A multi-factor predictive model for oil-US stock nexus with persistence, endogeneity and conditional heteroscedasticity effects
In this study, we extend the single-predictor model for US stock market developed by Narayan and ... more In this study, we extend the single-predictor model for US stock market developed by Narayan and Gupta (2014) to capture more important predictors of the market. Our analyses are conducted in three distinct ways. First, we test whether oil price will produce better forecast accuracy in the multiple-factor model than in the single-factor model. Secondly, we also test the plausibility of making generalization about the predictive model for oil-US stocks on the basis of large cap stocks. Thirdly, we employ the recently developed Feasible Quasi Generalized Least Squares (FQGLS) estimator by Westerlund and Narayan (2014) in order to capture the inherent persistence, endogeneity and heteroscedasticity effects in the predictors. Our results reveal that oil price renders better forecast performance in the multiple-factor predictive model than in the single-factor variants for both in-sample and out-of-sample forecasts. Also, we find that generalizing the predictability of oil-US stock market with large cap may lead to misleading inferences. In addition, it may be necessary to pre-test the predictors for persistence, endogeneity and conditional heteroscedasticity particularly when modeling with high frequency series. Our results are robust to different forecast measures and forecast horizons.
We assess whether recent US DOJ price-fixing cases exhibit characteristics that are associated th... more We assess whether recent US DOJ price-fixing cases exhibit characteristics that are associated theoretically with optimal use of criminal law. We take our welfare standard from Posner and Shavell's seminal work on optimal legal design. Optimal legal design recognizes the private and public elements present in all areas of the law. The mixed results show that the characteristics to be expected in criminal cases are not all present in the DOJ cases. Criminal sanctions applied in these collusive antitrust cases do however show significant responsiveness to some of the variables derived from the economic analysis of criminal law.
Improving the predictability of commodity prices in US inflation: The role of coffee price
In this paper, we set forth to answer the research question: can coffee price predict US inflatio... more In this paper, we set forth to answer the research question: can coffee price predict US inflation? Motivated by the importance of coffee to Americans and the significance of the coffee subsector to the US economy, we pursue three notable innovations. First, we augment the traditional Phillips curve model with coffee price as a predictor and show that the resulting model outperforms the traditional variant in both in-sample and out-of-sample predictability of US inflation. Second, we justify the need to account for the inherent statistical features in the predictor as well as make a case for the superiority of Westerlund and Narayan (WN) estimator especially in the in-sample predictive model. These answer the research question in the affirmative with strong evidence that coffee price indeed serves as a good predictor, along with economic activity, for US inflation. These further challenge the position of Stock and Watson (1999, 2007, 2008) and establish that economic models can outp...
The impact of crude oil prices on stock prices of oil firms: Should upstream-downstream dichotomy in supply chain be ignored?
In this paper, we query whether stock prices of non-integrated firms in upstream and downstream s... more In this paper, we query whether stock prices of non-integrated firms in upstream and downstream sectors of global oil supply chain respond similarly to changes in oil prices. This enquiry relates to “homogenous expectation†assumption among investors and fund managers pertaining to returns and variances of assets of specialized firms operating in upstream and downstream sectors of the supply chain. Using theoretical framework underpinned by the arbitrage pricing theory in conjunction with heterogeneous panel ARDL regression models, we find that stock prices of upstream and downstream firms move in contrasting directions in response to changes in benchmark crude oil prices in the long-run. Specifically, we show that stock prices of upstream sector firms increased in response to increase in oil prices, while the reverse holds for stock prices of downstream firms. In the short run, returns on stock of firms in both sectors increase following increase in oil prices; but downstream fi...
International Journal of Finance & Economics, 2020
We investigate the power of commodity prices to improve inflation forecast performance in 21 OECD... more We investigate the power of commodity prices to improve inflation forecast performance in 21 OECD countries, within the framework of commodity prices-augmented Phillips curve model. Using monthly data spanning over 57 years, we use single and multi-factor predictor models, and Westerlund and Narayan (2012, 2015) estimator to address inherent issues of heteroscedasticity, persistence and endogeneity, which present empirical challenges to erstwhile attempts to forecast inflation. Contrary to Stock and Watson (1999) findings, our results overwhelmingly show that commodity prices significantly improve the power of Phillips curve-based inflation forecasts in OECD countries. These findings hold for both core and headline measures of inflation, and within extensive in-sample and various out-ofsample forecast horizons. In addition, we find differential degrees of commodity pricesinflation pass-through, with agricultural and energy commodity prices exerting the highest pass-through to inflation. We further evaluate and compare the forecast performance of our augmented inflation forecast models with that of conventional random walk model as a benchmark. Our results overwhelmingly confirm that commodity prices-augmented versions of inflation forecast models outperformed popular random walk models in all forecast horizons.
This article may be used for non-commercial purposes in accordance With Wiley Terms and Condition... more This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving. 2 Can urban coffee consumption help predict US inflation?
In this paper, we query whether the stock prices of nonintegrated firms in the upstream and downs... more In this paper, we query whether the stock prices of nonintegrated firms in the upstream and downstream sectors of the global oil supply chain respond symmetrically to changes in oil prices. This inquiry relates to the "homogenous expectation" assumption among investors and fund managers pertaining to the returns and variances of assets of specialized firms operating in upstream and downstream sectors of the supply chain. Motivated by the Arbitrage Pricing Theory, we formulate a Panel Autoregressive Distributed Lag (PARDL) model, which explains the possible macroeconomic factors in the oil-stock nexus as well as any inherent persistence and heterogeneity effects due to large cross-sections and time. In accordance with the Shin et al. (2014) approach, a Nonlinear Panel ARDL model is also formulated to test for possible asymmetric responses of the nonintegrated oil firms to positive and negative changes in the oil price. Our findings indicate that the stock prices of upstream and downstream firms move in contrasting directions in response to changes in the benchmark crude oil prices in the long-run. Specifically, we show that the stock prices of upstream sector firms increased in response to an increase in oil prices, while the reverse holds for the stock prices of downstream firms. In the short run, returns on the stock of firms in both sectors increase following an increase in oil prices; however, downstream firms' stock returns decreased in response to negative oil price shocks. The findings further show that both sectors respond differently to episodic changes in market conditions that emanated from the global financial crisis. However, upstream firms show a stronger response to changing market conditions than their downstream counterparts.
In this study, we revisit the oil-stock nexus by accounting for the role of macroeconomic variabl... more In this study, we revisit the oil-stock nexus by accounting for the role of macroeconomic variables and testing their in-sample and out-of-sample predictive powers. We follow the approaches of Lewellen (2004) and Westerlund and Narayan (2015), which were formulated into a linear multipredictive form by Makin et al. (2014) and Salisu et al. (2018) and a nonlinear multi-predictive model by Salisu and Isah (2018). Thereafter, we extend the multi-predictive model to account for structural breaks and asymmetries. Our analyses are conducted on aggregate and sectoral stock price indexes for the US stock market. Our proposed predictive model, which accounts for macroeconomic variables, outperforms the oil-based single-factor variant in forecasting aggregate and sectoral US stocks for both in-sample and out-of-sample forecasts. We find that it is important to account for structural breaks in our proposed predictive model, although asymmetries do not seem to improve predictability. In addition, we show that it is important to pre-test the predictors for persistence, endogeneity, and conditional heteroscedasticity, particularly when modeling with high-frequency series. Our results are robust to different forecast measures and forecast horizons.
This chapter compares the record of the Blair governments on public expenditure with that of the ... more This chapter compares the record of the Blair governments on public expenditure with that of the previous Labour governments of Clement Attlee, Harold Wilson and James Callaghan. A study of the data confirms that public expenditure during the years of the Blair government had increased significantly above the levels reached by the previous Labour governments. This applies not only for the total levels of public expenditure but also for individual programmes, including health, education, social security, defence, law and order, and trade and industry. However, the Wilson and Callaghan governments did spend more than the Blair governments on subsidies to the nationalized industries and on housing capital and housing subsidies.
This paper uses cointegration and error correction modelling techniques to examine the relationsh... more This paper uses cointegration and error correction modelling techniques to examine the relationship between non-fuel commodity prices and world macroeconomic and monetary variables. The results show that fluctuations in industrial production of OECD countries, real effective exchange rate of the U.S. dollar and oil prices have significant short-and long-run impact on non-fuel commodity prices. In addition, there is evidence of highly significant positive correlation between the index of non-fuel commodity prices and crude oil price. This implies nonfuel commodity-dependent developing countries that are net importers of oil can derive little benefit from upward movements in commodity prices.
... and Mark Weiner. 2001. Electronic Monitoring of Released Prisoners: An Evaluation of the Home... more ... and Mark Weiner. 2001. Electronic Monitoring of Released Prisoners: An Evaluation of the Home Detention Curfew Scheme. Home Office Research Study, No. 222. London: Home Office Research, Development and Statistics Directorate. Donato, Ron, and Martin Shanahan. ...
The authors published an article in the Annals of the Academy of Political and Social Science bas... more The authors published an article in the Annals of the Academy of Political and Social Science based on preliminary analyses of the benefit-cost studies presented in this review (McDougall, et al., 2003), and a chapter on 'Policy choices for a safer society: costs and benefits of sentencing' in the Welsh and Farrington edited book on 'Preventing crime: What works for children, offenders, victims and places
On the Relationship between the Public’s Worry about Safety from Burglary and Probabilities of Burglary: Some Evidence from Simultaneous Equation Models
This paper utilizes linear demand and supply models, with additive independent shocks, to derive ... more This paper utilizes linear demand and supply models, with additive independent shocks, to derive producer price and income variances of a typical commodity during and after a buffer stock control. It proceeds to use the models to evaluate International Cocoa Organization's (ICCO) Buffer Stock's decision to purchase excess stock from the market a floor price and resell it, in periods of low supply, at the ceiling price. The results show that cocoa producer prices and incomes were more stable during periods of ICCO buffer stock intervention than after the demise of the buffer stock. The results further indicate that stock-buying operations induced greater stability in producer incomes than buying stock-selling operations.
This paper utilizes three univariate ARCH-type models to empirically examine persistence and asym... more This paper utilizes three univariate ARCH-type models to empirically examine persistence and asymmetry in volatility of prices of primary agricultural commodities produced in Sub-Sahara Africa. Maximum likelihood estimation results of the three models ranked the GARCH version as the best statistical fit, lending support for hypotheses of persistence, symmetry and variability in volatility. This pattern of volatility could effectively jeopardize the success of traditional commodity price risk management policies used in this region. Policymakers should appreciate potential benefits associated with market-based strategies for managing commodity exposure of these countries.
Applied Econometrics and International Development, 2005
Economists have proffered myriads of causes of the debt problem faced by less developed countries... more Economists have proffered myriads of causes of the debt problem faced by less developed countries (LDCs). This paper uses the panel data technique to investigate the fundamental causes of the debt problem among primary commodity dependent LDCs. The results show a strong link between high levels of indebtedness and unfavourable terms of trade among commodity-dependent countries. Further results show that t he degree of openness of the LDC's economy also has a significant influence on its external debt level.
A multi-factor predictive model for oil-US stock nexus with persistence, endogeneity and conditional heteroscedasticity effects
In this study, we extend the single-predictor model for US stock market developed by Narayan and ... more In this study, we extend the single-predictor model for US stock market developed by Narayan and Gupta (2014) to capture more important predictors of the market. Our analyses are conducted in three distinct ways. First, we test whether oil price will produce better forecast accuracy in the multiple-factor model than in the single-factor model. Secondly, we also test the plausibility of making generalization about the predictive model for oil-US stocks on the basis of large cap stocks. Thirdly, we employ the recently developed Feasible Quasi Generalized Least Squares (FQGLS) estimator by Westerlund and Narayan (2014) in order to capture the inherent persistence, endogeneity and heteroscedasticity effects in the predictors. Our results reveal that oil price renders better forecast performance in the multiple-factor predictive model than in the single-factor variants for both in-sample and out-of-sample forecasts. Also, we find that generalizing the predictability of oil-US stock market with large cap may lead to misleading inferences. In addition, it may be necessary to pre-test the predictors for persistence, endogeneity and conditional heteroscedasticity particularly when modeling with high frequency series. Our results are robust to different forecast measures and forecast horizons.
We assess whether recent US DOJ price-fixing cases exhibit characteristics that are associated th... more We assess whether recent US DOJ price-fixing cases exhibit characteristics that are associated theoretically with optimal use of criminal law. We take our welfare standard from Posner and Shavell's seminal work on optimal legal design. Optimal legal design recognizes the private and public elements present in all areas of the law. The mixed results show that the characteristics to be expected in criminal cases are not all present in the DOJ cases. Criminal sanctions applied in these collusive antitrust cases do however show significant responsiveness to some of the variables derived from the economic analysis of criminal law.
Improving the predictability of commodity prices in US inflation: The role of coffee price
In this paper, we set forth to answer the research question: can coffee price predict US inflatio... more In this paper, we set forth to answer the research question: can coffee price predict US inflation? Motivated by the importance of coffee to Americans and the significance of the coffee subsector to the US economy, we pursue three notable innovations. First, we augment the traditional Phillips curve model with coffee price as a predictor and show that the resulting model outperforms the traditional variant in both in-sample and out-of-sample predictability of US inflation. Second, we justify the need to account for the inherent statistical features in the predictor as well as make a case for the superiority of Westerlund and Narayan (WN) estimator especially in the in-sample predictive model. These answer the research question in the affirmative with strong evidence that coffee price indeed serves as a good predictor, along with economic activity, for US inflation. These further challenge the position of Stock and Watson (1999, 2007, 2008) and establish that economic models can outp...
The impact of crude oil prices on stock prices of oil firms: Should upstream-downstream dichotomy in supply chain be ignored?
In this paper, we query whether stock prices of non-integrated firms in upstream and downstream s... more In this paper, we query whether stock prices of non-integrated firms in upstream and downstream sectors of global oil supply chain respond similarly to changes in oil prices. This enquiry relates to “homogenous expectation†assumption among investors and fund managers pertaining to returns and variances of assets of specialized firms operating in upstream and downstream sectors of the supply chain. Using theoretical framework underpinned by the arbitrage pricing theory in conjunction with heterogeneous panel ARDL regression models, we find that stock prices of upstream and downstream firms move in contrasting directions in response to changes in benchmark crude oil prices in the long-run. Specifically, we show that stock prices of upstream sector firms increased in response to increase in oil prices, while the reverse holds for stock prices of downstream firms. In the short run, returns on stock of firms in both sectors increase following increase in oil prices; but downstream fi...
International Journal of Finance & Economics, 2020
We investigate the power of commodity prices to improve inflation forecast performance in 21 OECD... more We investigate the power of commodity prices to improve inflation forecast performance in 21 OECD countries, within the framework of commodity prices-augmented Phillips curve model. Using monthly data spanning over 57 years, we use single and multi-factor predictor models, and Westerlund and Narayan (2012, 2015) estimator to address inherent issues of heteroscedasticity, persistence and endogeneity, which present empirical challenges to erstwhile attempts to forecast inflation. Contrary to Stock and Watson (1999) findings, our results overwhelmingly show that commodity prices significantly improve the power of Phillips curve-based inflation forecasts in OECD countries. These findings hold for both core and headline measures of inflation, and within extensive in-sample and various out-ofsample forecast horizons. In addition, we find differential degrees of commodity pricesinflation pass-through, with agricultural and energy commodity prices exerting the highest pass-through to inflation. We further evaluate and compare the forecast performance of our augmented inflation forecast models with that of conventional random walk model as a benchmark. Our results overwhelmingly confirm that commodity prices-augmented versions of inflation forecast models outperformed popular random walk models in all forecast horizons.
This article may be used for non-commercial purposes in accordance With Wiley Terms and Condition... more This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving. 2 Can urban coffee consumption help predict US inflation?
In this paper, we query whether the stock prices of nonintegrated firms in the upstream and downs... more In this paper, we query whether the stock prices of nonintegrated firms in the upstream and downstream sectors of the global oil supply chain respond symmetrically to changes in oil prices. This inquiry relates to the "homogenous expectation" assumption among investors and fund managers pertaining to the returns and variances of assets of specialized firms operating in upstream and downstream sectors of the supply chain. Motivated by the Arbitrage Pricing Theory, we formulate a Panel Autoregressive Distributed Lag (PARDL) model, which explains the possible macroeconomic factors in the oil-stock nexus as well as any inherent persistence and heterogeneity effects due to large cross-sections and time. In accordance with the Shin et al. (2014) approach, a Nonlinear Panel ARDL model is also formulated to test for possible asymmetric responses of the nonintegrated oil firms to positive and negative changes in the oil price. Our findings indicate that the stock prices of upstream and downstream firms move in contrasting directions in response to changes in the benchmark crude oil prices in the long-run. Specifically, we show that the stock prices of upstream sector firms increased in response to an increase in oil prices, while the reverse holds for the stock prices of downstream firms. In the short run, returns on the stock of firms in both sectors increase following an increase in oil prices; however, downstream firms' stock returns decreased in response to negative oil price shocks. The findings further show that both sectors respond differently to episodic changes in market conditions that emanated from the global financial crisis. However, upstream firms show a stronger response to changing market conditions than their downstream counterparts.
In this study, we revisit the oil-stock nexus by accounting for the role of macroeconomic variabl... more In this study, we revisit the oil-stock nexus by accounting for the role of macroeconomic variables and testing their in-sample and out-of-sample predictive powers. We follow the approaches of Lewellen (2004) and Westerlund and Narayan (2015), which were formulated into a linear multipredictive form by Makin et al. (2014) and Salisu et al. (2018) and a nonlinear multi-predictive model by Salisu and Isah (2018). Thereafter, we extend the multi-predictive model to account for structural breaks and asymmetries. Our analyses are conducted on aggregate and sectoral stock price indexes for the US stock market. Our proposed predictive model, which accounts for macroeconomic variables, outperforms the oil-based single-factor variant in forecasting aggregate and sectoral US stocks for both in-sample and out-of-sample forecasts. We find that it is important to account for structural breaks in our proposed predictive model, although asymmetries do not seem to improve predictability. In addition, we show that it is important to pre-test the predictors for persistence, endogeneity, and conditional heteroscedasticity, particularly when modeling with high-frequency series. Our results are robust to different forecast measures and forecast horizons.
This chapter compares the record of the Blair governments on public expenditure with that of the ... more This chapter compares the record of the Blair governments on public expenditure with that of the previous Labour governments of Clement Attlee, Harold Wilson and James Callaghan. A study of the data confirms that public expenditure during the years of the Blair government had increased significantly above the levels reached by the previous Labour governments. This applies not only for the total levels of public expenditure but also for individual programmes, including health, education, social security, defence, law and order, and trade and industry. However, the Wilson and Callaghan governments did spend more than the Blair governments on subsidies to the nationalized industries and on housing capital and housing subsidies.
This paper uses cointegration and error correction modelling techniques to examine the relationsh... more This paper uses cointegration and error correction modelling techniques to examine the relationship between non-fuel commodity prices and world macroeconomic and monetary variables. The results show that fluctuations in industrial production of OECD countries, real effective exchange rate of the U.S. dollar and oil prices have significant short-and long-run impact on non-fuel commodity prices. In addition, there is evidence of highly significant positive correlation between the index of non-fuel commodity prices and crude oil price. This implies nonfuel commodity-dependent developing countries that are net importers of oil can derive little benefit from upward movements in commodity prices.
... and Mark Weiner. 2001. Electronic Monitoring of Released Prisoners: An Evaluation of the Home... more ... and Mark Weiner. 2001. Electronic Monitoring of Released Prisoners: An Evaluation of the Home Detention Curfew Scheme. Home Office Research Study, No. 222. London: Home Office Research, Development and Statistics Directorate. Donato, Ron, and Martin Shanahan. ...
The authors published an article in the Annals of the Academy of Political and Social Science bas... more The authors published an article in the Annals of the Academy of Political and Social Science based on preliminary analyses of the benefit-cost studies presented in this review (McDougall, et al., 2003), and a chapter on 'Policy choices for a safer society: costs and benefits of sentencing' in the Welsh and Farrington edited book on 'Preventing crime: What works for children, offenders, victims and places
On the Relationship between the Public’s Worry about Safety from Burglary and Probabilities of Burglary: Some Evidence from Simultaneous Equation Models
This paper utilizes linear demand and supply models, with additive independent shocks, to derive ... more This paper utilizes linear demand and supply models, with additive independent shocks, to derive producer price and income variances of a typical commodity during and after a buffer stock control. It proceeds to use the models to evaluate International Cocoa Organization's (ICCO) Buffer Stock's decision to purchase excess stock from the market a floor price and resell it, in periods of low supply, at the ceiling price. The results show that cocoa producer prices and incomes were more stable during periods of ICCO buffer stock intervention than after the demise of the buffer stock. The results further indicate that stock-buying operations induced greater stability in producer incomes than buying stock-selling operations.
This paper utilizes three univariate ARCH-type models to empirically examine persistence and asym... more This paper utilizes three univariate ARCH-type models to empirically examine persistence and asymmetry in volatility of prices of primary agricultural commodities produced in Sub-Sahara Africa. Maximum likelihood estimation results of the three models ranked the GARCH version as the best statistical fit, lending support for hypotheses of persistence, symmetry and variability in volatility. This pattern of volatility could effectively jeopardize the success of traditional commodity price risk management policies used in this region. Policymakers should appreciate potential benefits associated with market-based strategies for managing commodity exposure of these countries.
Applied Econometrics and International Development, 2005
Economists have proffered myriads of causes of the debt problem faced by less developed countries... more Economists have proffered myriads of causes of the debt problem faced by less developed countries (LDCs). This paper uses the panel data technique to investigate the fundamental causes of the debt problem among primary commodity dependent LDCs. The results show a strong link between high levels of indebtedness and unfavourable terms of trade among commodity-dependent countries. Further results show that t he degree of openness of the LDC's economy also has a significant influence on its external debt level.
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