This research from economics professor Alex Maynard is funded by a SSHRC Insight Grant.
SSHRC Spotlight: Enhancing the economist’s toolbox
What does this research focus on?
My research focuses on the analysis of financial and macroeconomic time series data, which are data that are collected across time. For example, the daily return on the TSX and quarterly Canadian GDP are both time series data. I am interested in both the development of the econometric methodologies – statistical methods used to analyze economic data – and the economic and financial problems to which they can be applied.
What challenge are you addressing with this research?
Identifying long-run relationships between economic variables is important in economics. Variables that are related and move together over a long period of time share a common trend. A limitation we see in our standard definition of a long-run equilibrium, which is the stable relationship between the different variables, is that it only accounts for temporary deviations; however, in practice, the deviation can be very long lived but so small that it’s barely noticeable. We want to expand our statistical definition of a long-run relationship to include this kind of deviation.
What is your research approach?
While the basic idea of broadening this definition is simple, the challenge lies in quantifying what we mean by “small deviation” and then developing statistical models that economists can use to put this new definition into practice.
What impact do you hope this research will have?
We are constantly trying to improve the tools economists use to analyze economic variables. The work economists do and the subject matter they analyze affects every person. While you won’t find definitions and models discussed in media reports, they form the foundation of the analyses done on economic data.
One place where we see these small, but long-lasting deviations is in the foreign exchange market when analyzing the long-run relationship between the spot rate – the current exchange rate or price of foreign currency today – and the forward rate – the price the bank sets today for buying foreign currency in the future. The deviations between them, known as the forward premium is very small but it can last for a long time, arguably violating the standard statistical definition of a long-run equilibrium, yet fitting easily into our expanded definition. This is just one example of a small, but long-lasting, equilibrium deviation, so ensuring that we have an inclusive definition and tools that can fully analyze these variables is an important contribution to economic theory and practice.
One of the empirical examples for our research involves the long-run relationship between stock valuations and demographic ratios of young, middle-age, and old-age populations. One thing that is particularly interesting about this relationship is that one of the variables – the demographics – is partially predictable far into the future. We are exploring how our methods can be used and extended to better project the influence of population aging on asset valuations.