Knowledge that Transforms

Benjamin M. Friedman, V. Vance Roley, Investors' Portfolio Behavior under Alternative Models of Long-Term Interest Rate Expectations: Unitary, Rational, or Autoregressive, Econometrica, Vol. 47, No. 6 (Nov., 1979), pp. 1475-1497

[This paper investigates the degree to which a "leading" time series improves the prediction of coincident series. The theory of covariance-stationary processes is used as the theoretical framework and empirical tests dealing with the predictive ability of "leading" series are supplied.]

[The Arrow-Debreu model is extended to include a sequential market model with financial markets. This is done by dropping the contingent contracts from the Arrow-Debreu model, leaving only a sequence of spot markets for commodities. The resulting market structure is inefficient. Efficiency is restored with a sequence of stock markets and option markets. In addition, consumers are shown to be unanimous in wanting each firm to maximize the price of its common stock.]

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A simple test for heteroscedastic disturbances in a linear regression model is developed using the framework of the Lagrangian multiplier test. For a wide range of heteroscedastic and random coefficient specifications, the criterion is given as a readily computed function of the OLS residuals. Some finite sample evidence is presented to supplement the general asymptotic properties of Lagrangian multiplier tests.