34 research outputs found
Risk aversion connectedness in five European countries
No full textIn this paper we compute an aggregate index of risk aversion and indices of vulnerability and the contribution to systemic risk aversion for five European countries. The variance risk premium proxies risk aversion. The contribution to the literature is twofold. First, this is the first study estimating not only the common component, but also indices of directional connectedness among variance risk premia. Second, it is the first to estimate the interconnections by means of a FIVAR model, in order to account for long memory. Our analysis indicates measures of total and directional connectedness unlike those that would be obtained with the use of a short memory VAR. These differences arise when the focus is on market turmoil periods and on forecast horizons of thirty days. Future research evaluating spillovers among long memory series can benefit from our results. Policy-makers should take these interconnections into account when adopting effective macroeconomic policies
Wavelet analysis and denoising: New tools for economists
No full textThis paper surveys the techniques of wavelets analysis and the associated methods of denoising. The Discrete Wavelet Transform and its undecimated version, the Maximum Overlapping Discrete Wavelet Transform, are described. The methods of wavelets analysis can be used to show how the frequency content of the data varies with time. This allows us to pinpoint in time such events as major structural breaks. The sparse nature of the wavelets representation also facilitates the process of noise reduction by nonlinear wavelet shrinkage, which can be used to reveal the underlying trends in economic data. An application of these techniques to the UK real GDP (1873-2001) is described. The purpose of the analysis is to reveal the true structure of the data - including its local irregularities and abrupt changes - and the results are surprising
Volatility co-movements: a time scale decomposition analysis
No full textIn this paper we are interested in detecting contagion from US to European stock market volatilities
in the period immediately after the Lehman Brothers’ collapse. The analysis, based on a factor
decomposition of the covariance matrix of implied and realized volatilities, is carried for different
sub-samples (identified as normal and crisis periods) and across different (high) frequency bands.
In particular, the analysis is split in two stages. In the first stage, we retrieve the time series of
wavelet coefficients for each volatility series for high frequency scales, using the Maximal
Overlapping Discrete Wavelet transform and, in a second stage, we apply Maximum Likelihood for
a factor decomposition of the short-run covariance matrix.Given our focus on the standardized
factor loadings associated with the US shock (to control for an heteroscedasticity bias), the
empirical findings show no evidence of contagion from the US stock market volatility in realized
volatility to all the European countries, while for implied volatility we find a weak evidence of
contagion which depends on the scale (the only country not influenced being Netherlands)
The Decline in U.S. Output Growth Volatility: A Wavelet Analysis
No full textThe aim of the paper is to determine whether or not the volatility of the growth rate of US output has changed in the period
since late 1940's, and to attribute a precise date, if possible, to
any such change.
By applying the Discrete Wavelet Transform (DWT) to the annualized quarter-to quarter output growth series, we can test the homogeneity of the variance on a scale by scale basis without needing to fit a parametric model to the observed time series. A version of the Inclan and Tiao (1994) Normalised and Centered Cumulative Sum of Squares test, adapted to wavelet analysis, leads us to reject the null hypothesis of constant variance in the two levels of decomposition of the highest resolution or frequency and to locate a single break in 1982. The economic implications are explored
A wavelet analysis of US fiscal sustainability
No full textIn this paper, we reassess the relationship between primary deficit and lagged debt to GDP ratio (Bohn, 1998), to
test for US debt sustainability over the period 1795–2012. Our analysis is rooted in the wavelet domain enabling
the detection of interesting patterns and otherwise hidden information. We find evidence of long term fiscal sustainability
but only up until 1995 and also we show that governments tend to respond more vigorously to budget
deficits when the level of debt is high rather than low
Testing for contagion: a time-scale decomposition
No full textThe aim of the paper is to test for financial contagion by estimating a simultaneous equation model
subject to structural breaks. For this purpose, we use the Maximum Overlapping Discrete Wavelet
Transform, MODWT, to decompose four asset returns into different scale components (each
associated with a given frequency range). The decomposition will enable us to obtain the moment
conditions necessary to (over)identify a structural form model with a single dummy and the one
with multiple dummies capturing shifts in the co-movement of asset returns occurring during
periods of financial turmoil. A Montecarlo simulation exercise shows that test based on a single
dummy structural form model has good size and power properties in detecting financial contagion.
The empirical results for four East Asian stock markets show that, once we account for
interdependence through an (unobservable) common factor, there is no evidence of contagion but
only (limited) empirical support of hypersensitivity and extra-vulnerability during the 1997-1998
financial turbulence
Spectral structures in econometrics modern techniques in wavelet analysis and band limited estimation
No full textEThOS - Electronic Theses Online ServiceGBUnited Kingdo
Testing for public debt sustainability using band spectrum regression analysis "
No full textIn this note we focus on the response of the primary surplus to debt (ratios to GDP)over a low frequency band (associated with cycles with period between eight and sixteen years) to filter out business cycle effects. For this purpose, we use band spectrum regression, using both the Fourier Transform and the Discrete Wavelet transform, fitted to pooled panel dataset of 18 EMU countries. The empirical findings give evidence of fiscal fatigue within Eurozone:the response of primary surplus to debt will decrease over a finite debt limit
An index of financial connectedness applied to variance risk premia
No full textThe purpose is to construct an index of financial connectedness among France, Germany, UK, Switzerland and the Netherlands variance risk premia.
The variance risk premium of each country stock market is measured by the difference between the (square) of implied volatility and expected
realized variance of the stock market for next month. The total and directional indices of financial connectedness are obtained from the forecast
error variance decomposition of a Vector Autoregressive Model, VAR, as recently suggested by Diebold and Yilmaz. While the authors main focus
is on connectedness among financial returns, they base their analysis on a short memory stationary VAR. Given the long memory properties of the
series under investigation, we base the computation of the moving average coefficients useful for the computation of variance decomposition by
modeling a fractionally integrated Vector Autoregressive Mode
Testing for public debt sustainability using a time-scale decomposition analysis
No full textIn this paper we estimate the response of primary surplus to lagged debt to test for debt sustainability within the 17 EMU countries by using a factor model. The analysis is split into two stages. In the first stage we retrieve the cyclical and long-run components of primary surplus and debt ratios of each EMU country using a wavelet decomposition for each fiscal covariate, based on the Maximal Overlapping Discrete Wavelet Transform. In the second stage, we use Full Information Maximum Likelihood for a factor decomposition of thecross covariance matrix of the wavelet coefficients of primary deficit and debt to GDP ratios in order to measure the short run and the long run reaction of the primary surplus to (lagged) debt. The empirical evidence shows a positive response of primary surplus to debt within EMU as a whole. Country specific factor decomposition confirms Germany as the one of the most virtuous countries, and, Italy, as the only PIIGS member on a long-run sustainable path for deb
