A comparison of linear forecasting models and neural networks:an application to Euro inflation and Euro Divisia

Linear models reach their limitations in applications with nonlinearities in the data. In this paper new empirical evidence is provided on the relative Euro inflation forecasting performance of linear and non-linear models. The well established and widely used univariate ARIMA and multivariate VAR models are used as linear forecasting models whereas neural networks (NN) are used as non-linear forecasting models. It is endeavoured to keep the level of subjectivity in the NN building process to a minimum in an attempt to exploit the full potentials of the NN. It is also investigated whether the historically poor performance of the theoretically superior measure of the monetary services flow, Divisia, relative to the traditional Simple Sum measure could be attributed to a certain extent to the evaluation of these indices within a linear framework. Results obtained suggest that non-linear models provide better within-sample and out-of-sample forecasts and linear models are simply a subset of them. The Divisia index also outperforms the Simple Sum index when evaluated in a non-linear framework. © 2005 Taylor & Francis Group Ltd.

A composite leading indicator of the inflation cycle for the Euro area

We evaluate the performance of composite leading indicators of turning points of inflation in the Euro area, constructed by combining the techniques of Fourier analysis and Kalman filters with the National Bureau of Economic Research methodology. In addition, the study compares the empirical performance of Euro Simple Sum and Divisia monetary aggregates and provides a tentative answer to the issue of whether or not the UK should join the Euro area. Our findings suggest that, first, the cyclical pattern of the different composite leading indicators very closely reflect that of the inflation cycle for the Euro area; second, the empirical performance of the Euro Divisia is better than its Simple Sum counterpart and third, the UK is better out of the Euro area. © 2005 Taylor & Francis Group Ltd.

Momentum profits and macroeconomic factors

This article tests whether macroeconomic variables and market sentiment influence the size of momentum profits. It finds that although returns to the winner and loser portfolios are influenced by a range of macroeconomic and market wide variables; momentum profits are influenced only by the scale of portfolio outflows. Thus, when investors are sending their capital elsewhere, reduced funds at home, dampen the profitability of the momentum trading strategy. It also finds that when the market closes, below its opening level in the previous six months, momentum profits are higher, which might be a reflection of mean reversion in the market. © 2004 Taylor and Francis Ltd.

The propensity to hedge with futures contracts:the case of potato futures contracts

This paper studies why UK non-financial firms hedge with potato futures contracts. It is found that the financial characteristics of firms in the sample play an important role in influencing the propensity to hedge. For example, it is found that firms that hedge are on average larger than firms that do not hedge. Firms that hedge also have more volatile earnings. Furthermore, firms that do hedge appear to want to smooth earnings to reduce the costs of financial distress and avoid entering the highest tax threshold. © 2005 Taylor & Francis.

Determinants of inward investment in the UK, a panel analysis

This paper develops an inter-industry model of inward investment, using a fixed effects approach. This demonstrates that when inward investment is investigated in such a framework, previous findings, relating to the specification of measures of location advantage and ownership advantages no longer hold. This also shows that there are some industries that have attracted significant inward investment over time, and continue to do so, while others are noticeably less successful. Reasons for this, and potential policy measures are briefly discussed.

The impact of foreign direct investment on UK manufacturing: is there a profit squeeze in domestic firms?

This paper examines the extent to which foreign direct investment (FDI) in selected UK manufacturing sectors has an impact on reported profits in domestic firms. Foreign manufacturing firms are characterized by relatively high labour productivity and low wage shares. Entry by foreign firms not only impacts on domestic market shares, but also on domestic cost conditions. As a result, profitability in the indigenous sector may be reduced. There are a number of policy implications of this analysis which are explored.

Determinants of entry and exit in the foreign owned sector of UK manufacturing

This paper examines the extent to which foreign entry and exit in the UK is related to domestic industry characteristics. The units of analysis are firm numbers, and thus entry and exit at the industry level are treated as being generated by Poisson processes. This therefore uses quasimaximum likelihood estimation, to estimate entry and exit functions simultaneously. The results demonstrate that foreign entry is attracted by industry level profitability and performance, but that firm specific 'ownership' advantages are also important. The results also demonstrate that inward investors that are motivated by the desire to exploit firm-specific assets, are unlikely to be more transient than domestic firms. This however, cannot be said of those foreign entrants who are attracted to the UK by location advantage or investment incentives.

An alternative DEA measure:a case of OECD countries

Analysis of the production efficiency of industrialized countries, questioning whether certain countries perform better than others in producing more output with the same or less inputs, is an example of the importance of estimating production relationships. In order to estimate efficiency one needs an appropriate model for the two major inputs into production activity, namely labour and capital. A physical asset once installed is capable of contributing several years of output. This implies that investments made in previous years must be taken into account in order to produce a measure of the efficiency and productivity for any given year. The purpose of this article is to introduce a dynamic efficiency model and compare the results with previous work on the analysis of efficiency and productivity of OECD countries. The article proposes that dynamic models capture efficiency better than static models.

Using monthly returns to model conditional heteroscedasticity

This empirical study examines the extent of non-linearity in a multivariate model of monthly financial series. To capture the conditional heteroscedasticity in the series, both the GARCH(1,1) and GARCH(1,1)-in-mean models are employed. The conditional errors are assumed to follow the normal and Student-t distributions. The non-linearity in the residuals of a standard OLS regression are also assessed. It is found that the OLS residuals as well as conditional errors of the GARCH models exhibit strong non-linearity. Under the Student density, the extent of non-linearity in the GARCH conditional errors was generally similar to those of the standard OLS. The GARCH-in-mean regression generated the worse out-of-sample forecasts.

Technology sourcing versus technology exploitation:An analysis of US foreign direct investment flows

The traditional paradigm of foreign direct investment (FDI) suggests that FDI is undertaken principally to exploit some firm-specific advantage in a foreign country which provides a locational advantage to the investor. However, recent theoretical work suggests a model of FDI in which the motivation is not to exploit existing technological advantages in a foreign country, but to access such technology and transfer it from the host economy to the investing multinational corporation via spillover effects. This paper tests the technology sourcing versus technology exploiting hypotheses for a panel of sectoral FDI flows between the United States and major OECD nations over a 15 year period. The research makes use of Patel and Vega's (Research Policy, 28, 145-55, 1999) taxonomy of sectors which are likely a priori to exhibit technology sourcing and exploiting behaviour respectively. While there is evidence that FDI flows into the United States are attracted to R and D intensive sectors, very little support is found for the technology sourcing hypothesis either for inward or outward FDI flows. The results suggest that, in aggregate, firm-specific 'ownership' effects remain powerful determinants of FDI flows.

Does the motivation for foreign direct investment affect productivity spillovers to the domestic sector?

There is increasing empirical and theoretical evidence that foreign direct investment (FDI) may be motivated not by the desire to exploit some competitive advantage possessed by multinationals, but to access the technology of host economy firms. Using a panel of FDI flows across OECD countries and manufacturing sectors between 1984 and 1995, we test whether these contrasting motivations influence the effects that FDI has on domestic total factor productivity. The distinction between technology-exploiting FDI (TEFDI) and technology-sourcing FDI (TSFDI) is made using R&D intensity differentials between host and source sectors. The hypothesis that the motivation for FDI has an effect on total factor productivity spillovers is supported: TEFDI has a net positive effect, while TSFDI has a net negative effect. These net effects are explained in terms of the offsetting influences of productivity spillovers and market stealing effects induced by incoming multinationals.

Information processing and the UK weekend effect:Do investors cut their losses on Mondays?

This paper complements earlier work by the author that shows that the pattern of information arrivals into the UK stock market may explain the behaviour of returns. It is argued that delays or other systematic behaviour in the processing of this information could compound the impact of information arrival patterns. It is found, however, that this does not happen, and so it is the arrival and not the processing of news that is most important. © 2004 Taylor & Francis Ltd.

Does German foreign direct investment lead to job losses at home?

This paper provides firm-level evidence on the labour demand effects of outward investments using a panel of multinationals (MNEs) based in Germany. Distinguishing the type of investments and the location of subsidiaries around the world between 1997 and 2008, our evidence shows that for both the manufacturing and services sector the expansion of employment abroad does not occur at the detriment of employment at home. The analysis is extended to see whether outward FDI causes average wage cuts for workers employed in the German parent firm. Our findings indicate no clear average wage effects due to outward FDI. Given that domestic MNEs are seen to play an important role in the growth potential for an economy, these findings are somewhat re-assuring from a policy point of view.

Exchange controls and European stock market integration

This paper examines the impact on stock price predictability that the removal of exchange controls had on major European countries during the late 1970s and 1980s. It is found that for Germany, Switzerland and France, the removal of exchange controls led to an increase in the interdependence between these and other markets. In contrast, there is little evidence of an increase in interdependence for the UK and Italy.