competitive equilibrium allocations are indeterminate when the net trades in commodities are constrained, while the asset market is incomplete
Bayesian Posterior Distributions In Limited Information Analysis Of The Simultaneous Equations Model Using The Jeffreys’ Prior, John C. Chao, Peter C.B. Phillips
Bayesian Posterior Distributions In Limited Information Analysis Of The Simultaneous Equations Model Using The Jeffreys’ Prior, John C. Chao, Peter C.B. Phillips
Cowles Foundation Discussion Papers
This paper studies the use of the Jeffreys’ prior in Bayesian analysis of the simultaneous equations model (SEM). Exact representations are obtained for the posterior density of the structural coefficient beta in canonical SEM’s with two endogenous variables. For the general case with m endogenous variables and an unknown covariance matrix, the Laplace approximation is used to derive an analytic formula for the same posterior density. Both the exact and the approximate formulas we derive are found to exhibit Cauchy-like tails analogous to comparable results in the classical literature on LIML estimation. Moreover, in the special case of a two-equation, …
Market Diffusion With Two-Sided Learning, Dirk Bergemann, Juuso Välimäki
Market Diffusion With Two-Sided Learning, Dirk Bergemann, Juuso Välimäki
Cowles Foundation Discussion Papers
The diffusion of a new product of uncertain value is analyzed in a duopolistic market in continuous time. The two sides of the market, buyers and sellers, learn the true value of the new product over time as a result of experimentation. Buyers have heterogeneous preferences over the products and sellers compete in prices. The pricing policies and market shares of the sellers in the unique Markov perfect equilibrium are obtained explicitly. The dynamics of the equilibrium market shares display excessive sales of the new product relative to the social optimum in early stages and too low sales later on. …
Hyperfinite Asset Pricing Theory, M. Ali Khan, Yeneng Sun
Hyperfinite Asset Pricing Theory, M. Ali Khan, Yeneng Sun
Cowles Foundation Discussion Papers
We present a model of a financial market which unifies the capital-asset-pricing model (CAPM) of Sharpe-Lintner, and the arbitrage pricing theory (APT) of Ross. The model is based on a recent theory of hyperfinite processes, and it uncovers asset pricing phenomena which cannot be treated by classical methods, and whose asymptotic counterparts are not already, or even readily, apparent in the setting of a large but finite number of assets. In the model, an asset’s unexpected return can be decomposed into a systematic and an unsystematic part, as in the APT, and the systematic part further decomposed leads to a …
Conditional Independence Restrictions: Testing And Estimation, Oliver B. Linton, Pedro Gozalo
Conditional Independence Restrictions: Testing And Estimation, Oliver B. Linton, Pedro Gozalo
Cowles Foundation Discussion Papers
We propose a nonparametric empirical distribution function based test of an hypothesis of conditional independence between variables of interest. This hypothesis is of interest both for model specification purposes, parametric and semiparametric, and for non-model based testing of economic hypotheses. We allow for both discrete variables and estimated parameters. The asymptotic null distribution of the test statistic is a functional of a Gaussian process. A bootstrap procedure is proposed for calculating the critical values. Our test has power against alternatives at distance n -1/2 from the null; this result holding independently of dimension. Monte Carlo simulations provide evidence on size …
On The Number Of Bootstrap Repetitions For Bootstrap Standard Errors, Confidence Internals, And Tests, Donald W.K. Andrews, Moshe Buchinsky
On The Number Of Bootstrap Repetitions For Bootstrap Standard Errors, Confidence Internals, And Tests, Donald W.K. Andrews, Moshe Buchinsky
Cowles Foundation Discussion Papers
This paper considers the problem of choosing the number of bootstrap repetitions B for bootstrap standard errors, confidence intervals, and tests. For each of these problems, the paper provides a three-step method for choosing B to achieve a desired level of accuracy. Accuracy is measured by the percentage deviation of the bootstrap standard error estimate, confidence interval endpoint(s), test’s critical value, or test’s p -value based on B bootstrap simulations from the corresponding ideal bootstrap quantities for which B = ∞. Monte Carlo simulations show that the proposed methods work quite well. The results apply quite generally to parametric, semiparametric, …
Spurious Regression Unmasked, Peter C.B. Phillips
Spurious Regression Unmasked, Peter C.B. Phillips
Cowles Foundation Discussion Papers
This paper argues that trending time series can admit valid regression representations even when the dependent variable and the regressors are statistically independent, i.e., in situations that are presently characterized in the literature as “spurious regressions.” Our theory is directed mainly at the two classic examples of regressions of stochastic trends on time polynomials and regressions among independent random walks. But it has more general applicability and, we think, wider implications. Contrary to established wisdom, our theory justifies regressions of this type as valid models for the data. The radical conclusion that emerges from this study is that there are …
Exchange And Optimality, S. Ghosal, Heracles M. Polemarchakis
Exchange And Optimality, S. Ghosal, Heracles M. Polemarchakis
Cowles Foundation Discussion Papers
A feasible social state is irreducible if and only if, for any non-trivial partition of individuals with two groups, there exists another feasible social state at which every individual in the first group is equally well-off and someone strictly better-off. Competitive equilibria decentralize irreducible Pareto optimal social states