Bank of Lithuania

This paper analyses overconfident strategic traders whose private information involves correlated errors. The analysis on the effects of two types of overconfidence-overconfidence in own signals and underconfidence in others' signals-provides richer implications than our typical understanding of overconfidence as follows. First, trading volume decreases (increases) with underconfidence in others' signals (overconfidence in own signals). Second, whereas overconfidence in own signals can explain large trading volume more easily, underconfidence in others' signals may cause trading volume and price informativeness to decrease with the number of traders. Third, overconfidence in own signals can lead to equilibrium multiplicity in information acquisition.

We show that households’ private information on future income can be identified from the correlation between consumption growth and future income growth conditional on current income growth. Employing PSID data, we find that this conditional correlation is positive and significant. We use this evidence to structurally estimate a standard incomplete markets model and discover that US households possess enough advance information to reduce their income forecast errors by 15%. This significantly affects the measurement of consumption insurance. With advance information, 25% more income shocks pass through to consumption on average, and more than twice as much for the 5% asset poorest. Without advance information, the marginal benefits of public insurance are underestimated by an order of magnitude for some of the poorest wealth quantiles.

This paper examined the adjustments to trade shocks by analysing the impact of Covid-19 restrictions on imports and exports. The study utilises firm- and partner country-level foreign trade data from Lithuania, Latvia and Estonia at a monthly frequency from January 2019 to December 2020. The analysis focuses on short-term adjustments during the first wave of the pandemic. Our findings reveal that (1) adjustments to Covid-19 restrictions predominantly occurred through the intensive margin, which accounted for 70%-90% of the overall adjustment. In contrast, the extensive margin-representing trade with specific partner countries or products-contributed a smaller proportion. Similarly, adjustments in trade quantities played a more significant role than price changes. (2) Analysis by product category indicates that differentiated products, which are more difficult to substitute, were more susceptible to trade shocks. (3) Smaller and less productive firms were more likely to adjust through the extensive margin compared to larger and more productive firms.

Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning, pp. 889-915 (2020) No AccessChapter 23: ASEAN Economic Community: Analysis Based on Fractional Integration and CointegrationLuis Alberiko Gil-Alana and Hector CarcelLuis Alberiko Gil-AlanaUniversity of Navarra, Spain and Hector CarcelBank of Lithuania, Lithuaniahttps://doi.org/10.1142/9789811202391_0023Cited by:0 PreviousNext AboutSectionsPDF/EPUB ToolsAdd to favoritesDownload CitationsTrack CitationsRecommend to Library ShareShare onFacebookTwitterLinked InRedditEmail Abstract: This paper deals with the analysis of the trade balances in the 10 countries that form the ASEAN Economic Community (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, The Philippines, Singapore, Thailand and Vietnam). For this purpose, we use standard unit roots along with fractional integration and cointegration methods. The latter techniques are more general than those based on integer differentiation and allow for a greater degree of flexibility in the dynamic specification of the series. The results based on unit roots were very inconclusive about the order of integration of the series. In fact, using fractional integration, the two hypotheses of stationarity I(0) and non-stationarity I(1) were decisively rejected in all cases, with orders of integration ranging between 0 and 1 and thus displaying long memory and mean reverting behavior. Focusing on the bivariate long-run equilibrium relationships between the countries, a necessary condition is that the two series must display the same degree of integration. This condition was fulfilled in a large number of cases. We observe some relations where cointegration could be satisfied, mainly involving countries such as Cambodia, Indonesia, Malaysia and the Philippines. Keywords: Fractional integrationLong memoryBalance of tradeASEAN FiguresReferencesRelatedDetails Handbook of Financial Econometrics, Mathematics, Statistics, and Machine LearningMetrics History KeywordsFractional integrationLong memoryBalance of tradeASEANPDF download

We examine how fluctuations in the house price-rent spread, which reflect shifts in expectations about future house price growth, impact household consumption while considering the role of credit constraints. A rise in the spread, indicating higher expected future house prices relative to rents, boosts household consumption and eases credit constraints. By incorporating a housing spread shock into a model of household decision-making with borrowing frictions, we analyze data from 28 OECD countries over 50 years. Our findings demonstrate that shocks to the housing spread provide a sustained stimulus to household consumption by enhancing expected future wealth and reducing borrowing frictions. In contrast, credit shocks lead to immediate but short-lived 'boom-bust' cycles. The combined effects of housing spread and credit shocks reveal significant asymmetries, particularly during crises. These results highlight the need for policies that jointly address credit conditions and household expectations to effectively stabilize the economy.