The Great Moderation Flattens Fat Tails: Disappearing Leptokurtosis

Recently, Fagiolo et al. (2008) find fat tails of economic growth rates after adjusting outliers, autocorrelation and heteroskedasticity. This paper employs US quarterly real output growth, showing that this finding of fat tails may reflect the Great Moderation. That is, leptokurtosis disappears after GARCH adjustment once we incorporate the break in the variance equation.

Empirical Analysis of Credit Risk Regime Switching and Temporal Conditional Default Correlation in Credit Default Swap Valuation: The Market liquidity effect

In this paper, we extend the debate concerning Credit Default Swap valuation to include time varying correlation and co-variances. Traditional multi-variate techniques treat the correlations between covariates as constant over time; however, this view is not supported by the data. Secondly, since financial data does not follow a normal distribution because of its heavy tails, modeling the data using a Generalized Linear model (GLM) incorporating copulas emerge as a more robust technique over traditional approaches. This paper also includes an empirical analysis of the regime switching dynamics of credit risk in the presence of liquidity by following the general practice of assuming that credit and market risk follow a Markov process. The study was based on Credit Default Swap data obtained from Bloomberg that spanned the period January 1st 2004 to August 08th 2006. The empirical examination of the regime switching tendencies provided quantitative support to the anecdotal view that liquidity decreases as credit quality deteriorates. The analysis also examined the joint probability distribution of the credit risk determinants across credit quality through the use of a copula function which disaggregates the behavior embedded in the marginal gamma distributions, so as to isolate the level of dependence which is captured in the copula function. The results suggest that the time varying joint correlation matrix performed far superior as compared to the constant correlation matrix; the centerpiece of linear regression models.

Ontogenetic Effects of Hatching Plasticity in the Spotted Salamander (Ambystoma maculatum) due to Egg and Larval Predators

The ability to respond plastically to the environment has allowed amphibians to evolve a response to spatial and temporal variation in predation threat (Benard 2004). Embroys exposed to egg predation are expected to hatch out earlier than their conspecifics. Larval predation can induce a suite of phenotypic changes including growing a larger tail area. When presented with cues from both egg and larval predators, embryos are expected to respond to the egg predator by hatching out earlier because the egg predator presents an immediate threat. However, hatching early may be costly in the larval environment in terms of development, morphology, and/or behavior. We created a laboratory experiment in which we exposed clutches of spotted salamander (Ambystoma maculatum) eggs to both egg (caddisfly larvae) and larval (A. opacum) predators to test this hypothesis. We recorded hatching time and stage and took developmental and morphological data of the animals a week after hatching. Larvae were entered into lethal predation trials with a larval predatory sunfish (Lepomis sp.) in order to study behavior. We found that animals exposed to the egg predator cues hatched out earlier and at earlier developmental stages than conspecifics regardless of whether there was a larval predator present. Animals exposed to larval predator cues grew relatively larger tails and survived longer in the lethal predation trials. However the group exposed to both predators showed a cost of early hatching in terms of lower tail area and shorter survival time in predation trials. The morphological and developmental effects measured of hatching plasticity were transient as there were no developmental or morphological differences between the treatment groups at metamorphosis. Hatching plasticity may be transient but it is important to the development and survival of many amphibians.