Does consumption-wealth ratio signal stock returns? VECM results for Germany

This paper studies the signalling effect of the consumption−wealth ratio (cay) on German stock returns via vector error correction models (VECMs). The effect of cay on U.S. stock returns has been recently confirmed by Lettau and Ludvigson with a two−stage method. In this paper, performance of the VECMs and the two−stage method are compared in both German and U.S. data. It is found that the VECMs are more suitable to study the effect of cay on stock returns than the two−stage method. Using the Conditional−Subset VECM, cay signals real stock returns and excess returns in both data sets significantly. The estimated coefficient on cay for stock returns turns out to be two times greater in U.S. data than in German data. When the two−stage method is used, cay has no significant effect on German stock returns. Besides, it is also found that cay signals German wealth growth and U.S. income growth significantly.

Price discovery of credit spreads in tranquil and crisis periods

In this paper we investigate the price discovery process in single-name credit spreads obtained from bond, credit default swap (CDS), equity and equity option prices. We analyse short term price discovery by modelling daily changes in credit spreads in the four markets with a vector autoregressive model (VAR). We also look at price discovery in the long run with a vector error correction model (VECM). We find that in the short term the option market clearly leads the other markets in the sub-prime crisis (2007-2009). During the less severe sovereign debt crisis (2009-2012) and the pre-crisis period, options are still important but CDSs become more prominent. In the long run, deviations from the equilibrium relationship with the option market still lead to adjustments in the credit spreads observed or implied from other markets. However, options no longer dominate price discovery in any of the periods considered. Our findings have implications for traders, credit risk managers and financial regulators.

Arbetslöshet som en icke önskvärd konsekvens av socialbidrag : Resultat från en tidsserieanalys på befolkningsnivå i Sverige 1946–1990

Unemployment as an unintended consequence of social assistance recipiency: results from a time-series analysis of aggregated population data Does the frequency of unemployment have a tendency to increase the number of social assistance recipients, or does the relationship work the other way around? This article utilizes Swedish annual data on aggregated unemployment and means-tested social assistance recipiency in the period 1946–1990 and proposes a multiple time-series approach based on vector error-correction modelling to establish the direction of influence. First, we show that rates of unemployment and receipt of social assistance is co-integrated. Second, we demonstrate that adjustments to the long-run equilibrium are made through adjustments of the unemployment. This indicates that the level of unemployment reacts to changes in rates of social assistance recipiency rather than vice versa. It is also shown that lagged changes in the level of unemployment do not predict changes in rates of social assistance recipients in short-term. Together these findings demonstrate that the number of social assistance recipients does increase the number of unemployed in a period characterized by low unemployment and high employment.

Granger causality among house price and macroeconomic variables in Victoria

This study analyses the dynamic causality of four macroeconomic variables on house prices. The four macroeconomic variables have interrelationships with house prices in certain lagged terms, but these relationships are not always the same as the notions put forward in prior research. The relationships are detected to be unstable in the three observation periods. The instability of these relationships would cause difficulty in predicting house prices in the market, especially for policy makers and market participants.

Does military expenditure determine Fiji's exploding debt levels?

Fiji's total debt stands at 65% of GDP. Domestic debt constitutes 55% of GDP. The goal of this paper is to investigate whether military expenditure has contributed to Fiji's exploding debt levels over the period 1970 to 2005. Our empirical analysis, conducted within a cointegration and vector error-correction framework, suggests that, in the long-run, military expenditure has had a statistically significant positive impact on both external debt and domestic debt, while income has had a statistically significant positive impact on domestic debt and a statistically significant negative impact on external debt. We explain the reasons behind this finding and draw some policy implications.

Crime rates, male youth unemployment and real income in Australia: evidence from Granger causality tests

This article applies Granger causality tests to examine the relationship between seven different categories of property crime and violent crime against the person, male youth unemployment and real male average weekly earnings in Australia from 1964 to 2001 within a cointegration and vector error correction framework. It is found that fraud, homicide and motor vehicle theft are cointegrated with male youth unemployment and real male average weekly earnings. However, there is no evidence of a long-run relationship between either break and enter, robbery, serious assault or stealing with male youth unemployment and real male average weekly earnings.

Convergence among the sub-markets in Australian regional building and construction sector

Studies on market convergence are well considered in the literature. However, the majority of the previous research focused on housing markets and few studies have concentrated on construction markets. Owing to a simultaneously dramatic increase in the construction prices of the sub-markets in the building construction sector in Australia, this paper aims to identify the convergence among these markets, involving house construction market, other-residential building construction market, and non-residential building construction market. To achieve it the Granger causality test and generalized response function depending on the vector error correction model with the quarterly data of Australia’s eight states from 1998 to 2010 will be applied. Based upon the econometric tests, the price diffusion patterns among these construction markets have been identified. Research on the convergences of construction markets not only helps construction firms perform well in business operations and arbitrage activities, but also provides policy makers with useful information for enacting effective construction policies for national perspectives and approaches to infrastructure planning.

Investigating housing supply and monetary policy under global economic turbulence

This research has contributed to literature by identifying the impacts of monetary policy and global economic turbulence on the supply side of the housing sector under a vector error correction model. The research outcomes provided policy makers with an insight to change Australia's housing shortage and declining housing affordability.

Analysing the transmission pattern within the framework of housing supply and monetary policy in Australia

Housing supply is one of important components of the housing sector. Compared with an increasingly strong housing demand, the growth rates of total housing stock in Australia have exhibited a downward trend since the end of the 1990s whilst the significant adjustments in the Australian monetary policy were being implemented. This research aims to estimate the nature of the relationship between housing supply and monetary policy by a vector error correction model. According to the empirical results, a transmission pattern comprised of the indicators associated with housing supply and monetary policy can be identified, which suggests that there is a significant interrelationship between monetary policy and the supply side of the housing sector in Australia.

The effects of the late 2000s global financial crisis on Australia's construction demand

An accurate measurement of the impacts of external shocks on construction demand will enable construction industry policymakers and developers to make allowances for future occurrences and advance the construction industry in a sustainable manner. This paper aims to measurethe dynamic effects of the late 2000s global financial crisis on the level of demand in the Australian construction industry. The vector error correction (VEC) model with intervention indicators is employed to estimate the external impact from the crisis on a macro-level construction economic indicator, namely construction demand. The methodology comprises six main stages to produce appropriate VEC models that describe the characteristics of the underlying process. Research findings suggestthat overall residential and non-residential construction demand were affected significantly by the recent crisis and seasonality. Non-residentialconstruction demand was disrupted more than residential construction demand at the crisis onset. The residential constructionindustry is more reactive and is able to recover faster following the crisis in comparison with the non-residential industry. The VEC model with intervention indicators developed in this study can be used as an experiment for an advanced econometric method. This can be used to analyse the effects of special eventsand factors not only on construction but also on other industries.

Economic growth with coal, oil and renewable energy consumption in China: prospects for fuel substitution

We examine the relationship between Chinese aggregate production and consumption of three main energy commodities: coal, oil and renewable energy. Both autoregressive distributed lag (ARDL) and vector error correction modeling (VECM) show that Chinese growth is led by all three energy sources. Economic growth also causes coal, oil and renewables consumption, but with negative own-price effects for coal and oil and a strong possibility of fuel substitution through positive cross-price effects. The results further show coal consumption causing pollution, while renewable energy consumption reduces emissions. No significant causation on emissions is found for oil. Hence, making coal both absolutely and relatively expensive compared to oil and renewable energy encourages shifting from coal to oil and renewable energy, thereby improving economic and environmental sustainability.

Energy consumption and income in six Asian developing countries: a multivariate cointegration analysis

 This article examines the short- and long-run causal relationship between energy consumption and GDP of six emerging economies of Asia. Based on cointegration and vector error correction modeling the empirical results show that there exists unidirectional short- and long-run causality running from energy consumption to GDP for China, uni-directional short-run causality from output to energy consumption for India, whilst bi-directional short-run causality for Thailand. Neutrality between energy consumption and income is found for Indonesia, Malaysia and Philippines. Both the generalized variance decompositions and impulse response functions confirm the direction of causality. These findings have important policy implications for the countries concerned. The results suggest that while India may directly initiate energy conservation measures, China and Thailand may opt for a balanced combination of alternative polices.

Common cycles in macroeconomic aggregates

Reduced form estimation of multivariate data sets currently takes into account long-run co-movement restrictions by using Vector Error Correction Models (VECM' s). However, short-run co-movement restrictions are completely ignored. This paper proposes a way of taking into account short-and long-run co-movement restrictions in multivariate data sets, leading to efficient estimation of VECM' s. It enables a more precise trend-cycle decomposition of the data which imposes no untested restrictions to recover these two components. The proposed methodology is applied to a multivariate data set containing U.S. per-capita output, consumption and investment Based on the results of a post-sample forecasting comparison between restricted and unrestricted VECM' s, we show that a non-trivial loss of efficiency results whenever short-run co-movement restrictions are ignored. While permanent shocks to consumption still play a very important role in explaining consumption’s variation, it seems that the improved estimates of trends and cycles of output, consumption, and investment show evidence of a more important role for transitory shocks than previously suspected. Furthermore, contrary to previous evidence, it seems that permanent shocks to output play a much more important role in explaining unemployment fluctuations.