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2001

Economics Working Papers, 2001

Copies may be downloaded on pdf, or hard copies may be requested from Joshua Hall, Working Paper Coordinator.

01 - 01: BALVERS, RONALD and MITCHELL, DOUGLAS W.

Reducing the Dimensionality of Linear Quadratic Control Problems

Abstract: In linear-quadratic control (LQC) problems with singular control cost matrix and/or singular transition matrix, we derive a reduction of the dimension of the Riccati matrix, simplifying iteration and solution. Employing a novel transformation, we show that, under a certain rank condition, the matrix of optimal feedback coefficients is linear in the reduced Riccati matrix. For a substantive class of problems, our technique permits scalar iteration, leading to simple analytical solution. By duality the technique can also be applied to Kalman filtering problems with a singular measurement error covariance matrix.

01 - 02: BANDYOPADHYAY, Subhayu.

Illegal Immigration and Preferential Trade Liberalization.

Abstract: This paper presents a version of the small-union Meade model to analyze the illegal immigration problem in the context of preferential trade liberalization. Two possible objectives for the host nation are explored: (i). holding the level of illegal immigration at an exogenously given social target; or, (ii). allowing for a variable illegal immigration level to maximize national welfare. The available policy instruments for the host nation are import tariffs/subsidies, border and internal enforcement. The second best tariff on the import from the partner country could either be positive or negative depending on the effect of the tariff on the wage rate and the pattern of substitutability in consumption. In scenario-(ii), greater enforcement that reduces labor inflow may contract the protected sector and confer additional benefits. If enforcement is too costly as a policy tool, tariff policy may be used to exploit monopsony power in the labor market and also to counter the distortionary effect of labor flows.

01 - 03: GARCIA, LETICIA.

Trading Rule Profits And Foreign Exchange Market Intervention In Emerging Economies.

Abstract: A moving average trading rule is applied to 28 exchange rates in the post Bretton Woods period. 14 of these currencies are from developed countries and 14 from emerging ones. The trading rule produces significant excess return for 27 exchange rates. It is shown that the profit possibilities from using the trading rule are higher when trading currencies from developed countries compared with the emerging. The trading rule returns from developed country currencies existed even after several transaction costs are subtracted. Returns using emerging country currencies are almost vanish subtracting transaction costs. Explanations for the currency returns are found in the leaning against the wind central bank intervention.

01 - 04: BALVERS, RONALD and MITCHELL, DOUGLAS W.

Linear Riccati Dynamics, Constant Feedback, and Controllability in Linear Quadratic Control Problems.

Abstract: Conditions are derived for linear-quadratic control (LQC) problems to exhibit linear evolution of the Riccati matrix and constancy of the control feedback matrix. One of these conditions involves a matrix upon whose rank a necessary condition and a sufficient condition for controllability are based. Linearity of Riccati evolution allows for rapid iterative calculation, and constancy of the control feedback matrix allows for time-invariant comparative static analysis of policy reactions.

01 - 05: SOBEL, RUSSELL.

The Budget Surplus: A Public Choice Explanation.

Abstract: Rapid federal expenditure growth and budget deficits became commonplace during the 1970s and 1980s. Public choice models explained this by continual special interest group pressure for spending, rationally ignorant voters, and shortsighted politicians finding deficit financing attractive. Recently, however, there have been budget surpluses and a slowdown in government expenditure growth. To date, only pure public finance explanations (mostly factual accounting stories) have been offered for the recent budget surpluses. This paper uses public choice theory to explain this turn of events. Ifpublic choice models are correct, they should explain the trends in both time periods.

01 - 06: GARRETT, Thomas A. and SOBEL, RUSSELL S.

The Political Economy of FEMA Disaster Payments.

Abstract: We explore whether presidential and congressional influences affect the rate of disaster declaration and the allocation of FEMA (Federal Emergency Management Agency) disaster expenditures across states. We find that states politically important to the president have a higher rate of disaster declaration by the president (which is necessary to receive FEMA funding). We also find that conditional on a disaster being declared, FEMA disaster relief expenditures are higher in states having congressional representation on FEMA oversight committees. Our findings reject a purely altruistic model of FEMA assistance, and have implications for the relative effectiveness of government versus private disaster relief.

01 - 07: SOBEL, RUSSELL S. and Robert A. Lawson.

The Effect of Early Media Projections on Presidential Voting in the Florida Panhandle.

Abstract: The media incorrectly called Al Gore the winner of Florida at 7:48 p.m. eastern time with 12 minutes still remaining to vote in the 10 central time zone counties in Florida. In addition, the media reported that polls "close in Florida at 7:00 p.m. eastern time," which may have misled some panhandle voters into thinking their polls closed at 6:00 p.m. central time. Given the closeness of the popular vote in Florida, and the degree to which the outcome in the state was contested, these media miscues could have been decisive in the election. When Bush was behind in the recount, his supporters adamantly claimed their candidate suffered a loss of votes because of these media miscues. We test this hypothesis and reject it. Our regression results find no significant impact on the Gore/Bush vote differential, nor do we find any impact on voter turnout or third party voting, in these counties.

01 - 08: VILASUSO, Jon and MITCHELL, Douglas.

Weighted Least Squares Estimation of the Memory Parameter of a Time Series." - Download not available.

Abstract:This paper presents and evaluates a weighted least squares estimator of the fractional integration parameter of a time series using Monte Carlo simulations. The simulations uncover several advantages in using weighted least squares rather than ordinary least squares for estimating the frequency domain regression introduced by Geweke and Porter-Hudak (1983). First, weighted least squares estimation has a smaller parameter variance and displays less bias. While there are exceptions concerning parameter bias, in these cases bias is slight. Second, weighted least squares estimation results in improved statistical inference in the presence of short-term dependence, as tests based on weighted least squares exhibit less size distortion.

01 - 09: BALVERS, RONALD and Yangru Wu

Momentum and Mean Reversion Across National Equity Markets.

Abstract: A number of studies have separately identified mean reversion and momentum. This paper considers these effects jointly; potential for mean reversion and momentum is combined into one index., interpretable as an expected return. Combination momentum-contrarian strategies, used to select from among 18 developed equity markets at a monthly frequency, outperform both pure momentum and pure mean reversion strategies. A breakdown of the combination strategies indicates that both extreme high-expected-return and low-expected-return strategies rely heavily on country-indices with higher standard deviation of return, smaller firm size, and a lower number of firms. These observations suggest a mispricing rather than risk-compensation explanation of returns, with overreaction tied to information-based neglect of countries with fewer and smaller firms.

01 - 10: WU, HONG.

Exchange Risk versus the Value Factor In International Asset Pricing.

Abstract: When the assumption of PPP is dropped in a CAPM context, exchange risks should be priced. This paper shows that employing the Fama-MacBeth cross-sectional regression approach, an International CAPM model with exchange rate risks cannot be rejected and outperforms the Fama and French (1998) two-factor model in explaining the cross-section of returns of country value portfolios and other international portfolios. While the exchange rate factors by themselves appear not to be priced, their correlation with the market factor significantly affects results.