BRICS: Testing for Commonalities using Common Features Bruno Delalibera (FGV), Roberto Castello Branco (FGV), Jo˜ao V. Issler (FGV) June, 2015 B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 1 / 16 Common Features – Basic Ideas 1 Series y1t has property A. B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 2 / 16 Common Features – Basic Ideas 1 Series y1t has property A. 2 Series y2t has property A. B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 2 / 16 Common Features – Basic Ideas 1 Series y1t has property A. 2 Series y2t has property A. 3 There exists a linear combination of them, y1t − e αy2t , that does not have property A. B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 2 / 16 Common Features – Basic Ideas 1 Series y1t has property A. 2 Series y2t has property A. 3 There exists a linear combination of them, y1t − e αy2t , that does not have property A. 4 Cointegration is the most well-known example of common features. B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 2 / 16 Common Features – Basic Ideas 1 Series y1t has property A. 2 Series y2t has property A. 3 There exists a linear combination of them, y1t − e αy2t , that does not have property A. 4 Cointegration is the most well-known example of common features. 5 Serial correlation-common features (SCCF) or common cycles are also well-known: stationary series y1t and y2t both have serial correlation (are predictable), but there exists y1t − e αy2t which is white noise (unpredictable). B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 2 / 16 Common Features – Basic Ideas Engle and Kozicki (1993) main example. 1 No cointegration for log-levels of GDP for the U.S. and Canada. Instantaneous growth rates of GDP for the U.S. and Canada have serial correlation and there is a linear combination of growth rates that is white noise. Cycles in U.S. and Canadian GDP growth are synchronized. B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 3 / 16 Common Features – Basic Ideas Engle and Kozicki (1993) main example. 1 2 No cointegration for log-levels of GDP for the U.S. and Canada. Instantaneous growth rates of GDP for the U.S. and Canada have serial correlation and there is a linear combination of growth rates that is white noise. Cycles in U.S. and Canadian GDP growth are synchronized. This is our main finding between the growth rates of GDP for BRICS countries (also for Industrial Production). B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 3 / 16 Common Features – Basic Ideas Engle and Kozicki (1993) main example. 1 2 3 No cointegration for log-levels of GDP for the U.S. and Canada. Instantaneous growth rates of GDP for the U.S. and Canada have serial correlation and there is a linear combination of growth rates that is white noise. Cycles in U.S. and Canadian GDP growth are synchronized. This is our main finding between the growth rates of GDP for BRICS countries (also for Industrial Production). Factor models and latent features: US ∆ ln ytUS λ εt = ft + , or, CAN 1 ∆ ln yt εCAN t CAN ∆ ln ytUS − λ∆ ln ytCAN = εUS , t − λεt 1 −λ is the cofeature vector, eliminating the SCCF. B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 3 / 16 Common GDP Cycles – BRICS (no India) B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 4 / 16 Common Growth Cycles – BRICS (no India) B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 5 / 16 Common Features – VAR and VECM Vahid and Engle (1993): VAR for yt , an n-vector of I (1) log GDP (or log Industrial Production): yt = Γ1 yt −1 + . . . + Γp yt −p + et . (1) ∆ yt = Γ1∗ ∆ yt −1 + . . . + Γp∗ −1 ∆ yt −p +1 + γα0 yt −1 + et . (2) VECM: Normalized cofeature vectors: α˜ = Is α˜ ∗(n−s )×s Quasi-structural model (restricted VECM): " Is 0 (n−s )×s α˜ ∗0 In−s # " ∆ yt = B. Delalibera, R. Castello Branco, J.V. Issler # 0 s ×(np +r ) Γ1∗∗ . . . Γp∗∗−1 γ∗ BRICS: Testing for Commonalities ∆ yt −1 .. . ∆ yt −p +1 α0 yt −1 + vt . (3) June, 2015 6 / 16 A GMM Test for Common Cycles GMM approach: exploits the following moment restriction and test H0 :existence of s linearly independent SCCF: " # Is α˜ ∗0 0 In − s ∆ y t − n − s s ( )× ∆ yt −1 " # ⊗ Zt − 1 0 = E , . 0 .. s ×( np + r ) Γ1∗∗ . . . Γp∗∗−1 γ∗ ∆ yt −p +1 0 α yt −1 where the elements of Zt −1 are the instruments comprising past series: α0 yt −1 , ∆ yt −1 , ∆ yt −2 , · · · , ∆ yt −p +1 . The test for common cycles is an over-identifying restriction test – the J test proposed by Hansen (1982). This test is robust to HSK of unknown form if it uses a White-correction in its several forms. B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 7 / 16 Common-Cycle Tests (GDP) Country Brazil China Russia South Africa Brazil 0.70 0.50 0.37 GDP China Russia South Africa 0.48 0.62 0.17 - Table: Real GDP: P-Values of Common-cycle tests – GMM based B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 8 / 16 Common Cycles in Industrial Production B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 9 / 16 Common Cycles in Industrial Production B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 10 / 16 Common Cycles in Industrial Production B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 11 / 16 Common-Cycle Tests (Ind. Production) Country Brazil China India Russia South Africa Industrial Production Brazil China India Russia 0.050 0.022 0.066 0.410 0.180 0.015 0.390 0.062 0.012 0.030 South Africa - Table: Industrial Production: P-Values of Common-cycle tests – GMM based B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 12 / 16 Common-Cycle Tests (Exports) Country Brazil China India Russia South Africa Brazil 0.004 0.013 0.002 0.002 Exports China India Russia South Africa 0.001 0.005 0.001 0.000 - 0.000 0.002 Table: Exports: P-Values in Common-cycle tests – GMM based B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 13 / 16 Common-Cycle Tests (Imports) Country Brazil China India Russia South Africa Brazil 0.002 0.015 0.210 0.001 Imports China India Russia South Africa 0.002 0.019 0.001 0.003 - 0.003 0.370 Table: Imports: P-Values in Common-cycle tests – GMM based B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 14 / 16 Common-Cycle Tests (BRICS and US) BRICS and US Country Industrial Production Brazil 0.09 China 0.54 India 0.62 Russia 0.21 South Africa 0.48 GDP 0.22 0.69 0.14 0.23 Table: BRICS and US: P-Values of Common-cycle tests – GMM based B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 15 / 16 Common-Cycle Tests (BRICS and Euro) BRICS and Euro zone Country Industrial Production Brazil 0.057 China 0.050 India 0.011 Russia 0.021 South Africa 0.024 GDP 0.293 0.420 0.270 0.210 Table: BRICS and Euro zone: P-Values of Common-cycle tests – GMM based B. Delalibera, R. Castello Branco, J.V. Issler BRICS: Testing for Commonalities June, 2015 16 / 16
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