Working Papers

CEMFI publishes two series of research papers: Working Papers and Master Theses. The Working Papers series contains research work from full-time professors and PhD students.

  • [1501]

    Javier Mencía, Enrique Sentana

    Volatility-related exchange traded assets: An econometric investigation


    We compare Semi-Nonparametric expansions of the Gamma distribution with alternative Laguerre expansions, showing that they substantially widen the range of feasible moments of positive random variables. Then, we combine those expansions with a component version of the Multiplicative Error Model to capture the mean reversion typical in positive but stationary financial time series. Finally, we carry out an empirical application in which we compare various asset allocation strategies for Exchange Traded Notes tracking VIX futures indices, which are increasingly popular but risky financial instruments. We show the superior performance of the strategies based on our econometric model.

  • [1502]

    Gabriele Fiorentini, Alessandro Galesi, Enrique Sentana

    Fast ML estimation of dynamic bifactor models: An application to European inflation


    We generalise the spectral EM algorithm for dynamic factor models in Fiorentini, Galesi and Sentana (2014) to bifactor models with pervasive global factors complemented by regional ones. We exploit the sparsity of the loading matrices so that researchers can estimate those models by maximum likelihood with many series from multiple regions. We also derive convenient expressions for the spectral scores and information matrix, which allows us to switch to the scoring algorithm near the optimum. We explore the ability of a model with a global factor and three regional ones to capture inflation dynamics across 25 European countries over 1999-2014.

  • [1503]

    Samuel Bentolila, Ildefonso Mendez, Francisco Maeso

    Leaving home with a partner


    Leaving the parental home is often a decision made together by two people. In this paper we present a theoretical model analyzing moving out as a joint decision and then test its implications using a new dataset of university graduates collected in the southern Spanish region of Murcia in 2004-2006, which includes information on partners and their parents. In equilibrium we find some evidence of the importance of assortative mating in moving out. Studying partnership, work, and moving out decisions simultaneously we obtain that the latter depend positively on own human capital and they are affected differently by maternal and paternal characteristics and with different effects on men and women.

  • [1504]

    Dante Amengual, Enrique Sentana

    Is a normal copula the right copula?


    We derive computationally simple and intuitive expressions for score tests of Gaussian copulas against Generalised Hyperbolic alternatives, including symmetric and asymmetric Student t, and Hermite polynomial expansions. We decompose our tests into third and fourth moment components, and obtain one-sided Likelihood Ratio analogues, whose asymptotic distribution we provide. We conduct Monte Carlo exercises to assess the finite sample properties of asymptotic and bootstrap versions of our tests. In an empirical application to CRSP stocks, we find that short-term reversals and momentum effects are better captured by non-Gaussian copulas. We estimate their parameters by indirect inference, and devise successful trading strategies.

  • [1505]

    Manuel Arellano, Stéphane Bonhomme

    Nonlinear panel data estimation via quantile regression


    We introduce a class of quantile regression estimators for short panels. Our framework covers static and dynamic autoregressive models, models with general predetermined regressors, and models with multiple individual effects. We use quantile regression as a flexible tool to model the relationships between outcomes, covariates, and heterogeneity. We develop an iterative simulation-based approach for estimation, which exploits the computational simplicity of ordinary quantile regression in each iteration step. Finally, an application to measure the effect of smoking during pregnancy on children’s birthweights completes the paper.

  • [1506]

    Manuel Arellano, Richard Blundell, Stéphane Bonhomme

    Earnings and consumption dynamics: A nonlinear panel data framework


    We develop a new quantile-based panel data framework to study the nature of income persistence and the transmission of income shocks to consumption. Log-earnings are the sum of a general Markovian persistent component and a transitory innovation. The persistence of past shocks to earnings is allowed to vary according to the size and sign of the current shock. Consumption is modeled as an age-dependent nonlinear function of assets and the two earnings components. We establish the nonparametric identification of the nonlinear earnings process and the consumption policy rule. Exploiting the enhanced consumption and asset data in recent waves of the Panel Study of Income Dynamics, we find nonlinear persistence and conditional skewness to be key features of the earnings process. We show that the impact of earnings shocks varies substantially across earnings histories, and that this nonlinearity drives heterogeneous consumption responses. The transmission of shocks is found to vary systematically with assets.

  • [1507]

    David Martinez-Miera, Rafael Repullo

    Search for yield


    We present a model of the connection between real interest rates, credit spreads, and the structure and the risk of the banking system. Banks intermediate between entrepreneurs and investors, and choose the monitoring intensity on entrepreneurs. projects. We characterize the equilibrium for a fixed aggregate supply of savings, showing that safer entrepreneurs will be funded by nonmonitoring (shadow) Banks and riskier entrepreneurs by monitoring (traditional) banks. We also show that a savings glut reduces interest rates and spreads, increases the relative size of the shadow banking system and the probability of failure of the traditional banks. The model provides a framework for understanding the emergence of endogenous boom and bust cycles, as well as the procyclical nature of the shadow banking system, the existence of countercyclical risk premia, and the low levels of interest rates and spreads leading to the buildup of risks during booms.


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