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Published Articles:


  • "Exponential class of dynamic binary choice panel data models with fixed effects", by Majid M. Al-Sadoon, Tong Li and M. Hashem Pesaran, CESifo Working Paper No. 4033, Econometrics Reviews, March 2017, Volume 36, Issue 6-9, pp. 898-927.

    Abstract: This paper proposes an exponential class of dynamic binary choice panel data models for the analysis of short T (time dimension) large N (cross section dimension) panel data sets that allows for unobserved heterogeneity (fixed effects) to be arbitrarily correlated with the covariates. The paper derives moment conditions that are in- variant to the fixed effects which are then used to identify and estimate the parameters of the model. Accordingly, GMM estimators are proposed that are consistent and asymptotically normally distributed at the root-N rate. We also study the conditional likelihood approach, and show that under exponential specification it can identify the effect of state dependence but not the effects of other covariates. Monte Carlo experiments show satisfactory nite sample performance for the proposed estimators, and investigate their robustness to miss-specification.
    JEL Classifications: C23, C25
    Key Words: Dynamic Discrete Choice, Fixed Effects, Panel Data, GMM, CMLE.
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  • "Oil Prices and the Global Economy: Is It Different This Time Around?", by Kamiar Mohaddes and M. Hashem Pesaran, Energy Economics, June 2017, Volume 65, pp. 315-325.

    Abstract: The recent plunge in oil prices has brought into question the generally accepted view that lower oil prices are good for the US and the global economy. In this paper, using a quarterly multi-country econometric model, we first show that a fall in oil prices lowers interest rates and inflation in most countries, and increases global real equity prices. The effects on real output are positive, although they take longer to materialize (around 4 quarters after the shock). We then re-examine the effects of low oil prices on the US economy over different sub-periods using monthly observations on real oil prices, real equity prices and real dividends. We confirm the perverse positive relationship between oil and equity prices over the period since the 2008 financial crisis highlighted in the recent literature, but show that this relationship has been unstable when considered over the longer time period of 1946–2016. In contrast, we find a stable negative relationship between oil prices and real dividends which we argue is a better proxy for economic activity (as compared to equity prices). On the supply side, the effects of lower oil prices differ widely across the different oil producers, and could be perverse initially, as some of the major oil producers try to compensate their loss of revenues by raising production. Taking demand and supply adjustments to oil price changes as a whole, we conclude that oil markets equilibrate but rather slowly, with large episodic swings between low and high oil prices.
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  • "Country-Specific Oil Supply Shocks and the Global Economy: A Counterfactual Analysis", by Kamiar Mohaddes and M. Hashem Pesaran, Energy Economics, September 2016, Volume 59, pp. 382-399.

    Abstract: This paper investigates the global macroeconomic consequences of country-specific oil-supply shocks. Our contribution is both theoretical and empirical. On the theo- retical side, we develop a model for the global oil market and integrate this within a compact quarterly model of the global economy to illustrate how our multi-country approach to modelling oil markets can be used to identify country-specific oil-supply shocks. On the empirical side, estimating the GVAR-Oil model for 27 countries/regions over the period 1979Q2 to 2013Q1, we show that the global economic implications of oil-supply shocks (due to, for instance, sanctions, wars, or natural disasters) vary considerably depending on which country is subject to the shock. In particular, we find that adverse shocks to Iranian oil output are neutralized in terms of their effects on the global economy (real outputs and financial markets) mainly due to an increase in Saudi Arabian oil production. In contrast, a negative shock to oil supply in Saudi Arabia leads to an immediate and permanent increase in oil prices, given that the loss in Saudi Arabian production is not compensated for by the other oil producers. As a result, a Saudi Arabian oil supply shock has significant adverse effects for the global economy with real GDP falling in both advanced and emerging economies, and large losses in real equity prices worldwide.
    JEL Classifications: C32, E17, F44, F47, O53, Q43.
    Key Words: Country-specific oil supply shocks, identification of shocks, oil sanctions, oil prices, global oil markets, Iran, Saudi Arabia, international business cycle, Global VAR (GVAR), interconnectedness, impulse responses.
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  • "Long-Run Effects in Large Heterogenous Panel Data Models with Cross-Sectionally Correlated Errors", by Alexander Chudik, Kamiar Mohaddes, M. Hashem Pesaran and Mehdi Raissi, Advances in Econometrics, 2016, Volume 36, pp. 85-135, Essays in Honor of Aman Ullah.

    Abstract: This paper develops a cross-sectionally augmented distributed lag (CS-DL) approach to the estimation of long-run effects in large dynamic heterogeneous panel data models with cross-sectionally dependent errors. The asymptotic distribution of the CS-DL estimator is derived under coefficient heterogeneity in the case where the time dimension (T) and the cross-section dimension (N) are both large. The CS-DL approach is compared with more standard panel data estimators that are based on autoregressive distributed lag (ARDL) specifications. It is shown that unlike the ARDL-type estimator, the CS-DL estimator is robust to misspecification of dynamics and error serial correlation. The theoretical results are illustrated with small sample evidence obtained by means of Monte Carlo simulations, which suggest that the performance of the CS-DL approach is often superior to the alternative panel ARDL estimates, particularly when T is not too large and lies in the range of 30–50.
    JEL Classifications: C23.
    Key Words: Long-run relationships, estimation and inference, panel distributed lags, large dynamic heterogeneous panels, cross-section dependence.
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  • "Theory and Practice of GVAR Modeling", by Alexander Chudik, and M. Hashem Pesaran, SSRN Research Paper Series No. 14.04, Journal of Economic Surveys, February 2016, Volume 30, No. 1, pp. 165-197.

    Abstract: The Global Vector Autoregressive (GVAR) approach has proven to be a very useful approach to analyse interactions in the global macroeconomy and other data networks where both the cross-section and the time dimensions are large. This paper surveys the latest developments in the GVAR modelling, examining both the theoretical foundations of the approach and its numerous empirical applications. We provide a synthesis of existing literature and highlight areas for future research.
    JEL Classifications: C32, E17.
    Key Words: Global VAR, global macroeconometric modelling, global interdependencies, policy simulations.
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  • "Robust Standard Errors in Transformed Likelihood Estimation of Dynamic Panel Data Models with Cross-Sectional Heteroskedasticity", by Kazuhiko Hayakawa and M. Hashem Pesaran, CWPE Working Paper No. 1224, IZA Discussion Paper 6583, Cesifo Working Paper No.3850, Journal of Econometrics, Volume 188, Issue 1, September 2015, pp. 111-134.

    Abstract: This paper extends the transformed maximum likelihood approach for estimation of dynamic panel data models by Hsiao, Pesaran, and Tahmiscioglu (2002) to the case where the errors are cross-sectionally heteroskedastic. This extension is not trivial due to the incidental parameters problem and its implications for estimation and inference. We approach the problem by working with a mis-specified homoskedastic model, and then show that the transformed maximum likelihood estimator continues to be consistent even in the presence of cross-sectional heteroskedasticity. We also obtain standard errors that are robust to cross-sectional heteroskedasticity of unknown form. By means of Monte Carlo simulations, we investigate the finite sample behavior of the transformed maximum likelihood estimator and compare it with various GMM estimators proposed in the literature. Simulation results reveal that, in terms of median absolute errors and accuracy of inference, the transformed likelihood estimator outperforms the GMM estimators in almost all cases.
    JEL Classifications: C12, C13, C23
    Key Words: Dynamic Panels, Cross-sectional heteroskedasticity, Monte Carlo simulation, Transformed MLE, GMM estimation.
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  • "Common Correlated Effects Estimation of Heterogeneous Dynamic Panel Data Models with Weakly Exogenous Regressors", by Alexander Chudik, and M. Hashem Pesaran,CESifo Working Paper No. 4232 and CAFE Research Paper No. 13.14, IZA Discussion Paper No. 6618, Journal of Econometrics, Volume 188, Issue 2, October 2015, pp. 393-420.
    Abstract: This paper extends the Common Correlated Effects (CCE) approach developed by Pesaran (2006) to heterogeneous panel data models with lagged dependent variable and/or weakly exogenous regressors. We show that the CCE mean group estimator continues to be valid but the following two conditions must be satisfied to deal with the dynamics: a sufficient number of lags of cross section averages must be included in individual equations of the panel, and the number of cross section averages must be at least as large as the number of unobserved common factors. We establish consistency rates, derive the asymptotic distribution, suggest using covariates to deal with the effects of multiple unobserved common factors, and consider jackknife and recursive de-meaning bias correction procedures to mitigate the small sample time series bias. Theoretical findings are accompanied by extensive Monte Carlo experiments, which show that the proposed estimators perform well so long as the time series dimension of the panel is sufficiently large.
    JEL Classifications: C31, C33
    Key Words: Large panels, lagged dependent variable, cross sectional dependence, coefficient heterogeneity, estimation and inference, common correlated effects, unobserved common factors.
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  • "Testing Weak Cross-Sectional Dependence in Large Panels", by M. Hashem Pesaran, January 2012, CWPE Working Paper No. 1208, IZA Discussion Paper No. 6432, Econometric Reviews, Volume 34, Issue 6-10, May 2015, pp. 1089-1117.

    Abstract: This paper considers testing the hypothesis that errors in a panel data model are weakly cross sectionally dependent, using the exponent of cross-sectional dependence , introduced recently in Bailey, Kapetanios and Pesaran (2012). It is shown that the implicit null of the CD test depends on the relative expansion rates of N and T. When T = O , for some , then the implicit null of the CD test is given by , which gives image6, when N and T tend to infinity at the same rate such that T/N , with being a finite positive constant. It is argued that in the case of large N panels, the null of weak dependence is more appropriate than the null of independence which could be quite restrictive for large panels. Using Monte Carlo experiments, it is shown that the CD test has the correct size for values of in the range [0, 1/4], for all combinations of N and T, and irrespective of whether the panel contains lagged values of the dependent variables, so long as there are no major asymmetries in the error distribution.
    JEL Classifications: C12, C13, C3
    Key Words: Exponent of cross-sectional dependence, Diagnostic tests, Panel data models, Dynamic heterogenous panels.
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  • "Constructing Multi-Country Rational Expectations Models", by Stephane Dees, M. Hashem Pesaran, Ron P. Smith and L. Vanessa Smith, CESifo Working Papers No. 3081, Oxford Bulletin of Economics and Statistics, Volume 76, Issue 6, pp. 812-840, December 2014.

    Abstract: This paper considers some of the technical issues involved in using the GVAR approach to construct a multi-country rational expectations, RE, model and illustrates them with a new Keynesian model for 33 countries estimated with quarterly data over the period 1980-2011. The issues considered are: the measurement of steady states; the determination of exchange rates and the specification of the short-run country-specific models; the identification and estimation of the model subject to the theoretical constraints required for a determinate rational expectations solution; the solution of a large RE model; the structure and estimation of the covariance matrix; and the simulation of shocks. The model used as an illustration shows that global demand and supply shocks are the most important drivers of output, inflation and interest rates in the long run. By contrast, monetary or exchange rate shocks have only a short-run impact in the evolution of the world economy. The paper also shows the importance of international connections, directly as well as indirectly through spillover effects. Overall, ignoring global inter-connections as country-specific models do, could give rise to misleading conclusions.
    JEL Classifications: C32, E17, F37, F42
    Key Words: Global VAR (GVAR), Multi-country New Keynesian (MCNK) models, supply shocks, demand shocks, monetary policy shocks
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  • "Large Panel Data Models with Cross-Sectional Dependence: A Survey", by Alexander Chudik, and M. Hashem Pesaran, CESifo WP Number 4371, in The Oxford Handbook on Panel Data edited by B. H. Baltagi, Oxford University Press, Ch. 1, ISBN: 978-0-19-994004-2.

    Abstract: This paper provides an overview of the recent literature on estimation and inference in large panel data models with cross-sectional dependence. It reviews panel data models with strictly exogenous regressors as well as dynamic models with weakly exogenous regressors. The paper begins with a review of the concepts of weak and strong cross-sectional dependence, and discusses the exponent of cross-sectional dependence that characterizes the different degrees of cross-sectional dependence. It considers a number of alternative estimators for static and dynamic panel data models, distinguishing between factor and spatial models of cross-sectional dependence. The paper also provides an overview of tests of independence and weak cross-sectional dependence.
    JEL Classifications: C31, C33
    Key Words: Large panels, weak and strong cross-sectional dependence, factor structure, spatial dependence, tests of cross-sectional dependence.
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  • "Signs of Impact Effects in Time Series Regression Models", by M. Hashem Pesaran and Ron P Smith, (2014), Economics Letters, Vol. 122, Issue 2, pp.150-153.

    Abstract: In this paper we consider the problem of interpreting the signs of the estimated coeficients in multivariate time series regressions where the regressors are correlated. Using a continuous time model, we argue that focussing on the signs of individual coeficients in such regressions could be misleading and argue in favour of allowing for the indirect effects that arise due to the historical correlations amongst the regressors. For estimation from discrete time data we show that the sign of the total impact, including the direct and indirect effects, of a regressor can be obtained using a simple regression that only includes the regressor of interest.
    JEL Classifications: C1, C5
    Key Words: Regression coeficients, Impact effects.
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  • "One Hundred Years of Oil Income and the Iranian Economy: A Curse or a Blessing?", by Kamiar Mohaddes, and M. Hashem Pesaran, (2014), Iran and the Global Economy: Petro Populism, Islam and Economic Sanctions edited by Parvin Alizadeh and Hassan Hakimian, Routledge, Ch. 1, pp.12-45. ISBN-10: 0415505542 ISBN-13: 978-0415505543.

    Abstract: This paper examines the impact of oil revenues on the Iranian economy over the past hundred years, spanning the period 1908–2010. It is shown that although oil has been produced in Iran over a very long period, its importance in the Iranian economy was relatively small up until the early 1960s. It is argued that oil income has been both a blessing and a curse. Oil revenues when managed appropriately are a blessing, but their volatility (which in Iran is much higher than oil price volatility) can have adverse effects on real output, through excessively high and persistent levels of inflation. Lack of appropriate institutions and policy mechanisms which act as shock absorbers in the face of high levels of oil revenue volatility have also become a drag on real output. In order to promote growth, policies should be devised to control inflation; to serve as shock absorbers negating the adverse effects of oil revenue volatility; to reduce rent seeking activities; and to prevent excessive dependence of government finances on oil income.
    JEL Classifications: E02, N15, Q32
    Key Words: Oil price volatility, oil income, rent seeking, inflation, macroeconomic policy.
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  • "An Empirical Growth Model for Major Oil Exporters", by Hadi Salehi Esfahani, Kamiar Mohaddes and M. Hashem Pesaran, (2014), Journal of Applied Econometrics, Vol. 29, Issue 1, pp. 1-21.

    Abstract: This paper develops a long-run output relation for a major oil exporting economy where the oil income to output ratio remains sufficiently high over a prolonged period. It extends the stochastic growth model developed in Binder and Pesaran (1999) by including oil exports as an additional factor in the capital accumulation process. The paper distinguishes between the two cases where the growth of oil income, g0, is less than the natural growth rate (the sum of the population growth, n, and the growth of technical progress, g), and when g0 > g+n. Under the former, the effects of oil income on the economy's steady growth rate will vanish eventually, whilst under the latter, oil income enters the long-run output equation with a coefficient which is equal to the share of capital if it is further assumed that the underlying production technology can be represented by a Cobb-Douglas production function. The long-run theory is tested using quarterly data on nine major oil economies. Overall, the test results support the long-run theory, with the existence of long-run relations between real output, foreign output and real oil income established for six of the nine economies considered.
    JEL Classifications: C32, C53, E17, F43, F47, Q32
    Key Words: Growth models, long-run and error-correcting relations, major oil exporters, OPEC member countries, oil exports and foreign output shocks.
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  • "Aggregation in Large Dynamic Panels", by M. Hashem Pesaran, Alexander Chudik, (2014), Journal of Econometrics, Vol 178, Issue 2, pp. 273-285.

    Abstract: This paper investigates the problem of aggregation in the case of large linear dynamic panels, where each micro unit is potentially related to all other micro units, and where micro innovations are allowed to be cross sectionally dependent. Following Pesaran (2003), an optimal aggregate function is derived and used (i) to establish conditions under which Granger's (1980) conjecture regarding the long memory properties of aggregate variables from 'a very large scale dynamic, econometric model' holds, and (ii) to show which distributional features of micro parameters can be identified from the aggregate model. The paper also derives impulse response functions for the aggregate variables, distinguishing between the effects of macro and aggregated idiosyncratic shocks. Some of the findings of the paper are illustrated by Monte Carlo experiments. The paper also contains an empirical application to consumer price inflation in Germany, France and Italy, and re-examines the extent to which 'observed' inflation persistence at the aggregate level is due to aggregation and/or common unobserved factors. Our findings suggest that dynamic heterogeneity as well as persistent common factors are needed for explaining the observed persistence of the aggregate inflation.
    JEL Classifications: C43, E31
    Key Words: Aggregation, Large Dynamic Panels, Long Memory, Weak and Strong Cross Section Dependence, VAR Models, Impulse Responses, Factor Models, Inflation Persistence.
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  • "Optimal Forecasts in the Presence of Structural Breaks", by M. Hashem Pesaran, Andreas Pick and Mikhail Pranovich, (2013), Journal of Econometrics, Vol. 177, Issue 2, pp 134-152, ISSN 0304-4076

    Abstract: This paper considers the problem of forecasting under continuous and discrete structural breaks and proposes weighting observations to obtain optimal forecasts in the MSFE sense. We derive optimal weights for one step ahead forecasts. Under continuous breaks, our approach largely recovers exponential smoothing weights. Under discrete breaks, we provide analytical expressions for optimal weights in models with a single regressor, and asymptotically valid weights for models with more than one regressor. It is shown that in these cases the optimal weight is the same across observations within a given regime and differs only across regimes. In practice, where information on structural breaks is uncertain, a forecasting procedure based on robust optimal weights is proposed. The relative performance of our proposed approach is investigated using Monte Carlo experiments and an empirical application to forecasting real GDP using the yield curve across nine industrial economies.
    JEL Classifications: C22, C53
    Key Words: Forecasting, Structural breaks, Optimal weights, Robust optimal weights,Exponential smoothing.
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  • "On identification of Bayesian DSGE Models", by Gary Koop, M. Hashem Pesaran and Ron P. Smith, (2013), Journal of Business Economics and Statistics, Vol. 31, Issue 3, pp. 300-314.

    Abstract: This article is concerned with local identification of individual parameters of dynamic stochastic general equilibrium (DSGE) models estimated by Bayesian methods. Identification is often judged by a comparison of the posterior distribution of a parameter with its prior. However, these can differ even when the parameter is not identified. Instead, we propose two Bayesian indicators of identification. The first follows a suggestion by Poirier of comparing the posterior density of the parameter of interest with the posterior expectation of its prior conditional on the remaining parameters. The second examines the rate at which the posterior precision of the parameter gets updated with the sample size, using data simulated at the parameter point of interest for an increasing sequence of sample sizes (T). For identified parameters, the posterior precision increases at rate T. For parameters that are either unidentified or are weakly identified, the posterior precision may get updated but its rate of update will be slower than T. We use empirical examples to demonstrate that these methods are useful in practice. This article has online supplementary material.
    JEL Classifications: C11, C15, E17
    Key Words: Bayesian identification, weak identification, DSGE models, posterior updating.
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  • "Oil Exports and the Iranian Economy", by Hadi Salehi Esfahani, Kamiar Mohaddes and M. Hashem Pesaran, (2013), The Quarterly Review of Economics and Finance, Vol. 53, Issue 3, pp. 221-237.

    Abstract: This paper presents an error-correcting macroeconometric model for the Iranian economy estimated using a new quarterly data set over the period 1979Q1-2006Q4. It builds on a recent paper by the authors, Esfahani et al. (2012), which develops a theoretical long-run growth model for major oil exporting economies. The core variables included in this paper are real output, real money balances, inflation, exchange rate, oil exports, and foreign real output, although the role of investment and consumption are also analyzed in a sub-model. The paper finds clear evidence for the existence of two long-run relations: an output equation as predicted by the theory and a standard real money demand equation with inflation acting as a proxy for the (missing) market interest rate. The results show that real output in the long run is influenced by oil exports and foreign output. However, it is also found that inflation has a significant negative long-run effect on real GDP, which is suggestive of economic inefficiencies and is matched by a negative association between inflation and the investment-output ratio. Finally, the results of impulse responses show that the Iranian economy adjusts quite quickly to the shocks in foreign output and oil exports, which could be partly due to the relatively underdeveloped nature of Iran's financial markets.
    JEL Classifications: C32, C53, E17, F43, F47, Q32
    Key Words: Growth models, long-run relations, oil exporters, Iranian economy, oil price and foreign output shocks, and error-correcting relations.
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  • "Panel Unit Root Test in the Presence of a Multifactor Error Structure", M. Hashem Pesaran, L. V. Smith, and T. Yamagata, (2013), in Journal of Econometrics, vol 175, no 2, pp. 94-115.

    Abstract: This paper extends the cross-sectionally augmented panel unit root test (CIPS) proposed by Pesaran (2007) to the case of a multifactor error structure, and proposes a new panel unit root test based on a simple average of cross-sectionally augmented Sargan-Bhargava statistics (CSB). The basic idea is to exploit information regarding the m unobserved factors that are shared by k observed time series in addition to the series under consideration. Initially, we develop the tests assuming that m0, the true number of factors is known, and show that the limit distribution of the tests does not depend on any nuisance parameters, so long asSmall sample properties of the tests are investigated by Monte Carlo experiments and are shown to be satisfactory. Particularly, the proposed CIPS and CSB tests have the correct size for all combinations of the cross section (N) and time series (T) dimensions considered. The power of both tests rise with N and T, although the CSB test performs better than the CIPS test for smaller sample sizes. The various testing procedures are illustrated with empirical applications to real interest rates and real equity prices across countries.
    Key Words: Panel unit root tests, Cross section dependence, Multifactor error structure, Fisher inflation parity, Real equity prices.
    JEL Classifications: C12, C15, C22, C23
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  • "Econometric Analysis of High Dimensional VARs Featuring a Dominant Unit", by M. Hashem Pesaran and Alexander Chudik, (2013), Econometrics Review, vol 32, pp. 592-649.

    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 influences 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.
    JEL Classifications: C10, C33, C51
    Key Words: Dominant Units, Factor Models, IVAR Models, Large Panels, Star Networks, Spatial Models, Weak and Strong Cross Section Dependence
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  • "China's Emergence in the World Economy and Business Cycles in Latin America", by Ambrogio Cesa-Bianchi, M. Hashem Pesaran, Alessandro Rebucci and TengTeng Xu, (2012), CWPE, IZA Discussion Paper, Economia, Journal of the Latin American and Caribbean Economic Association, vol 12, pp. 1-75.

    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 longterm
    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 Classifications: C32, F44, E32, O54
    Key Words: China, GVAR, Great Recession, Emerging Markets, International Business Cycle, Latin America, Trade linkages.
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  • "Diagnostic Tests of Cross Section Independence for Limited Dependent Variable Panel Data Models", by Cheng Hsiao, M. Hashem Pesaran and Andreas Pick, (2012), Oxford Bulletin of Economics and Statistics, vol 74, no 2, pp. 253-277.

    Abstract: This paper considers the problem of testing for cross section independence in limited dependent variable panel data models. It derives a Lagrangian multiplier (LM) test and shows that in terms of generalized residuals of Gourieroux, Monfort, Renault and Trognon (1987) it reduces to the LM test of Breusch and Pagan (1980). Due to the tendency of the LM test to over-reject in panels with large N (cross section dimension), we also consider the application of the cross section dependence test (CD) proposed by Pesaran (2004). In Monte Carlo experiments it emerges that for most combinations of N and T the CD test is correctly sized, whereas the validity of the LM test requires T (time series dimension) to be quite 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 find that the votes display a significant degree of cross section dependence.
    JEL Classifications: C12, C33, C35
    Key Words: Nonlinear panels, cross section dependence, probit and To-bit models
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  • "On the Interpretation of Panel Unit Root Tests", by M. Hashem Pesaran, (2012), Economics Letters, vol 116, pp. 545-546.

    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 clarifies that rejection of the panel unit root hypothesis should be interpreted as evidence that a statistically significant 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 proportion 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
    Key Words: Unit Root tests, Panels, Statistical Significance.
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  • "Beyond the DSGE Straitjacket, by M. Hashem Pesaran and Ron P. Smith, (2011), The Manchester School, vol 79, pp. 5–16.

    Abstract: Academic macroeconomics and the research department of central banks have come to be dominated by Dynamic, Stochastic, General Equilibrium (DSGE) models based on micro-foundations of optimising representative agents with rational expectations. We argue that the dominance of this particular sort of DSGE and the resistance of some in the profession to alternatives has become a straitjacket that restricts empirical and theoretical experimentation and inhibits innovation and that the profession should embrace a more flexible approach to macroeconometric modelling. We describe one possible approach.
    JEL Classifications: C100, E100
    Key Words: macroeconometric models, DSGE, VARs, long run theory.
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  • "Forecast Combination across Estimation Windows", by M. Hashem Pesaran and Andreas Pick (2011), Journal of Business Economics and Statistics, vol 29, pp. 307-318.

  • 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.
    Key Words: Forecast averaging, estimation windows, exponential down-weighting, structural breaks.
    JEL Classifications: C22, C53.
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  • "Lumpy Price Adjustments: A Microeconometric Analysis", Emmanuel Dhyney, Catherine Fuss, M. Hashem Pesaran, Patrick Sevestre, (2011), Journal of Business Economics and Statistics, vol 29, no 4, pp. 529-540

    Abstract: Based on a reduced form state-dependent pricing model with random thresholds, we specify and estimate a non-linear panel data model with an unobserved factor representing the common cost or demand components of the unobserved optimal price. Using this model we are able to assess the relative importance of common and idiosyncratic shocks in explaining the frequency and magnitude of price changes in the case of a large variety of consumer products in Belgium and France. We find that the mean level and variability of the random thresholds are key for explaining differences across products in the frequency of price changes. We also find that the idiosyncratic shocks are the most important driver of the magnitude of price changes.
    JEL Classifications: C51, C81, D21
    Key Words: Sticky prices, idiosyncratic shocks, micro non-linear panels
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  • "Panels With Nonstationary Multifactor Error Structures", by G. Kapetanios, M. Hashem Pesaran and T. Yamagata (2011), Journal of Econometrics, vol 160, issue 2, pp. 326-348

    Abstract: The presence of cross-sectionally correlated error terms invalidates much inferential theory of panel data models. Recently, work by Pesaran (2006) has suggested a method which makes use of crosssectional averages to provide valid inference in the case of stationary panel regressions with a multifactor error structure. This paper extends this work and examines the important case where the unobservable common factors follow unit root processes. The extension to I(1) processes is remarkable on two counts. First, it is of great interest to note that while intermediate results needed for deriving the asymptotic distribution of the panel estimators differ between the I(1) and I(0) cases, the final results are surprisingly similar. This is in direct contrast to the standard distributional results for I(1) processes that radically differ from those for I(0) processes. Second, it is worth noting the significant extra technical demands required to prove the new results. The theoretical findings are further supported for small samples via an extensive Monte Carlo study. In particular, the results of the Monte Carlo study suggest that the crosssectional-average-based method is robust to a wide variety of data generation processes and has lower biases than the alternative estimation methods considered in the paper.
    JEL Classifications: C12, C13, C33.
    Key Words: Cross Section Dependence, Large Panels, Unit Roots, Principal Components, Common Correlated Effects.
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  • "Weak and Strong Cross Section Dependence and Estimation of Large Panels", by Alexander Chudik, M. Hashem Pesaran and Elisa Tosetti (2011), The Econometrics Journal, vol 14, pp. C45-C90

    Abstract: This paper introduces the concepts of time-specific weak and strong cross section dependence, and investigates how these notions are related to the concepts of weak, strong and semi-strong common factors, frequently used for modelling residual cross section correlations in panel data models. It then focuses on the problems of estimating slope coefficients in large panels, where cross section units are subject to possibly a large number of unobserved common factors. It is established that the Common Correlated Effects (CCE) estimator introduced by Pesaran (2006) remains asymptotically normal under certain conditions on factors loadings of an infinite factor error structure, including cases where methods relying on principal components fail. The paper concludes with a set of Monte Carlo experiments where the small sample properties of estimators based on principal components and CCE estimators are investigated and compared under various assumptions on the nature of the unobserved common effects.
    JEL Classifications: Common correlated effects (CCE) estimator, Panels, Strong and weak crosssection dependence, Weak and strong factors.
    Key Words: C10, C31, C33.
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  • "Large Panels with Common Factors and Spatial Correlation", M. Hashem Pesaran and Elisa Tosseti (2011), Journal of Econometrics, vol 161, pp. 182-202

    Abstract: This paper considers methods for estimating the slope coefficients in large panel data models that are robust to the presence of various forms of error cross section dependence. It introduces a general framework where error cross section dependence may arise because of unobserved common effects and/or error spill-over effects due to spatial or other forms of local dependencies. Initially, this paper focuses on a panel regression model where the idiosyncratic errors are spatially dependent and possibly serially correlated, and derives the asymptotic distributions of the mean group and pooled estimators under heterogeneous and homogeneous slope coefficients, and for these estimators proposes non-parametric variance matrix estimators. The paper then considers the more general case of a panel data model with a multifactor error structure and spatial error correlations. Under this framework, the Common Correlated Effects (CCE) estimator, recently advanced by Pesaran (2006), continues to yield estimates of the slope coefficients that are consistent and asymptotically normal. Small sample properties of the estimators under various patterns of cross section dependence, including spatial forms, are investigated by Monte Carlo experiments. Results show that the CCE approach works well in the presence of weak and/or strong cross sectionally correlated errors.
    JEL Classifications: C10, C31, C33
    Key Words: Panels, Common Factors, Spatial Dependence, Common Correlated Effects Estimator.
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  • "Variable Selection, Estimation and Inference for Multi-period Forecasting Problems", by M. Hashem Pesaran, A. Pick and A. Timmerman (2011), Journal of Econometrics, vol 164, issue 1, pp. 173-187

    Abstract: This paper conducts a broad-based comparison of iterated and direct multi-period forecasting approaches applied to both univariate and multivariate models in the form of parsimonious factor-augmented vector autoregressions. To account for serial correlation in the residuals of the multi-period direct forecasting models we propose a new SURE-based estimation method and modified Akaike information criteria for model selection. Empirical analysis of the 170 variables studied by Marcellino, Stock and Watson (2006) shows that information in factors helps improve forecasting performance for most types of economic variables although it can also lead to larger biases. It also shows that SURE estimation and finite-sample modifications to the Akaike information criterion can improve the performance of the direct multi-period forecasts.
    JEL Classifications: C22, C32, C52, C53
    Key Words: Direct forecasts, iterated forecasts, factor augmented VARs, SURE estimation, Akaike information criterion.
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  • "Infinite Dimensional VARs and Factor Models", Alexander Chudik and M. Hashem Pesaran (2011), Journal of Econometrics, vol 163, pp. 4-22

    Abstract: This paper proposes a novel approach for dealing with the ‘curse of dimensionality’ in the case of infinite dimensional vector autoregressive (IVAR) models. It is assumed that each unit or variable in the IVAR is related to a small number of neighbors and a large number of non-neighbors. The neighborhood effects are fixed and do not change with the number of units (N), but the coefficients of non-neighboring units are restricted to vanish in the limit as N tends to infinity. Problems of estimation and inference in a stationary IVAR model with an unknown number of unobserved common factors are investigated. A cross section augmented least squares (CALS) estimator is proposed and its asymptotic distribution is derived. Satisfactory small sample properties are documented by Monte Carlo experiments. An empirical illustration shows the statistical significance of dynamic spill-over effects in modelling of U.S. real house prices across the neighboring States.
    JEL Classifications: C10, C33, C51
    Key Words: Large N and T Panels, Weak and Strong Cross Section Dependence, VARs, Spatial Models, Factor Models.
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  • "Predictability of Asset Returns and the Efficient Market Hypothesis", by M. Hashem Pesaran (2011), Handbook of Empirical Economics and Finance, edited by Aman Ullah and David E. Giles, Taylor & Francis, ISBN-10: 1420070355, ISBN-13: 978-1420070354.

    Abstract: This paper is concerned with empirical and theoretical basis of the Efficient Market Hypothesis (EMH). The paper begins with an overview of the statistical properties of asset returns at different frequencies (daily, weekly and monthly), and considers the evidence on return predictability, risk aversion and market efficiency. The paper then focuses on the theoretical foundation of the EMH, and show that market efficiency could co-exit with heterogeneous beliefs and individual irrationality so long as individual errors are cross sectionally weakly dependent in the sense defined by Chudik, Pesaran, and Tosetti (2010). But at times of market euphoria or gloom these individual errors are likely to become cross sectionally strongly dependent and the collective outcome could display significant departures from market efficiency. Market efficiency could be the norm, but it is likely to be punctuated with episodes of bubbles and crashes. The paper also considers if market inefficiencies (assuming that they exist) can be exploited for profit.
    JEL Classifications: G12, G14
    Key Words: Market Efficiency, Predictability, Heterogeneity of Expectations, Forecast averaging, Equity Premium Puzzle.
    Full Text:
    Link to Book:

  • "The Spatial and Temporal Diffusion of House Prices in the UK", by Sean Holly, M. Hashem Pesaran and Takashi Yamagata (2011), Journal of Urban Economics, vol 69, pp. 2-23

  • Abstract: This paper provides a method for the analysis of the spatial and temporal diffusion of shocks in a dynamic system. We use changes in real house prices within the UK economy at the level of regions to illustrate its use. Adjustment to shocks involves both a region specific and a spatial effect. Shocks to a dominant region - London - are propagated contemporaneously and spatially to other regions. They in turn impact on other regions with a delay. We allow for lagged effects to echo back to the dominant region. London in turn is influenced by international developments through its link to New York and other financial centers. It is shown that New York house prices have a direct effect on London house prices. We analyse the effect of shocks using generalised spatio-temporal impulse responses. These highlight the diffusion of shocks both over time (as with the conventional impulse responses) and over space.
    Key Words: House Prices, Cross Sectional Dependence, Spatial Dependence.
    JEL Classifications: C21, C23
    Full Text:
    Data and Supplemental Results:
    Gauss codes and Data:


  • "Conditional Volatility and Correlations of Weekly Returns and the VaR Analysis of 2008 Stock Market Crash", Bahram Pesaran and M. Hashem Pesaran (2010), Special Issue of Economic Modelling in honor of PAVB Swamy, edited by Stephen G. Hall, Lawrence R. Klein, George S. Tavlas and Arnold Zellner, vol 27, pp. 1398-1416

    Abstract: Modelling of conditional volatilities and correlations across asset returns is an integral part of portfolio decision making and risk management. Over the past three decades there has been a trend towards increased asset return correlations across markets, a trend which has been accentuated during the recent financial crisis. We shall examine the nature of asset return correlations using weekly returns on futures markets and investigate the extent to which multivariate volatility models proposed in the literature can be used to formally characterize and quantify market risk. In particular, we ask how adequate these models are for modelling market risk at times of financial crisis. In doing so we consider a multivariate t version of the Gaussian dynamic conditional correlation (DCC) model proposed by Engle (2002), and show that the t-DCC model passes the usual diagnostic tests based on probability integral transforms, but fails the value at risk (VaR) based diagnostics when applied to the post 2007 period that includes the recent financial crisis.
    JEL Classifications: C51, C52, G11
    Key Words: Volatilities and Correlations, Weekly Returns, Multivariate t, Financial Interdependence, VaR diagnostics, 2008 Stock Market Crash.
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  • "A Spatio-Temporal Model Of House Prices In The US", by Sean Holly, M. Hashem Pesaran and Takashi Yamagata (2010), Journal of Econometrics, vol 158, pp. 160-173

    Abstract: This paper provides an empirical analysis of changes in real house prices in the USA using State level data. It examines the extent to which real house prices at the State level are driven by fundamentals such as real per capita disposable income, as well as by common shocks, and determines the speed of adjustment of real house prices to macroeconomic and local disturbances. We take explicit account of both crosssectional dependence and heterogeneity.This allows us to find a cointegrating relationship between real house prices and real per capita incomes with coefficients (1, - 1), as predicted by the theory. We are also able to identify a significant negative effect for a net borrowing cost variable, and a significant positive effect for the State level population growth on changes in real house prices. Using this model we then examine the role of spatial factors, in particular, the effect of contiguous states by use of a weighting matrix. We are able to identify a significant spatial effect, even after controlling for State specific real incomes, and allowing for a number of unobserved common factors. We do, however, find evidence of departures from long run equilibrium in the housing markets in a number of States notably California, NewYork, Massachusetts, and to a lesser extent Connecticut, Rhode Island, Oregon and Washington State.
    JEL Classifications: C21, C23.
    Key Words: House Price, Cointegration, Cross Sectional Dependence, Spatial Dependence.
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    Gauss Code:


  • "A VECX* Model of the Swiss Economy", by Katrin Assenmacher-Wesche and M. Hashem Pesaran (2009) Swiss National Bank Economic Studies, no 6.

  • Abstract: This paper applies the modelling strategy of Garratt, Lee, Pesaran and Shin (2003) to the estimation of a structural cointegrated VAR model that relates the core macroeconomic variables of the Swiss economy to current and lagged values of a number of key foreign variables. We identify and test a long-run structure between the variables. Moreover, we analyse the dynamic properties of the model using Generalised Impulse Response Functions. In its current form the model can be used to produce forecasts for the endogenous variables either under alternative specifications of the marginal model for the exogenous variables, or conditional on some pre-specified path of those variables (for scenario forecasting). In due course the Swiss VECX* model can also be integrated within a Global VAR (GVAR) model where the foreign variables of the model are determined endogenously.
    Key Words: Long-run structural vector autoregression.
    JEL Classifications: C53, C32.
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  • "Identification of New Keynesian Phillips Curves from a Global Perspective", by Stephane Dees, M. Hashem Pesaran, L. Vanessa Smith and Ron P. Smith (2009), Journal of Money, Credit and Banking, vol 41, issue 7, pp. 1481-1502

  • Abstract: This paper is concerned with the estimation of New Keynesian Phillips Curves (NKPC) and focusses on two issues: the weak instrument problem and the characterisation of the steady states. It proposes some solutions from a global perspective. Using a global vector autoregressive model (GVAR) steady states are estimated as long-horizon expectations and valid instruments are constructed from the global variables as weighted averages. The proposed estimation strategy is illustrated using estimates of the NKPC for 8 developed industrial countries. The GVAR generates global factors that are valid instruments and help alleviate the weak instrument problem. The steady states also reflect global in‡uences and any long-run theoretical relationships that might prevail within and across countries in the global economy. The GVAR measure of the steady state performed better than the HP measure, and the use of foreign instruments substantially increased the precision of the estimates of the output coeffcient.
    Key Words: Steady States, Long Horizon Expectations, Global VAR, identification, New Keynesian Phillips Curve, Trend-Cycle Decomposition.
    JEL Classifications: C32, E17, F37, F42.
    Full Text:
    Data Notes:

  • Response to discussions on "Forecasting Economic and Financial Variables with Global VARs", by M. Hashem Pesaran, T. Schuermann and L. Vanessa Smith (2009), International Journal of Forecasting, vol 25, issue 4, pp. 703-715

  • Full Text:

  • "Obituary in Memory of Clive Granger: An Advisory Board Mmember of The Journal", by David F. Hendry and M. Hashem Pesaran (2009), Journal Of Applied Econometrics, vol 24, pp 871–873

    Abstract: Professor Sir Clive William John Granger, Kt, Professor Emeritus at the University of California, San Diego, died on 27 May 2009. He was born on 4 September 1934. In a distinguished career spanning more than 50 years, Clive Granger greatly influenced the theory and practice of time-series econometrics, with major contributions to most of the key concepts and approaches during that period. It is almost impossible to undertake empirical analyses of economic time series without using some of his methods or ideas which spanned causality, spurious regressions, forecasting, long-memory, non-linearity, aggregation and, most importantly, cointegration, where his formulation with Robert F. Engle, with whom he was awarded the Sveriges Riksbank Prize in Economic Science in Memory of Alfred Nobel in October 2003, changed forever our understanding of non-stationary data.
    JEL Classifications:
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  • "Pairwise Tests of Purchasing Power Parity", by M. Hashem Pesaran, Ron P. Smith, Takashi Yamagata, Lyudmyla Hvozdyk (2009), Econometric Reviews, vol 28, pp 495-521

    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 U.S. 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 effects on estimation and inference. In this article, 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 nonlinear alternative..
    JEL Classifications: C23, F31, F41
    Key Words: Cross-rates; Cross-section dependence; Pairwise approach; Panel data; Purchasing power parity.
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    Gauss Code:

  • "The Iranian Economy in the Twentieth Century: A Global Perspective", by Hadi Salehi Esfahani and M. Hashem Pesaran (2009), Iranian Studies, vol 42, issue 2, pp 177-211

    Abstract: This paper examines the transformation of the Iranian economy through the twentieth century within a global context. At the start of that century, the Iranian economy had long remained stagnant, poor, and largely agrarian, with a marginal role in the world economy. By the turn of the twenty-first century, Iran had transformed into a complex and relatively large economy with important consequences for the economies of the Middle East and other parts of the world. While the initial conditions and the evolution of domestic institutions and resources played major roles in the pace and nature of that transformation, relations with the rest of the world had crucial influences as well. This paper focuses on the latter forces, while taking account of their interactions with domestic factors in shaping the particular form of economic development in Iran. We study the ways in which the development of the Iranian economy has been affected by international price movements and by the ebbs and flows of trade, investment, and economic growth in the rest of the world. In considering these effects, we also analyze the role of domestic political economy factors and policies in enhancing or hindering the ability of domestic producers to respond to external challenges and opportunities.
    JEL Classifications: N15, O11, O53.
    Key Words: Development and Growth, Political Economy, Oil Prices and the Iranian Economy.
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    Translation into Persian: by Ali Sarzeem in Donya-e Eqtesad

  • "Testing Dependence Among Serially Correlated Multicategory Variables", by M. Hashem Pesaran and Allan Timmermann (2009), Journal of the American Statistical Association, vol 104, no 485, pp 325-337

    Abstract: The contingency table literature on tests for dependence among discrete multicategory variables is extensive. Standard tests assume, however, that draws are independent and only limited results exist on the effect of serial dependency - a problem that is important in areas such as economics, finance, medical trials, and meteorology. This article proposes new tests of independence based on canonical correlations from dynamically augmented reduced rank regressions. The tests allow for an arbitrary number of categories as well as multiway tables of arbitrary dimension and are robust in the presence of serial dependencies that take the form of finite-order Markov processes. For three-way or higher order tables we propose new tests of joint and marginal independence. Monte Carlo experiments show that the proposed tests have good finite sample properties. An empirical application to microeconomic survey data on firms’ forecasts of changes to their production and prices demonstrates the importance of correcting for serial dependencies in predictability tests.
    JEL Classifications:
    Key Words: Canonical correlations; Contingency tables; Markov chains; Serial dependence.
    Full Text:
    Supplementary Material :

  • "Model Averaging in Risk Management with an Application to Futures Markets", by M. Hashem Pesaran, Christoph Schleicher and Paolo Zaffaroni (2009), Journal of Empirical Finance, vol 16, issue 2, pp 280-305

    Abstract: This paper considers the problem of model uncertainty in the case of multi-asset volatility models and discusses the use of model averaging techniques as away of dealing with the risk of inadvertently using false models in portfolio management. Evaluation of volatility models is then considered and a simple Value-at-Risk (VaR) diagnostic test is proposed for individual as well as ‘average’ models. The asymptotic as well as the exact finite-sample distribution of the test statistic, dealing with the possibility of parameter uncertainty, are established. The model averaging idea and the VaR diagnostic tests are illustrated by an application to portfolios of daily returns on six currencies, four equity indices, four ten year government bonds and four commodities over the period 1991–2007. The empirical evidence supports the use of ‘thick’ model averaging strategies over single models or Bayesian type model averaging procedures.
    JEL Classifications: C32, C52, C53, G11.
    Key Words: Model averaging, Value-at-Risk, Decision based evaluations.
    Full Text:
    Matlab Code for PSZ MARM:
    Documentation of Matlab Code:


  • "Non-nested hypotheses", by Rodrigo Dupleich Ulloa and M. Hashem Pesaran, (2008), The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan. The New Palgrave Dictionary of Economics Online.

    Palgrave Macmillan.

    Abstract: This article provides an overview of the literature on hypotheses testing when the hypotheses or models under consideration are non-nested. Two models are said to be non-nested if neither can be obtained from the other by some limiting process, including the imposition of equality and/or inequality constrains on one of the model's parameters. Relevant concepts such as closeness measures and pseudo-true values are discussed and alternative approaches to testing non-nested hypotheses, including the Cox procedure, artificial nesting and the encompassing approach, are reviewed. The Vuong approach to model selection is also covered.
    JEL Classifications:
    Key Words: artificial nesting; Cox's test; encompassing test; hypothesis testing; Kullback–Leibler information criteria; linear regression models; maximum likelihood estimation; model selection; non-nested hypotheses; pseudo-true values
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  • "Econometrics", by John Geweke, Joel Horowitz, and M. Hashem Pesaran, (2008), The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan. The New Palgrave Dictionary of Economics Online.

    Palgrave Macmillan.

    Abstract: As a unified discipline, econometrics is still relatively young and has been transforming and expanding very rapidly. Major advances have taken place in the analysis of cross-sectional data by means of semiparametric and nonparametric techniques. Heterogeneity of economic relations across individuals, firms and industries is increasingly acknowledged and attempts have been made to take it into account either by integrating out its effects or by modelling the sources of heterogeneity when suitable panel data exist. The counterfactual considerations that underlie policy analysis and treatment valuation have been given a more satisfactory foundation. New time-series econometric techniques have been developed and employed extensively in the areas of macroeconometrics and finance. Nonlinear econometric techniques are used increasingly in the analysis of cross-section and time-series observations. Applications of Bayesian techniques to econometric problems have been promoted largely by advances in computer power and computational techniques. The use of Bayesian techniques has in turn provided the investigators with a unifying framework where the tasks of forecasting, decision making, model evaluation and learning can be considered as parts of the same interactive and iterative process, thus providing a basis for ‘real time econometrics’.
    JEL Classifications: C1, C2, C3, C4, C5.
    Key Words: History of econometrics, Microeconometrics, Macroeconometrics, Bayesian Econometrics, Nonparametric and Semi-parametric Analysis.
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  • "A Bias-Adjusted Lm Test Of Error Cross Section Independence", by M. Hashem Pesaran, Aman Ullah and Takashi Yamagata, (2008), The Econometrics Journal, vol 11, pp. 105–127

    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
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    "Testing Slope Homogeneity In Large Panels", by M. Hashem Pesaran and Takashi Yamagata, (2008), Journal of Econometrics, vol 142, pp. 50-93

    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.
    Full Text:
    Code and Data:


  • "Econometric Analysis of Structural Systems with Permanent and Transitory Shocks", by Adrian Pagan and M. Hashem Pesaran (2008), Journal of Economic Dynamics and Control, vol 32, issue 10, pp. 3376-3395

    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.
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  • "Firm Heterogeneity And Credit Risk Diversification" by Samuel Hanson, M. Hashem Pesaran, and Til Schuermann, (2008), Journal of Empirical Finance, vol 15, issue 4, pp. 583-612.

    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.
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  • "Random Coefficient Models", Cheng Hsiao and M. Hashem Pesaran, (2008), L. Matyas, and P. Sevestre (eds), The Econometrics of Panel Data (Third Edition), Ch 6, pp. 185-213.

    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.
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  • "Unit Roots and Cointegration in Panels", by Breitung, J. and M.H. Pesaran (2008), L. Matyas, and P. Sevestre (eds), The Econometrics of Panel Data (Third Edition), Ch 9, pp. 279-322.

    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
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  • "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), National Institute Economic Review 203, 91–108.

    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.
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  • "Long Run Macroeconomic Relations In The Global Economy", by Stephane Dees, Sean Holly, M. Hashem Pesaran and L. Vanessa Smith, economics - The Open-Access, Open-Assessment E-Journal, 2007-3.

    Abstract: This paper focuses on testing long run macroeconomic relations for interest rates, equity, prices and exchange rates within a model of the global economy. It considers a number of plausible long run relationships suggested by arbitrage in financial and goods markets, and uses the global vector autoregressive (GVAR) model developed in Dees, di Mauro, Pesaran and Smith (2007) to test for long run restrictions in each country/region conditioning on the rest of the world. Bootstrapping is used to compute both the empirical distribution of the impulse responses and the log-likelihood ratio statistic for over-identifying restrictions. The paper also examines the speed with which adjustments to the long run relations take place via the persistence profiles. We find strong evidence in favour of the uncovered interest parity and to a lesser extent the Fisher equation across a number of countries, but our results for the PPP are much weaker. Also as to be expected, the transmission of shocks and subsequent adjustments in financial markets are much faster than those in goods markets.
    JEL Classifications: C32, E17, F47, R11.
    Key Words: Global VAR, interdependencies, Fisher relationship, Uncovered Interest Rate Parity , Purchasing Power Parity, persistence profile, error variance decomposition.
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  • "A Simple Panel Unit Root Test In The Presence Of Cross Section Dependence" by M. Hashem Pesaran, in Journal of Applied Econometrics, Vol 22, Issue 2, pp. 265-312, 2007.

    Abstract: A number of panel unit root tests that allow for cross section dependence have been proposed in the literature that use orthogonalization type procedures to asymptotically eliminate the cross dependence of the series before standard panel unit root tests are applied to the transformed series. In this paper we propose a simple alternative where the standard ADF regressions are augmented with the cross section averages of lagged levels and first-differences of the individual series. New asymptotic results are obtained both for the individual cross sectionally augmented ADF (CADF) statistics, and their simple averages. It is shown that the individual CADF statistics are asymptotically similar and do not depend on the factor loadings. The limit distribution of the average CADF statistic is shown to exist and its critical values are tabulated. Small sample properties of the proposed test are investigated by Monte Carlo experiments. The proposed test is applied to a panel of 17 OECD real exchange rate series as well as to log real earnings of households in the PSID data.
    JEL Classification: C12, C15, C22, C23.
    Key Words: Panel Unit Root Tests, Cross Section Dependence, Monte Carlo Results, Purchasing Power Parity, Real Earning Dynamics.
    Full text:
    Gauss Codes for Computation of the CADF Panel Unit Root Test Statistics:
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  • "Learning, Structural Instability And Present Value Calculations" by M. Hashem Pesaran, Davide Pettenuzzo and Allan Timmermann, in Econometric Reviews, Vol 26, Issue 2-4, pp. 253-288, 2007

    Abstract: Present value calculations require predictions of cash flows both at near and distant future points in time. Such predictions are generally surrounded by considerable uncertainty and may critically depend on assumptions about parameter values as well as the form and stability of the data generating process underlying the cash flows. This paper presents new theoretical results for the existence of the infinite sum of discounted expected future values under uncertainty about the parameters characterizing the growth rate of the cash flow process. Furthermore, we explore the consequences for present values of relaxing the stability assumption in a way that allows for past and future breaks to the underlying cash flow process. We find that such breaks can lead to considerable changes in present values.
    JEL Classifications: C11, G12, G22
    Key Words: Bayesian learning; Present value; Stock prices; Structural breaks.
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  • "A Pair-Wise Approach To Testing For Output And Growth Convergence" by M. Hashem Pesaran, in the Journal of Econometrics, Vol 138, Issue 1, pp. 312-355, 2007

    Abstract: This paper proposes a pair-wise approach to testing for output con- vergence that considers all N(N - 1)/2 possible pairs of log per capita output gaps across N economies. A general probabilistic definition of output convergence is also proposed, which suggests that all such out- put gap pairs must be stationary with a constant mean. The approach is compatible with individual output series having unit roots, or other non-stationary common components and does not involve the choice of a reference country in computation of output gaps. It is also applicable when N is large relative to T (the time dimension of the panel). After providing some encouraging Monte Carlo evidence on the small sample properties of the pair-wise test, the test is applied to output series in the Penn World Tables over 1950-2000. Overall, the results do not support output convergence, and suggest that the findings of convergence clubs in the literature might be spurious. However, significant evidence of growth convergence is found, a result which is reasonably robust to the choice of the sample period and country groupings. Non-convergence of log per capita outputs combined with growth convergence suggests that while common technological progress seems to have been diffusing reasonably widely across economies, there are nevertheless important country-specific factors that render output gaps highly persistent, such that we can not be sure that the probability for the output gaps to lie within a fixed range will be non-zero.
    JEL Classifications: C32, C33, D90, O47
    Keywords: Economic Growth, Panel Data Models, Common Technological Shocks, Convergence.
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  • "Exploring The International Linkages Of The Euro Area: A Global Var Analysis" by Stephane Dees, Filippo di Mauro, M. Hashem Pesaran, and L. Vanessa Smith, in the Journal of Applied Econometrics, Vol 22, Issue 1, pp.1-38, 2007.

    Abstract: This paper presents a quarterly global model combining individual country vector error-correcting models in which the domestic variables are related to the country-specific foreign variables. The global VAR (GVAR) model is estimated for 26 countries, the euro area being treated as a single economy, over the period 1979-2003. It advances research in this area in a number of directions. In particular, it provides a theoretical framework where the GVAR is derived as an approximation to a global unobserved common factor model. Using average pair-wise cross-section error correlations, the GVAR approach is shown to be quite effective in dealing with the common factor interdependencies and international comovements of business cycles. It develops a sieve bootstrap procedure for simulation of the GVAR as a whole, which is then used in testing the structural stability of the parameters, and for establishing bootstrap confidence bounds for the impulse responses. Finally, in addition to generalized impulse responses, the current paper considers the use of the GVAR for ‘structural’ impulse response analysis. Although, the GVAR model can be used for many different purposes, this paper focusses on the short term and long term implications of external shocks for the euro area economy, particularly in response to shocks to the U.S.. The results show that financial shocks are transmitted rapidly, and often get amplified as they travel from the U.S. to the euro area. Equity and bond markets seem to be far more synchronous as compared to real output and inflation. While the impact of an oil price shock on inflation is statistically significant, its impact on output remains limited. In contrast, the effects of a shock to the U.S. monetary policy for the euro area output and inflation are limited and not highly significant.
    JEL Classifications: C32, E17, F47
    Keywords: Global VAR (GVAR), Global interdependencies, global macroeconomic modeling, impulse responses.
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    Supplement A:
    Supplement B: Results)DdPS11April06.pdf
    GVAR code:


  • "Econometric Issues In The Analysis Of Contagion", by M. Hashem Pesaran and Andreas Pick, in the Journal of Economic Dynamics and Control, Vol 31, Issue 4, pp. 1245-1277, 2007.

    Abstract: This paper presents a canonical, econometric model of contagion and investigates the conditions under which contagion can be distinguished from interdependence. In a two-market set up it is shown that for a range of fundamentals the solution is not unique, and for sufficiently large values of the contagion coefficients it has interesting bifurcation properties with bimodal density functions. The identification of contagion requires that the equations for the individual markets contain market specific regressors. This sheds doubt on the general validity of the correlation based tests of contagion recently proposed in the literature which do not involve any market specific variables. Furthermore, we show that ignoring endogeneity and interdependence can introduce an upward bias in the estimate of the contagion coefficient, and using Monte Carlo experiments we further show that this bias could be substantial. Finally, we analyse data on European interest rates spreads during the ERM and find a clear asymmetry in the contagion effects of sharp rises and falls; with only the former having some statistically significant effects.
    JEL Classifications: C10, C123, G10, G15
    Keywords: Contagion, Inter-dependence, Identification, Financial Crises.
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  • "Selection Of Estimation Window In The Presence Of Breaks", by M. Hashem Pesaran and Allan Timmermann, Journal of Econometrics,Vol. 137, Issue 1, pp. 134-161, 2007.

    Abstract: In situations where a regression model is subject to one or more breaks it is shown that it can be optimal to use pre-break data to estimate the parameters of the model used to compute out-of-sample forecasts. The issue of how best to exploit the trade-off that might exist between bias and forecast error variance is explored and illustrated for the multivariate regression model under the assumption of strictly exogenous regressors. In practice when this assumption cannot be maintained and both the time and size of the breaks are unknown the optimal choice of the observation window will be subject to further uncertainties that make exploiting the bias-variance trade-off difficult. To that end we propose a new set of cross-validation methods for selection of a single estimation window and weighting or pooling methods for combination of forecasts based on estimation windows of different lengths. Monte Carlo simulations are used to show when these procedures work well compared with methods that ignore the presence of breaks.
    JEL Classifications: C22, C53. 
    Key Words: Parameter instability, forecasting with breaks, choice of observation window, forecast combination
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  • "What if the UK or Sweden had Joined the Euro in 1999? An Empirical Evaluation using a Global VAR", by M. Hashem Pesaran, L. Vanessa Smith, Ron P. Smith, International Journal of Finance and Economics, Vol. 12, Issue 1, pp. 55-87, 2007.

    Abstract: This paper attempts to provide a conceptual framework for the analysis of counterfactual scenarios using macroeconometric models. As an application we consider UK entry to the euro. Entry involves a long-term commitment to restrict UK nominal exchange rates and interest rates to be the same as those of the euro area. We derive conditional probability distributions for the difference between the future realisations of variables of interest (e.g UK and euro area output and prices) subject to UK entry restrictions being fully met over a given period and the alternative realisations without the restrictions. The robustness of the results can be evaluated by also conditioning on variables deemed to be invariant to UK entry, such as oil or US equity prices. Economic interdependence means that such policy evaluation must take account of international linkages and common factors that drive fluctuations across economies. In this paper this is accomplished using the Global VAR recently developed by Dees, di Mauro, Pesaran and Smith (2005). The paper briefly describes the GVAR which has been estimated for 25 countries and the euro area over the period 1979-2003. It reports probability estimates that output will be higher and prices lower in the UK and the euro area as a result of entry. It examines the sensitivity of these results to a variety of assumptions about when and how the UK entered and the observed global shocks and compares them with the effects of Swedish entry.
    JEL Classifications: C32, C35, E17, F15, F42.
    Keywords: Global VAR (GVAR), Counterfactual Analysis, UK and Sweden entry to euro.
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    Code and Data: Euroentry

  • "Alternative Approaches To Estimation And Inference In Large Multifactor Panels: Small Sample Results With An Application To Modelling Of Asset Return". By G. Kapetanios and M. Hashem, Pesaran, in Garry Phillips and Elias Tzavalis (eds.), The Refinement of Econometric Estimation and Test Procedures: Finite Sample and Asymptotic Analysis, Cambridge University Press, Cambridge, 2007.

    Abstract: This paper considers alternative approaches to the analysis of large panel data models in the presence of error cross section dependence. A popular method for modelling such dependence uses a factor error structure. Such models raise new problems for estimation and inference. This paper compares two alternative methods for carrying out estimation and inference in panels with a multifactor error structure. One uses the correlated common effects estimator that proxies the unobserved factors by cross section averages of the observed variables as suggested by Pesaran, and the other uses principal components following the work of Stock and Watson. The paper develops the principal component method and provides small sample evidence on the comparative properties of these estimators by means of extensive Monte Carlo experiments. An empirical application to company returns provides an illustration of the alternative estimation procedures.
    Keywords: Cross Section Dependence, Large Panels, Principal Components, Common Correlated Effects, Return Equations.
    JEL-Classification: C12, C13, C33.
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  • "Global Business Cycles And Credit Risk", by M. Hashem Pesaran, Til Schuermann,  and Björn-Jakob Treutler, in ' The Risks of Financial Institutions ', Mark Carey and Rene M. Stultz (eds.), 2006, Ch. 9, pp. 419-473, with Comment by Richard Cantor. ISBN No.'s: 13: 978-0-226-09285-0 & 10: 0-226-09285-2

    Abstract: The potential for portfolio diversification is driven broadly by two characteristics: the degree to which systematic risk factors are correlated with each other and the degree of dependence individual firms have to the different types of risk factors. Using a global vector autoregressive macroeconometric model accounting for about 80% of world output, we propose a model for exploring credit risk diversification across industry sectors and across different countries or regions. We find that full firm-level parameter heterogeneity along with credit rating information matters a great deal for capturing differences in simulated credit loss distributions. Imposing homogeneity results in overly skewed and fat-tailed loss distributions. These differences become more pronounced in the presence of systematic risk factor shocks: increased parameter heterogeneity reduces shock sensitivity. Allowing for regional parameter heterogeneity seems to better approximate the loss distributions generated by the fully heterogeneous model than allowing just for industry heterogeneity. The regional model also exhibits less shock sensitivity.
    Key Words: Risk management, default dependence, economic interlinkages, portfolio choice
    JEL Classifications: C32, E17, G20

    Also available at: Wharton Financial Institutions Center WP #05-14

  • "Forecasting Time Series Subject To Multiple Structural Breaks". By M. Hashem Pesaran, Davide Pettenuzzo, and Allan Timmermann, Review of Economic Studies, 2006, October, Vol. 73, Issue 4, pp. 1057-1084

    Abstract: This paper provides a new approach to forecasting time series that are subject to discrete structural breaks. We propose a Bayesian estimation and prediction procedure that allows for the possibility of new breaks occurring over the forecast horizon, taking account of the size and duration of past breaks (if any) by means of a hierarchical hidden Markov chain model. Predictions are formed by integrating over the parameters from the meta distribution that characterizes the stochastic break point process. In an application to US Treasury bill rates, we find that the composite-meta method leads to better out-of-sample forecasts than a range of alternative methods.
    JEL Classifications: C110, C150, C530.
    Keywords: Structural Breaks, Forecasting, Hierarchical hidden Markov Chain Model, Bayesian Model Averaging.

  • "Macroeconomic Dynamics And Credit Risk: A Global Perspective", M. Hashem Pesaran, Til Schuermann, Bjorn-Jakob Treutler, Scott M.Weiner, Journal of Money Credit and Banking, Volume 38, No. 5, pp. 1211-1262 , August 2006.

    Abstract: This paper presents a new approach to modelling conditional credit loss distributions. Asset value changes of firms in a credit portfolio are linked to a dynamic global macroeconometric model, allowing macro effects to be isolated from idiosyncratic shocks from the perspective of default (and hence loss). Default probabilities are driven primarily by how firms are tied to business cycles, both domestic and foreign, and how business cycles are linked across countries. We allow for firm-specific business cycle effects and the heterogeneity of firm default thresholds using credit ratings. The model can be used, for example, to compute the effects of a hypothetical negative equity price shock in South East Asia on the loss distribution of a credit portfolio with global exposures over one or more quarters. We show that the effects of such shocks on losses are asymmetric and non-proportional, reflecting the highly non-linear nature of the credit risk model.
    JEL Classifications: C32, E17, G20
    Key Words: Risk management, economic interlinkages, loss forecasting, default correlation

  • "Market Efficiency Today", by M. Hashem Pesaran , Medium For Econometric Applications, Vol. 14, Issue 2, Spring 2006.

    Abstract: Economists have long been fascinated by the sources of variations in the stock market. By the early 1970’s a consensus had emerged among financial economists suggesting that stock prices could be well approximated by a random walk model and that changes in stock returns were basically unpredictable. Fama (1970) provides an early, definitive statement of this position. Historically, the ‘random walk’ theory of stock prices was preceded by theories relating movements in the financial markets to the business cycle. A prominent example is the interest shown by Keynes in the variation in stock returns over the business cycle. The efficient market hypothesis (EMH) evolved in the 1960’s from the random walk theory of asset prices advanced by Paul Samuelson (1965). Samuelson showed that in an informationally efficient market price changes must be unforecastable. Kendall (1953), Cowles (1960), Osborne (1959, 1962), and many others had already provided statistical evidence on the random nature of equity price changes. Samuelson’s contribution was, however, instrumental in providing academic respectability for the hypothesis, despite the fact that the random walk model had been around for many years; having been originally discovered by Louis Bachelier, a French statistician, back in 1900!
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  • "Macroeconomic Modelling With A Global Perspective" by M. Hashem Pesaran and Ron Smith , The Manchester School, Supplement, 2006. pp. 24-49.

    Abstract: This paper provides a synthesis and further development of a global modelling approach introduced in Pesaran, Schuermann andWeiner (2004), where country specific models in the form of VARX* structures are estimated relating a vector of domestic variables, xit, to their foreign counterparts, xit, and then consistently combined to form a Global VAR (GVAR). It is shown that the VARX* models can be derived as the solution to a dynamic stochastic general equilibrium (DSGE) model where over-identifying long-run theoretical relations can be tested and imposed if acceptable. This gives the system a transparent long-run theoretical structure. Similarly, short-run over-identifying theoretical restrictions can be tested and imposed if accepted. Alternatively, if one has less confidence in the short-run theory the dynamics can be left unrestricted. The assumption of the weak exogeneity of the foreign variables for the long-run parameters can be tested, where x*it variables can be interpreted as proxies for global factors. Rather than using deviations from ad hoc statistical trends, the equilibrium values of the variables reflecting the long-run theory embodied in the model can be calculated. The paper also provides some new results on the relative importance of external shocks for the UK and the euro area economies.
    JEL Classifications: C32, E17, F37, F42.
    Key Words: Global VAR (GVAR), DSGE models, VARX*
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  • "Estimation And Inference In Large Heterogeneous Panels With A Multifactor Error Structure", by M. Hashem Pesaran, Econometrica 74 (4), 967-1012.

    Abstract: This paper presents a new approach to estimation and inference in panel data models with a general multifactor error structure. The unobserved factors and the individual-specific errors are allowed to follow arbitrary stationary processes, and the number of unobserved factors need not be estimated. The basic idea is to filter the individual-specific regressors by means of cross-section averages such that asymptotically as the cross-section dimension (N) tends to infinity the differential effects of unobserved common factors are eliminated. The estimation procedure has the advantage that it can be computed by least squares applied to auxiliary regressions where the observed regressors are augmented with cross sectional averages of the dependent variable and the individual-specific regressors. A number of estimators (refereed to as common correlated effects, CCE, estimators) are proposed and their asymptotic distributions are derived. The small sample properties of mean group and pooled CCE estimators are investigated by Monte Carlo experiments, showing that the CCE estimators have satisfactory small sample properties even under a substantial degree of heterogeneity and dynamics and for relatively small values of N and T.
    JEL-Classification: C12, C13, C33. 
    Keywords: Cross Section Dependence, Large Panels, Common Correlated Effects, Heterogeneity, Estimation and Inference.
    Full Text:
    Gauss Code:

  • "Survey Expectations", by M. Hashem Pesaran and Martin Weale, in the Handbook of Economic Forecasting, G. Elliott, C.W.J. Granger, and A.Timmermann (eds.), North-Holland .

    Abstract: This paper focusses on survey expectations and discusses their uses for testing and modeling of expectations. Alternative models of expectations formation are reviewed and the importance of allowing for heterogeneity of expectations is emphasized. A weak form of the rational expectations hypothesis which focusses on average expectations rather than individual expectations is advanced. Other models of expectations formation, such as the adaptive expectations hypothesis, are briefly discussed. Testable implications of rational and extrapolative models of expectations are reviewed and the importance of the loss function for the interpretation of the test results is discussed. The paper then provides an account of the various surveys of expectations, reviews alternative methods of quantifying the qualitative surveys, and discusses the use of aggregate and individual survey responses in the analysis of expectations and for forecasting.
    JEL Classifications: C40, C50, C53, C80
    Key Words: Models of Expectations Formation, Survey Data, Heterogeneity, Tests of Rational Expectations.
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  • SMALL SAMPLE PROPERTIES OF FORECASTS FROM AUTOREGRESSIVE MODELS UNDER STRUCTURAL BREAKS, by M. Hashem Pesaran, Allan Timmermann. Journal of Econometrics, 129, pp. 183-217.

    Abstract: This paper develops a theoretical framework for the analysis of small-sample properties of forecasts from general autoregressive models under structural breaks. Finite-sample results for the mean squared forecast error of one-step ahead forecasts are derived, both conditionally and unconditionally, and numerical results for different types of break specifications are presented. It is established that forecast errors are unconditionally unbiased even in the presence of breaks in the autoregressive coefficients and/or error variances so long as the unconditional mean of the process remains unchanged. Insights from the theoretical analysis are demonstrated in Monte Carlo simulations and on a range of macroeconomic time series from G7 countries. The results are used to draw practical recommendations for the choice of estimation window when forecasting from autoregressive models subject to breaks.
    JEL Classifications: C22, C53.
    Key Words: Small sample properties of forecasts, MSFE, structural breaks, autoregression, rolling window estimator.
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  • THE COST EFFECTIVENESS OF THE UK'S SOVEREIGN DEBT PORTFOLIO, by Patrick J. Coe, M. Hashem Pesaran and Shaun P. Vahey, 2005, Oxford Bulletin of Economics and Statistics, 67, pp. 467-495.

    Abstract: This paper provides a recursive empirical analysis of the scope for cost minimization in public debt management when the debt manager faces a given short term interest rate dictated by monetary policy as well as risk and market impact constraints. It simulates the `real time' interest costs of alternative portfolios for UK government debt between April 1985 and March 2000. These portfolios are constructed using forecasts of return spreads based on a recursive modelling procedure. While we find statistically significant evidence of predictability, the interest cost savings are quite small when portfolio shares are constrained to lie within historical bounds.
    JEL Classifications: E17, E44, G12, H63.
    Keywords: Public debt management, cost minimization, recursive modelling, data snooping.
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  • ESTIMATION AND INFERENCE IN SHORT PANEL VECTOR AUTOREGRESSIONS WITH UNIT ROOTS AND COINTEGRATION With, Michael Binder and Cheng Hsiao, 2005, Econometric Theory, Volume 21, No.4, pp. 795-837.

    Abstract: This paper considers estimation and inference in panel vector autoregressions (PVARs) where (i) the individual effects are either random or fixed, (ii) the time-series properties of the model variables are unknown a priori and may feature unit roots and cointegrating relations, and (iii) the time dimension of the panel is short and its cross-sectional dimension is large. Generalized Method of Moments (GMM) and Quasi Maximum Likelihood (QML) estimators are obtained and compared in terms of their asymptotic and finite sample properties. It is shown that the asymptotic variances of the GMM estimators that are based on levels as well as first-differences of the model variables depend on the variance of the individual effects; whereas by construction the fixed effects QML estimator is not subject to this problem. Monte Carlo evidence is provided showing that the fixed effects QML estimator tends to outperform the various GMM estimators in finite sample under both normal and non-normal errors. The paper also shows how the fixed effects QML estimator can be successfully used for unit root and cointegration tests in short panels.
    JEL-Classification: C12, C13, C33. 
    Keywords: Panel Vector Autoregressions, Random/Fixed Effects, Unit Roots, Cointegration. 
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  • REAL TIME ECONOMETRICS. by Hashem Pesaran and Allan Timmermann, Econometric Theory, 2005, 21, pp. 212-231.

    Abstract: This paper considers the problems facing decision makers using econometric models in real time. It identifies the key stages involved and highlights the role of automated systems in reducing the effect of data snooping. It sets out many choices that researchers face in construction of automated systems and discusses some of the possible ways advanced in the literature for dealing with them. The role of feedbacks from the decision maker's actions to the data generating process is also discussed and highlighted through an example.
    JEL Classifications: C51, C52, C53.
    Keywords: Specification Search, Data Snooping, Recursive/Sequential Modelling, Automated Model Selection.
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  • "HOW COSTLY IS IT TO IGNORE BREAKS WHEN FORECASTING THE DIRECTION OF A TIME SERIES?" M. Hashem Pesaran and Allan Timmermann, International Journal of Forecasting, Volume, 20, No. 3, July-August 2004, pp. 411-425.

    Abstract: Empirical evidence suggests that many macroeconomic and financial time series are subject to occasional structural breaks. In this paper we present analytical results quantifying the effects of such breaks on the correlation between the forecast and the realization and on the ability to forecast the sign or direction of a time-series that is subject to breaks. Our results suggest that it can be very costly to ignore breaks. Forecasting approaches that condition on the most recent break are likely to perform better over unconditional approaches that use expanding or rolling estimation windows provided that the break is reasonably large.
    JEL Classification: C22, G10
    Key Words: Sign prediction, estimation window, structural breaks.
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  • "MODELLING REGIONAL INTERDEPENDENCIES USING A GLOBAL ERROR-CORRECTING MACROECONOMETRIC MODEL", M. Hashem Pesaran, Til Schuermann and Scott Weiner. Journal of Business and Economics Statistics, Volume 22, Number 2, April 2004, pp 129-162

    Abstract: Financial institutions are ultimately exposed to macroeconomic fluctuations in the global economy. This paper proposes and builds a compact global model capable of generating forecasts for a core set of macroeconomic factors (or variables) across a number of countries. The model explicitly allows for the interdependencies that exist between national and international factors. Individual region-specific vector error-correcting models are estimated, where the domestic variables are related to corresponding foreign variables constructed exclusively to match the international trade pattern of the country under consideration. The individual country models are then linked in a consistent and cohesive manner to generate forecasts for all the variables in the world economy simultaneously. The global model is estimated for 25 countries grouped into 11 regions using quarterly data over 1979Q1-99Q1. The degree of regional interdependencies is investigated via generalized impulse responses where the effects of shocks to a given variable in a given country on the rest of the world are provided. The model is then used to investigate the effects of various global risk scenarios on a bank's loan portfolio.
    JEL Classification: C32, E17, G20. 
    Key Words: Global interdependencies, global macroeconometric modeling, Credit loss distribution, Risk management, Global Vector Error Correcting Model. 
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    Figures (colour):

    Rejoinder to Comments by Baltagi, Dennis and Lopez, Johansen, and Wallis Journal of Business Economics and Statistics, Volume 22, Number 2, April 2004, pp 175-181



  • "FORECAST UNCERTAINTIES IN MACROECONOMETRIC MODELLING: AN APPLICATION TO THE UK ECONOMY", Anthony Garratt, Kevin Lee, M. Hashem Pesaran, and Yongcheol Shin, Journal of the American Statistical Association, Applications and Case Studies, December 2003, 98, 464, pp829-838

    Abstract: This paper argues that probability forecasts convey information on the uncertainties that surround macro-economic forecasts in a straightforward manner which is preferable to other alternatives, including the use of confidence intervals. Probability forecasts obtained using a small benchmark macroeconometric model as well as a number of other alternatives are presented and evaluated using recursive forecasts generated over the period 1999q1-2001q1. Out of sample probability forecasts of inflation and output growth are also provided over the period 2001q2-2003q1, and their implications discussed in relation to the Bank of England's inflation target and the need to avoid recessions, both as separate events and jointly. The robustness of the results to parameter and model uncertainties is also investigated using Bayesian model averaging techniques.
    JEL Classifications: C32, C53, E17 
    Keywords: Probability Forecasting, Long Run Structural VARs, Macroeconometric Modelling, Forecast Evaluation, Probability Forecasts of Inflation and Output Growth;
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    Extended Version of the paper:

  • "TESTING FOR UNIT ROOTS IN HETEROGENEOUS PANELS" Kyung So Im, M Hashem Pesaran and Yongcheol Shin, Journal of Econometrics, 115 (July 2003), pp.53-74.

    Abstract: This paper proposes unit root tests for dynamic heterogeneous panels based on the mean of individual unit root statistics. In particular it proposes a standardized t-bar test statistic based on the (augmented) Dickey-Fuller statistics averaged across the groups. Under a general setting this statistic is shown to converge in probability to a standard normal variate sequentially with T (the time series dimension) --> infinity, followed by N (the cross sectional dimension) --> infinity. A diagonal convergence result with T and N --> infinity while N/T-->k, k being a finite non-negative constant, is also conjectured. In the special case where errors in individual Dickey-Fuller (DF) regressions are serially uncorrelated a modified version of the standardized t-bar statistic, denoted by Z_{tbar}, is shown to be distributed as standard normal as N--> infinity for a fixed T, so long as T>5 in the case of DF regressions with intercepts and T>6 in the case of DF regressions with intercepts and linear time trends. An exact fixed N and T test is also developed using the simple average of the DF statistics. Monte Carlo results show that if a large enough order is selected for the underlying ADF regressions, then the small sample performances of the t-bar test is reasonably satisfactory and generally better than the test proposed by Levin and Lin (1993).
    JEL Classification: C12, C15, C22, C23 
    Key Words: Heterogeneous dynamic panels, Tests of unit roots, LM-bar and t-bar statistics, Finite sample properties. 
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  • "A LONG RUN STRUCTURAL MACROECONOMETRIC MODEL OF THE UK" Anthony Garratt, Kevin Lee, M. Hashem Pesaran and Yongcheol Shin. Economic Journal, Volume 113, pp. 412-455. (April 2003)

    Abstract: A new modelling strategy is introduced that provides a practical approach to incorporating long-run structural relationships, suggested by economic theory, in an otherwise unrestricted VAR model. The strategy is applied to construct a small quarterly macroeconometric model of the UK, estimated over 1965q1-1995q4 in nine  variables: domestic and foreign outputs, prices and interest rates, oil prices, the nominal effective exchange rate, and real money balances. The aim is to develop a model with a transparent and theoretically coherent foundation. Tests of restrictions on the long-run relations of the model are presented.  The dynamic properties of the model are discussed using impulse responses for the effects of an oil price shock as the movements in interest rates beyond those explained by the implementation of an optimal interest rate rule and by oil price, exchange rate and foreign interest rate innovations.
    JEL Classification: C32, E24 
    Keywords:  Long-Run Structural VAR, A Core UK Model, Macroeconomic Modelling, Monetary Policy Shock, Oil Price Shock. 
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    Program and Data:

  • "AGGREGATION OF LINEAR DYNAMIC MODELS: AN APPLICATION TO LIFE-CYCLE CONSUMPTION MODELS UNDER HABIT FORMATION", M. Hashem Pesaran. Economic Modelling Volume 20, Issue 2, pp 227-435 (March 2003) Henry Special Issue 

    Abstract: This paper provides a general framework for aggregating linear dynamic models by deriving the aggregate model as the optimal prediction (in the minimum mean-squared error sense) of the aggregate variable of interest with respect to an aggregate information set generated by current and past values of available aggregate observations. The approach is applied to a number of aggregation problems that have been considered in the literature. It is shown how the results in much of the literature can be readily obtained using the proposed forecasting approach, and a number of important extensions and generalizations are provided. Our approach does not require the assumption of independence of the micro distributed lag coefficients from the other micro coefficients, and establishes that in general the long-run coefficients obtained from the optimal aggregate relation are equal to the averages of the long-run coefficients from the micro relations. The approach is then applied to life-cycle consumption decision rules under habit formation and the implications of the heterogeneity in habit formation coefficients across individuals for the analysis of aggregate consumption is investigated. Using stochastic simulations it is shown that the estimates of the habit persistence coefficient are likely to be biased downward if they are based on analogue aggregate consumption functions, which could partly explain the excess smoothness and excess sensitivity puzzles in terms of neglected heterogeneity. 
    JEL Classifications: C10, C43, D91, E21 
    Keywords: Aggregation, Heterogeneous Dynamic Models, Long Memory, Life Cycle Models under Habit Formation. 
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  • "MARKET TIMING AND RETURN PREDICTION UNDER MODEL INSTABILITY", M. Hashem Pesaran and Allan Timmermann.  Journal of Empirical Finance, 2002, Vol.9 pp.495-510. 

    Abstract: Despite mounting empirical evidence to the contrary, the literature on predictability of stock returns almost uniformly assumes a time-invariant relationship between state variables and returns. In this paper we propose a new two-stage approach for forecasting of financial return series that are subject to breaks.  The first stage adopts a reversed ordered Cusum (ROC) procedure to determine in real time when the most recent break has occurred.  In the second stage, post-break data is used to estimate the parameters of the forecasting model.  We compare this approach to existing alternatives for dealing with parameter instability such as the Bai-Perron method and the time-varying parameter model.  An out-of-sample forecasting experiment demonstrates considerable gains in market timing precision from adopting the proposed two-stage forecasting method. 
    JEL Classification: C22, G10.
    Key Words: Predictability of US stock returns. Market timing information. Structural breaks.
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  • “MAXIMUM LIKELIHOOD ESTIMATION OF FIXED EFFECTS DYNAMIC PANEL DATA MODELS COVERING SHORT TIME PERIODS” Cheng Hsiao, M. Hashem Pesaran, A. Kamil Tahmiscioglu. Journal of Econometrics, 2002, Vol.109 pp.107-150.

    Abstract: A transformed likelihood approach is suggested to estimate fixed effects dynamic panel data models. Conditions on the data generating process of the exogenous variables are given to get around the issue of  “incidental parameters”. The maximum likelihood (MLE) and minimum distance estimator (MDE) are suggested. Both estimators are shown to be consistent and asymptotically more efficient than the instrumental variable (IV) or generalized method of moment (GMM) estimators. A Hausman type specification test is suggested to test the fixed versus random effects specification or conditions on the data generating process of the exogenous variables. Monte Carlo studies are conducted to evaluate the finite sample properties of the MLE, MDE, IV, and GMM. It is shown that the likelihood approach appears to dominate the GMM approach both in terms of the bias or root mean squares error of the estimators and the size and power of the test statistics.
    JEL Classifications: C13, C15, C23 
    Key Words:  Dynamic Panels, Short Time Periods, Fixed and Random Effects, IV, GMM, Forward Filter, Minimum Distance Estimators, Maximum Likelihood Estimators, Monte Carlo Experiments. 
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  • "LONG RUN STRUCTURAL MODELLING"  M Hashem Pesaran and Yongcheol Shin. Econometrics Reviews, 2002, Vol.21 pp.49-87.

    Abstract: The paper develops a general framework for identification, estimation, and hypothesis testing in cointegrated systems when the cointegrating coefficients are subject to (possibly) non-linear and cross-equation restrictions, obtained from economic theory or other relevant a priori information. It provides a proof of the consistency of the quasi maximum likelihood estimators (QMLE), establishes the relative rates of convergence of the QMLE of the short-run and the long-run parameters, and derives their asymptotic distribution; thus generalizing the results already available in the literature for the linear case. The paper also develops tests of the over-identifying (possibly) non-linear restrictions on the cointegrating vectors. The estimation and hypothesis testing procedures are applied to an Almost Ideal Demand System estimated on U.K. quarterly observations. Unlike many other studies of consumer demand this application does not treat relative prices and real per capita expenditures as exogenously given. 
    JEL Classifications: C1, C3, D1, E1. 
    Key Words: Cointegration; identification; QMLE; consistency; asymptotic distribution, testing non-linear restrictions; Almost Ideal Demand Systems. 
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  • “DECISION-BASED METHODS FOR FORECAST EVALUATION”, M. Hashem Pesaran and Spyros Skouras.  In (eds) M.P. Clements and D.F. Hendry, A Companion to Economic Forecasting,  Oxford: Basil Blackwell, chapter 11, pp.241-267. ISBN 0 631 21569 7.

    Abstract: This chapter provides an overview of quantitative and qualitative methods for evaluating forecasts when there exists a priori information regarding the use to which the forecasts will be put. The chapter discusses a decision-based approach for evaluation and comparison of forecasts, and shows how such an approach can provide a unifying theme for recent developments in the forecast evaluation literature - namely the use of generalized cost of error functions, probability event and density forecast evaluation and the evaluation of market-timing skills. The approach is illustrated by means of a number of simple examples. For forecast comparisons, the chapter discusses the use of the sample mean of the loss-differentials between using one forecast distribution relative to another. The problem of testing the “equivalence” of two forecast distributions in a decision-based context is also addressed briefly.
    JEL Classification: C44, C52, C53.
    Key Words: Forecast evaluation, decision making, economic value of forecasts, probability event forecasts, density forecasts, generalised cost of error functions, loss-differentials.
    Web Link:


  • “NON-NESTED HYPOTHESIS TESTING: AN OVERVIEW” M. Hashem Pesaran and Melvyn Weeks.  In (ed) Badi H Baltagi, Companion to Theoretical Econometrics, (2001) Basil Blackwell, Oxford. ISBN 0 63121 254 X.

    Abstract: In econometric analysis non-nested models arise naturally when rival economic theories are used to explain the same phenomenon such as unemployment, inflation or output growth. We examine the problem of hypothesis testing when the models under consideration are “non-nested” or belong to “separate” families of distributions in the sense that none of the individual models may be obtained from the remaining either by imposition of parameter restrictions or through a limiting process. Although our primary focus is on non-nested hypothesis testing, we also briefly discuss the problem of model selection and discuss the differences and similarities of the two approaches. By utilizing the linear regression model as a convenient framework, we examine three broad approaches to non-nested hypothesis testing: the modified (centred) log-likelihood ratio procedure, the comprehensive models approach; and the encompassing procedure. Finally, we consider a number of practical problems which arise in the application of non-nested tests to non-linear models such as the probit and logit qualitative response models.
    JEL Classifications: C1, C20, C52 
    Keywords: Non-nested hypothesis, model selection, Cox test, ecompassing, stochastic simulation, Kullback-Leibler divergence measure. 
    Web Link:

  • “BOUNDS TESTING APPROACHES TO THE ANALYSIS OF LEVEL RELATIONSHIPS” M Hashem Pesaran, Yongcheol Shin and Richard J Smith. Journal of Applied Econometrics special issue in honour of J D Sargan on the theme “Studies in Empirical Macroeconometrics”, (eds) D.F. Hendry and M.H. Pesaran, 2001, Vol.16 pp.289-326.

    Abstract: This paper develops a new approach to the problem of testing the existence of a level relationship between a dependent variable and a set of regressors, when it is not known with certainty whether the underlying regressors are trend- or first-difference stationary. The proposed tests are based on standard F- and t- statistics used to test the significance of the lagged levels of the variables in a univariate error correction mechanism. The asymptotic distributions of these statistics are non-standard under the null hypothesis that there exists no level relationship, irrespective of whether the regressors are I(0) or I(1). Two sets of asymptotic critical values are provided: one when all the regressors are I(1) and the other if they are all purely I(0). These two sets of critical values provide a band covering all possible classifications of the regressors into purely I(0), purely I(1)or mutually cointegrated. Accordingly, various bounds testing procedures are proposed. It is shown that the proposed tests are consistent, and their asymptotic distribution under the null and suitably defined local alternatives are derived. The empirical relevance of the bounds procedures is demonstrated by a re-examination of the earnings equation included in the UK Treasury macroeconometric model. This is a particularly relevant application as there is considerable doubt concerning the order of integration of variables such as the unemployment rate, the union strength and the wedge between the “real product wage” and the “real consumption wage” that enter the earnings equation.
    JEL Classification: C12, C22, C32, E24. 
    Key Words: Level Relationship, Unrestricted Error Correction Model, Cointegration, Unit Roots, Bounds Tests, Critical Value Bounds, Asymptotic Local Power, Earnings Equation. 
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  • "LIFE-CYCLE CONSUMPTION UNDER SOCIAL INTERACTIONS", Michael Binder and M. Hashem Pesaran. Journal of Economic Dynamics and Control, special issue on Computational Methods in Economic Dynamics and Finance, (ed) Sean Holly, 2001, Vol.25 pp.35-83.

    Abstract: In this paper we examine how social interactions affect consumption decisions at various levels of aggregation in a life-cycle economy made up of peer groups. For this purpose, we consider two analytically solvable life-cycle models, one under certainty equivalent behavior and one under prudence, and explicitly allow for three different forms of social interactions in peer groups, namely conformism, altruism, and jealousy. We show that whether social interactions have any effects on individuals’ optimal consumption decisions critically depends on intertemporal rather than static considerations. This is true regardless of whether individuals’ preferences are time separable or exhibit habit formation, and whether information within peer groups is homogeneous or disparate. It implies that analyzing the effects of social interactions in static rather than intertemporal settings is likely to be misleading. We also show that social interactions, when coupled with either habit formation or prudence, can significantly strengthen the effects of habit formation or prudence in the direction of resolving two well-known puzzles in the literature on the permanent income hypothesis, namely excess smoothness and excess sensitivity. 
    JEL-Classification: D91, E21 
    Keywords: Life-Cycle Model, Social Interactions, Habit Formation, Disparate Information, Prudence. 
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  • “ECONOMIC TRENDS AND MACROECONOMIC POLICIES IN POST-REVOLUTIONARY IRAN”  M. Hashem Pesaran. In (ed) Parvin Alizadeh, The Economy of Iran: Dilemmas of an Islamic State, (2000) London: I.B. Tauris, chapter 2, pp.63-100. ISBN 1-86064-464-3

    Abstract: This paper reviews some of the main trends in the Iranian economy over the past two decades and discusses the key economic policy issues that divide the reformist from the more conservative factions in Iran. It argues that the economic policy dilemma of whether to liberalize the economy has not gone away and very much lies dormant. For a small open economy such as Iran operating in an increasingly globalized world economic environment, the neglect of fundamental economic forces in favour of political vested interest can have dire consequences in the long run. 
    JEL Classifications: E60, E66, O21. 
    Key words: Macroeconomic Trends, Monetary and Exchange Rate Policies, Islamic Republic of Iran. 
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  • “ECONOMIC AND STATISTICAL MEASURES OF FORECAST ACCURACY” Clive W.J. Granger and M Hashem Pesaran. Journal of Forecasting, 2000, Vol. 19, pp.537-560.

    Abstract: This paper argues in favour of a closer link between the decision and the forecast evaluation problems. Although the idea of using decision theory for forecast evaluation appears early in the dynamic stochastic programming literature, and has continued to be used with meteorological forecasts, it is hardly mentioned in standard academic texts on economic forecasting. Some of the main issues involved are illustrated in the context of a two-state, two-action decision problem as well as in a more general setting. Relationships between statistical and economic methods of forecast evaluation are discussed and useful links between Kuipers score used as a measure of forecast accuracy in the meteorology literature and the market timing tests used in finance are established. An empirical application to the problem of stock market predictability is also provided, and the conditions under which such predictability could be exploited in the presence of transaction costs are discussed. 
    JEL Classifications: C10, C20, C22, C52 
    Key Words: Decision theory, forecast evaluation, probabilistic forecasts, economic and statistical measures of forecast accuracy, stock market predictability. 
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  • “A STRUCTURAL COINTEGRATING VAR APPROACH TO MACROECONOMETRIC MODELLING" Anthony Garratt, Kevin Lee, M. Hashem Pesaran and Yongcheol Shin.  In (eds) Sean Holly and Martin Weale, Econometric Modelling: Techniques and Applications, (2000) Cambridge: Cambridge University Press, chapter 5, pp.94-131. ISBN 0-521-65069-0

    Abstract: In this paper we discuss the 'structural cointegrating VAR' approach to macroeconometric modelling and compare it to other approaches currently followed in the literature, namely the large-scale simultaneous equation macroeconometric models, the structural VARs, and the dynamic stochastic general equilibrium models.  The structural cointegrating VAR approach has the attractive features that the estimated long-run relationships embedded in the model are theory consistent, and have a clear economic interpretation, and yet the short-run dynamics are flexibly estimated within a VAR framework.  The approach is illustrated using a small quarterly macroeconometric model of the UK.  The uses of the model in impulse response analysis and probability forecasting is also discussed. 
    JEL Classifications: C5, C32, E17 
    Keywords: Structural Cointegrating VAR, Macroeconomic Modelling, Generalised Impulse Responses, Persistence Profiles, Probability Forecasts. 
    Web link:

  • “STRUCTURAL ANALYSIS OF VECTOR ERROR CORRECTION MODELS WITH EXOGENOUS I(1) VARIABLES" M Hashem Pesaran, Yongcheol Shin and Richard J Smith. Journal of Econometrics, 2000, Vol 97, pp.293-343.

    Abstract: This paper generalizes the existing cointegration analysis literature in two respects. Firstly, the problem of efficient estimation of vector error correction models containing exogenous I(1) variables is examined. The asymptotic distributions of the (log-) likelihood ratio statistics for testing cointegrating rank are derived under different intercept and trend specifications and their respective critical values are tabulated. Tests for the presence of an intercept or linear trend in the cointegrating relations are also developed together with model misspecification tests. Secondly, efficient estimation of vector error correction models when the short-run dynamics may differ within and between equations is considered. A re-examination of the purchasing power parity and the uncovered interest rate parity hypotheses is conducted using UK data under the maintained assumption of exogenously given foreign and oil prices. 
    JEL Classifications: C12, C13, C32 
    Keywords: Structural Vector Error Correction Model, Cointegration, Unit Roots, Likelihood Ratio Statistics, Critical Values, Seemingly Unrelated Regression, Monte Carlo Simulations, Purchasing Power Parity, Uncovered Interest Rate Parity. 
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  • “A DECISION THEORETIC APPROACH TO FORECAST EVALUATION” C.W.J. Granger and M. Hashem Pesaran. In (eds) W.S. Chan, W.K. Li and Howell Tong, Statistics and Finance: An Interface, Imperial College Press, London, 2000, chapter 15, pp.261-278.  ISBN 1-86094-237-7.

    Abstract: This paper addresses the problem of forecast evaluation in the context of a simple but realistic decision problem, and proposes a procedure, for the evaluation of forecasts based on their average realized value to the decision maker.  It is shown that by concentrating on probability forecasts stronger theoretical results can be achieved than if just event forecasts were used.  A possible generalisation is considered concerning the use of the correct, conditional predictive density function when forming forecasts. 
    JEL Classifications: C10, C20, C22 
    Keywords: Forecast evaluation, cost function, probabilistic forecasts. 
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  • “NEGLECTED HETEROGENEITY AND DYNAMICS IN CROSS-COUNTRY SAVINGS REGRESSIONS”  M. Hashem Pesaran, Nadeem U. Haque and Sunil Sharma. In (eds) J. Krishnakumar and E. Ronchetti, Panel Data Econometrics - Future Direction: Papers in Honour of Professor Pietro Balestra. In  the series, “Contributions to Economic Analysis”,  Elsevier Science, 2000, chapter 3, pp.53-82. ISBN 0-444-50237-8.

    Abstract: This paper examines the extent to which conclusions of cross-country studies of private savings are robust to allowing for the possible heterogeneity of saving behaviour across countries and the inclusion of dynamics. It provides a review of the econometric implications of neglected slope heterogeneity and dynamics for the fixed effects estimators routinely used in such studies, and illustrates the nature and extent of the biases involved by a re-examination of time series data from 21 OECD countries previously analysed in the literature. The paper shows that neglecting heterogeneity and dynamics in cross-country savings regressions can lead to misleading inferences about the key determinants of savings behavior. If differences across countries are ignored, one can overestimate the influence of certain factors on the private savings rates and at the same time obtain highly significant, but spurious, nonlinear effects for some of the potential determinants. The results indicate that among the many variables considered in the literature only the fiscal variables -- the general government surplus as a proportion of GDP and the ratio of government consumption to GDP-- seem to be the key determinants of private savings rates in the industrial countries in the post world war II period. 
    JEL Classifications: E21, C23 
    Key Words: Saving Behaviour, Cross-country Studies, Slope Heterogeneity, Dynamics, Panel Data Models 
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  • “SOLUTION OF NONLINEAR RATIONAL EXPECTATIONS MODELS WITH APPLICATIONS TO FINITE-HORIZON LIFE-CYCLE MODELS OF CONSUMPTION” Michael Binder, M Hashem Pesaran and S. Hossein Samiei. Journal of Computational Economics, 2000, Vol 15, pp.25-57.

    Abstract: This paper considers the solution of nonlinear rational expectations models resulting from the optimality conditions of a finite-horizon intertemporal optimization problem satisfying Bellman's principle of optimality (and possibly involving inequality constraints). A backward recursive procedure is used to characterize and solve the time-varying optimal decision rules generally associated with these models. At each stage of these backward recursions, either an analytical or numerical solution of the optimality conditions is required. When an analytical solution is not possible, a minimum weighted residual approach is used. The solution technique is illustrated using a life-cycle model of consumption under labor income and interest rate uncertainties (and possibly involving liquidity constraints). Approximate numerical solutions are provided and compared with certainty-equivalent solutions and, when possible, with exact solutions. 
    JEL-Classification: C60, D90, E20. 
    Keywords: Nonlinear Rational Expectations Models, Intertemporal Consumer Choice, Minimum Weighted Residual Method, Exact and Certainty-Equivalent Solutions.
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  • "THE LIFE AND WORK OF JOHN RICHARD NICHOLAS STONE 1913-1991" M Hashem Pesaran and Geoff Harcourt, Economic Journal, 2000, Vol 110, pp.F146-F165.

    Abstract: Sir Richard Stone, knighted in 1978 and Nobel Laureate in Economics in 1984, was one of the pioneering architects of national income and social accounts, and one of the few economists of his generation to have faced the challenge of economics as a science by combining theory and measurement within a cohesive framework.  He was awarded the Nobel Prize in Economics for his “fundamental contributions to the development of national accounts”, but made equally significant contributions to the empirical analysis of consumer behaviour.  His work on the “Growth Project” was also instrumental in the development of appropriate econometric methodology for the construction and the analysis of large disaggregated macroeconometric models.  This paper provides an analysis of Stone’s many contributions. 
    JEL Classification:  B3, C8, E2 O4 
    Key Words:  National Income Accounting; Consumer Behaviour; Macroeconometric Modelling. 
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  • “CROSS-SECTIONAL AGGREGATION OF NONLINEAR MODELS” Kees Jan van Garderen, Kevin Lee and M. Hashem Pesaran. Journal of Econometrics, 2000, Vol 95, pp.285-331.

    Abstract: This paper considers the problem of cross-sectional aggregation when the underlying micro behavioural relations are characterized by general non-linear specifications. It focuses on forecasting the aggregates, and shows how an optimal aggregate model can be derived by minimizing the mean squared prediction errors conditional on the aggregate information. The paper also derives model selection criteria for distinguishing between aggregate and disaggregate models when the primary object of the analysis is forecasting the aggregates, and establishes the consistency of the model selection criteria in large samples. In the case of standard non-linear micro relations with additive errors it also provides suitable small sample corrections. For more general non-linear specifications we consider bootstrap techniques to correct for small sample bias of the proposed model selection criteria. Some of the ideas in the paper are illustrated using log-linear micro relations, often employed in applied research. The paper also contains an empirical application where log-linear production functions are estimated for the UK economy disaggregated by eight industrial sectors and at the aggregate level over the period 1954-1995. 
    JEL Classifications: C43, C52, E23 
    Keywords: Aggregation, Prediction, Model selection, Non-linear models , Log-linear specifications, Production functions, Parametric bootstrap. 
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  • “RECURSIVE MODELLING APPROACH TO PREDICTING UK STOCK RETURNS” M Hashem Pesaran and Allan Timmermann. Economic Journal, 2000, Vol 110, pp.159-191.

    Abstract: This paper applies an extended and generalized version of the recursive modelling strategy developed in Pesaran and Timmermann (1995) to the UK stock market. The focus of the analysis is to simulate investors' search in ‘real time’ for a model that can forecast stock returns. It demonstrates the extent to which monthly stock returns in the UK were predictable over the period 1970-1993. Due to a set of unique historical circumstances, UK stock returns were extremely volatile in 1974-1975, and we discuss how to design a modelling approach capable of accounting for this and similar low probability events. We find evidence of both long-term and short-term predictability in UK stock returns, which could have been exploited by investors to improve on the risk-return trade-off offered by a passive strategy in the market portfolio. Alternative interpretations of this finding are briefly discussed. 
    JEL Classifications: G11, G12, E17, E44 
    Keywords: Stock returns, UK stock market, recursive modeling, switching portfolio, predicting stock prices. 
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  • "SOLUTION OF FINITE-HORIZON MULTIVARIATE LINEAR RATIONAL EXPECTATIONS MODELS AND SPARSE LINEAR SYSTEMS" Michael Binder and M. Hashem Pesaran. Journal of Economic Dynamics and Control, 2000, Vol 24 pp.325-346.

    Abstract: This paper presents efficient methods for the solution of finite-horizon multivariate linear rational expectations models, linking the solution of such models to the problem of solving sparse linear equation systems with a block-tridiagonal coefficient matrix structure. Two numerical schemes for the solution of sparse linear equation systems with a block-tridiagonal coefficient matrix structure are discussed, and it is shown how these procedures can be readily adapted to efficiently solve finite-horizon multivariate linear rational expectations models. As the two numerical schemes are fully recursive and only involve elementary matrix operations, they are also straightforward to implement. The numerical schemes are illustrated by applying them to a general finite-horizon adjustment cost problem of expenditure shares, and to a finite-horizon linear-quadratic optimal control problem. 
    JEL-Classification: C32, C63. 
    Keywords: Multivariate Linear Rational Expectations Models, Sparse Linear Systems. 
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  • "AN AUTOREGRESSIVE DISTRIBUTED LAG MODELLING APPROACH TO COINTEGRATION ANALYSIS" M Hashem Pesaran and Yongcheol Shin, in (ed) S Strom, Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium, 1999, chapter 11. Cambridge University Press, Cambridge. ISBN 0-521-63323-0 (hb) 0-521 63365-6 (pb)

    Abstract: This paper examines the use of autoregressive distributed lag (ARDL) models for the analysis of long-run relations when the underlying variables are I(1).  It shows that after appropriate augmentation of the order of the ARDL model, the OLS estimators of the short-run parameters are pT -consistent with the asymptotically singular covariance matrix, and the ARDL-based estimators of the long-run coefficients are super-consistent, and valid inferences on the long-run parameters can be made using standard normal asymptotic theory. The paper also examines the relationship between the ARDL procedure and the fully modified OLS approach of Phillips and Hansen to estimation of cointegrating relations, and compares the small sample performance of these two approaches via Monte Carlo experiments. These results provide strong evidence in favour of a rehabilitation of the traditional ARDL approach to time series econometric modelling. The ARDL approach has the additional advantage of yielding consistent estimates of the long-run coefficients that are asymptotically normal irrespective of whether the underlying regressors are I(1) or I(0). 
    JEL Classifications: C12, C13, C15, C22. 
    Key Words: Autoregressive distributed lag model, Cointegration, I(1) and I(0) regressors, Model selection, Monte Carlo simulation. 
    Web Link:

  • "STOCHASTIC GROWTH MODELS AND THEIR ECONOMETRIC IMPLICATIONS"  Michael Binder and M Hashem Pesaran.  Journal of Economic Growth, 1999, Vol 4 pp.139-183.

    Abstract: This paper considers the consequences of explicitly allowing for stochastic technological progress and stochastic labor input in the discrete time Solow-Swan and ‘AK’ growth models. It shows that the capital-output ratio, but not output per capita, is ergodic irrespective of whether there is a unit root in technology, and thus is the more appropriate measure to use in the cross-sectional analysis of the growth process. Furthermore, the paper derives the cross-sectional and time-series implications of the stochastic Solow-Swan model and contrasts these to those of its deterministic counterpart. Among these implications are that the mean of the capital-output ratio depends in a precise way not only on the saving rate and the growth rate of labor input, but also on the variance and higher-order cumulants of the capital-output ratio. Using the Summers-Heston data for 72 countries from 1960 to 1992, strong support is found for the predictions of the stochastic Solow-Swan model as compared to those of its deterministic counterpart (as well as those of the ‘AK’  model), including a significant negative cross-sectional relationship between the mean and the variance of the capital-output ratio. 
    Keywords: Stochastic Growth Models, Ergodicity, Econometric Implications, Cross-Country Growth Regressions. 
    JEL-Classifications: C10, E20, O40. 
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  • "POOLED MEAN GROUP ESTIMATION OF DYNAMIC HETEROGENEOUS PANELS"  M Hashem Pesaran, Yongcheol Shin and Ron Smith. Journal of the American Statistical Association, 1999, Vol 94 pp.621-634.

    Abstract: It is now quite common to have panels in which both T, the number of time series observations, and N, the number of groups, are quite large and of the same order of magnitude. The usual practice is either to estimate N separate regressions and calculate the coefficient means, which we call the Mean Group (MG) estimator, or to pool the data and assume that the slope coefficients and error variances are identical. In this paper, we propose an intermediate procedure, referred to as the Pooled Mean Group (PMG) estimator, which constrains the long run coefficients to be identical, but allows the short run coefficients and error variances to differ across groups. We consider both the case where the regressors are stationary and the case where they follow unit root processes, and for both cases derive the asymptotic distribution of the PMG estimators as T tends to infinity. We also provide two empirical applications: aggregate consumption functions for 24 OECD economies over the period 1962-93, and energy demand functions for 10 Asian developing economies over the period 1974-90. 
    JEL-Classification: C13 C23, C63, E21. 
    Keywords: Heterogeneous dynamic panels, pooled mean group estimator, I(0) and I(1) regressors, consumption functions, energy demand. 
    Web Link:
    Program and Data:
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  • “BAYES ESTIMATION OF SHORT-RUN COEFFICIENTS IN DYNAMIC PANEL DATA MODELS” Cheng Hsiao, M Hashem Pesaran and A. Kamil Tahmiscioglu, in C. Hsiao, K. Lahiri, L-F Lee and M.H. Pesaran (eds), Analysis of Panels and Limited Dependent Variables: A Volume in Honour of G S Maddala Cambridge University Press, Cambridge, 1999, chapter 11, pp.268-296. ISBN 0 521 63169 6.

    Abstract: This study is concerned with estimating the mean of the coefficients in a dynamic panel data model when the coefficients are assumed to be randomly distributed across cross-sectional units. We suggest a Bayes approach to the estimation of such models using Markov chain Monte Carlo methods. We establish the asymptotic equivalence of the Bayes estimator and the mean group estimator proposed by Pesaran and Smith (1995), and show that the Bayes estimator is asymptotically normal for large N (the number of units) and large T (the number of time periods) so long as root N/T --> 0 as both N and T --> infinity. The performance of the Bayes estimator for the short-run coefficients in dynamic panels is also compared against alternative estimators using both simulated and real data. The Monte Carlo results show that the Bayes estimator has better sampling properties than other estimators for both small and moderate T samples. The analysis of Tobin's q model yields new results. 
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  • With Z. Zhao, Bias Reduction in Estimating Long-run Relationships from Dynamic Heterogeneous Panels in C. Hsiao, K. Lahiri, L-F Lee and M.H. Pesaran (eds), Analysis of Panels and Limited Dependent Variables: A Volume in Honour of G S Maddala Cambridge University Press, Cambridge, 1999, chapter 12, pp.297-321. ISBN 0 521 63169 6.

  • With L.W. Taylor, Diagnostics for IV Regressions Oxford Bulletin of Economics and Statistics, 1999, Vol.61 pp.255-281.

  • With F.J. Ruge-Murcia, Analysis of Exchange Rate Target Zones using a Limited-Dependent Rational Expectations Model with Jumps (Program and Data) Journal of Business and Economic Statistics, 1999, Vol.17 pp.50-66.

    Abstract: This paper examines the exchange rate determination in target zone regime using a Limited-Dependent Rational Expectations (LD-RE) model where the bounds can be fixed for an extended period, but are subject to occasional jumps. In this case, the behavior of the endogenous variable is affected by the agents’ expectations about both the occurrence and the size of the jump. The RE solution is derived and shown to encompass the cases of perfectly predictable and stochastically varying bounds examined by earlier literature. We demonstrate that the solution exists for all the parameter values and is unique if the coefficient of the expectational variable is less than or equal to one. These results hold even when the jump probability is stochastically varying and the error terms are conditionally heteroskedastic. The model is estimated using data for the Franc/Mark exchange rate. Empirical results provide support for the non-linear model with time-varying realignment probability and indicate that the agents correctly anticipated most of the observed changes in the central parity. 



  • The role of economic theory in modelling the long-run, Economic Journal, "Controversy", 1997, Vol.107 No.440, pp.178-191.
  • With S.M. Potter, A Floor and Ceiling Model of US Output, Journal of Economic Dynamics and Control, 1997, Vol.21 Nos.4-5, pp.661-695.
  • With K. Lee and R.P. Smith, Growth and convergence in a multi-country empirical stochastic Solow model, Journal of Applied Econometrics, 1997, Vol.12 No.4, pp.357-392.
  • With R.P.Smith, New Directions in Applied Dynamic Macroeconomic Modelling. In Models for Economic Policy Evaluation Theory and Practice: An International Experience (eds) R. Dahel and I. Sirageldin, 1997, chapter 1, pp.3-26, JAI Press Inc, Greenwich, Connecticut. ISBN 0 7623 0193 7. Volume 11 in series Research in Human Capital and Development, (series ed) A. Sorkin.
  • Experiment in Applied Econometrics: A Comparative Review of the papers by Anderson/Vahid, Bearse/Bozdogan/Schlottmann, and van Driel/Nadall/ Zeelenberg.Journal of Applied Econometrics Special Issue on The Experiment in Applied Econometrics, (eds) Jan Magnus and Mary Morgan, 1997, Vol.12 pp.500-503, 527-529, 586-587.  Also in (eds) Magnus and Morgan, Methodology and Tacit Knowledge: Two Experiments in Econometrics, 1999, Chichester, John Wiley.
  • The Iranian Economy During the Pahlavi Era, in Encyclopaedia Iranica, (ed) E. Yarshater, 1997, Vol VIII Fascicle 2, Economy V-Education XX, pp.143-156, Mazda Publishers, Costa Mesa, California. ISBN 1 56859 051 2
  • With M. Binder, Multivariate linear rational expectations models: characterization of the nature of the solutions and their fully recursive computation. Econometric Theory, 1997, Vol.13, pp.887-888.


  • With R.P.Smith and K.S.Im, Dynamic Linear Models for Heterogenous Panels. In The Econometrics of Panel Data (eds) L. Mátyás and P. Sevestre, 1996, chapter 8, pp.145-195, Kluwer Academic Publishers, Dordrecht, The Netherlands. ISBN 0 7923 3787 5.
  • With Y. Shin, Cointegration and Speed of Convergence to Equilibrium, Journal of Econometrics, 1996, Vol.71 No.2, pp.117-143.
  • With F.J. Ruge-Murcia, Limited-Dependent Rational Expectations Models with Stochastic Thresholds, Economics Letters, 1996, Vol.51, pp.267-276.
  • With G. Koop and S.M. Potter, Impulse Response Analysis in Nonlinear Multivariate Models, Journal of Econometrics, 1996, Vol.74 No.1, pp.119-147.


  • With R.P. Smith, Alternative Approaches to Estimating Long-Run Energy Demand Elasticities: An Application to Asian Developing Countries, Chapter in Terry Barker, Paul Ekins and Nick Johnstone (eds) Global Warming and Energy Demand, Routledge, London, 1995 pp 19-46. ISBN 0-415-10980-9.
  • Planning and Macroeconomic Stabilization in Iran. Persian translation in a special issue of Iran Nameh edited by Dr Jahangir Amuzegar, Vol.XIII, Nos. 1-2, 1995, Winter and Spring, pp.75-95.
  • With M. Karshenas, Economic Reform and the Reconstruction of the Iranian Economy, The Middle East Journal, 1995, Vol.49 pp.88-111.
  • With R.P. Smith, The Natural Rate Hypothesis and its Testable Implications, chapter in Rod Cross (ed), The Natural Rate of Unemployment: Reflections on 25 years of the hypothesis, Cambridge University Press, Cambridge, 1995, pp.203-230. ISBN 0 521 47298 9.
  • With R.P. Smith, The Role of Theory in Econometrics, Journal of Econometrics, 1995, Vol.67 pp.61-79.
  • With R.P. Smith, Estimating Long-Run Relationships from Dynamic Heterogeneous Panels, Journal of Econometrics, 1995, Vol.68 pp.79-113.
  • With A. Timmermann, Predictability of Stock Returns: Robustness and Economic Significance, Journal of Finance, 1995, Vol.50 pp.1201-1228.
    Abstract: This article examines the robustness of the evidence on predictability of US stock returns, and addresses the issue of whether this predictability could have been historically exploited by investors to earn profits in excess of a buy-and-hold strategy in the market index.  We find that the predictive power of various economic factors over stock returns changes through time and tends to vary with the volatility of returns.  The degree to which stock returns were predictable seemed quite low during the relatively calm markets in the 1960s, but increased to a level where, net of transaction costs, it could have been exploited by investors in the volatile markets of the 1970s. 
  • With M. Binder, Multivariate Rational Expectations Models and Macroeconometric Modelling: A Review and Some New Results. In Handbook of Applied Econometrics: Volume 1 - Macroeconometrics (eds) M.H. Pesaran and M.R. Wickens, 1995, pp.139-187, Blackwell, Oxford, ISBN 1 55786 208 7. A Spanish translation of this paper also published in Cuadernos Economicos de ICE, Volume 55, 1993 pp.87-134.
  • With H. Samiei, Limited-Dependent Rational Expectations Models with Future Expectations, Journal of Economic Dynamics and Control, 1995,Z Vol.19 pp.1325-1353.
  • With B. Pesaran, A Non-Nested Test of Level-Differenced versus Log-Differenced Stationary Models, Econometrics Reviews, 1995, Vol.14 pp.213-228.
  • Rational expectations in disaggregated models: an empirical analysis of OPEC's behaviour. In Social Statistics, National Accounts and Economic Analysis (ed) E. Giovannini. Part of the Annali di Statistica series published by the Italian National Institute of Statistics (ISTAT), 1995, Vol.6 pp.51-77.
  • With H. Samiei, Forecasting Ultimate Resource Recovery, International Journal of Forecasting, 1995, Vol.11 pp.543-555.


  • With M. McAleer and C.R. McKenzie, Cointegration and Direct Tests of the Rational Expectations Hypothesis, Econometric Reviews, 1994, Vol.13 No.2, pp.231-258.
  • With M. Karshenas, Exchange Rate Unification: The Role of Markets and Planning in the Iranian Economic Reconstruction, in The Economy of Islamic Iran: Between State and Market, (ed) Thierry Coville, published by Institut Francais de Recherche en Iran (1994). Also Persian translation published in Jameae Salem, Vol.3 No.10, Mordad 1372, 1993.
  • With R. Pierse and K. Lee, Choice Between Disaggregate and Aggregate Specifications Estimated by IV Method, Journal of Business and Economic Statistics, 1994, 12, pp. 111-121.
  • With A. Timmermann, A Generalization of the Non-parametric Henriksson-Merton Test of Market Timing, Economic Letters, 1994, 44, pp.1-7.
  • With R.J. Smith, A Generalized R2 Criterion for Regression Models Estimated by the Instrumental Variables Method, Econometrica, 1994, Vol.62 No.3, pp.705-710.
  • With A. Timmermann, Forecasting Stock Returns: An Examination of Stock Market Trading in the Presence of Transaction Costs, Journal of Forecasting, 1994, Vol.13 No.4, pp.335-367.
  • With Carlo Favero, Oil Investment in the North Sea, Economic Modelling, 1994, Vol.11 No.3, pp.308-329.
  • With Carlo Favero and Sunil Sharma, A Duration Model of Irreversible Oil Investment: Theory and Empirical Evidence, Journal of Applied Econometrics, Special Issue "Calibration Techniques and Econometrics", Adrian Pagan (ed), Vol.9 Supplement, 1994, pp S95-S112.


  • With R.G. Pierse and K.C. Lee, Persistence, cointegration and aggregation: a disaggregated analysis of output fluctuations in the US economy, Journal of Econometrics, March 1993, Vol.56 Nos.1/2, pp.57-88.
  • With K. Lee, The Role of Sectoral Interactions in Wage Determination in the UK Economy, Economic Journal, 1993, 103, No.416, pp.21-55.
  • With B. Pesaran, A simulation approach to the problem of computing Cox's Statistic for Testing Non-nested Models, Journal of Econometrics, 1993, Vol 57 Nos.1-3 pp.377-392.
  • "Stationarity", "Saving and Consumption Behaviour", "Natural Rate Hypothesis" entries in The New Palgrave Dictionary of Money & Finance, (eds) P. Newman, M. Milgate, J. Eatwell. Macmillan Press Ltd, UK, 1993.
  • With K. Lee, Persistence Profiles and Business Cycle Fluctuations in a Disaggregated Model of UK Output Growth, Ricerche Economiche, 1993, Vol 47 No.3, pp.293-322.
  • Comment on Michael Artis's paper, "The role of the exchange rate in monetary policy: experience of other countries", in Conference Volume on Exchange Rates, Federal Reserve Bank of Australia, Proceedings of a Conference, 1993, pp.265-268.


  • The Iranian Foreign Exchange Policy and the Black Market for Dollars, International Journal of Middle Eastern Studies, (1992) 24, pp.101-125. (Persian translation in Planning & Development, Vol.2 No.2, 1992).
  • With Hossein Samiei, An Analysis of the Determination of Deutsche mark/French franc Exchange Rate in a discrete-time target-zone model, Economic Journal, 1992, 102, pp.388-401.
  • With K. Lee and R. Pierse, Persistence of Shocks and their Sources in a Multisectoral Model of UK Output Growth, Economic Journal, March 1992, 102, pp.342-356.
  • With H. Samiei, Estimating limited-dependent rational expectations models: with an application to exchange rate determination in a target zone, Journal of Econometrics, 1992, Vol.53, pp.141-163.
  • With A.K. Bera and M. McAleer, Joint test of non-nested models and general error specifications, Econometrics Reviews, Volume 11 No.2, 1992.
  • On the Volatility and Efficiency of Stock Prices, (Sobre la Volatilidad y Eficiencia de los Precios de las Acciones) Cuadernos Economicos de ICE, Volume 49, 1992 (in Spanish).
  • With A. Timmermann, A simple non-parametric test of predictive performance, Journal of Business and Economic Statistics, 1992, 10, pp. 461-465.
  • With Simon Potter, Non-linear dynamics and econometrics: an introduction, Journal of Applied Econometrics Special Issue, Vol.7, Supplement, 1992, pp. S1-S7.
  • With R.P. Smith, The Interaction Between Theory and Observation in Economics, Economic and Social Review, 1992, Vol.24 No.1, pp.1-23.


  • With H. Samiei, Persistence, Seasonality and Trend in the UK Egg Production, Applied Economics, 1991, Vol. 23, pp. 479-484.
  • Estimation of a simple class of multivariate rational expectations models: A test of the new classical model at a sectoral level, Empirical Economics, 1991, pp. 211-232.
  • An Interview with Sir Richard Stone, Econometric Theory, 1991, Vol. 7, pp. 85-123.
  • Expectations in Economics, D. Greenaway, M. Bleaney and I. Stewart (Eds.), Companion to Contemporary Economic Thought, Routledge, (1991).
  • Costly adjustment under rational expectations: a generalisation, Review of Economics and Statistics, (1991), Vol.73, pp. 353-358.


  • With T. Barker, Disaggregation in Econometric Modelling - an Introduction, in T. Barker and M.H. Pesaran (eds), Disaggregation in Econometric Modelling, Routledge, 1990, pp. 1-14.
  • With K. Lee and R.G. Pierse, Aggregation bias in labour demand equations for the UK economy, in T. Barker and M.H. Pesaran (eds), Disaggregation in Econometric Modelling, Routledge, 1990, pp. 113-149.
  • With R.J. Smith, A Unified Approach to Estimation and Orthogonality Tests in Linear Single-Equation Econometric Models, Journal of Econometrics, 1990, Vol.44, pp. 41-66.
  • With K. Lee and R.G. Pierse, Testing for aggregation bias in linear models, Economic Journal (supplement), 1990, Vol. 100, pp. 137-150.
  • Comment on G.S. Maddala's paper. Estimation of dynamic disequilibrium models with rational expectations: the case of commodity markets, in L.A. Winters and D. Sapsford, (Eds.), Primary Commodity Prices: Economic Models and Policy, Basil Blackwell, Oxford, 1990.
  • An econometric model of exploration and extraction of oil in the UK Continental Shelf, Economic Journal, June 1990, Vol. 100, pp. 367-390.
  • With A. Bera and M. McAleer, Alternative approaches to testing non-nested models with autocorrelated disturbances: application to models of U.S. unemployment, Communication in Statistics: Theory and Methods, 1990, Vol 19, pp.3619-3644.


  • With R.G. Pierse and M. Kumar, Econometric analysis of aggregation in the context of linear prediction models, Econometrica, 1989, Vol 57, pp. 861-888.
  • Consistency of short-term and long-term expectations, Journal of International Money and Finance, 1989, Vol.8, pp. 511-516.
  • With R.G. Pierse, A proof of the asymptotic validity of a test for perfect aggregation, Economics Letters, 1989, Vol 30 No.1, pp 41-47.


  • On the policy ineffectiveness proposition and a Keynesian alternative: a rejoinder, Economic Journal, 1988, pp. 504-508.
  • With A.D. Hall, Tests of non-nested linear regression models subject to linear restrictions, Economics Letters, 1988, pp. 341-348.
  • The role of theory in applied econometrics, Economic Record, 1988, pp. 336-339.


  • Global and partial non-nested hypotheses and asymptotic local power, Econometric Theory, 1987, pp. 69-97.
  • Econometrics, entry in The New Palgrave: a dictionary of economic theory and doctrine, Macmillan, 1987, Volume 2, pp. 8-22.
  • Non-nested Hypotheses, entry in The New Palgrave: a dictionary of economic theory and doctrine, Macmillan, 1987, Volume 3, pp. 670-672.


  • With R. Tarling, Changes in the UK male labour force in the post-war period, in A. Dogramaci (ed.), Measurement Issues and Behaviour of Productivity Variables, Kluwer-Nojhoff, Boston, 1986, pp. 41-97.
  • With M. McAleer, Statistical inference in non-nested econometric models, Applied Mathematics and Computation, 1986, pp. 271-311.
  • Structural Keynesianism: an alternative to monetarism, in P. Nolan and S.H. Paine (eds) Socialist Policies for the UK, Polity Press, 1986, pp. 165-175.
  • Comment on L. Taylor, K.T. Yurukoglu and S.A. Chaudhry, "A macro model of an oil exporter: Nigeria", Natural Resources and the Macroeconomy, J.P. Neary & S. van Wijnbergen (eds), 1986, CEPR, Blackwell.


  • With R.P. Smith, Keynes on Econometrics, in T. Lawson and M.H. Pesaran (eds) Keynes' Economics: Methodological Issues, Croom Helm, 1985, pp. 134-150.
  • With R.P. Smith, Evaluation of macroeconometric models, Economic Modelling, 2, 1985, pp. 125-134.
  • With R.P. Smith and S. Yeo, Testing for structural stability and predictive failure: a review, Manchester School, September, 1985, pp. 280-295.
  • Formation of inflation expectations in British manufacturing industries, Economic Journal, 1985, 95, pp. 948-975.
  • With Tony Lawson, Methodological issues in Keynes' Economics: An Introduction, in Keynes' Economics: Methodological Issues, (eds) T. Lawson and M H. Pesaran, Croom Helm, 1985, pp. 1-9.
  • Comment on Swamy, P.A.V.B., R.K. Conway and P. von zur Muehlen, "The foundations of econometrics - are there any?", Econometric Reviews, 4, 1985, pp. 75-80.


  • Expectations formations and macroeconometric modelling, in Malgrange and Muet (eds). Contemporary Macroeconometric Modelling, Basil Blackwell, 1984, pp. 27-55.
  • With R.A. Evans, Inflation, capital gains and UK personal savings: 1953-81, Economic Journal, 1984, pp. 237-257.
  • Asymptotic power comparisons of tests of separate parametric families by Bahadur's approach, Biometrika, 1984, pp. 245-252.
  • Macroeconomic policy in an oil-exporting economy with foreign exchange controls, Economica, 1984, pp. 253-270.
  • The new classical macroeconomics: a critical exposition, in R. van der Ploeg (ed.) Mathematical Methods in Economics, John Wiley, 1984, pp. 195-215.


  • With L.G. Godfrey, Tests of non-nested regression models: small sample adjustments and Monte Carlo evidence, Journal of Econometrics, 21, 1983, pp. 133-154.
  • With J. Hausman, The J-test as a Hausman specification test, Economics Letters, 12, 1983, pp. 277-281.
  • A note on the maximum likelihood estimation of regression models with first-order moving average errors with roots in the unit circle, Australian Journal of Statistics, 25, 1983, pp. 442-448.
  • Comment on the paper by J.G. MacKinnon, "Model specification tests against non-nested alternatives", Econometric Reviews, 2, 1983, pp. 145-149.


  • On the Comprehensive method of testing non-nested regression models, Journal of Econometrics, 1982, pp. 263-274.
  • A critique of the proposed tests of the natural rate/rational expectations hypothesis, Economic Journal, 1982, pp. 529-54.  Reprinted, 1999, in (ed) Kevin Hoover, The Legacy of Robert Lucas, Jr. Vol I, chapter 18. Cheltenham: Edward Elgar. ISBN 1 85898 387 8
  • Comparison of local power of alternative tests of non-nested regression models, Econometrica, 1982, pp.1287-1305.
  • The system of dependent capitalism in pre- and post- revolutionary Iran, International Journal of Middle East Studies, 14, 1982, pp. 501-522.


  • Identification of rational expectations models, Journal of Econometrics, 1981, 375-398.
  • Diagnostic testing and exact maximum likelihood estimation of dynamic models, in Charatsis, E.G. (ed.) Proceedings of the Econometric European Meeting 1979 - Selected Econometric Papers, North-Holland, 1981, pp. 63-87.
  • Pitfalls of testing non-nested hypotheses by the Lagrange multiplier method, Journal of Econometrics, 1981, pp. 323-331.


  • Economic development and revolutionary upheavals in Iran, (under the pseudonym of T. Walton), Cambridge Journal of Economics, 1980, pp. 271-292. A revised and extended version of this article is published in Iran: A Revolution in Turmoil, edited by H. Afshar, MacMillan, 1985.


  • With F. Gahvary, Growth and income distribution in Iran, in Stone, R. and Peterson, W. (eds), Econometric Contributions to Public Policy, Macmillan 1978, pp. 231-248.
  • With A.S. Deaton, Testing non-nested, non-linear regression models, Econometrica, May 1978, pp. 677-694.


  • With E. Aziz Lavi, Accountancy under inflationary conditions, presented to the Accountancy Symposium, Tehran 1977, and published in The Auditor, (in Persian).


  • Income distribution and its major determinants in Iran, published in J.A. Jacqs (ed.), Iran: Past, Present and Future, Aspen Institute for Humanistic Studies, 1976, pp. 267-286.
  • Planning and social welfare; a paper presented at the Second National Seminar on Social Welfare in May 1976, Tehran, (in Persian), and published in the Proceedings of the Seminar.
  • With G.E.J. Llewellyn, Determinants of United Kingdom import prices - a note. Economic Journal, June 1976, pp. 315-320.


  • On the general problem of model selection. Review of Economic Studies, 1974, pp. 153-171.


  • The small sample problem of truncation remainders in the estimation of distributed lag models with auto-correlated errors. International Economic Review, February 1973, pp. 120-131.
  • An alternative econometric approach to the permanent income hypothesis: an international comparison: a comment. Review of Economics and Statistics, May 1973, pp. 259-261.
  • The exact maximum likelihood estimation of a regression equation with first order moving-average errors. Review of Economic Studies, October 1973, pp. 529-535.
  • A dynamic inter-industry model of price determination - a test of the normal price hypothesis. Quarterly Journal of Economic Research, Tehran University, 1973, reprinted in Department of Applied Economics, (University of Cambridge), Reprint Series, No. 410.