Large shocks vs. small shocks. (Or does size matter? May be so.)

Abstract

What are the shocks that drive economic fluctuations? The answer to this question requires as a first step solving the shock identification issue. This paper proposes a new identification scheme based on two aspects: the long run effect of the shock (permanent or transitory), and the size of the shock (Large or small). This is done by using a threshold integrated moving average model (TIMA) previously introduced in the literature by the authors. Based on this model we develop a testing strategy to determine whether Large and small shocks have different long run effects, as well as whether one of them is purely transitory. The paper analyzes the impulse response function of both types of shocks, and provides the asymptotic results sufficient to implement the above testing strategy. Based on these results we develop a new nonlinear permanent transitory decomposition, that is applied to US stock prices to analyze the quality of the stock market, and to US GNP to investigate the asymmetric behavior of its shocks. r 2005 Elsevier B.V. All rights reserved.JEL classification: C22; C51

How smooth is price discovery? Evidence from cross-listed stock trading

“…Finally, Canadian stocks trade in the U.S. as ordinary shares due to compatible accounting standards, whereas most other cross-listed shares are ADRs issued by U.S. custodian banks. 11 A similar idea is illustrated by Gonzalo and Martinez (2006) in a model of the price discovery for stocks traded in a single market. In their model, only new information which implies a profit greater than the transaction cost, measured by bid-ask spread, is translated into the transaction price.…”

Stochastic analysis of GSB process

“…Finally, if A(L) = 1 and B(L) = 1 − L the mentioned model represents the basic and the simplest case of STOPBREAK process, also introduced and particularly discussed by Engle and Smith [2]. This model was investigated later by several authors, for instance Gonzáles [4], or Gonzalo and Martinez [5], and their works were mainly based on different variations of the reaction (q t ).…”

“…In this sense, the similarity of this model to the standard linear MA model is noticeable, and the sequence (X t ) we shall call the general Split-MA model (of order p), or simply Split-MA(p) model. It represents the generalization of the adequate model defined in Stojanović, Popović and Popović [9] and the threshold integrated moving average (TIMA) model introduced in Gonzalo and Martinez [5]. The main properties of this process can be expressed in the following way.…”

A Nonlinear Threshold Model for the Dependence of Extremes of Stationary Sequences

“…The models in the second class assume that the regime cannot be observed and are determined by an unobservable stochastic process. In this class lies the widely studied Markov Switching Models, see Hamilton (1989), the STOPBREAK model of Engle and Smith (1999) or TIMA models of Gonzalo and Martinez (2006). In the last two cases the threshold variable is the shock that is not observable although estimable.…”