Zero-non-zero patterned vector error correction modeling for I(2) cointegrated time series with applications in testing PPP and stock market relationships

Vector error-correction models (VECMs) have become increasingly important in their application to financial markets. Standard full-order VECM models assume non-zero entries in all their coefficient matrices. However, applications of VECM models to financial market data have revealed that zero entries are often a necessary part of efficient modelling. In such cases, the use of full-order VECM models may lead to incorrect inferences. Specifically, if indirect causality or Granger non-causality exists among the variables, the use of over-parameterised full-order VECM models may weaken the power of statistical inference. In this paper, it is argued that the zero–non-zero (ZNZ) patterned VECM is a more straightforward and effective means of testing for both indirect causality and Granger non-causality. For a ZNZ patterned VECM framework for time series of integrated order two, we provide a new algorithm to select cointegrating and loading vectors that can contain zero entries. Two case studies are used to demonstrate the usefulness of the algorithm in tests of purchasing power parity and a three-variable system involving the stock market.

Post-Bretton Woods evidence on PPP under different exchange rate regimes

This article investigates the behaviour of exchange rates across different regimes for a post-Bretton Woods period. The exchange rate regime classification is based on the classification of Frankel et al. (2004) who condensed the 10 categories of exchange rate regimes reported by the International Monetary Fund (IMF) into three categories. Panel unitroot tests and panel cointegration are used to examine the Purchasing Power Parity (PPP) hypothesis. The latter test is used to check for both the weak and strong forms of PPP. The panel unit-root tests show no evidence of PPP and suggest there is no difference in the behaviour of exchange rates across different regimes. However, failure to detect PPP across any of the regimes could be due to structural breaks. This assumption is reinforced by the results of cointegration tests, which suggest that there exists at least a weak form of PPP for the different regimes. The evidence for strong PPP decreases as the exchange rate regime moves away from a flexible exchange rate regime.

Principal agent problems evident in Chinese PPP infrastructure projects

The demand for infrastructure remains high in China. In order to meet this demand under conditions of limited government funding availability, local governments have increasingly sought private participation through ‘public, private partnerships’ (PPPs). While PPPs are recognised as a reliable mode for delivering infrastructure projects, agency problems are also known to interfere with their success. The nature of these agency problems, along with the types of partnership arrangements under which they occur, is the subject of this research. Semi-structured interviews were conducted with PPP consultants working on infrastructure projects in China. Results suggest that opportunistic behaviour is to be found both within the private sector and within the government sector. While the private sector is shown to take advantage of ‘information asymmetries,’ the government sector is shown to allocate project risks and responsibilities disproportionately in their favour. Results also indicate that PPP arrangements between local government and ‘state owned enterprises’ (SOEs) were less prone to agency abuse, while agency problems in PPP arrangements between local government and private firms were relatively greater.