Three Essays in Applied Time Series Econometrics

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Virginia Tech

This dissertation is comprised of four chapters. Chapter 1 provides an introduction to
Economic application of time series analysis and discusses the topics covered in each of the following chapters along with some main results therein.
    In Chapter 2, I construct a measure of information asymmetry in the financial markets in U.S., by estimating an index of agency cost pertaining to U.S. manufacturing firms. The cyclical behavior of the unobservable agency cost is derived by a novel application of the Kalman filter within a Bayesian framework, using firm level data from 1984-2006. The preliminary results provide support to the financial accelerator mechanism in the business cycle literature.
    In Chapter 3, I show that people's expectation of uncertainty in financial markets is a significant factor impacting short-term real exchange rate movements. Specifically, a sudden increase in expectation of stock market volatility in a low interest rate country tends to appreciate their currencies against high interest rate currencies. I construct a measure of conditional expected uncertainty from volatility of returns of the dominant portfolio (indices) of 7 industrialized countries. I identify uncertainty shocks and its impact on dollar real exchange rate, and explain my results in the context of currency carry trade.
    Chapter 4 of my dissertation documents the presence of significant non-linearity in the deficit-interest rate relationship in the U.S. economy. Using an asymptotic threshold test as per Hansen (2000), I find strong evidence for threshold effects in the impact of expected deficit on future long-term interest rates. I find that a percentage point increase in expected deficit in a regime where the expected deficit/GDP ratio is above 1.8 percent (the estimated threshold value) increases future nominal long term interest rates by 29-30 basis point, and a "news shock" to expectation of future deficit increases future real long term interest rates by 12-18 basis points. When expected deficit/GDP ratio is below 1.8 percent, an increase in expected deficit has no impact on future long-term interest rates.

Kalman Filter, Uncertainty, Exchange rates, VAR, Threshold, Deficit, Interest Rates