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Mean Reversion (mean + reversion)
Selected AbstractsMEAN REVERSION OF THE FISCAL CONDUCT IN 24 DEVELOPING COUNTRIESTHE MANCHESTER SCHOOL, Issue 4 2010AHMAD ZUBAIDI BAHARUMSHAH In this paper, we examine the mean reverting behaviour of fiscal deficit by analysing the fiscal position of 24 developing countries. Using annual data over the period 1970,2003 and the series-specific panel unit root test developed by Breuer et al. (Oxford Bulletin of Economics and Statistics, Vol. 64 (2002), pp. 527,546), we found the budget process for most developing countries fails to satisfy the strong-form sustainability condition. Further investigation shows the budget process for a majority of the countries is on a sustainable path (weak form) when a one-time, structural break is allowed in the model. Therefore, our empirical results suggest that the budget process in most of the sample countries is in accordance with the intertemporal budget constraint. [source] Mean Reversion and the Distribution of United Kingdom Stock Index ReturnsJOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 9-10 2006David Ashton Abstract:, Our purpose here is to develop the Pearson Type IV distribution as a candidate for modelling the evolution of short period stock index returns. Here, early work by Praetz (1972 and 1978) and Blattberg and Gonedes (1974) has shown that the scaled ,t' distribution, which is a particular (symmetric) interpretation of the Pearson Type IV, provides a reasonable description of the way stock index returns evolve over time. Our analysis shows this is certainly not the case for the daily stock index returns on which our empirical analysis is based. There is significant skewness in the data and this cannot be captured by symmetric distributions like the scaled ,t' and normal distributions. However, the Pearson Type IV, which is a skewed generalisation of the scaled ,t', is capable of modelling the skewness inherent in our data and in such a way that it satisfies asymptotically efficient goodness of fit criteria. Furthermore, the Pearson Type IV can be derived from a stochastic differential equation with standard Markov properties. This enables one to integrate the distributional and time series properties of the returns process and thereby, facilitates both the interpretation and understanding of the role played by the distribution's parameters in the generation of the underlying stock index returns. [source] Mean Reversion in the Short Horizon Returns of UK PortfoliosJOURNAL OF BUSINESS FINANCE & ACCOUNTING, Issue 1-2 2001Patricia Chelley-Steeley This paper will show that short horizon stock returns for UK portfolios are more predictable than suggested by sample autocorrelation co-efficients. Four capitalisation based portfolios are constructed for the period 1976,1991. It is shown that the first order autocorrelation coefficient of monthly returns can explain no more than 10% of the variation in monthly portfolio returns. Monthly autocorrelation coefficients assume that each weekly return of the previous month contains the same amount of information. However, this will not be the case if short horizon returns contain predictable components which dissipate rapidly. In this case, the return of the most recent week would say a lot more about the future monthly portfolio return than other weeks. This suggests that when predicting future monthly portfolio returns more weight should be given to the most recent weeks of the previous month, because, the most recent weekly returns provide the most information about the subsequent months' performance. We construct a model which exploits the mean reverting characteristics of monthly portfolio returns. Using this model we forecast future monthly portfolio returns. When compared to forecasts that utilise the autocorrelation statistic the model which exploits the mean reverting characteristics of monthlyportfolio returns can forecast future returns better than the autocorrelation statistic, both in and out of sample. [source] Mean Reversion of Interest Rates in the Eurocurrency MarketOXFORD BULLETIN OF ECONOMICS & STATISTICS, Issue 4 2001Jhy-Lin Wu One stylised fact to emerge from the empirical analysis of interest rates is that the unit-root hypothesis in nominal interest rates cannot be rejected. However, using the panel date unit-root test IM, Pesaran and Shin (1997), we find support for the mean-reverting property of Eurocurrency rates. Thus, neither a vector-error-correction model nor a vector autoregressive model in differences is appropriate for modelling Eurocurrency rates. Instead, conventional modelling strategies with level data are appropriate. Furthermore, the finding of stationary interest rates supports uncovered interest parity, and hence the convergence hypothesis of interest rates. This in turn suggests a limited role for a monetary authority to affect domestic interest rates. [source] Markov-Switching Mean Reversion in Short-Term Interest Rates: Evidence from East Asian Economies,THE ECONOMIC RECORD, Issue 263 2007CHEW LIAN CHUA This paper employs a Markov-switching approach to model the dynamics of East Asian short rates. Regime changes are incorporated in standard unit root test to reveal periodic changes in the stationarity property of interest rates. There is evidence that three of the five short rates follow a random walk process in tranquil and low rates episodes but mean-revert in periods when rates are high and volatile. Singapore short rates are characterised by a random walk process, whereas the Philippines rates behave as a mean-reverting process in both regimes. Factors such as exchange rates, monetary policy and interest rate differentials vis-à-vis US interest rates influence the likelihood of short rates being in a volatile state. The regime switching dynamics of interest rates carry important implications for policy-makers. [source] A Required Yield Theory of Stock Market Valuation and Treasury Yield DeterminationFINANCIAL MARKETS, INSTITUTIONS & INSTRUMENTS, Issue 1 2009Christophe Faugère Stock market valuation and Treasury yield determination are consistent with the Fisher effect (1896) as generalized by Darby (1975) and Feldstein (1976). The U.S. stock market (S&P 500) is priced to yield ex-ante a real after-tax return directly related to real long-term GDP/capita growth (the required yield). Elements of our theory show that: (1) real after-tax Treasury and S&P 500 forward earnings yields are stationary processes around positive means; (2) the stock market is indeed priced as the present value of expected dividends with the proviso that investors are expecting fast mean reversion of the S&P 500 nominal growth opportunities to zero. Moreover, (3) the equity premium is mostly due to business cycle risk and is a direct function of below trend expected productivity, where productivity is measured by the growth in book value of S&P 500 equity per-share. Inflation and fear-based risk premia only have a secondary impact on the premium. The premium is always positive or zero with respect to long-term Treasuries. It may be negative for short-term Treasuries when short-term productivity outpaces medium and long run trends. Consequently: (4) Treasury yields are mostly determined in reference to the required yield and the business cycle risk premium; (5) the yield spread is largely explained by the differential of long-term book value per share growth vs. near term growth, with possible yield curve inversions. Finally, (6) the Fed model is partially validated since both the S&P 500 forward earnings yield and the ten-year Treasury yield are determined by a common factor: the required yield. [source] The real exchange rate,real interest rate relation: evidence from tests for symmetric and asymmetric threshold cointegrationINTERNATIONAL JOURNAL OF FINANCE & ECONOMICS, Issue 2 2006Robert Sollis Abstract This paper investigates the existence of threshold cointegration between real exchange rates and real interest rate differentials. Unlike previous work, which generally fails to find evidence of a long-run relationship employing linear models, we employ tests of the null hypothesis of no cointegration derived from nonlinear bivariate models that allow for threshold cointegration under the alternative hypothesis. For six of the countries in our sample our analysis reveals some evidence of a nonlinear long-run relationship between real exchange rates and real interest rate differentials. Asymmetric mean reversion of the equilibrium error is found to be driven by the asymmetric short-run adjustment of the real exchange rate to dis-equilibrium. When threshold cointegration is found to exist, we find stronger mean reversion when the equilibrium error is negative relative to when it is positive. Copyright © 2006 John Wiley & Sons, Ltd. [source] Asymmetric adjustment and nonlinear dynamics in real exchange ratesINTERNATIONAL JOURNAL OF FINANCE & ECONOMICS, Issue 1 2005Hyginus Leon Abstract This paper examines whether deviations from PPP are stationary in the presence of nonlinearity, and whether the adjustment towards PPP is symmetric from above and below. Using alternative nonlinear models, our results support mean reversion and asymmetric adjustment dynamics. We find differences in magnitudes, frequencies and durations of the deviations of exchange rates from fixed and time-varying thresholds, both between over-appreciations and over-depreciations and between developed and developing countries. In particular, the average cumulative sum of deviations during periods when exchange rates are below forecasts is twice that during periods of over-appreciation and larger for developing than advanced countries. Copyright © 2005 John Wiley & Sons, Ltd. [source] Short Rate Dynamics and Regime Shifts,INTERNATIONAL REVIEW OF FINANCE, Issue 3 2009HAITAO LI ABSTRACT We characterize the dynamics of the US short-term interest rate using a Markov regime-switching model. Using a test developed by Garcia, we show that there are two regimes in the data: In one regime, the short rate behaves like a random walk with low volatility; in another regime, it exhibits strong mean reversion and high volatility. In our model, the sensitivity of interest rate volatility to the level of interest rate is much lower than what is commonly found in the literature. We also show that the findings of nonlinear drift in Aït-Sahalia and Stanton, using nonparametric methods, are consistent with our regime-switching model. [source] Nonlinear Alternatives to Unit Root Tests and Public Finances Sustainability: Some Evidence from Latin American and Caribbean Countries,OXFORD BULLETIN OF ECONOMICS & STATISTICS, Issue 5 2008Georgios Chortareas Abstract We analyse the sustainability of government debt for Latin American and Caribbean countries employing unit-root tests with nonlinear alternative hypotheses and examine the robustness of our results against those from unit-root tests with breaks and threshold nonlinearities. We show that, in general support for sustainability substantially improves when nonlinear mean reversion is taken into account. We also find that the results obtained from applying various tests with nonlinear alternatives, although broadly consistent, are not identical. This suggests that reliance on a single unit-root test for assessing fiscal policy sustainability may be misleading. [source] Investor Rationality: Evidence from U.K. Property Capitalization RatesREAL ESTATE ECONOMICS, Issue 2 2005Patric H. Hendershott Recent analyses have suggested the irrationality of Australian and U.S. office property investors in that they have failed to raise capitalization rates sufficiently at rental cyclical peaks to account for the obvious mean reversion in real rents and thus have significantly overvalued properties. In this article, we present a model of capitalization rates and explain U.K. office and retail cap rates in an error correction framework. We demonstrate that our proxies for expected real rental growth do, in fact, forecast future real growth and that cap rates reflect rational expectations of mean reversion in future real cash flows. Moreover, property cap rates are linked to the equity capitalization rate (dividend/price ratio) and expected real dividend growth in the expected manner. [source] The Hull and White Model of the Short Rate: An Alternative Analytical RepresentationTHE JOURNAL OF FINANCIAL RESEARCH, Issue 4 2002Dwight Grant Abstract Hull and White extend Ho and Lee's no-arbitrage model of the short interest rate to include mean reversion. This addition eliminates the problem of negative interest rates and has found wide application. To implement their model, Hull and White employ a sequential search process to identify the mean interest rate in a trinomial lattice at each date. In this article we extend Hull and White's work by developing an analytical solution for the mean interest rate at each date. This solution applies equally well to trinomial lattices, interest rate trees, and Monte Carlo simulation. We illustrate the analytical result by applying it to an example originally used by Hull and White and then for valuing an option on a bond. [source] Path-dependent currency options with mean reversionTHE JOURNAL OF FUTURES MARKETS, Issue 3 2008Hoi Ying Wong This paper develops a path-dependent currency option pricing framework in which the exchange rate follows a mean-reverting lognormal process. Analytical solutions are derived for barrier options with a constant barrier, lookback options, and turbo warrants. As the analytical solutions are obtained using a Laplace transform, this study numerically shows that the solution implemented with a numerical Laplace inversion is efficient and accurate. The pricing behavior of path-dependent options with mean reversion is contrasted with the Black-Scholes model. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:275,293, 2008 [source] Valuing credit derivatives using Gaussian quadrature: A stochastic volatility frameworkTHE JOURNAL OF FUTURES MARKETS, Issue 1 2004Nabil Tahani This article proposes semi-closed-form solutions to value derivatives on mean reverting assets. A very general mean reverting process for the state variable and two stochastic volatility processes, the square-root process and the Ornstein-Uhlenbeck process, are considered. For both models, semi-closed-form solutions for characteristic functions are derived and then inverted using the Gauss-Laguerre quadrature rule to recover the cumulative probabilities. As benchmarks, European call options are valued within the following frameworks: Black and Scholes (1973) (represents constant volatility and no mean reversion), Longstaff and Schwartz (1995) (represents constant volatility and mean reversion), and Heston (1993) and Zhu (2000) (represent stochastic volatility and no mean reversion). These comparisons show that numerical prices converge rapidly to the exact price. When applied to the general models proposed (represent stochastic volatility and mean reversion), the Gauss-Laguerre rule proves very efficient and very accurate. As applications, pricing formulas for credit spread options, caps, floors, and swaps are derived. It also is shown that even weak mean reversion can have a major impact on option prices. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:3,35, 2004 [source] ARE LABOUR FORCE PARTICIPATION RATES NON-STATIONARY?AUSTRALIAN ECONOMIC PAPERS, Issue 2 2008EVIDENCE FROM 130 YEARS FOR G7 COUNTRIES This paper applies a unit root test with a non-linear threshold to examine whether labour force participation rates are mean reverting for G7 countries using annual data over a 130 year period. We find some evidence of mean reversion for just over half the sample; however, this result is sensitive to regime shifts. We also examine whether the labour force participation rate is trend reverting through employing a lagrange multiplier (LM) unit root test with one and two structural breaks in the intercept and slope. The LM unit root test provides no additional evidence in support of stationarity. On the basis of the unit root tests for mean reversion we conclude that there is at best mixed evidence that long-term changes in unemployment rates translate into long-term changes in employment rates and that the unemployment rate is a useful indicator of joblessness. [source] | ||||||||||||||||||||||