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TIME SERIES AND PANEL DATA ECONOMETRICS

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Time Series and

Panel Data Econometrics

M. HASHEM PESARAN

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3
Great Clarendon Street, Oxford, OX2 6DP,
United Kingdom
Oxford University Press is a department of the University of Oxford.
It furthers the University’s objective of excellence in research, scholarship,
and education by publishing worldwide. Oxford is a registered trade mark of
Oxford University Press in the UK and in certain other countries
© M. Hashem Pesaran 2015
The moral rights of the author have been asserted
First Edition published in 2015
Impression: 1
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted, in any form or by any means, without the
prior permission in writing of Oxford University Press, or as expressly permitted
by law, by licence or under terms agreed with the appropriate reprographics
rights organization. Enquiries concerning reproduction outside the scope of the
above should be sent to the Rights Department, Oxford University Press, at the
address above
You must not circulate this work in any other form
and you must impose this same condition on any acquirer
Published in the United States of America by Oxford University Press
198 Madison Avenue, New York, NY 10016, United States of America
British Library Cataloguing in Publication Data
Data available
Library of Congress Control Number: 2015936093
ISBN 978–0–19–873691–2 (HB)
978–0–19–875998–0 (PB)
Printed and bound by
CPI Group (UK) Ltd, Croydon, CR0 4YY
Links to third party websites are provided by Oxford in good faith and
for information only. Oxford disclaims any responsibility for the materials
contained in any third party website referenced in this work.

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To my wife and in memory of my parents.

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Preface

T his book is concerned with recent developments in time series and panel data techniques
for the analysis of macroeconomic and financial data. It provides a rigorous, nevertheless
user-friendly, account of the time series techniques dealing with univariate and multivariate time
series models, as well as panel data models. An overview of econometrics as a subject is provided
in Pesaran (1987a) and updated in Geweke, Horowitz, and Pesaran (2008).
It is distinct from other time series texts in the sense that it also covers panel data models
and attempts at a more coherent integration of time series, multivariate analysis, and panel data
models. It builds on the author’s extensive research in the areas of time series and panel data
analysis and covers a wide variety of topics in one volume. Different parts of the book can be
used as teaching material for a variety of courses in econometrics. It can also be used as a reference
manual.
It begins with an overview of basic econometric and statistical techniques and provides an
account of stochastic processes, univariate and multivariate time series, tests for unit roots,
cointegration, impulse response analysis, autoregressive conditional heteroskedasticity mod-
els, simultaneous equation models, vector autoregressions, causality, forecasting, multivariate
volatility models, panel data models, aggregation and global vector autoregressive models
(GVAR). The techniques are illustrated using Microfit 5 (Pesaran and Pesaran (2009)) with
applications to real output, inflation, interest rates, exchange rates, and stock prices.
The book assumes that the reader has done an introductory econometrics course. It begins
with an overview of the basic regression model, which is intended to be accessible to advanced
undergraduates, and then deals with more advanced topics which are more demanding and
suited to graduate students and other interested scholars.
The book is organized into six parts:
Part I: Chapters 1 to 7 present the classical linear regression model, describe estimation and
statistical inference, and discuss the violation of the assumptions underlying the classical linear
regression model. This part also includes an introduction to dynamic economic modelling, and
ends with a chapter on predictability of asset returns.
Part II: Chapters 8 to 11 deal with asymptotic theory and present the maximum likelihood
and generalized method of moments estimation frameworks.
Part III: Chapters 12 and 13 provide an introduction to stochastic processes and spectral den-
sity analysis.
Part IV: Chapters 14 to 18 focus on univariate time series models and cover stationary ARMA
models, unit root processes, trend and cycle decomposition, forecasting and univariate volatility
models.
Part V: Chapters 19 to 25 consider a variety of reduced form and structural multivariate mod-
els, rational expectations models, as well as VARs, vector error corrections, cointegrating VARs,
VARX models, impulse response analysis, and multivariate volatility models.

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viii Preface

Part VI: Chapters 26 to 33 considers panel data models both when the time dimension (T)
of the panels is short, as well as when panels with N (the cross-section dimension) and T are
large. These chapters cover a wide range of panel data models, starting with static panels with
homogenous slopes and graduating to dynamic panels with slope heterogeneity, error cross-
section dependence, unit roots, and cointegration.
There are also chapters dealing with the aggregation of large dynamic panels and the theory
and practice of GVAR modelling. This part of the book focuses more on large N and T panels
which are less covered in other texts, and draws heavily on my research in this area over the past
20 years starting with Pesaran and Smith (1995).
Appendices A and B present background material on matrix algebra, probability and distribu-
tion theory, and Appendix C provides an overview of Bayesian analysis.
This book has evolved over many years of teaching and research and brings together in one
place a diverse set of research areas that have interested me. It is hoped that it will also be of
interest to others. I have used some of the chapters in my teaching of postgraduate students at
Cambridge University, University of Southern California, UCLA, and University of Pennsylva-
nia. Undergraduate students at Cambridge University have also been exposed to some of the
introductory material in Part I of the book. It is impossible to name all those who have helped
me with the preparation of this volume. But I would like particularly to name two of my Cam-
bridge Ph.D. students, Alexander Chudik and Elisa Tosetti, for their extensive help, particularly
with the material in Part VI of the book.
The book draws heavily from my published and unpublished research. In particular:
Chapter 7 is based on Pesaran (2010).
Chapter 25 draws from Pesaran and Pesaran (2010).
Chapter 32 is based on Pesaran (2003) and Pesaran and Chudik (2014) where additional
technical details and proofs are provided.
Chapter 31 is based on Breitung and Pesaran (2008) and provides some updates and extensions.
Chapter 33 is based on Chudik and Pesaran (2015b).
I would also like to acknowledge all my coauthors whose work has been reviewed in this vol-
ume. In particular, I would like to acknowledge Ron Smith, Bahram Pesaran, Allan Timmer-
mann, Kevin Lee, Yongcheol Shin, Vanessa Smith, Cheng Hsiao, Michael Binder, Richard Smith,
Alexander Chudik, Takashi Yamagata, Tony Garratt, Til Schermann, Filippo di Mauro, Stéphane
Dées, Alessandro Rebucci, Adrian Pagan, Aman Ullah, and Martin Weale. It goes without saying
that none of them is responsible for the material presented in this volume.
Finally, I would like to acknowledge the helpful and constructive comments and suggestions
from two anonymous referees which provided me with further impetus to extend the coverage
of the material included in the book and to improve its exposition over the past six months. Ron
Smith has also provided me with detailed comments and suggestions over a number of successive
drafts. I am indebted to him for helping me to see the wood from the trees over the many years
that we have collaborated with each other.
Hashem Pesaran
Cambridge and Los Angeles
January 2015

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Contents

List of Figures xxvii

List of Tables xxix

Part I Introduction to Econometrics 1

1 Relationship Between Two Variables 3
1.1 Introduction 3
1.2 The curve fitting approach 3
1.3 The method of ordinary least squares 4
1.4 Correlation coefficients between Y and X 5
1.4.1 Pearson correlation coefficient 6
1.4.2 Rank correlation coefficients 6
1.4.3 Relationships between Pearson, Spearman, and Kendall correlation coefficients 8
1.5 Decomposition of the variance of Y 8
1.6 Linear statistical models 10
1.7 Method of moments applied to bivariate regressions 12
1.8 The likelihood approach for the bivariate
regression model 13
1.9 Properties of the OLS estimators 14
1.9.1 Estimation of σ 2 18
1.10 The prediction problem 19
1.10.1 Prediction errors and their variance 20
1.10.2 Ex ante predictions 21
1.11 Exercises 22
2 Multiple Regression 24
2.1 Introduction 24
2.2 The classical normal linear regression model 24
2.3 The method of ordinary least squares in multiple regression 27
2.4 The maximum likelihood approach 28
2.5 Properties of OLS residuals 30
2.6 Covariance matrix of β̂ 31
2.7 The Gauss–Markov theorem 34
2.8 Mean square error of an estimator and the bias-variance trade-off 36
2.9 Distribution of the OLS estimator 37
2.10 The multiple correlation coefficient 39

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2.11 Partitioned regression 41

2.12 How to interpret multiple regression coefficients 43
2.13 Implications of misspecification for the OLS estimators 44
2.13.1 The omitted variable problem 45
2.13.2 The inclusion of irrelevant regressors 46
2.14 Linear regressions that are nonlinear in variables 47
2.15 Further reading 48
2.16 Exercises 48
3 Hypothesis Testing in Regression Models 51
3.1 Introduction 51
3.2 Statistical hypothesis and statistical testing 51
3.2.1 Hypothesis testing 51
3.2.2 Types of error and the size of the test 52
3.3 Hypothesis testing in simple regression models 53
3.4 Relationship between testing β = 0, and testing the significance of
dependence between Y and X 55
3.5 Hypothesis testing in multiple regression models 58
3.5.1 Confidence intervals 59
3.6 Testing linear restrictions on regression coefficients 59
3.7 Joint tests of linear restrictions 62
3.8 Testing general linear restrictions 64
3.8.1 Power of the F-test 65
3.9 Relationship between the F-test and the coefficient of multiple correlation 65
3.10 Joint confidence region 66
3.11 The multicollinearity problem 67
3.12 Multicollinearity and the prediction problem 72
3.13 Implications of misspecification of the regression model on hypothesis testing 74
3.14 Jarque–Bera’s test of the normality of regression residuals 75
3.15 Predictive failure test 76
3.16 A test of the stability of the regression coefficients: the Chow test 77
3.17 Non-parametric estimation of the density function 77
3.18 Further reading 79
3.19 Exercises 79
4 Heteroskedasticity 83
4.1 Introduction 83
4.2 Regression models with heteroskedastic disturbances 83
4.3 Efficient estimation of the regression coefficients in the presence of
heteroskedasticity 86
4.4 General models of heteroskedasticity 86
4.5 Diagnostic checks and tests of homoskedasticity 89
4.5.1 Graphical methods 89
4.5.2 The Goldfeld–Quandt test 90
4.5.3 Parametric tests of homoskedasticity 90
4.6 Further reading 92
4.7 Exercises 92

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5 Autocorrelated Disturbances 94
5.1 Introduction 94
5.2 Regression models with non-spherical disturbances 94
5.3 Consequences of residual serial correlation 95
5.4 Efficient estimation by generalized least squares 95
5.4.1 Feasible generalized least squares 97
5.5 Regression model with autocorrelated disturbances 98
5.5.1 Estimation 99
5.5.2 Higher-order error processes 100
5.5.3 The AR(1) case 102
5.5.4 The AR(2) case 102
5.5.5 Covariance matrix of the exact ML estimators for the AR(1) and AR(2) disturbances 103
5.5.6 Adjusted residuals, R2 , R̄2 , and other statistics 103
5.5.7 Log-likelihood ratio statistics for tests of residual serial correlation 105
5.6 Cochrane–Orcutt iterative method 106
5.6.1 Covariance matrix of the C-O estimators 107
5.7 ML/AR estimators by the Gauss–Newton method 110
5.7.1 AR(p) error process with zero restrictions 111
5.8 Testing for serial correlation 111
5.8.1 Lagrange multiplier test of residual serial correlation 112
5.9 Newey–West robust variance estimator 113
5.10 Robust hypothesis testing in models with serially correlated/heteroskedastic errors 115
5.11 Further reading 118
5.12 Exercises 118
6 Introduction to Dynamic Economic Modelling 120
6.1 Introduction 120
6.2 Distributed lag models 120
6.2.1 Estimation of ARDL models 122
6.3 Partial adjustment model 123
6.4 Error-correction models 124
6.5 Long-run and short-run effects 125
6.6 Concept of mean lag and its calculation 127
6.7 Models of adaptive expectations 128
6.8 Rational expectations models 129
6.8.1 Models containing expectations of exogenous variables 130
6.8.2 RE models with current expectations of endogenous variable 130
6.8.3 RE models with future expectations of the endogenous variable 131
6.9 Further reading 133
6.10 Exercises 134
7 Predictability of Asset Returns and the Efficient Market Hypothesis 136
7.1 Introduction 136
7.2 Prices and returns 137
7.2.1 Single period returns 137
7.2.2 Multi-period returns 138

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7.2.3 Overlapping returns 138

7.3 Statistical models of returns 139
7.3.1 Percentiles, critical values, and Value at Risk 140
7.3.2 Measures of departure from normality 141
7.4 Empirical evidence: statistical properties of returns 142
7.4.1 Other stylized facts about asset returns 144
7.4.2 Monthly stock market returns 145
7.5 Stock return regressions 147
7.6 Market efficiency and stock market predictability 147
7.6.1 Risk-neutral investors 148
7.6.2 Risk-averse investors 151
7.7 Return predictability and alternative versions of the efficient market hypothesis 153
7.7.1 Dynamic stochastic equilibrium formulations and the joint hypothesis problem 153
7.7.2 Information and processing costs and the EMH 154
7.8 Theoretical foundations of the EMH 155
7.9 Exploiting profitable opportunities in practice 159
7.10 New research directions and further reading 161
7.11 Exercises 161

Part II Statistical Theory 165

8 Asymptotic Theory 167
8.1 Introduction 167
8.2 Concepts of convergence of random variables 167
8.2.1 Convergence in probability 167
8.2.2 Convergence with probability 1 168
8.2.3 Convergence in s-th mean 169
8.3 Relationships among modes of convergence 170
8.4 Convergence in distribution 172
8.4.1 Slutsky’s convergence theorems 173
8.5 Stochastic orders Op (·) and op (·) 176
8.6 The law of large numbers 177
8.7 Central limit theorems 180
8.8 The case of dependent and heterogeneously distributed observations 182
8.8.1 Law of large numbers 182
8.8.2 Central limit theorems 185
8.9 Transformation of asymptotically normal statistics 186
8.10 Further reading 193
8.11 Exercises 193
9 Maximum Likelihood Estimation 195
9.1 Introduction 195
9.2 The likelihood function 195
9.3 Weak and strict exogeneity 197
9.4 Regularity conditions and some preliminary results 200
9.5 Asymptotic properties of ML estimators 203

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9.6 ML estimation for heterogeneous and the dependent observations 209

9.6.1 The log-likelihood function for dependent observations 209
9.6.2 Asymptotic properties of ML estimators 210
9.7 Likelihood-based tests 212
9.7.1 The likelihood ratio test procedure 213
9.7.2 The Lagrange multiplier test procedure 213
9.7.3 The Wald test procedure 214
9.8 Further reading 222
9.9 Exercises 222
10 Generalized Method of Moments 225
10.1 Introduction 225
10.2 Population moment conditions 226
10.3 Exactly q moment conditions 228
10.4 Excess of moment conditions 229
10.4.1 Consistency 230
10.4.2 Asymptotic normality 230
10.5 Optimal weighting matrix 232
10.6 Two-step and iterated GMM estimators 233
10.7 Misspecification test 234
10.8 The generalized instrumental variable estimator 235
10.8.1 Two-stage least squares 238
10.8.2 Generalized R2 for IV regressions 239
10.8.3 Sargan’s general misspecification test 239
10.8.4 Sargan’s test of residual serial correlation for IV regressions 240
10.9 Further reading 241
10.10 Exercises 241
11 Model Selection and Testing Non-Nested Hypotheses 242
11.1 Introduction 242
11.2 Formulation of econometric models 243
11.3 Pseudo-true values 244
11.3.1 Rival linear regression models 245
11.3.2 Probit versus logit models 246
11.4 Model selection versus hypothesis testing 247
11.5 Criteria for model selection 249
11.5.1 Akaike information criterion (AIC) 249
11.5.2 Schwarz Bayesian criterion (SBC) 249
11.5.3 Hannan–Quinn criterion (HQC) 250
11.5.4 Consistency properties of the different model selection criteria 250
11.6 Non-nested tests for linear regression models 250
11.6.1 The N-test 251
11.6.2 The NT-test 251
11.6.3 The W-test 252
11.6.4 The J-test 252
11.6.5 The JA-test 252
11.6.6 The Encompassing test 253

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11.7 Models with different transformations of the dependent variable 253

11.7.1 The PE test statistic 253
11.7.2 The Bera–McAleer test statistic 254
11.7.3 The double-length regression test statistic 254
11.7.4 Simulated Cox’s non-nested test statistics 256
11.7.5 Sargan and Vuong’s likelihood criteria 257
11.8 A Bayesian approach to model combination 259
11.9 Model selection by LASSO 261
11.10 Further reading 262
11.11 Exercises 262

Part III Stochastic Processes 265

12 Introduction to Stochastic Processes 267
12.1 Introduction 267
12.2 Stationary processes 267
12.3 Moving average processes 269
12.4 Autocovariance generating function 272
12.5 Classical decomposition of time series 274
12.6 Autoregressive moving average processes 275
12.6.1 Moving average processes 276
12.6.2 AR processes 277
12.7 Further reading 281
12.8 Exercises 281
13 Spectral Analysis 285
13.1 Introduction 285
13.2 Spectral representation theorem 285
13.3 Properties of the spectral density function 287
13.3.1 Relation between f (ω) and autocovariance generation function 289
13.4 Spectral density of distributed lag models 291
13.5 Further reading 292
13.6 Exercises 292

Part IV Univariate Time Series Models 295

14 Estimation of Stationary Time Series Processes 297
14.1 Introduction 297
14.2 Estimation of mean and autocovariances 297
14.2.1 Estimation of the mean 297
14.2.2 Estimation of autocovariances 299
14.3 Estimation of MA(1) processes 302
14.3.1 Method of moments 302
14.3.2 Maximum likelihood estimation of MA(1) processes 303
14.3.3 Estimation of regression equations with MA(q) error processes 306
14.4 Estimation of AR processes 308
14.4.1 Yule–Walker estimators 308

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14.4.2 Maximum likelihood estimation of AR(1) processes 309

14.4.3 Maximum likelihood estimation of AR(p) processes 312
14.5 Small sample bias-corrected estimators of φ 313
14.6 Inconsistency of the OLS estimator of dynamic models with serially
correlated errors 315
14.7 Estimation of mixed ARMA processes 317
14.8 Asymptotic distribution of the ML estimator 318
14.9 Estimation of the spectral density 318
14.10 Exercises 321
15 Unit Root Processes 324
15.1 Introduction 324
15.2 Difference stationary processes 324
15.3 Unit root and other related processes 326
15.3.1 Martingale process 326
15.3.2 Martingale difference process 327
15.3.3 Lp -mixingales 328
15.4 Trend-stationary versus first difference stationary processes 328
15.5 Variance ratio test 329
15.6 Dickey–Fuller unit root tests 332
15.6.1 Dickey–Fuller test for models without a drift 332
15.6.2 Dickey–Fuller test for models with a drift 334
15.6.3 Asymptotic distribution of the Dickey–Fuller statistic 335
15.6.4 Limiting distribution of the Dickey–Fuller statistic 338
15.6.5 Augmented Dickey–Fuller test 338
15.6.6 Computation of critical values of the DF statistics 339
15.7 Other unit root tests 339
15.7.1 Phillips–Perron test 339
15.7.2 ADF–GLS unit root test 341
15.7.3 The weighted symmetric tests of unit root 342
15.7.4 Max ADF unit root test 345
15.7.5 Testing for stationarity 345
15.8 Long memory processes 346
15.8.1 Spectral density of long memory processes 348
15.8.2 Fractionally integrated processes 348
15.8.3 Cross-sectional aggregation and long memory processes 349
15.9 Further reading 350
15.10 Exercises 351
16 Trend and Cycle Decomposition 358
16.1 Introduction 358
16.2 The Hodrick–Prescott filter 358
16.3 Band-pass filter 360
16.4 The structural time series approach 360
16.5 State space models and the Kalman filter 361
16.6 Trend-cycle decomposition of unit root processes 364
16.6.1 Beveridge–Nelson decomposition 364

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16.6.2 Watson decomposition 367

16.6.3 Stochastic trend representation 368
16.7 Further reading 369
16.8 Exercises 370
17 Introduction to Forecasting 373
17.1 Introduction 373
17.2 Losses associated with point forecasts and forecast optimality 373
17.2.1 Quadratic loss function 373
17.2.2 Asymmetric loss function 375
17.3 Probability event forecasts 376
17.3.1 Estimation of probability forecast densities 378
17.4 Conditional and unconditional forecasts 378
17.5 Multi-step ahead forecasting 379
17.6 Forecasting with ARMA models 380
17.6.1 Forecasting with AR processes 380
17.6.2 Forecasting with MA processes 381
17.7 Iterated and direct multi-step AR methods 382
17.8 Combining forecasts 385
17.9 Sources of forecast uncertainty 387
17.10 A decision-based forecast evaluation framework 390
17.10.1 Quadratic cost functions and the MSFE criteria 391
17.10.2 Negative exponential utility: a finance application 392
17.11 Test statistics of forecast accuracy based on loss differential 394
17.12 Directional forecast evaluation criteria 396
17.12.1 Pesaran–Timmermann test of market timing 397
17.12.2 Relationship of the PT statistic to the Kuipers score 398
17.12.3 A regression approach to the derivation of the PT test 398
17.12.4 A generalized PT test for serially dependent outcomes 399
17.13 Tests of predictability for multi-category variables 400
17.13.1 The case of serial dependence in outcomes 404
17.14 Evaluation of density forecasts 406
17.15 Further reading 408
17.16 Exercises 408
18 Measurement and Modelling of Volatility 411
18.1 Introduction 411
18.2 Realized volatility 412
18.3 Models of conditional variance 412
18.3.1 RiskMetricsTM ( JP Morgan) method 412
18.4 Econometric approaches 413
18.4.1 ARCH(1) and GARCH(1,1) specifications 414
18.4.2 Higher-order GARCH models 415
18.4.3 Exponential GARCH-in-mean model 416
18.4.4 Absolute GARCH-in-mean model 417
18.5 Testing for ARCH/GARCH effects 417
18.5.1 Testing for GARCH effects 418

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18.6 Stochastic volatility models 419

18.7 Risk-return relationships 419
18.8 Parameter variations and ARCH effects 420
18.9 Estimation of ARCH and ARCH-in-mean models 420
18.9.1 ML estimation with Gaussian errors 421
18.9.2 ML estimation with Student’s t-distributed errors 421
18.10 Forecasting with GARCH models 423
18.10.1 Point and interval forecasts 423
18.10.2 Probability forecasts 424
18.10.3 Forecasting volatility 424
18.11 Further reading 425
18.12 Exercises 426

Part V Multivariate Time Series Models 429

19 Multivariate Analysis 431
19.1 Introduction 431
19.2 Seemingly unrelated regression equations 431
19.2.1 Generalized least squares estimator 432
19.2.2 System estimation subject to linear restrictions 434
19.2.3 Maximum likelihood estimation of SURE models 436
19.2.4 Testing linear/nonlinear restrictions 438
19.2.5 LR statistic for testing whether  is diagonal 439
19.3 System of equations with endogenous variables 441
19.3.1 Two- and three-stage least squares 442
19.3.2 Iterated instrumental variables estimator 444
19.4 Principal components 446
19.5 Common factor models 448
19.5.1 PC and cross-section average estimators of factors 450
19.5.2 Determining the number of factors in a large m and large T framework 454
19.6 Canonical correlation analysis 458
19.7 Reduced rank regression 461
19.8 Further reading 464
19.9 Exercises 464
20 Multivariate Rational Expectations Models 467
20.1 Introduction 467
20.2 Rational expectations models with future expectations 467
20.2.1 Forward solution 468
20.2.2 Method of undetermined coefficients 470
20.3 Rational expectations models with forward and backward components 472
20.3.1 Quadratic determinantal equation method 473
20.4 Rational expectations models with feedbacks 476
20.5 The higher-order case 479
20.5.1 Retrieving the solution for yt 481
20.6 A ‘finite-horizon’ RE model 482
20.6.1 A backward recursive solution 482

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20.7 Other solution methods 483

20.7.1 Blanchard and Kahn method 483
20.7.2 King and Watson method 485
20.7.3 Sims method 486
20.7.4 Martingale difference method 488
20.8 Rational expectations DSGE models 489
20.8.1 A general framework 489
20.8.2 DSGE models without lags 490
20.8.3 DSGE models with lags 493
20.9 Identification of RE models: a general treatment 495
20.9.1 Calibration and identification 496
20.10 Maximum likelihood estimation of RE models 498
20.11 GMM estimation of RE models 500
20.12 Bayesian analysis of RE models 501
20.13 Concluding remarks 503
20.14 Further reading 504
20.15 Exercises 504
21 Vector Autoregressive Models 507
21.1 Introduction 507
21.2 Vector autoregressive models 507
21.2.1 Companion form of the VAR(p) model 508
21.2.2 Stationary conditions for VAR(p) 508
21.2.3 Unit root case 509
21.3 Estimation 509
21.4 Deterministic components 510
21.5 VAR order selection 512
21.6 Granger causality 513
21.6.1 Testing for block Granger non-causality 516
21.7 Forecasting with multivariate models 517
21.8 Multivariate spectral density 518
21.9 Further reading 520
21.10 Exercises 520
22 Cointegration Analysis 523
22.1 Introduction 523
22.2 Cointegration 523
22.3 Testing for cointegration: single equation approaches 525
22.3.1 Bounds testing approaches to the analysis of long-run relationships 526
22.3.2 Phillips–Hansen fully modified OLS estimator 527
22.4 Cointegrating VAR: multiple cointegrating relations 529
22.5 Identification of long-run effects 530
22.6 System estimation of cointegrating relations 532
22.7 Higher-order lags 535
22.8 Treatment of trends in cointegrating VAR models 536
22.9 Specification of the deterministics: five cases 538
22.10 Testing for cointegration in VAR models 540

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22.10.1 Maximum eigenvalue statistic 540

22.10.2 Trace statistic 541
22.10.3 The asymptotic distribution of the trace statistic 541
22.11 Long-run structural modelling 544
22.11.1 Identification of the cointegrating relations 544
22.11.2 Estimation of the cointegrating relations under general linear restrictions 545
22.11.3 Log-likelihood ratio statistics for tests of over-identifying restrictions on
the cointegrating relations 546
22.12 Small sample properties of test statistics 547
22.12.1 Parametric approach 548
22.12.2 Non-parametric approach 548
22.13 Estimation of the short-run parameters of the VEC model 549
22.14 Analysis of stability of the cointegrated system 550
22.15 Beveridge–Nelson decomposition in VARs 552
22.16 The trend-cycle decomposition of interest rates 556
22.17 Further reading 559
22.18 Exercises 559
23 VARX Modelling 563
23.1 Introduction 563
23.2 VAR models with weakly exogenous I(1) variables 563
23.2.1 Higher-order lags 566
23.3 Efficient estimation 567
23.3.1 The five cases 568
23.4 Testing weak exogeneity 569
23.5 Testing for cointegration in VARX models 569
23.5.1 Testing Hr against Hr+1 570
23.5.2 Testing Hr against Hmy 571
23.5.3 Testing Hr in the presence of I(0) weakly exogenous regressors 571
23.6 Identifying long-run relationships in a cointegrating VARX 572
23.7 Forecasting using VARX models 573
23.8 An empirical application: a long-run structural model for the UK 574
23.8.1 Estimation and testing of the model 577
23.9 Further Reading 580
23.10 Exercises 581
24 Impulse Response Analysis 584
24.1 Introduction 584
24.2 Impulse response analysis 584
24.3 Traditional impulse response functions 584
24.3.1 Multivariate systems 585
24.4 Orthogonalized impulse response function 586
24.4.1 A simple example 587
24.5 Generalized impulse response function (GIRF) 589
24.6 Identification of a single structural shock in a structural model 590
24.7 Forecast error variance decompositions 592
24.7.1 Orthogonalized forecast error variance decomposition 592
24.7.2 Generalized forecast error variance decomposition 593

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24.8 Impulse response analysis in VARX models 595

24.8.1 Impulse response analysis in cointegrating VARs 596
24.8.2 Persistence profiles for cointegrating relations 597
24.9 Empirical distribution of impulse response functions and persistence profiles 597
24.10 Identification of short-run effects in structural VAR models 598
24.11 Structural systems with permanent and transitory shocks 600
24.11.1 Structural VARs (SVAR) 600
24.11.2 Permanent and transitory structural shocks 601
24.12 Some applications 603
24.12.1 Blanchard and Quah (1989) model 603
24.12.2 Gali’s IS-LM model 603
24.13 Identification of monetary policy shocks 604
24.14 Further reading 605
24.15 Exercises 605
25 Modelling the Conditional Correlation of Asset Returns 609
25.1 Introduction 609
25.2 Exponentially weighted covariance estimation 610
25.2.1 One parameter exponential-weighted moving average 610
25.2.2 Two parameters exponential-weighted moving average 610
25.2.3 Mixed moving average (MMA(n,ν)) 611
25.2.4 Generalized exponential-weighted moving average (EWMA(n,p,q,ν)) 611
25.3 Dynamic conditional correlations model 612
25.4 Initialization, estimation, and evaluation samples 615
25.5 Maximum likelihood estimation of DCC model 615
25.5.1 ML estimation with Gaussian returns 616
25.5.2 ML estimation with Student’s t-distributed returns 616
25.6 Simple diagnostic tests of the DCC model 618
25.7 Forecasting volatilities and conditional correlations 620
25.8 An application: volatilities and conditional correlations in weekly returns 620
25.8.1 Devolatized returns and their properties 621
25.8.2 ML estimation 622
25.8.3 Asset-specific estimates 623
25.8.4 Post estimation evaluation of the t-DCC model 624
25.8.5 Recursive estimates and the VaR diagnostics 625
25.8.6 Changing volatilities and correlations 626
25.9 Further reading 629
25.10 Exercises 629

Part VI Panel Data Econometrics 631

26 Panel Data Models with Strictly Exogenous Regressors 633
26.1 Introduction 633
26.2 Linear panels with strictly exogenous regressors 634
26.3 Pooled OLS estimator 636
26.4 Fixed-effects specification 639
26.4.1 The relationship between FE and least squares dummy variable estimators 644
26.4.2 Derivation of the FE estimator as a maximum likelihood estimator 645

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26.5 Random effects specification 646

26.5.1 GLS estimator 646
26.5.2 Maximum likelihood estimation of the random effects model 649
26.6 Cross-sectional Regression: the between-group estimator of β 650
26.6.1 Relation between pooled OLS and RE estimators 652
26.6.2 Relation between FE, RE, and between (cross-sectional) estimators 652
26.6.3 Fixed-effects versus random effects 653
26.7 Estimation of the variance of pooled OLS, FE, and RE estimators of β robust
to heteroskedasticity and serial correlation 653
26.8 Models with time-specific effects 657
26.9 Testing for fixed-effects 659
26.9.1 Hausman’s misspecification test 659
26.10 Estimation of time-invariant effects 663
26.10.1 Case 1: zi is uncorrelated with ηi 663
26.10.2 Case 2: zi is correlated with ηi 665
26.11 Nonlinear unobserved effects panel data models 670
26.12 Unbalanced panels 671
26.13 Further reading 673
26.14 Exercises 674
27 Short T Dynamic Panel Data Models 676
27.1 Introduction 676
27.2 Dynamic panels with short T and large N 676
27.3 Bias of the FE and RE estimators 678
27.4 Instrumental variables and generalized method of moments 681
27.4.1 Anderson and Hsiao 681
27.4.2 Arellano and Bond 682
27.4.3 Ahn and Schmidt 685
27.4.4 Arellano and Bover: Models with time-invariant regressors 686
27.4.5 Blundell and Bond 688
27.4.6 Testing for overidentifying restrictions 691
27.5 Keane and Runkle method 691
27.6 Transformed likelihood approach 692
27.7 Short dynamic panels with unobserved factor error structure 696
27.8 Dynamic, nonlinear unobserved effects panel data models 699
27.9 Further reading 701
27.10 Exercises 701
28 Large Heterogeneous Panel Data Models 703
28.1 Introduction 703
28.2 Heterogeneous panels with strictly exogenous regressors 704
28.3 Properties of pooled estimators in heterogeneous panels 706
28.4 The Swamy estimator 713
28.5 The mean group estimator (MGE) 717
28.5.1 Relationship between Swamy’s and MG estimators 719
28.6 Dynamic heterogeneous panels 723
28.7 Large sample bias of pooled estimators in dynamic heterogeneous models 724

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28.8 Mean group estimator of dynamic heterogeneous panels 728

28.8.1 Small sample bias 730
28.9 Bayesian approach 730
28.10 Pooled mean group estimator 731
28.11 Testing for slope homogeneity 734
28.11.1 Standard F-test 735
28.11.2 Hausman-type test by panels 735
28.11.3 G-test of Phillips and Sul 737
28.11.4 Swamy’s test 737
28.11.5 Pesaran and Yamagata -test 738
28.11.6 Extensions of the -tests 741
28.11.7 Bias-corrected bootstrap tests of slope homogeneity for the AR(1) model 743
28.11.8 Application: testing slope homogeneity in earnings dynamics 744
28.12 Further reading 746
28.13 Exercises 746
29 Cross-Sectional Dependence in Panels 750
29.1 Introduction 750
29.2 Weak and strong cross-sectional dependence in large panels 752
29.3 Common factor models 755
29.4 Large heterogeneous panels with a multifactor error structure 763
29.4.1 Principal components estimators 764
29.4.2 Common correlated effects estimator 766
29.5 Dynamic panel data models with a factor error structure 772
29.5.1 Quasi-maximum likelihood estimator 773
29.5.2 PC estimators for dynamic panels 774
29.5.3 Dynamic CCE estimators 775
29.5.4 Properties of CCE in the case of panels with weakly exogenous regressors 778
29.6 Estimating long-run coefficients in dynamic panel data models with a factor
error structure 779
29.7 Testing for error cross-sectional dependence 783
29.8 Application of CCE estimators and CD tests to unbalanced panels 793
29.9 Further reading 794
29.10 Exercises 795
30 Spatial Panel Econometrics 797
30.1 Introduction 797
30.2 Spatial weights and the spatial lag operator 798
30.3 Spatial dependence in panels 798
30.3.1 Spatial lag models 798
30.3.2 Spatial error models 800
30.3.3 Weak cross-sectional dependence in spatial panels 801
30.4 Estimation 802
30.4.1 Maximum likelihood estimator 802
30.4.2 Fixed-effects specification 802
30.4.3 Random effects specification 803
30.4.4 Instrumental variables and GMM 807

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30.5 Dynamic panels with spatial dependence 810

30.6 Heterogeneous panels 810
30.6.1 Temporal heterogeneity 812
30.7 Non-parametric approaches 813
30.8 Testing for spatial dependence 814
30.9 Further reading 815
30.10 Exercises 815
31 Unit Roots and Cointegration in Panels 817
31.1 Introduction 817
31.2 Model and hypotheses to test 818
31.3 First generation panel unit root tests 821
31.3.1 Distribution of tests under the null hypothesis 822
31.3.2 Asymptotic power of tests 825
31.3.3 Heterogeneous trends 826
31.3.4 Short-run dynamics 828
31.3.5 Other approaches to panel unit root testing 830
31.3.6 Measuring the proportion of cross-units with unit roots 832
31.4 Second generation panel unit root tests 833
31.4.1 Cross-sectional dependence 833
31.4.2 Tests based on GLS regressions 834
31.4.3 Tests based on OLS regressions 835
31.5 Cross-unit cointegration 836
31.6 Finite sample properties of panel unit root tests 838
31.7 Panel cointegration: general considerations 839
31.8 Residual-based approaches to panel cointegration 843
31.8.1 Spurious regression 843
31.8.2 Tests of panel cointegration 848
31.9 Tests for multiple cointegration 849
31.10 Estimation of cointegrating relations in panels 850
31.10.1 Single equation estimators 850
31.10.2 System estimators 852
31.11 Panel cointegration in the presence of cross-sectional dependence 853
31.12 Further reading 855
31.13 Exercises 855
32 Aggregation of Large Panels 859
32.1 Introduction 859
32.2 Aggregation problems in the literature 860
32.3 A general framework for micro (disaggregate) behavioural relationships 863
32.4 Alternative notions of aggregate functions 864
32.4.1 Deterministic aggregation 864
32.4.2 A statistical approach to aggregation 864
32.4.3 A forecasting approach to aggregation 865
32.5 Large cross-sectional aggregation of ARDL models 867
32.6 Aggregation of factor-augmented VAR models 872
32.6.1 Aggregation of stationary micro relations with random coefficients 874
32.6.2 Limiting behaviour of the optimal aggregate function 875

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32.7 Relationship between micro and macro parameters 877

32.8 Impulse responses of macro and aggregated idiosyncratic shocks 878
32.9 A Monte Carlo investigation 881
32.9.1 Monte Carlo design 882
32.9.2 Estimation of gξ̄ (s) using aggregate and disaggregate data 883
32.9.3 Monte Carlo results 884
32.10 Application I: aggregation of life-cycle consumption decision rules under
habit formation 887
32.11 Application II: inflation persistence 892
32.11.1 Data 893
32.11.2 Micro model of consumer prices 893
32.11.3 Estimation results 894
32.11.4 Sources of aggregate inflation persistence 895
32.12 Further reading 896
32.13 Exercises 897
33 Theory and Practice of GVAR Modelling 900
33.1 Introduction 900
33.2 Large-scale VAR reduced form representation of data 901
33.3 The GVAR solution to the curse of dimensionality 903
33.3.1 Case of rank deficient G0 906
33.3.2 Introducing common variables 907
33.4 Theoretical justification of the GVAR approach 909
33.4.1 Approximating a global factor model 909
33.4.2 Approximating factor-augmented stationary high dimensional VARs 911
33.5 Conducting impulse response analysis with GVARs 914
33.6 Forecasting with GVARs 917
33.7 Long-run properties of GVARs 921
33.7.1 Analysis of the long run 921
33.7.2 Permanent/transitory component decomposition 922
33.8 Specification tests 923
33.9 Empirical applications of the GVAR approach 923
33.9.1 Forecasting applications 924
33.9.2 Global finance applications 925
33.9.3 Global macroeconomic applications 927
33.9.4 Sectoral and other applications 932
33.10 Further reading 932
33.11 Exercises 933

Appendices 937
Appendix A: Mathematics 939
A.1 Complex numbers and trigonometry 939
A.1.1 Complex numbers 939
A.1.2 Trigonometric functions 940
A.1.3 Fourier analysis 941
A.2 Matrices and matrix operations 942

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A.2.1 Matrix operations 943

A.2.2 Trace 944
A.2.3 Rank 944
A.2.4 Determinant 944
A.3 Positive definite matrices and quadratic forms 945
A.4 Properties of special matrices 945
A.4.1 Triangular matrices 945
A.4.2 Diagonal matrices 946
A.4.3 Orthogonal matrices 946
A.4.4 Idempotent matrices 946
A.5 Eigenvalues and eigenvectors 946
A.6 Inverse of a matrix 947
A.7 Generalized inverses 948
A.7.1 Moore–Penrose inverse 948
A.8 Kronecker product and the vec operator 948
A.9 Partitioned matrices 950
A.10 Matrix norms 951
A.11 Spectral radius 952
A.12 Matrix decompositions 953
A.12.1 Schur decomposition 953
A.12.2 Generalized Schur decomposition 953
A.12.3 Spectral decomposition 953
A.12.4 Jordan decomposition 954
A.12.5 Cholesky decomposition 954
A.13 Matrix calculus 954
A.14 The mean value theorem 956
A.15 Taylor’s theorem 957
A.16 Numerical optimization techniques 957
A.16.1 Grid search methods 957
A.16.2 Gradient methods 958
A.16.3 Direct search methods 959
A.17 Lag operators 960
A.18 Difference equations 961
A.18.1 First-order difference equations 961
A.18.2 pth -difference equations 962
Appendix B: Probability and Statistics 965
B.1 Probability space and random variables 965
B.2 Probability distribution, cumulative distribution, and density function 966
B.3 Bivariate distributions 966
B.4 Multivariate distribution 967
B.5 Independent random variables 968
B.6 Mathematical expectations and moments of random variables 969
B.7 Covariance and correlation 970
B.8 Correlation versus independence 971
B.9 Characteristic function 972

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B.10 Useful probability distributions 973

B.10.1 Discrete probability distributions 973
B.10.2 Continuous distributions 974
B.10.3 Multivariate distributions 977
B.11 Cochran’s theorem and related results 979
B.12 Some useful inequalities 980
B.12.1 Chebyshev’s inequality 980
B.12.2 Cauchy–Schwarz’s inequality 981
B.12.3 Holder’s inequality 982
B.12.4 Jensen’s inequality 982
B.13 Brownian motion 983
B.13.1 Probability limits involving unit root processes 984
Appendix C: Bayesian Analysis 985
C.1 Introduction 985
C.2 Bayes theorem 985
C.2.1 Prior and posterior distributions 985
C.3 Bayesian inference 986
C.3.1 Identification 987
C.3.2 Choice of the priors 987
C.4 Posterior predictive distribution 988
C.5 Bayesian model selection 989
C.6 Bayesian analysis of the classical normal linear regression model 990
C.7 Bayesian shrinkage (ridge) estimator 992

References 995
Name Index 1035
Subject Index 1042

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List of Figures

5.1 Log-likelihood profile for different values of φ 1 . 109

7.1 Histogram and Normal curve for daily returns on S&P 500 (over the period 3 Jan 2000–31
Aug 2009). 143
7.2 Daily returns on S&P 500 (over the period 3 Jan 2000–31 Aug 2009). 143
7.3 Autocorrelation function of the absolute values of returns on S&P 500 (over the period 3 Jan
2000–31 Aug 2009). 146
14.1 Spectral density function for the rate of change of US real GNP. 320
15.1 A simple random walk model without a drift. 325
15.2 A random walk model with a drift, μ = 0.1. 325
16.1 Logarithm of UK output and its Hodrick–Prescott filter using λ = 1, 600. 359
16.2 Plot of detrended UK output series using the Hodrick–Prescott filter with λ = 1, 600. 359
17.1 The LINEX cost function defined by (17.5) for α = 0.5. 375
21.1 Multivariate dynamic forecasts of US output growth (DLYUSA). 520
25.1 Conditional volatilities of weekly currency returns. 626
25.2 Conditional volatilities of weekly bond returns. 627
25.3 Conditional volatilities of weekly equity returns. 627
25.4 Conditional correlations of the euro with other currencies. 628
25.5 Conditional correlations of US 10-year bond with other bonds. 628
25.6 Conditional correlations of S&P 500 with other equities. 628
25.7 Maximum eigenvalue of 17 by 17 matrix of asset return correlations. 629
28.1 Fixed-effects and pooled estimators. 711
29.1 GIRFs of one unit shock (+ s.e.) to London on house price changes over time
and across regions. 763
31.1 Log ratio of house prices to per capita incomes over the period 1976–2007 for the 49 states
of the US. 847
31.2 Percent change in house prices to per capita incomes across the US states over 2000–06 as
compared with the corresponding ratios in 2007. 848
32.1 Contribution of the macro and aggregated idiosyncratic shocks to GIRF of one unit (1 s.e.)
combined aggregate shock on the aggregate variable; N = 200. 885

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32.2 GIRFs of one unit combined aggregate shock on the aggregate variable, gξ̄ (s), for different
persistence of common factor, ψ = 0, 0.5, and 0.8. 886
32.3 GIRFs of one unit combined aggregate shock on the aggregate variable. 895
32.4 GIRFs of one unit combined aggregate shocks on the aggregate variable (light-grey colour)
and estimates of as (dark-grey colour); bootstrap means and 90% confidence bounds,
s = 6, 12, and 24. 896

i i
Another Random Scribd Document
with Unrelated Content
 Recent Science
(Nineteenth Century Review, December, 1900).

Dr. Patrick Manson, of London, is credited with the final

formulation of the mosquito-malarial theory; but the proofs by
which it has been established have come from a number of
investigators, who have patiently traced the singular
life-history of the parasite, throughout its passage from man
to the mosquito and from the mosquito back to man, as a
vehicle of disease. Among the latter, prominence is given to
Major Ronald Ross, who lectured on the subject in London in
September, 1900, and was reported in "The Times" as follows:

"They first carried on their life in man—the intermediary

host—and later in the mosquito, the definitive host. These
Hæmamœbidæ began as spores which entered a blood corpuscle,
grew and became amœbæ. The nuclear matter divided, the
corpuscle containing it burst, the spores scattered, and each
spore then attached itself to a fresh corpuscle. The access of
the typical fever began with this scattering of the spores,
and thus the periodicity of the fever was accounted for.
Besides this neutral proliferation there was proliferation by
gametes. The blood of a fever patient exhibited the first
forms of the gametocytes. The spore grew inside the blood
corpuscle, and in that species which caused malignant fever it
grew until it had almost eaten the whole of the host. It was
then technically called a crescent. If this crescent were
examined under the microscope a wonderful development might be
observed to take place in a few moments. The crescent swelled
and became first oval, then spherical, and in about 15 minutes
after the drawing of the blood the microgametes made their escape
and were to be seen wriggling about in the 'liquor sanguinis.'
Ultimately they entered the macrogametocytes and produced
zygotes, which was nothing but a perfect example of the sperm
and the ovum process. "The whole process could be watched
under the microscope. The mosquito, having bitten a person in
whose blood these gametocytes were present, would take perhaps
100 of them into its own system, where the zygotes acquired a
power of movement, edging towards the wall of the mosquito's
stomach. About 12 hours afterwards they would be found
adhering to the walls of the stomach, through which they
passed and to which they finally attached themselves on the
outside. This process was accomplished in about 36 hours. The
zygotes then grew until they had increased to about eight
times their original diameter and were almost visible to the
naked eye. As the zygote increased it divided into meres
containing nuclear matter, which went to the surface. The
process here seemed to be closely similar to spermato-genesis,
and Professor Ray Lankester declared that the process was the
first known example of audrocratic parthenogenesis. When the
final development was reached the cells burst and the blasts
escaped and were immediately carried into all parts of the
insect. They made their way to the salivary gland, with the
evident purpose of seeking the blood of a fresh human host;
and the injection of the secretion of the mosquito's salivary
gland caused the bump which marked the mosquito's bite. A very
large series of experiments had shown conclusively that
malarial infection was caused by the bite of the mosquito.

"The parasites which infested human blood were carried only by

one genus of mosquito—'Anopheles'; the genus 'Culex' was
harmless. The two genera could be readily distinguished. For
example, 'Anopheles' rested on walls with their tails stuck
out perpendicular to the wall; 'Culex' attached themselves
with tails hanging downwards. 'Culex' bred in the water in
pots and tubs; 'Anopheles' in pools. The larvæ of 'Culex,' if
disturbed, sank to the bottom; the larvæ of 'Anopheles'
skimmed along the surface. It was doubtful whether the eggs of
'Anopheles' would live for more than a few days after
desiccation. The eggs were laid in an equilateral triangular
pattern; they were soon hatched, and the larvæ then began to
feed on the green scum in the water. A still evening, just
before or after rain, was the time most favourable for the
hatching out from the pupæ. As to the adults, he believed that
 they could live for a year; at any rate, they had been kept
alive in tubes for more than a month; and it was certain that
in England and Italy they hibernated. The female of
'Anopheles' alone was the biter, and though the favourite
feeding time was at night, in West Africa the insects had been
found to bite all day. While 'Culex' could be detected by its
humming, 'Anopheles' was silent, and it was possible to be
bitten without knowing of it at the moment. He had found that
a blood diet was always necessary to the maturing of the eggs.
He had kept many thousands of mosquitoes under observation and
had never known one to lay eggs except after a meal of blood.
Malarial infection was derived chiefly from the native
children, who swarmed everywhere, and whose blood was full of
the infecting parasites."

An expedition sent out to West Africa by the Liverpool School

of Tropical Medicine, to pursue investigations there, reported
in December, 1900, that its observations confirm the
conclusion "that the blood parasite which gives rise to
malarial fever in man is carried by the mosquito from the
native to the European—and more especially from the native
children.
{446}
The examination of the blood of hundreds of native children
revealed the interesting fact that between 50 and 80 per cent.
of those under five years, between 20 and 30 per cent. of ages
between five and ten years, and a small percentage over ten
years contained malarial parasites, often in very large
numbers. The breeding places of the 'Anopheles' were found to
be chiefly the dug-out native canoes in the regions of the
mangrove swamps, claypits and puddles in the forested
district, and at Lokoja puddles and ditches on and alongside
the roads and footpaths. It was particularly noticed
everywhere how carelessness in the construction of roads and
footpaths, and more especially in the laying out of the areas
surrounding the factories of the European traders, was
accountable for the production of a large number of breeding
places for mosquitoes, which could easily have been avoided.
In fact, it is certain that in West Africa such conditions are
far more dangerous and more common than the proximity of a
marsh or swamp, which is often noted as a cause of fever. …
The two methods upon which alone any reliance can be placed as
measures for prevention are—(l) segregation of Europeans from
natives of all sorts, at a distance of about half a mile; and
(2) complete and efficient surface drainage of the whole
district in the immediate neighbourhood of European quarters."

The detection of the mosquito as a carrier of one disease drew

suspicion on the pestilent insect of other kindred crimes, and
strong evidence of its agency in propagating yellow fever has
been gathered already. A board of medical officers, which went
from the United States to Cuba in the summer of 1900 to study
the matter, reported in October that their investigations
tended quite positively to that conclusion. The board was
composed of Dr. Walter Reed, surgeon, United States Army, and
Dr. James Carroll, Dr. A. Agramonte, and Dr. Jesse W. Lazear,
all acting assistant surgeons of the United States Army. Two
months later, so much confirmation had been obtained that
Major-General Wood, Military-Governor of Cuba (himself a
medical man) was reported, on the 29th of December, to have
issued a general order directed to his post commanders,
"reciting that the chief surgeon of the Department of Cuba has
reported that it is now well-established that malaria, yellow
fever and filarial infection are transmitted by the bites of
mosquitoes. Therefore the troops are enjoined to observe
carefully two precautions: First—they are to use mosquito bars
in all barracks, hospitals and field service whenever
practicable. Second—They are to destroy the 'wigglers,' or
young mosquitoes, by the use of petroleum on the water where
they breed. Permanent pools or puddles are to be filled up. To
the others is to be applied one ounce of kerosene to each
fifteen square feet of water twice a month, which will destroy
not only the young but the old mosquitoes. This does not
injure drinking water if drawn from below and not dipped out.
 Protection is thus secured, according to the order, because
the mosquito does not fly far, but seeks shelter when the wind
blows, and thus each community breeds its own mosquitoes."

This was followed in April, 1901, by an order from the chief

surgeon at Havana, approved by Surgeon-General Sternberg, U.
S. A., which says: "The recent experiments made in Havana by
the Medical Department of the Army having proved that yellow
fever, like malarial fever, is conveyed chiefly, and probably
exclusively, by the bite of infected mosquitoes, important
changes in the measures used for the prevention and treatment
of this disease have become necessary. So far as yellow fever
is concerned, infection of a room or building simply means
that it contains infected mosquitoes, that is mosquitoes which
have fed on yellow fever patients. Disinfection, therefore,
means the employment of measures aimed at the destruction of
these mosquitoes. The most effective of these measures is
fumigation, either with sulphur, formaldehydes or insect
powder. The fumes of sulphur are the quickest and the most
effective insecticide, but are otherwise objectionable.
Formaldehyde gas is quite effective if the infected rooms are
kept closed and sealed for two or three hours. The smoke of
insect powder has also been proved useful; it readily
stupefies mosquitoes, which drop to the floor and can then be
easily destroyed. The washing of walls, floors, ceilings and
furniture with disinfectants is unnecessary."

MEDICAL AND SURGICAL:

Recent advances in surgery.

"In no department of surgery has greater progress been made

than in the treatment of diseases of the abdominal organs. …
At the present time no abdominal organ is sacred from the
surgeon's knife. Bowels riddled with bullet-holes are
stitched up successfully; large pieces of gangrenous or
cancerous intestine are cut out, the ends of the severed tube
being brought into continuity by means of ingenious
 appliances; the stomach is opened for the removal of a foreign
body, for the excision of a cancer, or for the administration
of nourishment to a patient unable to swallow; stones are
extracted from the substance of the kidneys, and these organs
when hopelessly diseased are extirpated; the spleen, when
enlarged or otherwise diseased, is removed bodily; gall-stones
are cutout, and even tumours of the liver are excised. The
kidney, the spleen, and the liver, when they cause trouble by
unnatural mobility, are anchored by stitches to the abdominal
wall; and the stomach has been dealt with successfully in the
same way for the cure of indigestion. Besides all this, many
cases of obstruction of the bowels, which in days not very
long gone by would have been doomed to inevitable death, are
now cured by a touch of the surgeon's knife. The perforation
of the intestine, which is one of the most formidable
complications of typhoid fever, has in a few cases been
successfully closed by operation; and inflammation of the
peritoneum, caused by the growth of tuberculous masses upon
it, has been apparently cured by opening the abdominal cavity.
Among the most useful advances of this department of surgery
must be accounted the treatment of the condition known as
'appendicitis,' which has been to a large extent rescued from
the physician, with his policy of 'laissez faire,' and placed
under the more resolute and more efficient government of the
surgeon. A New York surgeon not long ago reported a series of
100 cases of operation for appendicitis, with only two deaths.
…

{447}

"That surgery could ever deal with the abdominal organs in the
manner just described would have seemed to our predecessors in
the earlier part of the Queen's reign the baseless fabric of a
vision. But the modern surgeon, clad in antisepsis, as the Lady
in 'Comus' was 'clothed round with chastity,' defies the
'rabble rout' of microbes and dares things which only a short
time ago were looked upon as beyond the wildest dreams of
scientific enthusiasm. It is scarcely twenty years since the
late Sir John Erichsen declared in a public address that
operative surgery had nearly reached its furthest possible
limits of development. He pointed out that there were certain
regions of the body into which the surgeon's knife could never
penetrate, naming the brain, the heart, and the lung as the
most obvious examples of such inviolable sanctuaries of life.
Within the last fifteen years the surgeon has brought each of
these organs, which constitute what Bichat called the 'tripod
of life,' within his sphere of conquest. … It must, however,
be admitted that the results of brain surgery, though
brilliant from the operative point of view, have so far been
somewhat disappointing as regards the ultimate cure of the
disease. In certain forms of epilepsy, in particular, which at
first seemed to be curable by removal of the 'cortical
discharging centre' in the brain which is the source of the
mischief, the tendency to fits has been found to return after
a time, and the last state of the patient has been worse than
the first. Still, the mere fact that the brain has been proved
to be capable of being dealt with surgically with perfect safety
is in itself a very distinct progress. …

"Other parts of the nervous system have been brought within

the range of surgical art. The vertebral column has been
successfully trephined, and fragments of bone pressing on the
cord have been taken away in cases of fractured spine; tumours
have also been removed from the spinal cord by Mr. Horsley and
others. There is a steadily increasing record of cures of
intractable neuralgia, especially of the face, by division or
removal of the affected nerve trunks. … The ends of cut nerves
have also been re-united, and solutions of their continuity
have been filled up with portions of nerve taken from animals.
… The heart naturally cannot be made so free with, even by the
most enterprising surgeon, as the brain or the lung. Yet
within the past twelve months a Norwegian practitioner has
reported a case which encourages a hope that even wounds of
the heart may not be beyond surgical treatment. … Tuberculous
 and inflammatory diseases of bones and joints, formerly
intractable except by the 'ultima ratio' of the amputating
knife, are now cured without mutilation. Deformities are
corrected by division of tendons, the excision of portions of
bone, and the physiological exercise of muscles, without
complicated apparatus. The healing of large wounds is assisted
by the grafting of healthy skin on the raw surface; wide gaps in
bones and tendons are filled up with portions of similar
structures obtained from animals." …

Malcolm Morris,
The Progress of Medicine during the Queen's Reign
(Nineteenth Century, May, 1897).

See, also, X RAYS, below.

SCIENTIFIC LITERATURE:
International cataloguing.

On the 22d of March, 1894, the Secretaries of the Royal

Society of London addressed the following communication to
various institutions and societies: "The Royal Society of
London, as you are probably aware, has published nine quarto
volumes of 'The catalogue of scientific papers,' the first
volume of the decade 1874-1883 having been issued last year.
This catalogue is limited to periodical scientific literature,
i. e., to papers published in the transactions, etc., of
societies, and in journals; it takes no account whatever of
monographs and independent books, however important. The
titles, moreover, are arranged solely according to authors'
names; and though the Society has long had under consideration
the preparation of, and it is hoped may eventually issue, as a
key to the volumes already published, a list in which the
titles are arranged according to subject-matter, the catalogue
is still being prepared according to authors' names. Further,
though the Society has endeavored to include the titles of all
the scientific papers published in periodicals of acknowledged
standing, the catalogue is, even as regards periodical
literature, confessedly incomplete, owing to the omission of
the titles of papers published in periodicals of little
importance, or not easy of access.

"Owing to the great development of scientific literature, the

task of the Society in continuing the catalogue, even in its
present form, is rapidly increasing in difficulty. At the same
time it is clear that the progress of science would be greatly
helped by, indeed, almost demands, the compilation of a
catalogue which should aim at completeness, and should contain
the titles of scientific publications, whether appearing in
periodicals or independently. In such a catalogue the titles
should be arranged not only according to authors' names, but
also according to subject-matter, the text of each paper and
not the title only being consulted for the latter purpose. And
the value of the catalogue would be greatly enhanced by a
rapid periodical issue, and by publication in such a form that
the portion which pertains to any particular branch of science
might be obtained separately. It is needless to say that the
preparation and publication of such a complete catalogue is
far beyond the power and means of any single society.

"Led by the above considerations, the president and council of

the Royal Society have appointed a committee to inquire into
and report upon the feasibility of such a catalogue being
compiled through international co-operation."

Library Journal,
March, 1895.

The movement thus initiated received cordial support and led

to the convening of an International Conference in London, in
1896. The Conference was opened on Tuesday, July 14, at
Burlington House. "The 42 delegates, representing nearly all
the governments of civilized countries and most of the leading
scientific societies of the world, were welcomed by Sir John
 Gorst, as provisional president. … It was decided that
English, German and French should be the official languages of
the conference. … The conference closed on Friday, July 17,
the need of an international catalogue having been fully
recognized, and a plan for its preparation mapped out. It was
decided 'That it is desirable to compile and publish by means
of some international organization a complete catalogue of
scientific literature, arranged according both to
subject-matter and to authors' names. That in preparing such a
catalogue regard shall, in the first instance, be had to the
requirements of scientific investigators, to the end that
these may, by means of the catalogue, find out most easily
what has been published concerning any particular subject of
inquiry.'

{448}

"The preparation of the catalogue is to be in charge of an

international council, to be appointed, and the final editing
and publication shall be conducted by a central international
bureau, under the direction of the international council. Any
country that is willing to do so shall be entrusted with the
task of collecting, provisionally classifying, and
transmitting to the central bureau, in accordance with rules
laid down by the international council, all the entries
belonging to the scientific literature of that country. 'In
indexing according to subject-matter regard shall be had, not
only to the title (of a paper or book), but also to the nature
of the contents.' The catalogue shall comprise all published
original contributions—periodical articles, pamphlets,
memoirs, etc.—to the mathematical, physical, or natural
sciences, … 'to the exclusion of what are sometimes called the
applied sciences—the limits of the several sciences to be
determined hereafter.' …

"The central bureau shall issue the catalogue in the form of

'slips' or 'cards,' the details of the cards to be hereafter
determined, and the issue to take place as promptly as
possible. … It was also decided that the central bureau shall
be located in London, and that the Royal Society appoint a
committee to study all undecided questions relating to the
catalogue and to report later. … No system of classification
was adopted and the subject was turned over for consideration
to the committee of organization, which should also suggest
'such details as will render the catalogue of the greatest
possible use to those unfamiliar with English.' January 1,
1900, is fixed as the date for the beginning of the
catalogue."

Library Journal,
August, 1896.

A second international conference, to consider further the

plans previously outlined, was held October 11-13, 1898, at
Burlington House, London. "The attendance was a representative
one, including delegates from Austria, Belgium, France,
Germany, Hungary, Japan, Mexico, Netherlands, Norway, Sweden,
Switzerland, the United Kingdom, the United States
(represented by Dr. Cyrus Adler), Cape Colony, India, Natal,
New Zealand, and Queensland. Russia, Spain and Italy were the
only large continental countries unrepresented. …

"Professor Forster having formally presented the report of the

Committee of the Royal Society, copies of which were forwarded
in April last to the several governments represented at the
conference, the discussion of the recommendations was opened,
and it was resolved: 'That the conference confirms the
principle that the catalog be published in the double form of
cards and books. That schedules of classification shall be
authorized for the several branches of science which it is
decided to include in the catalog. That geography be defined
as limited to mathematical and physical geography, and that
political and general geography be excluded. That anatomy be
entered on the list as a separate subject. That a separate
schedule be provided for each of the following branches of
science: Mathematics, Astronomy, Meteorology, Physics,
Crystallography, Chemistry, Mineralogy, Geology (including
Petrology), Geography, mathematical and physical,
Paleontology, Anatomy, Zoology, Botany, Physiology (including
Pharmacology and Experimental Pathology), Bacteriology,
Psychology, Anthropology. That each of the sciences for which
a separate schedule is provided shall be indicated by a
symbol.'" Resolutions were then adopted providing for the
regulations to be observed in the preparation of cards or
slips, and for the organization of the work through Regional
Bureaus.

"The following recommendations of the Royal Society providing

for international conventions in connection with the catalog
were adopted: 'Each region in which a Regional Bureau is
established, charged with the duty of preparing and
transmitting slips to the Central Bureau for the compilation
of the catalog, shall be called a constituent region. In 1905,
in 1910, and every tenth year afterwards, an international
convention shall be held in London (in July) to reconsider,
and, if necessary, revise the regulations for carrying out the
work of the catalog authorized by the international convention
of 1898. Such an international convention shall consist of
delegates appointed by the respective governments to represent
the constituent regions, but no region shall be represented by
more than three delegates. The rules of procedure of each
international convention shall be the same as those of the
international convention of 1898. The decisions of an
international convention shall remain in force until the next
convention meets.'

"The following recommendations of the Royal Society relating

to the constitution of an International Council, which shall
be the governing body of the catalog, were adopted: 'Each
Regional Bureau shall appoint one person to serve as a member
of a body to be called The International Council. The
International Council shall, within the regulations laid down
by the international convention, be the governing body of the
catalog. The International Council shall appoint its own
chairman and secretary. It shall meet in London once in three
years at least, and at such other times as the chairman, with
the concurrence of five other members, may specially appoint.
It shall, subject to the regulations laid down by the
convention, be the supreme authority for the consideration of
and decision concerning all matters belonging to the Central
Bureau. It shall make a report of its doings, and submit a
balance sheet, copies of which shall be distributed to the
several Regional Bureaus, and published in some recognized
periodical or periodicals in each of the constituent
regions.'"

Library Journal,
December, 1898.

The third international conference on a catalog of scientific

literature was held in London, June 12, 1900, under the
auspices of the Royal Society. "Unfortunately the United
States finds no place in the list [of delegates]. This was
owing to the failure to secure from Congress the necessary
appropriation enabling the United States to join in the
enterprise; and as the call to the conference required that
delegates be charged with full powers, it was impossible for
any representative of the United States to be in attendance. …

"The general results of the conference are reviewed by

Professor Henry E. Armstrong, in 'Nature,' as follows: 'There
can be little doubt that the ultimate execution of this
important enterprise is now assured. … Everyone was of opinion
that if a fair beginning can once be made, the importance of the
work is so great; it will be of such use to scientific workers
at large; that it will rapidly grow in favor and soon secure
that wide support which is not yet given to it simply because
its character and value are but imperfectly understood.
 Therefore, all were anxious that a beginning should be made.

{449}

"'It has been estimated that if 300 sets or the equivalent are
sold the expenses of publication will be fully met. As the
purchase of more than half this number was guaranteed by
France, Germany, Italy, Norway, Switzerland, and the United
Kingdom, the conference came to the conclusion that the number
likely to be taken by other countries would be such that the
subscriptions necessary to cover the cost of the catalog would
be obtained. The resolution arrived at after this opinion had
been formed, That the catalog include both an author's and a
subject index, according to the schemes of the Provisional
International Committee, must, in fact, be read as a
resolution to establish the catalog.

"'Of the countries represented at the various conferences,

excepting Belgium, not one has expressed any unwillingness
eventually to co-operate in the work. Unfortunately, neither
the United States nor Russia was officially represented on the
present occasion. The attempts that have been made to induce
the government in the United States to directly subsidise the
catalog have not been successful: but that the United States
will contribute its fair share, both of material and pecuniary
support, cannot be doubted. There as here private or corporate
enterprise must undertake much that is done under government
auspices in Europe. As to Russia, the organization of
scientific workers there has been so little developed that it
is very difficult to secure their attention, and probably our
Russian colleagues are as yet but very imperfectly aware of
what is proposed. … A Provisional International Committee has
been appointed, which will take the steps now necessary to
secure the adhesion and co-operation of countries not yet
pledged to support the scheme.

"'Originally it was proposed to issue a card as well as a book

catalog, but on account of the great additional expense this
would involve, and as the Americans in particular have not
expressed themselves in favor of a card issue, it is resolved
to publish the catalog, for the present, only in the form of
annual volumes.

"'From the outset great stress has been laid on the

preparation of subject indexes which go behind the titles of
papers and give fairly full information as to the nature of
their contents. Both at the first and the second International
Conference this view met with the fullest approval. Meanwhile,
the action of the German government has made it necessary to
somewhat modify the original plan. In Germany, a regional
bureau will be established, supported by a government
subvention, and it is intended that the whole German
scientific literature shall be cataloged in this office; no
assistance will be asked from authors or editors or corporate
bodies. In such an office it will for the present be
impossible to go behind titles; consequently, only the titles
of German papers will be quoted in the catalog. In the first
instance, some other countries may prefer to adopt this course
on the ground of economy. But in this country, at least, the
attempt will be made to deal fully with the literature, and
the co-operation of authors and editors will be specially
invited. …

"'The catalog is to be published annually in seventeen

distinct volumes. The collection of material is to commence
from January 1, 1901. As it will be impossible to print and
issue so many volumes at once, it is proposed to publish them
in sets of four or five at quarterly intervals.'"

Library Journal,
September, 1900.

The fourth Conference was held at London, December 12-13,

1900, when "all arrangements were completed for the definitive
 commencement of the work on January 1. … The responsibility
for publication and for the initial expenditure is undertaken
by the Royal Society. … A comprehensive and elaborate system
of classification has been devised with the assent of all the
countries interested. This uniformity in a region where
diversity of a perplexing kind has hitherto ruled is in itself
a great boon to scientific workers everywhere. It may be
anticipated that the scheme will by degrees be adopted in all
collections of scientific works. As to the nothing aspects of
this important undertaking, larger more need be said at
present than that the scientific cataloguing of all scientific
work most appropriately celebrates the opening of the
twentieth century."

[Transcriber's note: In the previous sentence the words

"nothing" and "larger" appear interchanged.]

London Times,
December 14, 1900.

SCIENTIFIC LITERATURE:
In the Nineteenth Century.

See (in this volume)

NINETEENTH CENTURY: DOMINANT LINES.

----------Scientific Literature: End--------

----------SCOTLAND: Start--------

SCOTLAND: A. D. 1900.
Union of the Free and United Presbyterian Churches.

"In the ecclesiastical world only one event of the first

importance has happened [in Scotland, in 1900], the
consummation of the union between the Free and United
Presbyterian Churches, which has been the subject of
 negotiation for six years past. The May meetings of the
leading representative courts of the two denominations were
occupied almost exclusively with the final arrangements for
the formal act of union, which was fixed to take place on
October 31. An attempt by a number of lay office-bearers of
the Free Church to postpone the final step, on the ground that
the congregations had not been directly and fairly consulted,
failed of its object. On October 30 the General Assembly of
the Free Church and the Synod of the United Presbyterian
Church held their last meetings in Edinburgh as independent
bodies. On the following day they formally constituted
themselves the United Free Church of Scotland in the Waverley
Market, the largest public hall in Scotland, in presence of an
audience computed to number 6,000 persons. The union has, as
is the rule in Scotland, been accompanied by a 'disruption.'
The minority of the Free Church, which on October 30 resolved
to remain outside the United Free Church, is very small in
number and is financially weak, but it claims to be the true
Free Church of Scotland, it is asserting itself vigorously in
the Highlands and islands, where Free Church
'constitutionalism' has always been strongest, and it has
taken the first step in a process of litigation for the
purpose of discovering whether it or the United Free Church is
legally entitled to the property of the original Free Church
founded in 1843. But for this secession, the strength of which
is not accurately estimable, the new denomination would,
according to the latest official returns, have opposed about
1,680 congregations and about 530,000 members to the 1,450
congregations and 650,000 members of the Church of Scotland."

London Times,
December 27, 1900.

{450}

SEA POWER.
 See (in this volume)
NAVIES OF THE SEA POWERS.

SEAL-KILLING DISPUTES.

See (in this volume)

BERING SEA QUESTIONS.

SEGAN FU,
SI-NGAN-FU,
The Chinese Imperial Court at.

See (in this volume)

CHINA: A. D. 1900 (AUGUST-SEPTEMBER).

SEMINOLES,
United States Agreement with the.

See (in this volume)

INDIANS, AMERICAN: A. D. 1893-1899.

SENEGAL; A. D. 1895.
Under a French Governor-General.

See (in this volume)

AFRICA: A. D. 1895 (FRENCH WEST AFRICA).

SENOUSSI, The Sect of the.

See (in this volume)

NIGERIA: A. D. 1882-1899.

SERAPEION, Discovery of the.

See (in this volume)

ARCHÆOLOGICAL RESEARCH: EGYPT:
DISCOVERY OF THE SERAPEION.
SERVIA: A. D. 1894-1901.
Abolition of the constitution by royal proclamation.
Final exile and death of ex-King Milan.

See (in this volume)

BALKAN AND DANUBIAN STATES (SERVIA).

SERVIA: A. D. 1901 (April).

Promulgation of a new constitution.

A new constitution for Servia was promulgated by King

Alexander, at Belgrade, on the 19th of April, 1901. Of the
character of the instrument, the King had previously given
intimations in an interview conceded to the editor of the
"Revue d'Orient," the account of which, translated for the
"London Times," is partly as follows: "Our three Constitutions
of 1869, 1888, and 1901 differ from each other in important
matters of principle. That of 1869 practically amounted to
absolutism, if I may thus qualify any Constitution. It is true
that the executive power retained but few prerogatives, but
that was deceptive, as the rights of the Legislature were
surrounded by exceptions and restrictions which made it easy
to paralyse and annihilate them at any moment. The
Constitution of 1888 had the contrary defects. It subordinated
the executive power to that of the Legislature, only leaving to
the former an altogether insufficient sphere of action. It had
another great fault. It was excessively doctrinaire and
theoretical, affecting to foresee everything and to regulate
everything, so that the legislative power was bound hand and
foot and could not legislate freely. The Constitution which
will be promulgated on April 19, the anniversary of the day
when the fortress of Belgrade was finally evacuated by the
Turks in 1867, is a charter similar to those which organize
the public powers in several countries of Europe, as, for
instance, in England and in France. It settles the form of
government, the powers of the King and of the State, the
rights of subjects, the working of the national
representation, &c. But it leaves to the Legislature the
settlement of all details. What more particularly
distinguishes the Constitution of 1901 from that of 1869 is
that it prevents the use and abuse of ordinances by the
Executive, which will be obliged to frame special laws in
every case—that is to say, laws accepted and approved of by
the King, the Senate, and the Chamber of Deputies. Thus
legality will henceforth be the regulating wheel in the
machinery of government. The Chamber of Deputies will be much
better organized, as the enlightened classes will be much more
numerously represented. The Constitution of 1901 will also
present great advantages over that of 1888. The Legislature
will control the acts of the Government as far as can possibly
be desired. At the same time the constitutional regime as
established in the new Constitution will give the King all the
power that he ought to retain in a country that is still new,
like Servia, without diminishing any of the inviolable
liberties of the nation.

"I attach very great importance to the new political

institution with which I am going to endow Servia—namely, an
Upper Chamber. Considering that it already exists, not only in
monarchical countries, but also in most Republics, as, for
instance, in France and the United States, I cannot admit that
it should be regarded as involving the slightest aristocratic
tendency or idea. I know my country well enough to be sure
that I shall find a sufficient number of high-class
politicians to recruit the Senate, and that enough will remain
for the Chamber of Deputies. I am likewise fully persuaded
that the legislative task of the Parliament will be much
better performed when the Chamber of Deputies is conscious
that above it there exists a Senate whose business it is to
revise and improve the laws which it has elaborated, of course
for the greater benefit of the nation. Then, again, the Senate
will form a moderating element which was much wanting in our
Legislature. What Servia is suffering from is not any lack of
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