|Asymmetric Common Value Auctions with Applications to Private Value Auctions with Resale
Harrison Cheng and Guofu Tan
|Coalition Formation in the Presence of Continuing Conflict
Guofu Tan and Ruqu Wang
|Diagnostic Tests of Cross Section Independence for nonlinear Panel Data Models
Cheng Hsiao and M. Hashem Pesaran
|Forecast Combination across Estimation Windows
M. Hashem Pesaran and Andreas Pick
|Lumpy Price Adjustments: “A Microeconometric Analysis”
Emmanuel Dhyne, Catherine Fuss, M. Hashem Pesaran and Patrick Sevestre
|Econometric Analysis of High Dimensional VARs Featuring a Dominant Unit
Alexander Chudik and M. Hashem Pesaran
|On the Interpretation of Panel Unit Root Tests
M. Hashem Pesaran
|China’s Emergence in the World Economy and Business Cycles in Latin America
Ambrogio Cesa-Bianchi, M. Hashem Pesaran, Alessandro Rebucci and Teng Teng Zu
|A quantitative analysis of China's structural transformation
Robert Dekle and Guillaume Vandenbroucke
|Econometric Analysis of Structural Systems with Permanent and Transitory Shock
Adrian Pagan and M. Hashem Pesaran
|Forecasting the Swiss Economy Using VECX* Models: An Exercise in Forecast Combination Across Models and Observation Windows
Katrin Assenmacher-Wesche and M. Hashem Pesaran
|Firm Heterogeneity And Credit Risk Diversification
Samuel Hanson, M. Hashem Pesaran, and Til Schuermann
|A Bias-Adjusted Lm Test Of Error Cross Section Independence
M. Hashem Pesaran, Aman Ullah and Takashi Yamagata
|Pairwise Tests of Purchasing Power Parity
M. Hashem Pesaran, Ron P. Smith, Takashi Yamagata
| Unit Roots and Cointegration in Panels
Breitung, J. and M.H. Pesaran
| Testing Slope Homogeneity In Large Panels
M. Hashem Pesaran and Takashi Yamagata
| Random Coefficient Panel Data Models
Cheng Hsiao and M. Hashem Pesaran
"Asymmetric Common Value Auctions with Applications to Private Value Auctions with Resale", by Harrison Cheng and Guofu Tan (2011), forthcoming in Economic Theory.
Abstract: We study a model of common-value auctions with two bidders in which bidders private
information are independently and asymmetrically distributed. We present su¢ cient and necessary conditions, respectively, under which the expected revenues from
rst-price and second-price auctions can be
ranked. Using these conditions and a bid-equivalence between common-value auctions and private-value
auctions with resale, we extend the revenue-ranking result of Hafalir and Krishna (2008) and provide
necessary conditions for their ranking to hold. In addition, we provide sufficient and necessary conditions
for the opposite ranking of revenues, respectively. Our analysis helps clarify the roles of two forms of
regularity assumptions (buyer-regularity and seller-regularity) in ranking revenues and illustrates how
revenue ranking is linked to submodularity and supermodularity of the common-value function and to a
single-crossing property of a function derived from the monopoly or monopsony pricing function in the
Keywords: Common-value Auctions; Private-value Auctions; Resale; Revenue Ranking; Regularity
Condition; Submodularity; Supermolarity; Single-crossing Condition
JEL Classification: D4, D8, L1
"Coalition Formation in the Presence of Continuing Conflict", by Guofu Tan and Ruqu Wang (2011), forthcoming in International Journal of Game Theory.
Abstract: This paper studies endogenous coalition formation in a rivalry environment where continuing
conflict exists. A group of heterogeneous players compete for a prize with the probability of
winning for a player depending on his strength as well as the distribution of strengths among
his rivals. Players can pool their strengths together to increase their probabilities of winning
as a group through coalition formation. The players in the winning coalition will compete
further until one individual winner is left. We show that in any equilibrium there are only two
coalitions in the initial stage of the contest. In the case of three players, the equilibrium often has
a coalition of the two weaker players against the strongest. The equilibrium coalition structure
with four players mainly takes one of the two forms: a coalition of the three weaker players
against the strongest or a coalition of the weakest and strongest players against a coalition of the
remaining two. Our findings imply that the rivalry with the possibility of coalition formation
in our model exhibits a pattern of two-sidedness and a balance of power. We further study the
impact of binding agreements by coalition members on equilibrium coalition structures. Our
analysis sheds some light on problems of temporary cooperation among individuals who are
rivals by nature.
Keywords: Coalition formation, Rivalry, Continuing conflict, Binding agreements
JEL Classification: C72, D74
"Information gatekeepers: theory and experimental evidence", by Isabelle Brocas, J. Carrillo and T. Palfrey (2011), forthcoming in Economic Theory.
Abstract: We consider a model where two adversaries can spend resources in acquiring public infor
mation about the unknown state of the world in order to influence the choice of a decision
maker. We characterize the sampling strategies of the adversaries in the equilibrium of the
game. We show that, as the cost of information acquisition for one adversary increases,
that person collects less evidence whereas the other adversary collects more evidence. We
then test the results in a controlled laboratory setting. The behavior of subjects is close to
the theoretical predictions. Mistakes are relatively infrequent (15%). They occur in both
directions, with a higher rate of over-sampling (39%) than under-sampling (8%). The
main difference with the theory is the smooth decline in sampling around the theoretical
equilibrium. Comparative statics are also consistent with the theory, with adversaries sampling more when their own cost is low and when the other adversary's cost is high. Finally,
there is little evidence of learning over the 40 matches of the experiment.
Keywords: experimental design, search, information acquisition, adversarial system.
JEL Classification: C91, D83.
“Diagnostic Tests of Cross Section Independence for nonlinear Panel Data Models" by Cheng Hsiao and M. Hashem Pesaran, and Andreas Pick (2011), forthcoming in the Oxford Bulletin of Economics and Statistics.
Abstract: This paper considers the problem of testing for cross section inde-pendence in the case of non-linear panel data models. It derives a
Lagrangian multiplier (LM) test and shows that in terms of general-ized residuals of Gourieoux, Monfort, Renault and Trognon (1987), it
reduces to the LM test of Breusch and Pagan (1970). Due to the tend-ency for the LM test to over-reject in panels with large N (cross sec-tion dimension), we also consider the application of the test proposed
in Pesaran (2004) to nonlinear panels. In Monte Carlo experiments it
emerges that the CD test has the correct size for any combination of
N and T, whereas the validity of the LM test requires T (time series
dimension) to be large relative to N. We illustrate the cross-sectional
independence tests by an application to a probit panel of roll-call votes
in the U.S. Congress and Önd that the votes display a signiÖcant de-gree of cross section dependence.
JEL classification:C12, C33, C35
Keywords: Nonlinear panels, cross section dependence, probit and To-bit models
“Forecast Combination across Estimation Windows” by M. Hashem Pesaran and Andreas Pick (2011), forthcoming in the Journal of Business Economics and Statistics.
Abstract: This paper considers combining forecasts generated from the same model but over
different estimation windows. It develops theoretical results for random walks with
breaks in the drift and volatility and for a linear regression model with a break in
the slope parameter. Averaging forecasts over different estimation windows leads to
a lower bias and root mean square forecast error than forecasts based on a single
estimation window for all but the smallest breaks. An application to weekly returns
on 20 equity index futures shows that averaging forecasts over estimation windows
leads to a smaller RMSFE than some competing methods.
Keywords: Forecast averaging, estimation windows, exponential down-weighting, structural breaks
JEL classifications: C22, C53
“Lumpy Price Adjustments: “A Microeconometric Analysis”, by Emmanuel Dhyne, Catherine Fuss, M. Hashem Pesaran and Patrick Sevestre (2011), forthcoming in the Journal of Business Economics and Statistics.
Abstract: Based on a state-dependent pricing model, we specify and estimate a non-linear
factor model allowing us to identify the relative importance of the degree of price
rigidity that is inherent to the price setting mechanism (intrinsic) and that which
is due to cost and/or demand factors (extrinsic). We find that intrinsic price stick-iness, related to price adjustment costs, is indeed an important determinant of the
frequency of price changes. However, the volatility of the shocks a§ecting optimal
prices also plays a significant role in the determination of the frequency of price
changes. We also find that this volatility is the major determining factor of the
magnitude of price changes.
JEL Classifications: C51, C81, D21.
Keywords: Sticky prices, intrinsic and extrinsic rigidities, micro non-linear
“Econometric Analysis of High Dimensional VARs Featuring a Dominant Unit”, by Alexander Chudik and M. Hashem Pesaran (2011), forthcoming in Econometric Reviews
Abstract: This paper extends the analysis of infinite dimensional vector autoregressive models (IVAR)
proposed in Chudik and Pesaran (2010) to the case where one of the variables or the cross section
units in the IVAR model is dominant or pervasive. This extension is not straightforward and
involves several technical difficulties. The dominant unit inuences the rest of the variables in
the IVAR model both directly and indirectly, and its effects do not vanish even as the dimension
of the model (N) tends to infinity. The dominant unit acts as a dynamic factor in the regressions
of the non-dominant units and yields an infinite order distributed lag relationship between the
two types of units. Despite this it is shown that the effects of the dominant unit as well as
those of the neighborhood units can be consistently estimated by running augmented least
squares regressions that include distributed lag functions of the dominant unit. The asymptotic
distribution of the estimators is derived and their small sample properties investigated by means
of Monte Carlo experiments.
Keywords: IVAR Models, Dominant Units, Large Panels, Weak and Strong Cross Section
Dependence, Factor Models.
JEL Classification: C10, C33, C51
“On the Interpretation of Panel Unit Root Tests”, by M. Hashem Pesaran forthcoming in Economics Letters.
Abstract: Applications of panel unit root tests have become commonplace in empirical economics, yet there are ambiguities as how best to interpret the test
results. This note claries that rejection of the panel unit root hypothesis
should be interpreted as evidence that a statistically signicant proportion
of the units are stationary. Accordingly, in the event of a rejection, and
in applications where the time dimension of the panel is relatively large, it
recommends the test outcome to be augmented with an estimate of the pro-
portion of the cross-section units for which the individual unit root tests are
rejected. The economic importance of the rejection can be measured by the
magnitude of this proportion.
JEL Classifications: C12, C33, C52
Keywords: Unit Root tests, Panels, Statistical Significance
"China’s Emergence in the World Economy and Business Cycles in Latin America”, by Ambrogio Cesa-Bianchi, M. Hashem Pesaran, Alessandro Rebucci and Teng Teng Zu,CWPE, IZA Discussion Paper, July 2011, forthcoming in Economia, Journal of the Latin American and Caribbean Economic Association.
Abstract: This paper investigates how changes in trade linkages between China, Latin America,
and the rest of the world have altered the transmission of international business cycles
to Latin America. Evidence based on a GVAR model for five large Latin American
economies shows that the long-term impact of a China GDP shock on the typical
Latin American economy has increased by three times since the mid-1990s, while the
long-term impact of a US GDP shock has halved, while the transmission of shocks to
Latin America and the rest of emerging Asia GDP (excluding China and India) has
not changed. These changes owe more changes in China’s impact on Latin America’s
traditional and largest trading partners than to increased direct bilateral trade linkages
boosted by the decade-long commodity price boom. These findings have important
implications for both Latin America and the international business cycle.
JEL Classification: C32, F44, E32, O54
Keywords: China, GVAR, Great Recession, Emerging Markets, International Business
Cycle, Latin America, Trade linkages
" A quantitative analysis of China's structural transformation ", by Robert Dekle and Guillaume Vandenbroucke (2011), forthcoming in the Journal of Economic Dynamics and Contro.
Abstract: The structural transformation of China – or the reallocation of resources from the agricultural sector to the nonagricultural sector – between 1978 and 2003 was truly remarkable. We develop a two-sector neoclassical growth model to quantitatively assess the driving forces of China's recent structural transformation. In addition to the forces currently emphasized in the literature–sectoral productivity growth—we show that China's transformation was accelerated significantly by the gradual reduction in the relative size of the Chinese government. We find that the reduction in the size of the Chinese government accounted – by itself – for 15% of the reduction in the agricultural share of employment. Two mechanisms explain this: (i) in our model the lower tax rate associated with reduced intervention encouraged the accumulation of physical capital, which is produced in the nonagricultural sector; (ii) lower inefficiencies induced incomes to rise and, given our preferences, resulted in a disproportionate increase in the demand for the nonagricultural good.
JEL classification: E13; O11; P20
Keywords: Structural transformation; Chinese economy; Neoclassical growth model
"Econometric Analysis of Structural Systems with Permanent and Transitory Shocks", by Adrian Pagan and M. Hashem Pesaran (2008), forthcoming in the Journal of Economic Dynamics and Control.
Abstract: This paper considers the implications of the permanent/transitory decomposition of shocks for identification of structural models in the general case where the model might contain more than one permanent structural shock. It provides a simple and intuitive generalization of the influential work of Blanchard and Quah (1989), and shows that structural equations with known permanent shocks can not contain error correction terms, thereby freeing up the latter to be used as instruments in estimating their parameters. The approach is illustrated by a re-examination of the identification schemes used by Wickens and Motto (2001), Shapiro and Watson (1988), King, Plosser, Stock, Watson (1991), Gali (1992, 1999) and Fisher (2006).
JEL Classifications: C30, C32, E10.
Key Words: Permanent shocks, structural identification, error correction models, IS-LM models.
"Forecasting the Swiss Economy Using VECX* Models: An Exercise in Forecast Combination Across Models and Observation Windows", Katrin Assenmacher-Wesche and M. Hashem Pesaran, (2008), forthcoming in the National Institute Economic Review on Economic Forecasting.
Abstract: This paper uses vector error correction models of Switzerland for forecasting output, inflation and the short-term interest rate. It considers three different ways of dealing with forecast uncertainties. First, it investigates the effect on forecasting performance of averaging over forecasts from different models. Second, it considers averaging forecasts from different estimation windows. It is found that averaging over estimation windows is at least as effective as averaging over different models and both complement each other. Third, it examines whether using weighting schemes from the machine learning literature improves the average forecast. Compared to equal weights the effect of alternative weighting schemes on forecast accuracy is small in the present application.
JEL Classifications: C53, C32
Key Words: Bayesian Model averaging, Choice of Observation Window, Longrun Structural Vector Autoregression.
"Firm Heterogeneity And Credit Risk Diversification" by Samuel Hanson, M. Hashem Pesaran, and Til Schuermann, (2007), forthcoming in the Journal of Empirical Finance.
Abstract: This paper examines the impact of neglected heterogeneity on credit risk. We show that neglecting heterogeneity in firm returns and/or default thresholds leads to under estimation of expected losses (EL), and its effect on portfolio risk is ambiguous. Once EL is controlled for, the impact of neglecting parameter heterogeneity is complex and depends on the source and degree of heterogeneity. We show that ignoring differences in default thresholds results in overestimation of risk, while ignoring differences in return correlations yields ambiguous results. Our empirical application, designed to be typical and representative, combines both and shows that neglected heterogeneity results in overestimation of risk. Using a portfolio of U.S. firms we illustrate that heterogeneity in the default threshold or probability of default, measured for instance by a credit rating, is of first order importance in affecting the shape of the loss distribution: including ratings heterogeneity alone results in a 20% drop in loss volatility and a 40% drop in 99.9% VaR, the level to which the risk weights of the New Basel Accord are calibrated.
JEL Classifications: C33, G13, G21.
Keywords: Risk management, correlated defaults, factor models, portfolio choice.
"A Bias-Adjusted Lm Test Of Error Cross Section Independence", by M. Hashem Pesaran, Aman Ullah and Takashi Yamagata, The Econometrics Journal
Abstract: This paper proposes bias-adjusted normal approximation versions of Lagrange multiplier (NLM) test of error cross section independence of Breusch and Pagan (1980) in the case of panel models with strictly exogenous regressors and normal errors. The exact mean and variance of the Lagrange multiplier (LM) test statistic are provided for the purpose of the bias-adjustments, and it is shown that the proposed tests have a standard normal distribution for the fixed time series dimension (T) as the cross section dimension (N) tends to infinity. Importantly, the proposed bias-adjusted NLM tests are consistent even when the Pesaran’s (2004) CD test is inconsistent. Also alternative bias-adjusted NLM tests, which are consistent under local error cross section independence of any fixed order p, are proposed. The finite sample behavior of the proposed tests are investigated and compared to the LM, NLM, and CD tests. It is shown that the bias-adjusted NLM tests successfully control the size, maintaining satisfactory power in panel with exogenous regressors and normal errors, even when cross section mean of the factor loadings is close to zero, where the CD test has little power. However, it is also shown that the bias-adjusted NLM tests are not as robust as the CD test to non-normal errors and/or in the presence of weakly exogenous regressors.
JEL Classifications: C12, C13, C33
Key Words: Cross Section Dependence, Spatial Dependence, LM test, Panel Model, Bias-adjusted Test
"Pairwise Tests of Purchasing Power Parity", by M. Hashem Pesaran, Ron P. Smith, Takashi Yamagata, Liudmyla Hvozdyk, Econometric Reviews.
Abstract: Given nominal exchange rates and price data on N + 1 countries indexed by i = 0; 1; 2; ..., N, the standard procedure for testing purchasing power parity (PPP) is to apply unit root or stationarity tests to N real exchange rates all measured relative to a base country, 0, often taken to be the US. Such a procedure is sensitive to the choice of base country, ignores the information in all the other cross rates and is subject to a high degree of cross section dependence which has adverse e¤ects on estimation and inference. In this paper we conduct a variety of unit root tests on all possible N(N +1)=2 real rates between pairs of the N + 1 countries and estimate the proportion of the pairs that are stationary. This proportion can be consistently estimated even in the presence of cross-section dependence. We estimate this proportion using quarterly data on the real exchange rate for 50 countries over the period 1957-2001. The main substantive conclusion is that to reject the null of no adjustment to PPP requires sufficiently large disequilibria to move the real rate out of the
band of inaction set by trade costs. In such cases one can reject the null of no adjustment to PPP up to 90% of the time as compared to around 40% in the whole sample using a linear alternative and almost 60% using a non-linear alternative..
JEL Classifications: C23, F31, F41
Key Words:Purchasing Power Parity, Panel Data, Cross Rates, Pairwise Approach, Cross Section Dependence.
"Unit Roots and Cointegration in Panels", by Breitung, J. and M.H. Pesaran (2007), forthcoming in L. Matyas, and P. Sevestre, The Econometrics of Panel Data (Third Edition), Kluwer Academic Publishers.
Abstract: This paper provides a review of the literature on unit roots and cointegration in panels where the time dimension (T), and the cross section dimension (N) are relatively large. It distinguishes between the first generation tests developed on the assumption of the cross section independence, and the second generation tests that allow, in a variety of forms and degrees, the dependence that might prevail across the different units in the panel. In the analysis of cointegration the hypothesis testing and estimation problems are further complicated by the possibility of cross section cointegration which could arise if the unit roots in the different cross section units are due to common random walk components.
JEL Classification: C12, C15, C22, C23.
Keywords: Panel Unit Roots, Panel Cointegration, Cross Section Dependence, Common Effects
"Testing Slope Homogeneity In Large Panels", by M. Hashem Pesaran and Takashi Yamagata, (2007), forthcoming in the Journal of Econometric.
Abstract: This paper proposes a standardized version of Swamy’s test of slope homogeneity for panel data models where the cross section dimension (N) could be large relative to the time series dimension (T). The proposed test, denoted by , exploits the cross section dispersion of individual slopes weighted by their relative precision. In the case of models with strictly exogenous regressors, but with non-normally distributed errors, the test is shown to have a standard normal distribution as such that When the errors are normally distributed, a mean-variance bias adjusted version of the test is shown to be normally distributed irrespective of the relative expansion rates of N and T. The test is also applied to stationary dynamic models, and shown to be valid asymptotically so long as N/T → κ , as where 0 ≤ κ ∞ . Using Monte Carlo experiments, it is shown that the test has the correct size and satisfactory power in panels with strictly exogenous regressors for various combinations of N and T. Similar results are also obtained for dynamic panels, but only if the autoregressive coefficient is not too close to unity and so long as T ≥ N.
JEL Classifications: C12, C33.
Keywords: Testing Slope Homogeneity, Dispersion Tests, Large Panels, Monte Carlo Results.
"Random Coefficient Panel Data Models", Cheng Hsiao and M. Hashem Pesaran, (2007), forthcoming in L. Matyas, and P. Sevestre, The Econometrics of Panel Data (Third Edition), Kluwer Academic Publishers.
Abstract: This paper provides a review of linear panel data models with slope heterogeneity, introduces various types of random coefficients models and suggest a common framework for dealing with them. It considers the fundamental issues of statistical inference of a random coefficients formulation using both the sampling and Bayesian approaches. The paper also provides a review of heterogeneous dynamic panels, testing for homogeneity under weak exogeneity, simultaneous equation random coefficient models, and the more recent developments in the area of cross-sectional dependence in panel data models.
JEL-Classification: C12, C13, C33.
Keywords: Random coefficient models, Dynamic heterogeneous panels, Classical and Bayesian approaches, Tests of slope heterogeneity, Cross section dependence.