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Article Citation - WoS: 2Citation - Scopus: 2Re-Examining the Real Interest Rate Parity Hypothesis Under Temporary Gradual Breaks and Nonlinear Convergence(Springer Heidelberg, 2023) Hasanov, Mubariz; Omay, Tolga; Abioglu, VasifThis paper investigates the real interest parity hypothesis by testing stationarity of real interest rate differentials for 52 countries with respect to the USA. Taking account of the fact that both asymmetric adjustment and gradual temporary breaks may better characterize the dynamics of real interest rate differentials, we propose a new test that allows for two temporary shifts together with asymmetric adjustment towards the equilibrium. We employ the newly proposed test procedure along with the conventional ADF test as well as nonlinear KSS and OSH tests to examine stationarity of real interest rate differentials. Among the main results, we find that the newly proposed unit root test procedure highly outperforms the existing unit root tests in terms of rejecting the null hypothesis of unit root. Our results suggest that real interest rate differentials can be characterized by a stationary process with asymmetric adjustment around gradual and temporary shifts of mean.Article Citation - WoS: 5Citation - Scopus: 5Historical Environmental Kuznets Curve for the Usa and the Uk: Cyclical Environmental Kuznets Curve Evidence(Springer, 2024) Omay, Tolga; Yildirim, Julide; Balta-Ozkan, NazmiyeHuman activities, including population growth, industrialization, and urbanization, have increasingly impacted the environment. Despite the benefits of economic growth to individual welfare, its negative environmental consequences necessitate a thorough assessment. The environmental Kuznets curve (EKC), positing an inverted U-shaped relationship between income per capita and environmental degradation, has been extensively studied since its proposition by Grossman and Krueger (Environmental impacts of a North American free trade agreement, National Bureau of Economic Research working paper, 1991. https://doi.org/10.3386/w3914). However, empirical evidence on the validity and shape of the EKC varies due to methodological differences, country-specific dynamics, and other factors. Examining the historical growth paths of individual countries helps explain the mixed findings in empirical EKC research. Long-term data allow researchers to determine the EKC's shape and turning points, aiding policymakers in devising appropriate environmental policies for each economic growth cycle within the framework of global environmental governance. Accordingly, this study contributes to the literature by taking a historical perspective on the EKC, focusing specifically on the United States and the United Kingdom. Drawing on data spanning from 1850, we employ advanced econometric techniques, including fractional frequency flexible Fourier form Dickey-Fuller-type unit root tests and structural breaks unit root tests, to overcome limitations of traditional linearized EKC estimations. Moreover, the classical polynomial regression approach is employed to model the long-term cycles based on the scatterplot inspection of per capita carbon dioxide (CO2) and per capita GNP series. Contrary to conventional expectations, our empirical findings do not support the existence of a clear inverted U-shaped EKC relationship between CO2 emissions and economic growth for either country. Instead, our analysis reveals the presence of multiple regimes, indicating a cyclical pattern where economic growth affects environmental quality with varying severity over time. Furthermore, we demonstrate proper modeling techniques for the EKC, highlighting the importance of identification and misspecification tests. Our study identifies cyclical EKC patterns for both the UK and the USA, with the UK exhibiting two cycles and the USA exhibiting three, shaped by varying economic, social, and technological contexts. By revealing the nuances of the economic growth-environmental degradation nexus for these early developer countries, our study provides valuable insights for policymakers seeking to devise evidence-based and environmentally sustainable growth policies within the framework of global environmental governance. These findings underscore the importance of considering historical context and structural changes when analyzing the EKC, providing valuable insights for policymakers aiming to design adaptive and sustainable economic growth strategies.Article Citation - WoS: 13Citation - Scopus: 15The Nexus Between the Oil Price and Its Volatility Risk in a Stochastic Volatility in the Mean Model With Time-Varying Parameters(Elsevier Sci Ltd, 2019) Balcilar, Mehmet; Ozdemir, Zeynel AbidinHigh price volatility in oil markets creates uncertainty and risk, and increased risk premium may feed back into the prices. This study investigates the dynamic nexus between oil price and its volatility for oil spot and futures markets by means of stochastic volatility in the mean model with time-varying parameters in the conditional mean. The study finds substantial time-variation about the impact of oil price volatility on oil price return in both spot and 1-month to 10-month futures markets. The oil price return volatility has a positive impact on oil price return series over the sample period form the mid-1980s to 2017s except for four very short time periods, which correspond to collapse of OPEC in 1986, invasion of Kuwait in 1990/91, Asian crisis in 1997/2000 and the Global Financial Crisis in 2008. While the oil price return volatility has a positive impact on oil prices, it has limited negative impact on oil prices during periods corresponding to these historical events. Moreover, the findings from this study point out to the existence of a negative and small effect of the lagged oil return series on its volatility for both the spot and futures markets.Article Citation - WoS: 1Citation - Scopus: 1A Unit Root Test With Markov Switching Deterministic Components: A Special Emphasis on Nonlinear Optimization Algorithms(Springer, 2023) Omay, Tolga; Corakci, AysegulIn this study, we investigate the performance of different optimization algorithms in estimating the Markov switching (MS) deterministic components of the traditional ADF test. For this purpose, we consider Broyden, Fletcher, Goldfarb, and Shanno (BFGS), Berndt, Hall, Hall, Hausman (BHHH), Simplex, Genetic, and Expectation-Maximization (EM) algorithms. The simulation studies show that the Simplex method has significant advantages over the other commonly used hill-climbing methods and EM. It gives unbiased estimates of the MS deterministic components of the ADF unit root test and delivers good size and power properties. When Hamilton's (Econometrica 57:357-384, 1989) MS model is re-evaluated in conjunction with the alternative algorithms, we furthermore show that Simplex converges to the global optima in stationary MS models with remarkably high precision and even when convergence criterion is raised, or initial values are altered. These advantages of the Simplex routine in MS models allow us to contribute to the current literature. First, we produce the exact critical values of the generalized ADF unit root test with MS breaks in trends. Second, we derive the asymptotic distribution of this test and provide its invariance feature.Article Citation - WoS: 19Citation - Scopus: 12Using Double Frequency in Fourier Dickey-Fuller Unit Root Test(Springer, 2022) Cai, Yifei; Omay, TolgaWe propose a double frequency fourier Dickey-Fuller (DF) unit root test. The asymptotic theory of the newly proposed test is first presented in this study. We conduct a series of simulations which suggest the proposed test statistic has correct size performance and gains more power when breaks are located at the beginning and end of the sample and in smooth type. In empirical analysis, we utilize the new test to examine the unit root hypothesis of relative commodity prices measured by Harvey et al. (Rev Econ Stat 92(2):367-377, 2010). The empirical results show that more relative commodity prices are stationary around a deterministic trend generated from double frequency Fourier function.
