Interest-Rate Arbitrage in Currency Baskets: Forecasting Weights and Measuring Risk |
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Authors: | Peter F Christoffersen Lorenzo Giorgianni |
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Institution: | 1. Faculty of Management , McGill University , Montreal , PQ , H3A 1G5 , Canada E-mail: christop@managementmcgill.ca;2. Asia and Pacific Department , International Monetary Fund , Washington , DC , 20431 E-mail: lgiorgianni@imf.org |
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Abstract: | This article addresses the problem of the bias of income and expenditure elasticities estimated on pseudopanel data caused by measurement error and unobserved heterogeneity. We gauge these biases empirically by comparing cross-sectional, pseudo-panel, and true panel data from both Polish and U.S. expenditure surveys. Our results suggest that unobserved heterogeneity imparts a downward bias to cross-section estimates of income elasticities of at-home food expenditures and an upward bias to estimates of income elasticities of away-from-home food expenditures. “Within” and first-difference estimators suffer less bias, but only if the effects of measurement error are accounted for with instrumental variables. |
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Keywords: | Time-varying parameters Cointegration Exchange rates |
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