Semiparametric estimation of the canonical permanent‐transitory model of earnings dynamics

This paper presents identification and estimation results for a flexible state space model. Our modification of the canonical model allows the permanent component to follow a unit root process and the transitory component to follow a semiparametric model of a higher‐order autoregressive‐moving‐average (ARMA) process. Using panel data of observed earnings, we establish identification of the nonparametric joint distributions for each of the permanent and transitory components over time. We apply the identification and estimation method to the earnings dynamics of U.S. men using the Panel Survey of Income Dynamics (PSID). The results show that the marginal distributions of permanent and transitory earnings components are more dispersed, more skewed, and have fatter tails than the normal and that earnings mobility is much lower than for the normal. We also find strong evidence for the existence of higher‐order ARMA processes in the transitory component, which lead to much different estimates of the distributions of and earnings mobility in the permanent component, implying that misspecification of the process for transitory earnings can affect estimated distributions of the permanent component and estimated earnings dynamics of that component. Thus our flexible model implies earnings dynamics for U.S. men different from much of the prior literature.

Component Structure of Credit Default Swap Spreads and Their Determinants

In this paper, we decompose credit default swap (CDS) spreads into a transitory component and a persistent component and test how these components are affected by the theoretical explanatory variables. We find significant but differing impacts of these explanatory variables on the extracted components. For example, equity volatility seems to have a larger influence on the transitory component, suggesting that its effect may be mostly short-lived, while our proxy for illiquidity has a greater impact on the persistent component indicating its more enduring effect. Also, the slope of the yield curve has impacts with opposite signs on the two components and so our analysis thus helps address the conflicting results reported in earlier studies without such a component framework. These results indicate that a two-factor formulation may be needed to model CDS options.

The Cash-Flow Permanence and the Choice between Dividends and Stock Repurchases

Firms can use dividends and/or share repurchases to distribute cash to shareholders. Jagannathan, Stephens, and Weisbach (2000) argue that managers tend to use dividends to pay out permanent cash flows and repurchases to pay out temporary cash flows. This paper examines Korean firms’ decisions on their choices between paying out cash flows in the form of dividends or share repurchases. We focus on the permanence of cash flows. To complete this analysis, we decompose cash flows into a transitory component and a permanent one of each firm, employing the approach of Beveridge and Nelson (1981). We find that higher permanent cash flows increase the probability of a dividend increase, while higher temporary cash flows increase the probability of repurchases. And Korean firms tend to choose both dividend change and repurchases when temporary cash flows increase, rather than to choose only repurchases without dividend change. These empirical results show that Korean firms take into consideration of permanence of cash flows in the choice of their payout methods.

INFLATION IN THE G7: MIND THE GAP(S)?

We investigate the importance of trend inflation and the real-activity gap in explaining inflation in G7 countries since 1960. Our analysis is based on a bivariate unobserved components model of inflation and unemployment in which inflation is decomposed into a stochastic trend and a transitory component. As in recent implementations of the New Keynesian Phillips Curve, it is the transitory component of inflation, or “inflation gap,” that is driven by the real-activity gap, which we measure as the deviation of unemployment from its natural rate. We find that both trend inflation and the inflation gap have been consistent and substantial determinants of inflation at business cycle horizons for all G7 countries since 1960. Also, the real-activity gap explains a large fraction of the variation in the inflation gap for each country. These results provide empirical support for the New Keynesian Phillips Curve augmented with trend inflation.

Corporate Sustainable Growth and the Financing of Innovation

R&D investments are a channel for growth, at the macro and micro levels. However, they are known to be characterized with high adjustment costs, therefore, it is generally admitted in the literature that firms try to smooth their R&D investments in face of shocks to internal finance, and the literature supposes that the observed investment – current cash-flow sensitivities are downward biased because R&D expenses are expected to respond to the permanent component of cash-flow but not to its transitory component. However, very few proofs, if at all, exist on the link between R&D and cash-flow components and its implications in terms of its contribution to the corporate sustainable growth. The authors decompose cash-flow into its permanent and transitory components and provide formal evidence that R&D- current cash-flow sensitivity is downward biased and that R&D- permanent cash-flow sensitivity better informs about the contribution of cash-flow to R&D smoothing, which shows a managerial commitment to sustainability. Unexpectedly, and in spite of the negligible observed sensitivities of R&D to the transitory component of cash-flow, the authors’ regressions reveal that these sensitivities have an asymmetric pattern: they are higher when cash-flow is expanding than when it is declining. This reveals a managerial preference for immediate growth, which jeopardizes sustainable growth, because of the risk of costly liquidation inherent to the reliance on the volatile transitory cash-flows.

Potassium Current Is Not Affected by Long-Term Exposure to Ghrelin or GHRP-6 in Somatotropes GC Cells

Ghrelin is a growth hormone (GH) secretagogue (GHS) and GHRP-6 is a synthetic peptide analogue; both act through the GHS receptor. GH secretion depends directly on the intracellular concentration of Ca2+; this is determined from the intracellular reserves and by the entrance of Ca2+ through the voltage-dependent calcium channels, which are activated by the membrane depolarization. Membrane potential is mainly determined by K+ channels. In the present work, we investigated the effect of ghrelin (10 nM) or GHRP-6 (100 nM) for 96 h on functional expression of voltage-dependent K+ channels in rat somatotropes: GC cell line. Physiological patch-clamp whole-cell recording was used to register the K+ currents. With Cd2+ (1 mM) and tetrodotoxin (1 μm) in the bath solution recording, three types of currents were characterized on the basis of their biophysical and pharmacological properties. GC cells showed a K+ current with a transitory component sensitive to 4-aminopyridine, which represents ~40% of the total outgoing current; a sustained component named delayed rectifier , sensitive to tetraethylammonium; and a third type of K+ current was recorded at potentials more negative than −80 mV, permitting the entrance of K+ named inward rectifier (KIR). Chronic treatment with ghrelin or GHRP-6 did not modify the functional expression of K+ channels, without significant changes () in the amplitudes of the three currents observed; in addition, there were no modifications in their biophysical properties and kinetic activation or inactivation.

Spot Trading Volume Volatility, Futures Trading Volume Volatility, and the Volatility of Korean Stock Market

This paper tries to investigate whether the information contained in trading volume volatilities of spot and futures may be statistically useful in explaining the volatility of korean stock market. This paper uses both the component-jump model and the bivariate GJR-GARCH type BEKK model to estimate the trading volume volatilities of spot and futures from 1/2/2001 to 9/30/2010. By using the component-jump model, the volume volatility is decomposed into a permanent component and a transitory component. According to this study, the relative importance of permanent component to the transitory component contained in both trading volume volatilities of spot and futures has been more significant in explaining the volatility of the korean stock markets.

Pengaruh Transitory Earnings Pada Penggunaan Rasio E/p Dalam Penilaian Perusahaan: Studi Empirik Di Indonesia

The purposes of this study are, firstly, to confirm the findings of the previous study, whether earnings contain transitory component$. Secondly, to investigate how E/P ratios are affected when firms experience transitory earning changes. Thirdly, tg examine whether the dffirences in E/P ratios across firms-due to differences in the magnitude of transitory earnings will quickly disappear in subsequent years. (Jsingfinancial dan of companies listed in Jakarta Stock Exchange (JSE).from the periods of 1993 to 2003, the study finds that earning changes etehibit a transitory component. Under the condition of transitory earnings, .fir*'t E/P ratio is positively affected by the changes in earnings. Industry-adjusted earning changes variable is shown to have a high explanqtory power in predicting-firm's E/P ratio. As the variation offirm's E/P ratios are mainly explained by the transitory component of earnings, time series pattern of E/P ratios reflects transitory deviations due to the transitorycomponent of earnings changes.