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Fact And Fiction In FX Arbitrage Processes
Get PDFThe efficient markets hypothesis implies that arbitrage opportunities in markets such as
those for foreign exchange (FX) would be, at most, short-lived. The present paper surveys the fragmented nature of FX markets, revealing that information in these markets is also likely to be fragmented. The “quant” workforce in the hedge fund featured in The Fear Index novel by Robert Harris would have little or no reason for their existence in an EMH world. The four currency combinatorial analysis of arbitrage sequences contained in Cross, Kozyakin, O’Callaghan, Pokrovskii
and Pokrovskiy (2012) is then considered. Their results suggest that arbitrage processes, rather than being self-extinguishing, tend to be periodic in nature. This helps explain the fact that arbitrage dealing tends to be endemic in FX markets
Where is the economics in spatial econometrics?
Get PDFSpatial econometrics has been criticized by some economists because some model specifications have been driven by data-analytic considerations rather than having a firm foundation in economic theory. In particular this applies to the so-called W matrix, which is integral to the structure of endogenous and exogenous spatial lags, and to spatial error processes, and which are almost the sine qua non of spatial econometrics. Moreover it has been
suggested that the significance of a spatially lagged dependent variable involving W may
be misleading, since it may be simply picking up the effects of omitted spatially dependent variables, incorrectly suggesting the existence of a spillover mechanism. In this paper we review the theoretical and empirical rationale for network dependence and spatial externalities as embodied in spatially lagged variables, arguing that failing to acknowledge their presence at least leads to biased inference, can be a cause of inconsistent estimation, and
leads to an incorrect understanding of true causal processes
Bayesian Model Averaging in the Instrumental Variable Regression Model
Get PDFThis paper considers the instrumental variable regression model when
there is uncertainty about the set of instruments, exogeneity restrictions,
the validity of identifying restrictions and the set of exogenous regressors.
This uncertainty can result in a huge number of models. To avoid statistical
problems associated with standard model selection procedures, we develop a
reversible jump Markov chain Monte Carlo algorithm that allows us to do
Bayesian model averaging. The algorithm is very exible and can be easily
adapted to analyze any of the di¤erent priors that have been proposed in
the Bayesian instrumental variables literature. We show how to calculate
the probability of any relevant restriction (e.g. the posterior probability that
over-identifying restrictions hold) and discuss diagnostic checking using the
posterior distribution of discrepancy vectors. We illustrate our methods in a
returns-to-schooling application
Economising, Strategising and the Decision to Outsource
Get PDFWe study the make-or-buy decision of oligopolistic firms in an industry in which final good production requires specialised inputs. Firms’ mode of operation decision depends on both the incentive to economize on costs and on strategic considerations. We explore the strategic incentives to outsource and show that asymmetric equilibria emerge, with firms
choosing different modes of operation, even when they are ex-ante identical. With ex-ante
asymmetries, higher cost firms are more likely to outsource. We apply our model to a
number of different international trading setups
Spatial Interactions in Hedonic Pricing Models: The Urban Housing Market of Aveiro, Portugal
Get PDFSpatial heterogeneity, spatial dependence and spatial scale constitute key features of spatial analysis of housing markets. However, the common practice of modelling spatial dependence as being generated by spatial interactions through a known spatial weights matrix is often not satisfactory. While existing estimators of spatial weights matrices are based on repeat sales or
panel data, this paper takes this approach to a cross-section setting. Specifically, based on an a priori definition of housing submarkets and the assumption of a multifactor model, we develop maximum likelihood methodology to estimate hedonic models that facilitate understanding of both spatial heterogeneity and spatial interactions. The methodology, based
on statistical orthogonal factor analysis, is applied to the urban housing market of Aveiro, Portugal at two different spatial scales
Stability of Growth Models with Generalised Lag Structures
Get PDFThis paper considers the lag structures of dynamic models in economics, arguing that the standard approach is too simple to capture the complexity of actual lag structures arising, for example, from production and investment decisions. It is argued that recent (1990s)
developments in the the theory of functional differential equations provide a means to analyse models with generalised lag structures.
The stability and asymptotic stability of two growth models with generalised
lag structures are analysed. The paper concludes with some speculative discussion of time-varying parameters
The regional economic impacts of biofuels: A review of multisectoral modelling techniques and evaluation of applications
Get PDFThe regional economic impact of biofuel production depends upon a number of interrelated factors: the specific biofuels feedstock and production technology employed; the sector’s embeddedness to the rest of the economy, through its demand for local resources; the extent to which new activity is created. These issues can be analysed using multisectoral economic models. Some studies have used (fixed price) Input-Output (IO) and Social Accounting Matrix (SAM) modelling frameworks, whilst a nascent Computable General Equilibrium (CGE) literature has also begun to examine the regional (and national) impact of biofuel development. This paper reviews, compares and evaluates these approaches for modelling the regional economic impacts of biofuels
The Stagnation Regime of the New Keynesian Model and Current US Policy
Get PDFIn Evans, Guse, and Honkapohja (2008) the intended steady state is locally but not globally stable under adaptive learning, and unstable deflationary paths can arise after large pessimistic shocks to expectations. In
the current paper a modified model is presented that includes a locally
stable stagnation regime as a possible outcome arising from large expectation shocks. Policy implications are examined. Sufficiently large temporary increases in government spending can dislodge the economy
from the stagnation regime and restore the natural stabilizing dynamics.
More specific policy proposals are presented and discussed
Transaction Costs and Institutions
Get PDFThis paper proposes a simple framework for understanding endogenous transaction costs - their composition, size and implications. In a model of diversification against risk, we distinguish between investments in institutions that facilitate exchange and the costs of conducting exchange itself. Institutional quality and market size are determined by the decisions of risk averse agents and conditions are discussed under which the efficient allocation may be
decentralized. We highlight a number of differences with models where
transaction costs are exogenous, including the implications for taxation and
measurement issues