Disaggregating annual variables

A reader emails me:

When doing econometrics on quarterly time series data, if there are some key variables that are available only annually, is there merit in interpolating the annual data to create a quarterly series or should the variables be discarded? What is the general advice on interpolation?

As a general rule, you should not discard the annual data. As with any econometric problem, the question is: do the additional data contain potentially useful information? If the answer is yes, then the next step is to find the best way to disaggregate the annual observations into quarterly ones.

There are many ways to do this, and the most appropriate one will depend on the problem at hand. Also, keep in mind that determining the appropriate standard errors for your included variables, especially the disaggregated ones, can be a bit tricky in this setting.

Here are some relevant papers (only the first free access)

Also keep in mind that, depending on the problem you are facing, it may even make sense to aggregate variables – e.g. making annual variables out of quarterly ones. Yes, you shed information in that case, but an even more critical question to ask is whether your assumptions are satisfied (usually E(u|X)=0). In many cases, you would have reason to expect the error to be correlated with your dependent variables in a ‘quarterly’ model but not in an ‘annual’ model, in which case it would be most probably preferable to use the latter.

Should I buy myself a football team?

Following a reader's request, I've been meaning to post something on this for a while. But Austan Goolsbee at the NYT beat me to it (via Mark Thoma):

Answering why people buy teams turns out to be important to more than just sports fans. There is big money at stake.

After owners indulge their childhood fantasy of buying a team, they tend to switch to an adult perspective and start viewing the team as a business. And they typically conclude that it’s a bad business.

Should we really care that it’s a bad business? If a billionaire throws a lavish 60th birthday party, it costs a lot of money. But that doesn’t make it a bad business. It’s a party. It’s not supposed to make money.

Is a sports team really that different?

Owners’ complaints about losses leave out the basic fact that capital gains are profits, too. And when scores of grown men desperately want to buy sports teams, there tend to be big capital gains.

Take the Sonics. The team may have lost $60 million while Mr. Schultz owned it. But he bought it for $200 million in 2001 and sold it for $350 million five years later. So he ended up making something like $90 million (taxed at the favorable capital gains tax rate, no less) on top of the fame, prestige and free tickets he got while he was owner.

If the Cubs do, indeed, sell for $1 billion, Tribune will have earned an annual return of almost 15 percent since it bought the team for around $20 million in 1981. Given the company’s recent problems, it’s probably the best investment it ever made.

So owning a sports team gives budding billionaires local stardom and a big return — no wonder that they are lining up to buy these teams. The only question that remains, I suppose, is why the vanity value of teams keeps climbing. You might have thought that this value would be about the same whenever there’s a sale, so that the capital gain wouldn’t be such a big component. But because ever-richer guys are bidding against one another, there has been persistent inflation in team values.

Having a stake in most companies yields no utility to its owners by itself: what matters is the financial rewards the investor is looking forward to. That said, a sports team (much like a charity) can survive and prosper even if the financial returns on offer are consistently below those of 'normal' companies.

Goolsbee makes a good point, in that when you buy shares in a sports team what you get (and pay for) is more than just a stake in future company profits and expected capital gains. Buying a controlling interest earns you status, and even fans owning a few shares acquire the privilege of owning a piece of their favourite team.

So should you buy yourself shares in a sports team? As is the case with 'ethical' or 'islamic' funds, the question you should really be asking is whether you value owning these shares in itself as much as the marginal investor. If you believe markets are efficient and you are not a fan or status-seeking multibillionaire, the answer is simple: steer clear.

Stories never told: The Cyprus referendum

A reader asks me to post more 'stories never told', that is events I believe were perceived and analysed in a particularly skewed or outright erroneous way at the time.

In my view, predominant amongst those is the Cyprus reunification referendum in 2004. Here's the historical background from Wikipedia:

The Cyprus dispute is the conflict between Greek Cypriots and Turkish Cypriots and also Republic of Cyprus and Turkey over Cyprus, an island nation in the eastern Mediterranean Sea. Since 1974 the internationally recognised Republic of Cyprus has been divided. The dividing line which cuts across the country has created a physical and social barrier between the Greek and Turkish Cypriot Communities. The Turkish Cypriot community declared itself Turkish Republic of Northern Cyprus, condemned by UN Security Council Resolutions as legally invalid. It is recognised only by Turkey.

In 2004, the Greek and Turkish communities held a dual referendum on the so-called 'Annan Plan' (BBC coverage here). The plan was put together over a long period of extensive consulation and opinion-gauging and set the terms for the reunification of Cyprus. In the end, the Turkish-Cypriot side voted overwhelmingly in favour, while the Greek-Cypriots rejected it. The plan was never implemented and Cyprus entered the EU a divided nation. The reaction was the same everywhere:

European Commission: The European Commission deeply regrets that the Greek Cypriot community did not approve the comprehensive settlement of the Cyprus problem, but it respects the democratic decision of the people.

US State Department Spokesman Richard Boucher: We are disappointed that a majority of Greek Cypriots voted against the settlement plan. Failure of the referendum in the Greek Cypriot community is a setback to the hopes of those on the island who voted for the settlement and to the international community.

European Commissioner for Enlargement Günter Verheugen: I feel cheated by the Greek Cypriot government... There is a shadow now over the accession of Cyprus. What we will seriously consider now is finding a way to end the economic isolation of the Turkish Cypriots.

So what's wrong with these accounts? Quite simply, it is nonsensical to claim one party in a dispute is responsible for the failure to reach a compromise - if the terms were sweeter for that party, a deal would have been struck, or it would have been the other side withdrawing its support. To my knowledge, no-one publicly commenting on the referendum ever grasped this simple and obvious point.

Of course, the Cyprus referendum is by no means the only example where one party is blamed for refusing to accept a deal. Phrases such as 'country X responsible for stalemate in talks' find their way into newspapers and public discourse all the time, despite the fact such analysis reveals little other than the author's moral stance on the issue.

When an arbiter puts a plan on the table that ends up being enthusiastically supported by one side and rejected by the other, the fault very probably lies with the plan itself; the first reaction should be to question the arbiter's competence or motives. This is especially true when said arbiter has very good information as to the voting intentions of the parties at each side of the dispute: in the case of Cyprus, it was abundantly clear early on that the final terms offered were acceptable to one community and not the other.

Without going into the details of the final plan, I believe that a deal acceptable to both parties could have been put to the vote instead. It's an absolute shame this didn't happen, and completely wrongheaded to blame the Greek-Cypriot side for this failure. The culprit was an incompetent UN, unable to realise that an arbiter should have no preconceived ideas, no preferences of their own and no interest in the opinions of parties that don't get to vote. The arbiter's role is confined to making sure the damn deal goes forward.