Publications - JBHill (UNC)

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Home Page of Jonathan B. Hill

Associate Professor of Economics

University of North Carolina – Chapel Hill

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PUBLISHED JOURNAL ARTICLES (see my cv for other publications)

Robust Expected Shortfall Estimation and Inference for Infinite Variance Time Series (2012) : conditionally accepted by Journal of Financial Econometrics

Paper: PDF

We develop robust methods of non-parametric estimation and inference for the Expected Shortfall of heavy tailed asset returns. We use a tail-trimming indicator to dampen extremes negligibly, ensuring standard Gaussian inference, and a higher rate of convergence than without trimming when the variance is infinite. Trimming, however, causes bias in small samples and possibly asymptotically when the variance is infinite, we exploit a rarely used remedy to estimate and utilize the tail mean that is removed by trimming. Since estimating the tail mean involves estimation of tail parameters and therefore an added arbitrary choice of the number of included extreme values, we present weak limit theory for an ES estimator that optimally selects the number of tail observations by making our estimator arbitrarily close to the untrimmed estimator, yet still asymptotically normal. Finally, we apply the new estimators to financial returns data.

Are There Common Values in First-Price Auctions? A Tail-Index Nonparametric Test (2013, with A. Shneyerov): Journal of Econometrics 174, 144-164.

Paper: PDF (this version: Feb. 2013)

Appendix: PDF

We develop a consistent nonparametric test of common values in first-price auctions and apply it to British Columbia Timber Sales data. The test is based on the behavior of the CDF of bids near the reserve price. We show that the curvature of the CDF is drastically different under private values (PV) and common values (CV). We then show that the problem of discriminating between PV and CV is equivalent to estimating the lower tail index of the bid distribution. Our approach admits unobserved auction heterogeneity of an arbitrary form. We develop a Hill (1975)-type tail index estimator and find presence of common values BC Timber Sales.

Least Tail-Trimmed Squares for Infinite Variance Autoregressions (2013) : Journal of Time Series Analysis 34, 168-186

Paper: PDF
Gauss Code

We develop a robust least squares estimator for autoregressions with possibly heavy tailed errors. Robustness to heavy tails is ensured by negligibly trimming the squared error according to extreme values of the error and regressors. Tail-trimming ensures asymptotic normality and super-root(n)-convergence with a rate comparable to the highest achieved amongst M-estimators for stationary data. Moreover, tail-trimming ensures robustness to heavy tails in both small and large samples. By comparison, existing robust estimators are not as robust in small samples, have a slower rate of convergence when the variance is infinite, or are not asymptotically normal. We present a consistent estimator of the covariance matrix and treat classic inference without knowledge of the rate of convergence. A simulation study demonstrates the sharpness and approximate normality of the estimator, and we apply the estimator to financial returns data. Finally, tail-trimming can be easily extended beyond least squares estimation for a linear stationary AR model. We discuss extensions to Quasi-Maximum Likelihood for GARCH, Weighted Least Squares for a possibly non-stationary Random Coefficient Autoregression, and Empirical Likelihood for robust confidence region estimation, in each case for models with possibly heavy tailed errors.

Heavy Tail and Plug-In Robust Consistent Conditional Moment Tests of Functional Form (2011): to appear in X. Chen and N. Swanson (ed.'s), Recent Advances and Future Directions in Causality, Prediction, and Specification Analysis: Essays in Honor of Halbert L. White Jr., pp. 241-274. Springer: New York

Paper: PDF

Appendix: PDF

We present asymptotic power-one test statistics for heavy tailed time series. Under the null the regression errors must have a finite mean, and otherwise they may have arbitrarily heavy tails. If the errors have an infinite variance then in principle any consistent plug-in is allowed, depending on the model, including those with non-Gaussian limits or a sub-root(n)-convergence rate. One statistic exploits an orthogonalized test equation that promotes plug-in robustness irrespective of tails. We derive chi-squared weak limits, characterize an empirical process method for selecting the trimming fractile, and study the finite sample properties.

Stochastically Weighted Average Conditional Moment Tests of Functional Form (2012): Studies in Nonlinear Dynamics and Econometrics 16 (in press)

Paper: PDF

We develop a new consistent conditional moment test of functional form based on nuisance parameter indexed sample moments first presented in Bierens (1982, 1990). We reduce the nuisance parameter space to known countable sets, which leads to a weighted average conditional moment test in the spirit of Bierens and Ploberger's (1997) Integrated Conditional Moment test. The weights are possibly stochastic in an arbitrary way, integer-indexed and flexible enough to cover a range of tests from average to higher quantile to maximum tests, the latter of which is impossible in the existing ICM framework. Nevertheless, the limit distribution under the null and local alternative belong to the same class as the ICM statistic, hence our test is admissible if the errors are Gaussian, and a flat weight leads to the greatest weighted average local power.

Moment Condition Tests for Heavy Tailed Time series (2013, with M. Aguilar): Journal of Econometrics 172, 255-274.

Paper: PDF
Appendix: PDF

We develop an asymptotically chi-squared statistic for testing moment conditions E[m(b)] = 0, where m(b) may be weakly dependent, scalar components of m(b) may have an infinite variance, and E[m(b)] need not exist under the alternative. Score tests are a natural application, and in general a variety of tests can be heavy-tail robustified by our method, including white noise, GARCH affects, omitted variables, distribution, functional form, causation, volatility spillover and over-identification. The test statistic is derived from a tail-trimmed sample version of the moments evaluated at a consistent plug-in for b. Depending on the test in question and heaviness of tails, the plug-in may be any consistent estimator including sub-root(T)-convergent and/or asymptotically non-Gaussian ones, since b can be assured not to affect the test statistic asymptotically. We adapt bootstrap, p-value occupation time, and covariance determinant methods for selecting the trimming fractile in any sample, and apply our statistic to tests of white noise, omitted variables and volatility spillover. We find it obtains sharp empirical size and strong power, while conventional tests exhibit size distortions.

Consistent GMM Residuals-Based Tests of Functional Form (2013): Econometric Reviews 32, 361-383.

Paper: PDF

Appendix: PDF

This paper presents a consistent GMM residuals-based test of functional form for time series models. By relating two moment conditions we deliver a vector moment condition in which at least one element must be non-zero if the model is mis-specified: the test will never fail to detect mis-specification of any form for large samples, and is asymptotically chi-squared under the null, allowing for fast and simple inference. A simulation study reveals randomly selecting the nuisance parameter leads to more power than supremum-tests, and can obtain empirical power nearly equivalent to the most powerful test for even relatively small n.

Extremal Memory of Stochastic Volatility with an Application to Tail Shape Inference (2011) Journal of Statistical Planning and Inference 141, 663-676.

Paper: PDF

In this paper we characterize joint tails and tail dependence for a class of stochastic volatility processes. We derive the exact joint tail shape of multivariate stochastic volatility processes with innovations that have a regularly varying distribution tail. This is used to give four new characterizations of tail dependence. In three cases tail dependence is a function of linear volatility memory parametrically represented by tail scales, while tail power indices do not provide any relevant dependence information. In the fourth case a linear function of tail events and exceedances is itself linearly independent, implying tail index inference based on the Hill (1975) estimator is identical to the iid case.

Tail and Non-Tail Memory with Applications to Extreme Value and Robust Statistics (2011) Econometric Theory 27, 844-884.

Paper: PDF

New notions of tail and non-tail dependence are used to characterize separately extremal and non-extremal information, including tail log-exceedances and events, and tail-trimmed levels. We prove Near Epoch Dependence (McLeish 1975, Gallant and White 1988) and L0-Approximability (Pötscher and Prucha 1991) are equivalent for tail events and tail-trimmed levels, ensuring a Gaussian central limit theory for important extreme value and robust statistics under general conditions. We apply the theory to characterize the extremal and non-extremal memory properties of possibly very heavy tailed GARCH processes and distributed lags. This in turn is used to verify Gaussian limits for tail index, tail dependence and tail trimmed sums of these data, allowing for Gaussian asymptotics for a new Tail-Trimmed Least Squares estimator for heavy tailed processes.

Institutions and Growth Volatility (2011: with N. Anbarci and H. Kirmanoglu): Economic Papers 30, 233–252.

Recently some studies provided evidence that democratic political institutions generate less volatile growth. These studies, however, do not provide any link between democracy and investment volatility. Here, we focus on the specific channel that links individualistic societies and low growth volatility. We test whether investment volatility and consequently growth volatility are lower in individualistic societies.We construct a two-equation system of investment and income growth volatility, allowing various measures of individualism to influence growth volatility both directly and indirectly. We find that individualism significantly directly and indirectly influences growth volatility negatively.

On Tail Index Estimation for Dependent, Heterogeneous Data (2010) Econometric Theory 26, 1398-1436.

Paper PDF (working paper with omitted proofs is here)

Gauss: code (Hill estimator with kernel confidence bands)

In this paper we analyze the asymptotic properties of the popular distribution tail index estimator by B. Hill (1975) for possibly heavy-tailed, heterogenous, dependent processes. We prove the Hill estimator is weakly consistent for processes with extremes that form mixingale sequences, and asymptotically normal for processes with extremes that are near-epoch-dependent on the extremes of a mixing process. Our limit theory covers infinitely many ARFIMA and FIGARCH processes, stochastic recurrence equations, and bilinear processes. Moreover, we develop a simple non-parametric kernel estimator of the asymptotic variance of the Hill estimator, and prove consistency for extremal-NED processes.

On Functional Central Limit Theorems for Dependent, Heterogeneous Arrays with Applications to Tail Index and Tail Dependence Estimation (2009) Journal of Statistical Planning and Inference: 139, 2091-2110.

Paper: PDF

Appendix: PDF

We establish invariance principles for a large class of dependent, heterogeneous arrays. The theory equally covers conventional non-tail arrays, and inherently degenerate tail arrays popularly encountered in the extreme value literature including sample means and covariances of extreme events and exceedances. For tail arrays we trim dependence assumptions down to a minimum by constructing extremal versions of mixing and Near-Epoch-Dependence properties, covering mixing, ARFIMA, FIGARCH, stochastic volatility, bilinear, random coefficient autoregressive, nonlinear distributed lag and Extremal Threshold processes, and stochastic recurrence equations.

Of practical importance our theory can be used to characterize the functional limit distributions of B. Hill's (1975) tail index estimator, the tail quantile process, and multivariate extremal dependence measures under substantially general conditions.

Heavy Tails and Mixed Distribution Hypothesis (2008) Encyclopedia of Quantitative Finance, Wiley 2009 : forthcoming.

Paper: PDF

We outline the Mixed Distribution Hypothesis as a means to explain heavy tails in financial time series. We discuss the hypothesis' historical roots, and fully present the most popular, and original, form of the hypothesis and its implications for modeling asset returns. Original contributions and modern extensions are cited.

Consistent and Non-Degenerate Model Specification Tests Against Smooth Transition and Neural Networks Alternatives (2008) Annales D’Economie et de Statistique 90, 145-179.

Paper: PDF

Appendix PDF

We develop a regression model specification test that directs maximal power toward smooth transition functional forms, and is consistent against any deviation from the null specification. We provide new details regarding whether consistent parametric tests of functional form are asymptotically degenerate: a test of linear autoregression against STAR alternatives is never degenerate. Moreover, a test of Exponential STAR has power attributes entirely associated with the choice of threshold. In a simulation experiment in which all parameters are randomly selected the proposed test has power nearly identical to a most-powerful test for true STAR, neural network and SETAR processes, and dominates popular tests. We apply the test to U.S. output, money, prices and interest rates.

Efficient Tests of Long-Run Causation in Trivariate VAR Processes with a Rolling Window Study of the Money-Income Relationship (2007) Journal of Applied Econometrics 22, 747-765.

Paper: PDF Appendix: PDF

Gauss: code

Data

This paper develops a simple sequential multiple horizon non-causation test strategy for trivariate VAR models (with one auxiliary variable). We apply the test strategy to a rolling window study of money supply and real income, with the price of oil, the unemployment rate and the spread between the Treasury bill and commercial paper rates as auxiliary processes. Ours is the first study to control simultaneously for common stochastic trends, sensitivity of test statistics to the chosen sample period, null hypothesis over-rejection, sequential test size bounds, and the possibility of causal delays. Evidence suggests highly significant direct or indirect causality from M1 to real income, in particular through the unemployment rate and M2 once we control for cointegration.

Strong Orthogonal Decompositions and Nonlinear Impulse Response Functions for Infinite Variance Processes (2006) Canadian Journal of Statistics 34, 453-473.

Paper: PDF (working paper with omitted proofs)

In this paper we prove Wold-type decompositions with strong-orthogonal prediction innovations exist in smooth, reflexive Banach spaces of discrete time processes if and only if the projection operator generating the innovations satisfies the property of iterations. Our theory includes as special cases all previous Wold-type decompositions of discrete time processes; completely characterizes when nonlinear heavy-tailed processes obtain a strong-orthogonal moving average representation; and easily promotes a theory of nonlinear impulse response functions for infinite variance processes. We exemplify our theory by developing a nonlinear impulse response function for smooth transition threshold processes, we discuss how to test decomposition innovations for strong orthogonality and whether the proposed model represents the best predictor, and we apply the methodology to currency exchange rates.

Royal African Company Share Prices during the South Sea Bubble (2002, with Ann Carlos and Nathalie Moyen), Explorations in Economic History 39, 61-87.

Paper: PDF

Price bubbles provide a unique opportunity to test whether investors act rationally and have sufficient knowledge of the economic environment in which they trade. We focus our attention on the 1720 South Sea bubble episode as experienced by a company not involved in governmental debt financing—the Royal African Company. Following the example of the South Sea Company, the Royal African Company lent its funds to equityholders at a preferential rate. Recognizing this benefit along with the announced dividends explains a large portion of the bubble. Furthermore, the unexplained residual does not behave like an exploding bubble, casting doubt that speculative excess motivated market participants in 1720. Our findings are indeed consistent with investor rationality, and the unexplained residual suggests that we are missing information that was available to the British financial market in 1720.