Econometric Institute Research Papers
http://repub.eur.nl/col/445/
List of Publicationsenhttp://repub.eur.nl/eur_signature.png
http://repub.eur.nl/
RePub, Erasmus University RepositoryAre the S&P 500 Index and Crude Oil, Natural Gas and Ethanol Futures Related for Intra-Day Data?
http://repub.eur.nl/pub/79731/
Mon, 01 Feb 2016 00:00:01 GMT<div>M. Caporin</div><div>C-L. Chang</div><div>M.J. McAleer</div>
The energy sector is one of the most important in the world, so that time series fluctuations in leading energy sources have been analysed widely. As the leading energy commodities are traded on international stock exchanges, the analysis of the fluctuations in stock and financial derivatives prices and returns have also been investigated extensively in recent years. Much of the empirical analysis has concentrated on using daily, weekly or monthly data, with little research based on intra-day data. The paper analyses the relationships among the S&P 500 Index and futures prices, returns and volatility of three leading energy commodities, namely crude oil, natural gas and ethanol, using intra- day data. The detailed analysis of intra-day temporal aggregation in examining returns relationships and volatility spillovers across the equity and energy futures markets, and the effects of overnight returns, volume, realized volatility, asymmetry, and spillovers across the four financial markets, leads to interesting and useful results for decision making and hedging strategies. The empirical results relating to alternative models of mean and variance feedback and asymmetry for intra-daily returns, asymmetry and volatility spillovers, and dynamic conditional correlations and covariances, show that the relationships between the stock market and alternative energy financial derivatives, specifically futures prices and returns, can and do vary according to the trading range, whether daily or overnight effects are considered, and the temporal aggregation and time frequencies that are used.A Bayesian Approach to Excess Volatility, Short-term Underreaction and Long-term Overreaction during Financial Crises
http://repub.eur.nl/pub/79730/
Fri, 01 Jan 2016 00:00:01 GMT<div>X. Guo</div><div>M.J. McAleer</div><div>W-K. Wong</div><div>L. Zhu</div>
In this paper, we introduce a new Bayesian approach to explain some market anomalies during financial crises and subsequent recovery. We assume that the earnings shock of an asset follows a random walk model with and without drift to incorporate the impact of financial crises. We further assume the earning shock follows an exponential family distribution to take care of symmetric as well as asymmetric information. By using this model setting, we develop some properties on the expected earnings shock and its volatility, and establish prop- erties of investor behavior on the stock price and its volatility during financial crises and subsequent recovery. Thereafter, we develop properties to explain excess volatility, short-term underreaction, long-term overreaction, and their magnitude effects during financial crises and subsequent recovery.A simple approach to discrete-time infinite horizon problems
http://repub.eur.nl/pub/79542/
Fri, 04 Dec 2015 00:00:01 GMT<div>J. Brinkhuis</div>
In this note, we consider a type of discrete-time infinite horizon problem that has one ingredient only, a constraint correspondence. The value function of a policy has an intuitive mono- tonicity property; this is the essence of the four standard theorems on the functional equation (‘the Bellman equation’). Some insight is offered into the boundedness condition for the value function that occurs in the formulation of these results: it can be interpreted as accountability of the loss of value caused by a non-optimal policy or, alternatively, it can be interpreted as irrelevance of devia- tions, in the distant future, from the considered policy. Without the boundedness condition, there is a gap, which can be viewed as the persistent potential positive impact of deviations, in the distant future, from the considered policy. The general stationary discrete-time infinite horizon optimization problem considered in Stokey and Lucas (1989) can be mapped to this type of problems and so the results in the present paper can be applied to this general class of problems.On the uniform limit condition for discrete-time infinite horizon problems
http://repub.eur.nl/pub/79541/
Thu, 03 Dec 2015 00:00:01 GMT<div>J. Brinkhuis</div>
In this note, a simplified version of the four main results for discrete-time infinite horizon problems, theorems 4.2-4.5 from Stokey, Lucas and Prescott (1989) [SLP], is presented. A novel assumption on these problems is proposed—the uniform limit condition, which is formulated in terms of the data of the problem. It can be used for example before one has started to look for the optimal value function and for an optimal plan or if one cannot find them analytically: one verifies the uniform limit condition and then one disposes of criteria for optimality of the value function and a plan in terms of the functional equation and the boundedness condition. A comparison to [SLP] is made. The version in [SLP] requires one to verify whether a candidate optimal value function satisfies the boundedness condition; it is easier to check the uniform limit condition instead, as is demonstrated by examples. There is essentially no loss of strength or generality compared to [SLP]. The necessary and sufficient conditions for optimality coincide in the present paper but not in [SLP]. The proofs in the present paper are shorter than in [SLP]. An earlier attempt to simplify, in Acemoglu (2009) --here the limit condition is used rather than the uniform limit condition-- is not correct.A new proof of the Lagrange multiplier rule
http://repub.eur.nl/pub/79540/
Wed, 02 Dec 2015 00:00:01 GMT<div>J. Brinkhuis</div><div>V. Protassov</div>
We present an elementary self-contained proof for the Lagrange multiplier rule. It does not refer to any substantial preparations and it is only based on the observation that a certain limit is positive. At the end of this note, the power of the Lagrange multiplier rule is analyzed.Choosing Expected Shortfall over VaR in Basel III Using Stochastic Dominance
http://repub.eur.nl/pub/79539/
Tue, 01 Dec 2015 00:00:01 GMT<div>C-L. Chang</div><div>J.A. Jiménez-Martín</div><div>E. Maasoumi</div><div>M.J. McAleer</div>
Bank risk managers follow the Basel Committee on Banking Supervision (BCBS) recommendations that recently proposed shifting the quantitative risk metrics system from Value-at-Risk (VaR) to Expected Shortfall (ES). The Basel Committee on Banking Supervision (2013, p. 3) noted that: “a number of weaknesses have been identified with using VaR for determining regulatory capital requirements, including its inability to capture tail risk”. The proposed reform costs and impact on bank balances may be substantial, such that the size and distribution of daily capital charges under the new rules could be affected significantly. Regulators and bank risk managers agree that all else being equal, a “better” distribution of daily capital charges is to be preferred. The distribution of daily capital charges depends generally on two sets of factors: (1) the risk function that is adopted (ES versus VaR); and (2) their estimated counterparts. The latter is dependent on what models are used by bank risk managers to provide for forecasts of daily capital charges. That is to say, while ES is known to be a preferable “risk function” based on its fundamental properties and greater accounting for the tails of alternative distributions, that same sensitivity to tails can lead to greater daily capital charges, which is the relevant (that is, controlling) practical reference for risk management decisions and observations. In view of the generally agreed focus in this field on the tails of non-standard distributions and low probability outcomes, an assessment of relative merits of estimated ES and estimated VaR is ideally not limited to mean variance considerations. For this reason, robust comparisons between ES and VaR will be achieved in the paper by using a Stochastic Dominance (SD) approach to rank ES and VaR.Down-side Risk Metrics as Portfolio Diversification Strategies across the GFC
http://repub.eur.nl/pub/79216/
Sun, 01 Nov 2015 00:00:01 GMT<div>D.E. Allen</div><div>M.J. McAleer</div><div>R.J. Powell</div><div>A.K. Singh</div>
This paper features an analysis of the effectiveness of a range of portfolio diversification strategies, with a focus on down-side risk metrics, as a portfolio diversification strategy in a European market context. We apply these measures to a set of daily arithmetically compounded returns on a set of ten market indices representing the major European markets for a nine year period from the beginning of 2005 to the end of 2013. The sample period, which incorporates the periods of both the Global Financial Crisis (GFC) and subsequent European Debt Crisis (EDC), is challenging one for the application of portfolio investment strategies. The analysis is undertaken via the examination of multiple investment strategies and a variety of hold-out periods and back-tests. We commence by using four two year estimation periods and subsequent one year investment hold out period, to analyse a naive 1/N diversification strategy, and to contrast its effectiveness with Markowitz mean variance analysis with positive weights. Markowitz optimisation is then compared with various down- side investment opimisation strategies. We begin by comparing Markowitz with CVaR, and then proceed to evaluate the relative e effctiveness of Markowitz with various draw-down strategies, utilising a series of backtests. Our results suggest that none of the more sophisticated optimisation strategies appear to dominate naive diversification.Nonlinear time series and neural-network models of exchange rates between the US dollar and major currencies
http://repub.eur.nl/pub/79217/
Sun, 01 Nov 2015 00:00:01 GMT<div>D.E. Allen</div><div>M.J. McAleer</div><div>S. Peiris</div><div>A.K. Singh</div>
This paper features an analysis of major currency exchange rate movements in relation to the US dollar, as constituted in US dollar terms. Euro, British pound, Chinese yuan, and Japanese yen are modelled using a variety of non- linear models, including smooth transition regression models, logistic smooth transition regressions models, threshold autoregressive models, nonlinear autoregressive models, and additive nonlinear autoregressive models, plus Neural Network models. The results suggest that there is no dominating class of time series models, and the different currency pairs relationships with the US dollar are captured best by neural net regression models, over the ten year sample of daily exchange rate returns data, from August 2005 to August 2015.Informatics, Data Mining, Econometrics and Financial Economics: A Connection
http://repub.eur.nl/pub/79219/
Sun, 01 Nov 2015 00:00:01 GMT<div>C-L. Chang</div><div>M.J. McAleer</div><div>W-K. Wong</div>
This short communication reviews some of the literature in econometrics and financial economics that is related to informatics and data mining. We then discuss some of the research on econometrics and financial economics that could be extended to informatics and data mining beyond the existing areas in econometrics and financial economics.The Fundamental Equation in Tourism Finance
http://repub.eur.nl/pub/79221/
Sun, 01 Nov 2015 00:00:01 GMT<div>M.J. McAleer</div>
The purpose of the paper is to present the fundamental equation in tourism finance that connects tourism research to empirical finance and financial econometrics. The energy industry, which includes, oil, gas and bio-energy fuels, together with the tourism industry, are two of the most important industries in the world today in terms of employment and generating income. The primary purpose in attracting domestic and international tourists to a country, region or city is to maximize tourism expenditure. The paper will concentrate on daily tourism expenditure, regardless of whether such data might be readily available. If such data are not available, a practical method is presented to calculate the appropriate data.Benchmarking judgmentally adjusted forecasts
http://repub.eur.nl/pub/79222/
Sun, 01 Nov 2015 00:00:01 GMT<div>Ph.H.B.F. Franses</div><div>L.P. de Bruijn</div>
Many publicly available macroeconomic forecasts are judgmentally-adjusted model-based forecasts. In practice usually only a single final forecast is available, and not the underlying econometric model, nor are the size and reason for adjustment known. Hence, the relative weights given to the model forecasts and to the judgment are usually unknown to the analyst.
This paper proposes a methodology to evaluate the quality of such final forecasts, also to allow learning from past errors. To do so, the analyst needs benchmark forecasts. We propose two such benchmarks. The first is the simple no-change forecast, which is the bottom line forecast that an expert should be able to improve. The second benchmark is an estimated model based forecast, which is found as the best forecast given the realizations and the final forecasts. We illustrate this methodology for two sets of GDP growth forecasts, one for the US and for the Netherlands. These applications tell us that adjustment appears most effective in periods of first recovery from a recession.Dose-optimal vaccine allocation over multiple populations
http://repub.eur.nl/pub/79212/
Thu, 29 Oct 2015 00:00:01 GMT<div>E. Duijzer</div><div>W.L. van Jaarsveld</div><div>J. Wallinga</div><div>R. Dekker</div>
For a large number of infectious diseases, vaccination is the most effective way to prevent an epidemic. However, the vaccine stockpile is hardly ever sufficient to treat the entire population, which brings about the challenge of vaccine allocation. To aid decision makers facing this challenge, we provide insights into the structure of this problem.
We first investigate the dependence of health benefit on the fraction of people that receive vaccination, where we define health benefit as the total number of people that escape infection. We start with the seminal SIR compartmental model. Using implicit function analysis, we prove the existence of a unique vaccination fraction that maxi- mizes the health benefit per dose of vaccine, and that the health benefit per dose of vaccine decreases monotonically when moving away from this fraction in either direc- tion. Surprisingly, this fraction does not coincide with the so-called critical vaccination coverage that has been advocated in literature. We extend these insights to other compartmental models such as the SEIR model.
These results allow us to provide new insights into vaccine allocation to multiple non-interacting or weakly interacting populations. We explain the counter-intuitive switching behavior of optimal allocation. We show that allocations that maximize health benefits are rarely equitable, while equitable allocations may be significantly non-optimal.Consensus forecasters: How good are they individually and why?
http://repub.eur.nl/pub/78774/
Mon, 12 Oct 2015 00:00:01 GMT<div>Ph.H.B.F. Franses</div><div>N. Maassen</div>
We analyze the monthly forecasts for annual US GDP growth, CPI inflation rate and the unemployment rate delivered by forty professional forecasters collected in the Consensus database for 2000M01-2014M12. To understand why some forecasters are better than others, we create simple benchmark model-based forecasts. Evaluating the individual forecasts against the model forecasts is informative for how the professional forecasters behave. Next, we link this behavior to forecast performance. We find that forecasters who impose proper judgment to model-based forecasts also have highest forecast accuracy, and hence, they do not perform best just by luck.An Iterative Framework for Real-time Railway Rescheduling
http://repub.eur.nl/pub/78719/
Mon, 05 Oct 2015 00:00:01 GMT<div>T.A.B. Dollevoet</div><div>D. Huisman</div><div>L.G. Kroon</div><div>L.P. Veelenturf</div><div>J.C. Wagenaar</div>
Since disruptions in railway networks are inevitable, railway operators and infrastructure managers need reliable measures and tools for disruption management. Current literature on railway disruption management focuses most of the time on rescheduling one resource (timetable, rolling stock or crew) at the time. In this research, we describe an iterative framework in which all three resources are considered. The framework applies existing models and algorithms for rescheduling the individual resources. We extensively test our framework on instances from Netherlands Railways and show that schedules which are feasible for all three resources can be obtained within short computation times. This shows that the framework and the existing rescheduling approaches can be of great value in practice.Market Integration Dynamics and Asymptotic Price Convergence in Distribution
http://repub.eur.nl/pub/79213/
Thu, 01 Oct 2015 00:00:01 GMT<div>A. García-Hiernaux</div><div>D.E. Guerrero</div><div>M.J. McAleer</div>
This paper analyzes the market integration process of nominal prices, develops a model to analyze market integration, and presents a test of increasing market integration. A distinction is made between the economic concepts of price conver- gence in mean and variance. When both types of convergence occur, prices are said to converge in distribution. We present concepts and definitions related to the market integration process, link these to price convergence in distribution, argue that the Law of One Price is not a sufficient condition for market integration, and present a test of price convergence in distribution. We apply our methodology to two different cases, namely the integration of: i) the inland grains market in 19th Century USA, and ii) the Eurozone long-term bonds market after the euro entered circulation.From Disorder to Order
http://repub.eur.nl/pub/79214/
Thu, 01 Oct 2015 00:00:01 GMT<div>X-G. Yue</div><div>Y. Cao</div><div>M.J. McAleer</div>
In the physical sciences, order and disorder refer to the presence or absence of some symmetry or correlation in a many-particle system. It follows that it is important to examine whether there is any regularity hidden in the phase transition of the disorder- order relationship. In this paper a series of experiments are devised and executed to reveal the power law relationship between order and disorder, and to determine that the power law is indeed an important regular pattern in the phase transition from disorder to order.Stochastic levels and duration dependence in US unemployment
http://repub.eur.nl/pub/78710/
Wed, 23 Sep 2015 00:00:01 GMT<div>L.P. de Bruijn</div><div>Ph.H.B.F. Franses</div>
We introduce a new time series model that can capture the properties of data as is typically exemplified by monthly US unemployment data. These data show the familiar nonlinear features, with steeper increases in unem- ployment during economic downswings than the decreases during economic prosperity. At the same time, the levels of unemployment in each of the two states do not seem fixed, nor are the transition periods abrupt. Finally, our model should generate out-of-sample forecasts that mimic the in-sample properties. We demonstrate that our new and flexible model covers all those features, and our illustration to monthly US unemployment data shows its merits, both in and out of sample.Research Ideas for the Journal of Health & Medical Economics: Opinion
http://repub.eur.nl/pub/78715/
Tue, 01 Sep 2015 00:00:01 GMT<div>C-L. Chang</div><div>M.J. McAleer</div>
The purpose of this Opinion article is to discuss some ideas that might lead to papers that are suitable for publication in the Journal of Health and Medical Economics. The suggestions include the affordability and sustainability of universal health care insurance, monitoring and managing costs associated with public and private health and medical care coverage, panel data models based on industrial organization and corporate finance, and health and medical investment finance.Research Ideas for the Journal of Informatics and Data Mining: Opinion
http://repub.eur.nl/pub/78716/
Tue, 01 Sep 2015 00:00:01 GMT<div>M.J. McAleer</div>
The purpose of this Opinion article is to discuss some ideas that might lead to papers that are suitable for publication in the Journal of Informatics and Data Mining. The suggestions include the analysis of citations databases, PI-BETA (Papers Ignored – By Even The Authors), model specification and testing, pre-test bias and data mining, international rankings of academic journals based on citations, international rankings of academic institutions based on citations and other factors, and case studies in numerous disciplines in the sciences and social sciences.Behavioural, Financial, and Health & Medical Economics: A Connection
http://repub.eur.nl/pub/78718/
Tue, 01 Sep 2015 00:00:01 GMT<div>C-L. Chang</div><div>M.J. McAleer</div><div>W-K. Wong</div>
This Opinion article briefly reviews some of the literature in behavioural and financial economics that are related to health & medical economics. We then discuss some of the research on behavioural and financial economics that could be extended to health & medical economics beyond the existing areas in theory, statistics and econometrics.