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23-04-2024 | Original Article

A Time Series Analysis of Corporate Profit Rates in Selected Developed Economies: Asymmetries, Non-linearity and Mean Reversion

Author: Ivan D. Trofimov

Published in: Journal of Quantitative Economics

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Abstract

This study examines the dynamic behaviour of corporate profits in selected developed economies using the quarterly data. Firstly, the non-linear and asymmetric behaviour is considered: the presence of general form of nonlinearity (based on linear autoregressive model, third order moments and Brock–Dechert–Scheinkman test), of steepness and deepness asymmetry (using the ‘triples test’), and of the cycle-specific asymmetry (using asymmetry in mean and variance models with cycle dummies). Secondly, we examined the possibility of mean-reversion in the series, using a battery of recently developed unit root tests that account for the presence of structural breaks and nonlinearities. The findings indicate mean reversion and trend-stationarity of the profits for most of the economies, thus suggesting impossibility of sustained growth in profits in times of sluggish economic growth and productivity slowdown. The profits were also found to contain non-Gaussian characteristics, to exhibit asymmetric fluctuation in mean (but not variance), and to demonstrate deepness asymmetry.

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Appendix
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Footnotes
1
The terms ‘profits’, ‘profitability’ and ‘rate of profit’, while denoting related concepts, differ nonetheless. The former term corresponds to the aggregate value of profits, while the latter two terms typically indicate the ratio of aggregate profits to capital denominator.
 
2
Fagerberg (2003) distinguishes two complementing versions of Schumpeterian dynamics: “creative destruction” or Schumpeter Type I dynamics, typically at the broad scale that alters the entire landscape of the economy (initiated by a revolutionary innovations, such as steam engine, electricity, computer technologies, and complemented by arising social, economic and cultural innovations); and “creative accumulation” or Schumpeter Type II dynamics that takes places at a slower pace and narrower scale and that involves more incremental innovation and, presumably smaller profits (compared to Schumpeter I).
 
3
Thus at the onset of the process, the innovation positive shocks shift equilibrium profit form one level to another (i.e. have disruptive effect on old equilibrium) and thus cause profits to exhibit persistence and non-stationarity, before profits start to mean-revert at a later point in the process (Canarella et al 2013: 77).
 
4
The moderation of profits as part of competitive process would then be represented by a reversion to the new trend, as opposed to the old historical mean.
 
5
Where such pressures do not exist or are weak, the nonlinearity in mean reversion is not observed. This was the case of profitability of firms listed on the stock exchanges of the 15 EU economies, given the higher degree of regulation and protectionism in EU economies (compared to the US) and the smaller prevalence of takeovers (Altunbas et al 2008).
 
7
The data was obtained from https://​www150.​statcan.​gc.​ca/​t1/​tbl1/​en/​tv.​action?​pid=​3310000801, ‘Quarterly statement of changes in financial position and selected financial ratios, by industry’, variable 33100008.
 
9
This country-specific indicator defines operating profits as operating income after adjustment for non-operating gains/losses.
 
10
The data is available at https://​www.​mof.​go.​jp/​english/​pri/​reference/​ssc/​historical.​htm, ‘Financial Statements Statistics of Corporations by Industry, Quarterly’, Sheet 53.
 
12
The data is available at https://​fred.​stlouisfed.​org, the variables CPATAX and NFCPATAX.
 
13
The latter case suggests consideration of the private economy (rather than corporate or total) profits, which, due to very specific definition, are not available in most instances.
 
14
The fractional integration and long memory methodologies have been applied extensively in the literature, including in the analysis of the profitability of financial organizations and vehicles. One example is the study of the profitability of private equity in Europe and the US by Gil-Alana and Puertolas-Montanes (2023), that confirmed stationarity and mean reversion in all countries (regions) in question, but nonetheless pointed to the differences in the degree of persistence (US demonstrating the most lasting effects of the shocks).
 
15
Following Cochrane (1991) we note a lower power of conventional unit root tests (in particular, in distinguishing among non-unit root alternatives) and the bias towards non-rejection of the null hypothesis in finite samples. This problem is typical to Philips and Perron unit root test that is more likely to suffer from size distortions and power losses when errors are autoregressively correlated, and to the standard ADF test that is known for unit root null bias (DeJong et al 1992; Glynn et al 2007). On the other hand, ability to incorporate non-linearities and/or structural break(s) in the testing framework as well as lengthening of the time series tend to improve tests’ outcomes (Haldrup and Jansson, 2005). The profit series in this study differed in terms of the length (including around 100 quarterly observation in the case of Australia and Japan, and close to 300 quarterly observations in the UK and the US). The tests’ outcomes, however, did not vary with regard to series length, with different conclusions reached in the ADF test, for instance, for Australia (failure to reject unit root null) and Japan (rejection of the null), with identification of stationarity for the Canada’s relatively short series, or, in contrast, identification of unit roots in a rather long US and UK series. The outcomes differed, however, when tests included structural breaks and non-linearity: compared to ADF test, ADF-SB and FADF-SB tests indicated a greater number of unit root null rejections, as expected.
 
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Metadata
Title
A Time Series Analysis of Corporate Profit Rates in Selected Developed Economies: Asymmetries, Non-linearity and Mean Reversion
Author
Ivan D. Trofimov
Publication date
23-04-2024
Publisher
Springer India
Published in
Journal of Quantitative Economics
Print ISSN: 0971-1554
Electronic ISSN: 2364-1045
DOI
https://doi.org/10.1007/s40953-024-00392-z

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