In this article we introduce a new class of test statistics designed to detect the occurrence of abnormal observations. It derives from the joint distribution of moment- and quantile-based estimators of power variation sigma^r, under the assumption of a normal distribution for the underlying data. Our novel tests can be applied to test for jumps and are found to be generally more powerful than widely used alternatives. An extensive empirical illustration for high-frequency equity data suggests that jumps can be more prevalent than inferred from existing tests on the second or third moment of the data.
{"title":"A Quantile-Based Realized Measure of Variation: New Tests for Outlying Observations in Financial Data","authors":"Charles S. Bos, P. Janus","doi":"10.2139/ssrn.2335900","DOIUrl":"https://doi.org/10.2139/ssrn.2335900","url":null,"abstract":"In this article we introduce a new class of test statistics designed to detect the occurrence of abnormal observations. It derives from the joint distribution of moment- and quantile-based estimators of power variation sigma^r, under the assumption of a normal distribution for the underlying data. Our novel tests can be applied to test for jumps and are found to be generally more powerful than widely used alternatives. An extensive empirical illustration for high-frequency equity data suggests that jumps can be more prevalent than inferred from existing tests on the second or third moment of the data.","PeriodicalId":425229,"journal":{"name":"ERN: Hypothesis Testing (Topic)","volume":"149 4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-10-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122457105","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We develop Granger causality tests that apply directly to data sampled at different frequencies. We show that taking advantage of mixed frequency data allows us to better recover causal relationships when compared to the conventional common low frequency approach. We also show that the new causality tests have higher local asymptotic power as well as more power in finite samples compared to conventional tests. In an empirical application involving U.S. macroeconomic indicators, we show that the mixed frequency approach and the low frequency approach produce very different causal implications, with the former yielding more intuitively appealing result.
{"title":"Testing for Granger Causality with Mixed Frequency Data","authors":"Eric Ghysels, Jonathan B. Hill, Kaiji Motegi","doi":"10.2139/ssrn.2465448","DOIUrl":"https://doi.org/10.2139/ssrn.2465448","url":null,"abstract":"We develop Granger causality tests that apply directly to data sampled at different frequencies. We show that taking advantage of mixed frequency data allows us to better recover causal relationships when compared to the conventional common low frequency approach. We also show that the new causality tests have higher local asymptotic power as well as more power in finite samples compared to conventional tests. In an empirical application involving U.S. macroeconomic indicators, we show that the mixed frequency approach and the low frequency approach produce very different causal implications, with the former yielding more intuitively appealing result.","PeriodicalId":425229,"journal":{"name":"ERN: Hypothesis Testing (Topic)","volume":"31 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124434657","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine how bank capital and borrower bargaining power affect loan spreads. Consistent with previous studies, higher bank capital has a negative impact on loan rates, but borrower cash flow has a significant effect on this impact: compared with high-capital banks, low-capital banks charge more for borrowers with low cash flow, but offer greater marginal discounts as these borrowers’ cash flow rises. These effects are largely focused on more bank-dependent borrowers. We find some evidence that low-capital banks charge a higher premium for bank-dependent borrowers’ systematic risk, but not for their total equity risk or default risk. Received January 27, 2015; editorial decision July 7, 2018 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
{"title":"Bank Capital, Borrower Power, and Loan Rates","authors":"João A. C. Santos, Andrew Winton","doi":"10.2139/ssrn.1343897","DOIUrl":"https://doi.org/10.2139/ssrn.1343897","url":null,"abstract":"\u0000 We examine how bank capital and borrower bargaining power affect loan spreads. Consistent with previous studies, higher bank capital has a negative impact on loan rates, but borrower cash flow has a significant effect on this impact: compared with high-capital banks, low-capital banks charge more for borrowers with low cash flow, but offer greater marginal discounts as these borrowers’ cash flow rises. These effects are largely focused on more bank-dependent borrowers. We find some evidence that low-capital banks charge a higher premium for bank-dependent borrowers’ systematic risk, but not for their total equity risk or default risk.\u0000 Received January 27, 2015; editorial decision July 7, 2018 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.","PeriodicalId":425229,"journal":{"name":"ERN: Hypothesis Testing (Topic)","volume":"56 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-05-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131211991","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Stock market inefficiency has important implications for both investors and authorities. When stock market fails to perform the "sensitive processor" role, investors should doubt the strategy "hold-the-market" and adopt the strategy "beat-the- market" to pick up the winners. In this paper a number of statitical tests are applied on individual and on sectoral price indices, as well as on the aggregate price index of Saudi stock exchange Market. The results of the tests reject the hypothesis of the random walk at all levels of stock price indices.
{"title":"Testing Efficiency Performance of Saudi Stock Market","authors":"I. Onour","doi":"10.4197/ECO.23-2.2","DOIUrl":"https://doi.org/10.4197/ECO.23-2.2","url":null,"abstract":"Stock market inefficiency has important implications for both investors and authorities. When stock market fails to perform the \"sensitive processor\" role, investors should doubt the strategy \"hold-the-market\" and adopt the strategy \"beat-the- market\" to pick up the winners. In this paper a number of statitical tests are applied on individual and on sectoral price indices, as well as on the aggregate price index of Saudi stock exchange Market. The results of the tests reject the hypothesis of the random walk at all levels of stock price indices.","PeriodicalId":425229,"journal":{"name":"ERN: Hypothesis Testing (Topic)","volume":"10 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-11-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133414460","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We examine whether organizational form matters for a firm's cost of capital. Contrary to conventional view, we argue that coinsurance among a firm's business units can reduce systematic risk through the avoidance of countercyclical deadweight costs. We find that diversified firms have on average a lower cost of capital than comparable portfolios of standalone firms. In addition, diversified firms with less correlated segment cash flows have a lower cost of capital, consistent with a coinsurance effect. Holding cash flows constant, our estimates imply an average value gain of approximately 5% when moving from the highest to the lowest cash flow correlation quintile.
{"title":"Corporate Diversification and the Cost of Capital","authors":"Rebecca N. Hann, M. Ogneva, O. Ozbas","doi":"10.2139/ssrn.1364481","DOIUrl":"https://doi.org/10.2139/ssrn.1364481","url":null,"abstract":"We examine whether organizational form matters for a firm's cost of capital. Contrary to conventional view, we argue that coinsurance among a firm's business units can reduce systematic risk through the avoidance of countercyclical deadweight costs. We find that diversified firms have on average a lower cost of capital than comparable portfolios of standalone firms. In addition, diversified firms with less correlated segment cash flows have a lower cost of capital, consistent with a coinsurance effect. Holding cash flows constant, our estimates imply an average value gain of approximately 5% when moving from the highest to the lowest cash flow correlation quintile.","PeriodicalId":425229,"journal":{"name":"ERN: Hypothesis Testing (Topic)","volume":"19 7","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-10-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120867752","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Lorenzo Camponovo, O. Scaillet, O. Scaillet, F. Trojani, Fabio Trojani
Testing procedures for predictive regressions with lagged autoregressive variables imply a suboptimal inference in presence of small violations of ideal assumptions. We propose a novel testing framework resistant to such violations, which is consistent with nearly integrated regressors and applicable to multi-predictor settings, when the data may only approximately follow a predictive regression model. The Monte Carlo evidence demonstrates large improvements of our approach, while the empirical analysis produces a strong robust evidence of market return predictability, using predictive variables such as the dividend yield, the volatility risk premium or labor income.
{"title":"Predictive Regression and Robust Hypothesis Testing: Predictability Hidden by Anomalous Observations","authors":"Lorenzo Camponovo, O. Scaillet, O. Scaillet, F. Trojani, Fabio Trojani","doi":"10.2139/ssrn.2080766","DOIUrl":"https://doi.org/10.2139/ssrn.2080766","url":null,"abstract":"Testing procedures for predictive regressions with lagged autoregressive variables imply a suboptimal inference in presence of small violations of ideal assumptions. We propose a novel testing framework resistant to such violations, which is consistent with nearly integrated regressors and applicable to multi-predictor settings, when the data may only approximately follow a predictive regression model. The Monte Carlo evidence demonstrates large improvements of our approach, while the empirical analysis produces a strong robust evidence of market return predictability, using predictive variables such as the dividend yield, the volatility risk premium or labor income.","PeriodicalId":425229,"journal":{"name":"ERN: Hypothesis Testing (Topic)","volume":"135 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-06-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131734182","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
For a broad class of linear biased estimators, we establish conditions under which the F statistic based on biased estimators is identical to the F statistic based on least-squares estimator. Several biased estimators in the literature are shown to satisfy these conditions.
{"title":"Hypothesis Testing When a Linear Regression is Estimated by Biased Estimators","authors":"Ai Deng","doi":"10.2139/ssrn.2106192","DOIUrl":"https://doi.org/10.2139/ssrn.2106192","url":null,"abstract":"For a broad class of linear biased estimators, we establish conditions under which the F statistic based on biased estimators is identical to the F statistic based on least-squares estimator. Several biased estimators in the literature are shown to satisfy these conditions.","PeriodicalId":425229,"journal":{"name":"ERN: Hypothesis Testing (Topic)","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116706926","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper investigates the empirical evidence of long-run risk and its implications for the equity premium puzzle. We find that the long-run risk model is generally weakly identified and that standard inferences tend to underestimate the uncertainty of long-run risk. We extend the LM-type test of Ma and Nelson (2010) that remains valid under weak identification to the bivariate VARMA-GARCH model of consumption and dividend growth. The results cast doubt on the validity of long-run risk as an explanation for the equity premium puzzle. We also evaluate the approach of Bansal, Kiku and Yaron (2007a), which extracts long-run risk by regressing consumption growth and its volatility on predictive variables. The results using the Bonferroni Q-test of Campbell and Yogo (2006) suggest that consumption and dividend growth are generally unpredictable by price-dividend ratio and risk-free rate. This casts doubt on the validity of the BKY approach.
{"title":"Long-Run Risk and its Implications for the Equity Premium Puzzle: New Evidence from a Multivariate Framework","authors":"Jun Ma","doi":"10.2139/ssrn.1821483","DOIUrl":"https://doi.org/10.2139/ssrn.1821483","url":null,"abstract":"This paper investigates the empirical evidence of long-run risk and its implications for the equity premium puzzle. We find that the long-run risk model is generally weakly identified and that standard inferences tend to underestimate the uncertainty of long-run risk. We extend the LM-type test of Ma and Nelson (2010) that remains valid under weak identification to the bivariate VARMA-GARCH model of consumption and dividend growth. The results cast doubt on the validity of long-run risk as an explanation for the equity premium puzzle. We also evaluate the approach of Bansal, Kiku and Yaron (2007a), which extracts long-run risk by regressing consumption growth and its volatility on predictive variables. The results using the Bonferroni Q-test of Campbell and Yogo (2006) suggest that consumption and dividend growth are generally unpredictable by price-dividend ratio and risk-free rate. This casts doubt on the validity of the BKY approach.","PeriodicalId":425229,"journal":{"name":"ERN: Hypothesis Testing (Topic)","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-03-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126051792","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper develops a simple panel unit-root test that accommodates cross-sectional dependence among variables and smooth structural changes in deterministic components. The proposed test is the simple average of the individual statistics constructed from the breaks and cross-sectional dependence augmented Dickey-Fuller (BCADF) regression. Applying the sequential limit approach, this paper shows that the asymptotic distribution of the BCADF statistic is free of nuisance parameters as N, T go to infinity. We also extend our analysis to the case where shocks are serially correlated. The limiting distribution of the average BCADF statistic is shown to exist and its critical values are tabulated. Monte-Carlo experiments point out that the size and power of the average BCADF statistic are generally good as long as T is greater than fifty. The test is then applied to examine the validity of long-run purchasing power parity.
{"title":"A Panel Unit-Root Test with Smooth Breaks and Cross-Sectional Dependence","authors":"Chingnun Lee, Jyh‐Lin Wu","doi":"10.2139/ssrn.2039620","DOIUrl":"https://doi.org/10.2139/ssrn.2039620","url":null,"abstract":"This paper develops a simple panel unit-root test that accommodates cross-sectional dependence among variables and smooth structural changes in deterministic components. The proposed test is the simple average of the individual statistics constructed from the breaks and cross-sectional dependence augmented Dickey-Fuller (BCADF) regression. Applying the sequential limit approach, this paper shows that the asymptotic distribution of the BCADF statistic is free of nuisance parameters as N, T go to infinity. We also extend our analysis to the case where shocks are serially correlated. The limiting distribution of the average BCADF statistic is shown to exist and its critical values are tabulated. Monte-Carlo experiments point out that the size and power of the average BCADF statistic are generally good as long as T is greater than fifty. The test is then applied to examine the validity of long-run purchasing power parity.","PeriodicalId":425229,"journal":{"name":"ERN: Hypothesis Testing (Topic)","volume":"26 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-02-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121077571","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This comment was prepared for the International Journal of Forecasting mini-symposium on the Soyer-Hogarth experiment. The experiment evaluates the ability of expert econometricians to make predictions based on commonly provided regression output. Visual displays of quantitative information, including simple plots of data, outperformed predictions based on R-squared, t-statistics, and other common diagnostics. Reliance on graphing - on the visualization of uncertainty - was suggested more than a century ago by Karl Pearson, a founding father of English language statistics. The results of the Soyer and Hogarth experiment, when combined with evidence produced by Ziliak and McCloskey (2008) and others, suggests that graphing and visualization should receive more attention and tests of statistical significance, less.
{"title":"Visualizing Uncertainty: On Soyer's and Hogarth's 'The Illusion of Predictability: How Regression Statistics Mislead Experts'","authors":"S. Ziliak","doi":"10.2139/ssrn.2104279","DOIUrl":"https://doi.org/10.2139/ssrn.2104279","url":null,"abstract":"This comment was prepared for the International Journal of Forecasting mini-symposium on the Soyer-Hogarth experiment. The experiment evaluates the ability of expert econometricians to make predictions based on commonly provided regression output. Visual displays of quantitative information, including simple plots of data, outperformed predictions based on R-squared, t-statistics, and other common diagnostics. Reliance on graphing - on the visualization of uncertainty - was suggested more than a century ago by Karl Pearson, a founding father of English language statistics. The results of the Soyer and Hogarth experiment, when combined with evidence produced by Ziliak and McCloskey (2008) and others, suggests that graphing and visualization should receive more attention and tests of statistical significance, less.","PeriodicalId":425229,"journal":{"name":"ERN: Hypothesis Testing (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-02-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129034220","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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