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Research Interests, Publications, and Working Papers
Financial Econometrics, with a focus on Commodity Markets.
NCN funded Project on Global Commodity Price Transmission.
Nonlinear Volatility in Commodity Prices
Abstract: Many commodity prices exhibit boom-bust type behavior: sustained periods of price increases, followed by sudden sharp collapses. Since around the year 2000, booms have become longer while busts have tended to be short but steep, suggesting a structural change in growth and persistence. We model these features of the data using a novel double mixture autoregression with two independent hidden Markov chains. One chain tracks shifts in mean growth rates that account for rising and falling prices, while a second chain tracks changes in volatility and lag structure. While the two chains are independent, the persistence of price growth depends on the volatility state, which allows the lag structure to vary across variance regimes. Estimation requires a two-stage Fisherian approach. Initially, location-related parameters are estimated while suppressing the underlying autoregressive structure. These parameters are then held fixed while the optimal lag structure across variance regimes is determined. We apply the model to three industrial commodities price time series: Crude Oil, Aluminum, and Rubber. We find that in each case, the model captures boom and bust cycles, with data from more recent periods exhibiting higher volatility, longer price rallies, and steeper collapses.
Market Microstructure of Commodity Markets
New Open to Old Close: Signs and Spreads in Daily Prices (in progress).
Abstract: I present simple dynamic linear models with switching to estimate transaction costs in financial markets. The models treat underlying price processes and bid-ask spreads as unobserved components in state-space systems, with trade direction indicators of buyer or seller-initiated transactions being the outcome of a hidden Markov process. In simulation studies, I show that the model provides accurate spread estimates and beats the tick-rule method of signing trades using prices: 82% versus 66% labeling accuracy of transactions from small samples. The model easily transitions to a low-frequency data implementation without loss of precision in parameter estimates. In empirical applications using daily commodity futures prices, I show that the model can deliver reliable inference on transaction costs and the order flow process over the trading day even in the absence of high-frequency intraday data.
Price Impact as Reaction to Order Flow Imbalance (in progress).
Abstract: We postulate a theory of transaction history-dependent price formation in a limit order book market for commodity futures. We hypothesize that trading agents post mid-price updates equal to half the bid-ask spread in response to the observed sequence of buy and sell orders. The theory leads to falsifiable empirical predictions of the relationship between the price impact of a trade, the effective spread, and volatility. In empirical tests using tick data from the Tokyo Commodities Exchange, we find that a significant fraction of price volatility can be attributed to the correlation of order signs within a given trading session, and conclude that high-frequency price dynamics are driven by reactions to order flow imbalances.
Macroeconomic Theory.
Abstract: We investigate the notable decline in wealth and income inequality in Kenya over the 10 years between 2005 to 2015. Using a calibrated continuous time heterogeneous agent model, we attribute up to 80% of the variation in top wealth and income inequality to a persistent but slow increase in the return to capital, a low risk-free rate, and rising ‘effective’ income tax rates. Our study suggests that a macroeconomic environment characterised by low risk-free interest rates anchored by low debt-to-fiscal revenue ratios is key to reducing both wealth and income inequality.
Abstract: We develop a dynamic general equilibrium model where employers may avoid making social security contributions by offering some workers “secondary contracts.” When calibrated using aggregate tax revenue data, the model delivers estimates of secondary “off the books” employment that are consistent with survey evidence for the EU14 and the United States. We investigate the fiscal and welfare effects of varying the avoidable and unavoidable shares of labor income tax while keeping the total wedge constant, and find that increasing the employer component raises hours worked, output, and welfare. Partial labor tax evasion makes tax revenues more elastic, but full tax compliance need not be a welfare-enhancing policy mix.
Risk Sharing with gradual financial integration: The Visegrád countries and the euro area, Bank and Credit 49 (1), 2018, 17–44. [PDF]
Abstract: Since the year 2000, three Visegrád Group economies – of Poland, the Czech Republic, and Hungary – have gradually become financially integrated with the euro area (EA) economies. However, standard risk-sharing regressions fail to show any significant consumption risk-sharing effects following integration. Using a measure of financial integration based on the coefficients of co-movement of interest rates between each country and the aggregate euro economies, I find that risk sharing occurs whenever there is a premium over the integrated area borrowing rates. For Poland, financial integration with the EA economies helps dampen the effects of income shocks as postulated by the risk-sharing hypothesis. For Hungary, financial integration with the EA economies explains its consumption growth, but the latter is independent of its income. The results for Poland and Hungary show that a well-defined measure of financial integration is needed in order to find risk sharing between financially integrated regions.
Corporate Governance, Taxation, and Business Cycles (with Ryszard Kokoszczynski). (Unpublished Manuscript). [PDF]
Abstract: We present an agency model of corporate tax auditing by a residual claimant government and embed it to a macro model with credit constraints. In our economy, entrepreneurs with access to risky investment technologies raise funds by issuing equity claims to new capital. Information asymmetries create incentives to choose a riskier but cheaper technology that provides private benefits and opportunities to evade taxes. Random auditing by the government for tax verification reveals technology choice, reducing the asymmetric information problem between lenders and borrowers. We calibrate the model to data from the United States and use it to show that moderate corporate governance quality, accompanied by high taxes, raises output, investment, and consumption. We use the model to investigate the impact of productivity shocks under different tax and governance regimes, and find that the impact of shocks is more pronounced in the high–tax, low–quality corporate governance economy.
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