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Simulation-Based Approaches in Financial Econometrics
Jönköping University, Jönköping International Business School, JIBS, Economics.
2007 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This doctoral thesis consists of four chapters all related to the field of financial econometrics. The main contributions are based on the empirical evaluation of theories in or related to financial economics supported by the recent advances of models and simulation-based methods in time-series econometrics.

In chapter II, following the summarizing introductory chapter, a new unit root test is developed which by the use of simulation is demonstrated to be robust in the presence of generalized conditional heteroscedasticity (GARCH) distortions. In the presence of GARCH disturbances, for empirically relevant sample sizes, this new test exhibits superior statistical size and power properties compared with a sample of eight commonly used traditional unit root tests.

In chapter III, a combination of an empirical and simulation-based evaluation of the theory of long-run purchasing power parity (PPP) is conducted. It is demonstrated that the traditional unit root tests of PPP are non-robust to the empirically identified GARCH distortions in the real exchange rates (RER). Therefore, based on this study and currently existing research, it appears virtually impossible to empirically come to a credible conclusion regarding whether long-run PPP holds or not.

In chapter IV certain financial stability requirements of the Basel (II) Accord are scrutinized. It is concluded that the Basel requirement of an estimation period that is at least one year long for the calculation of minimum capital risk requirements is not empirically justified.

Place, publisher, year, edition, pages
Jönköping: Internationella Handelshögskolan , 2007. , p. 153
Series
JIBS Dissertation Series ; 43
Keywords [en]
Economics
Keywords [sv]
Nationalekonomi
Identifiers
URN: urn:nbn:se:hj:diva-954ISBN: 91-89164-80-6 (print)OAI: oai:DiVA.org:hj-954DiVA, id: diva2:4710
Public defence
2007-09-28, B1014, Internationella Handelshögskolan, 10:00 (English)
Opponent
Available from: 2007-09-10 Created: 2007-09-10 Last updated: 2009-04-01Bibliographically approved
List of papers
1. A New Test for Simultaneous Estimation of Unit Roots and GARCH Risk in the Presence of Stationary Conditional Heteroscedasticity Disturbances
Open this publication in new window or tab >>A New Test for Simultaneous Estimation of Unit Roots and GARCH Risk in the Presence of Stationary Conditional Heteroscedasticity Disturbances
2008 (English)In: Applied Financial Economics, ISSN 0960-3107, E-ISSN 1466-4305, Vol. 18, no 7, p. 527-558Article in journal (Refereed) Published
Abstract [en]

According to previous research, standard unit root tests are considered robust to stationary GARCH distortions. These conclusions are in fact correct when the number of observations is extraordinarily high. However, simulation experiments in this study, using more normal sample sizes, reveal that eight of the most commonly applied unit root tests exhibit considerable bias in the size in the presence of fairly moderate GARCH distortions. As a remedy for the disturbances from GARCH, this paper presents size-corrected unbiased critical values for all these examined tests. Nevertheless there is still reduced power in the presence of stationary GARCH distortions. As a solution, a completely new test is formulated which simultaneously models unit roots and the interconnected parameters of GARCH risk. For empirically relevant sample sizes, this new test exhibits superior size and power properties compared with all the traditional unit root tests in the presence of GARCH disturbances.

National Category
Economics
Identifiers
urn:nbn:se:hj:diva-1476 (URN)
Available from: 2007-09-10 Created: 2009-03-10 Last updated: 2017-12-08Bibliographically approved
2. Unreal Exchange Rates: A Simulation-Based Approach to Adjust Misleading PPP Estimates
Open this publication in new window or tab >>Unreal Exchange Rates: A Simulation-Based Approach to Adjust Misleading PPP Estimates
2007 (English)In: Journal of economic studies, ISSN 0144-3585, E-ISSN 1758-7387, Vol. 34, no 3, p. 256-288Article in journal (Refereed) Published
Abstract [en]

Currently, the theory of long-run purchasing power parity (PPP) attains its strongest support in more than thirty years. In this paper, the validity of the PPP revisionists’ scientific evidence supporting long-run PPP is questioned based on the replication of an influential review study that is considered by PPP revisionists to exhibit “some of the strongest evidence” in favour of the PPP theory. By simulation experiments it is demonstrated that the traditional PPP unit root tests are non-robust to the empirically identified (G)ARCH distortions. Due to (G)ARCH distortions, over-rejections for the traditional unit root tests are shown to be a problem that potentially misleads researchers to believe that long-run PPP holds under circumstances when it is in fact not valid. As a potential remedy to this problem, a new unit root test is introduced which is robust to conditional heteroscedasticity disturbances, and in contrast to traditional unit root tests, it exhibits no significant empirical support for the PPP theory. The study illustrates that the PPP revisionists’ unit root tests cannot reliably test the PPP hypothesis in the presence of (G)ARCH distortions, due to bad power and size properties. Perhaps it is time to conclude that, based on the currently existing research, it is virtually impossible to empirically come to a credible conclusion regarding whether long-run PPP holds or not.

National Category
Economics
Identifiers
urn:nbn:se:hj:diva-1477 (URN)
Available from: 2007-09-10 Created: 2009-03-16 Last updated: 2017-12-08Bibliographically approved
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