In this paper we take seriously the consequences of the Pricing Equation in constructing a novel consistent estimator of the stochastic discount factor (SDF) using panel data. Under general conditions it depends exclusively on appropriate averages of asset returns, and its computation is a...

Based on an idea in Backus, Foresi, and Telmer (1998) we extend the class of discrete-time affine multifactor Gaussian models by allowing factor innovations to be distributed as Gaussian mixtures. This is motivated by the observation that bond yield changes for some maturities are distinctly...

The techniques to analyze time series generally use model identification and estimation procedures based on the stationarity assumption of the Data Generating Process (in short DGPs). This hypothesis is often violated when we study financial phenomena, that show non stationary features. When we...

The lion’s share of hidden Markov models (HMMs) /Markov regime switching models considered in economic research incorporates a comparably small number of states. The popularity of models with mostly two or three states principally results from their good interpretability: often regime...

In this paper we use a Dynamic Factor model to retrieve vulnerability indicators able to predict financial turmoil. A stochastic simulation experiment is then used to produce the corresponding probability forecasts regarding the currency crisis events a®ecting a number of East Asian countries...

While tests for unit roots and cointegration have important econometric and economic implications, they do not always offer conclusive results. For example, Rudebusch (1992; 1993) demonstrates that standard unit root tests have low power against estimated trend stationary alternatives. In addition,...

Total factor productivity (TFP) computed as Solow-residuals could be subject to input-substitution bias for two reasons. First, the Cobb-Douglas (CD) production function restricts all input substitutions to one. Second, observed inputs generally differ from optimal inputs, so that inputs...

A specification search algorithm is proposed that aims to assist the user in the process of constructing Vector Error Correction Models. The algorithm automates testing the cointegration rank of the system and performs simplifications based on possible weak exogeneity of some variables....

This paper assesses the relative merits of panel time series models in forecasting sovereign default. It explores the contentious issue of whether controlling for time-series and country heterogeneity is important in forecasting emerging market default. For this purpose, it uses conventional...