WP

"Detecting Big Structural Breaks in Large Factor Model" (with Liang Cheng and Juan Jose Dolado) (PDF + Extra Material) (This version is April 2012)

[It is amazing how easily can this test be implemented in E-Views....A huge advantage with respect other existing tests]

A Short Informal Abstract: Time invariance of factor loadings is a standard assumption in the analysis of large
factor models. Yet, this assumption may be restrictive unless parameter shifts are mild
(i.e., local to zero). In this paper we develop a new testing procedure to detect big
breaks in these loadings at either known or unknown dates. It relies upon testing for
parameter breaks in a regression of the first of the ¯r factors estimated by PCA on the
remaining ¯r−1 factors, where ¯r is chosen according to Bai and Ng’s (2002) information
criteria. The test fares well in terms of power relative to other recently proposed
tests on this issue, and can be easily implemented to avoid forecasting failures in standard
factor-augmented (FAR, FAVAR) models where the number of factors is a priori
imposed on the basis of theoretical considerations.
"Conditional Stochastic Dominance Tests in Dynamic Settings" (with Jose Olmo) (PDF) (February 2012)

A Short Informal Abstract: This paper proposes nonparametric consistent tests of conditional stochastic dominance of arbitrary
order in a dynamic setting. The novelty of these tests lies in the nonparametric manner of incorporating
the information set into the test. The test allows for general forms of unknown serial and mutual dependence
between random variables, and has an asymptotic distribution that can be easily approximated by
simulation. This method has good finite-sample performance. These tests are applied to determine the
investment efficiency between US industry portfolios conditional on the dynamics of the market portfolio.
The empirical analysis suggests that Telecommunications dominates the other sectoral portfolios under risk
aversion.

"Summability of Stochastic Processes (A Generalization of Integration and Co-integration valid for
Non-linear Processes)" (with Vanessa Berenguer-Rico) (PDF) (This version is June 2011)

[The degree of Summability can be easily estimated in E-Views]

A Short Informal Abstract: The order of integration is valid to characterize linear processes;
but it is not appropriate for non-linear worlds. We propose the concept of summability (a re-scaled partial sum of the
process being Op(1)) to handle non-linearities. The paper shows that this new concept, S (delta): (i)
generalizes I (delta); (ii) measures the degree of persistence as well as of the evolution of the variance;
(iii) controls the balancedness of non-linear relationships; (iv) opens the door to the concept of
co-summability which represents a generalization of co-integration for non-linear processes. To
make this concept empirically applicable, an estimator for delta and its asymptotic properties are
provided. The …nite sample performance of subsampling con…dence intervals is analyzed via a
Monte Carlo experiment. The paper …finishes with the estimation of the degree of summability of
the macroeconomic variables in an extended version of the Nelson-Plosser database.

"The Reaction of Stock Market Returns to Anticipated Unemployment" (with Abderrahim Taamouti)(PDF) (May 2012)

A Short Informal Abstract: We empirically investigate the short-run impact of anticipated and unanticipated unemployment rates on
stock prices. We particularly examine the nonlinearity in stock market's reaction to unemployment rate and
study the eect at each individual point (quantile) of stock return distribution. Using nonparametric Granger
causality and quantile regression based tests, we nd that, contrary to the general ndings in the literature,
only anticipated unemployment rate has a strong impact on stock prices. Quantile regression analysis shows
that the causal eects of anticipated unemployment rate on stock return are usually heterogeneous across
quantiles. For quantile range [0.35, 0.80], an increase in the anticipated unemployment rate leads to an
increase in the stock market price. For the other quantiles the impact is statistically insignifcant. Thus,
an increase in the anticipated unemployment rate is in general a good news for stock prices. Finally, we
oer a reasonable explanation of why unemployment rate should aect stock prices and how it aects them.
Using Fisher and Phillips curve equations, we show that high unemployment rate is followed by monetary
policy action of Federal Reserve (Fed). When unemployment rate is high, the Fed decreases the interest
rate, which in turn increases the stock market prices.

"Inferring the Predictability Induced by a Persistent Regressor in a Predictive Threshold Model" (with Jean-Yves Pitarakis)(PDF) (July 2011)

A Short Informal Abstract: In this paper we develop a distributional theory for detecting predictability induced by a per-
sistent variable. Our framework is that of a predictive regression model with threshold eects and
our goal is to develop operational and easily implementable inferences when one does not want to
impose a priori restrictions on the parameters other than the slopes corresponding to the persistent
predictor. Dierently put our tests for the null hypothesis of no predictability against threshold style
predictbility across two regimes remain valid without the need to know whether the remaining pa-
rameters of the model are characterised by threshold eects or not (e.g. shifting versus non-shifting
intercepts). One interesting feature of our setting is that our test statistic remains unaected by
whether some nuisance parameters are identified or not.

"SHOCKS (Can we identify them? YES, WE CAN)" (with Oscar Martinez)
A Short Informal Abstract: At time "t" there is a shock e_t. This shock can be big or small, positive or negative, blue or red, may have been produced when the economic is
recession or expansion, when inflation is high or small, when Barcelona soccer team wins or looses, etc. In this paper, via a new Threshold Moving Average Model,
we show how to identify and test if these type of shocks are transitory or permanent.