A Model Forecasting Risk for Emerging Market Currencies

In this paper, we propose a risk forecasting model for emerging market currencies. Our model is based on the Markov regime switch which is constructed by exploiting daily equity market information, and we show that our model outperforms the existing model using macroeconomic information. We evaluate it by the performance measures, the goodness-of-fit and the Wilcoxon rank-sum test.     

Investor perceptions and equity-sovereign bond return correlation: revisiting the Mexican Peso Crisis

We investigate evidence of state-dependent correlation between Mexican Brady bond and Mexican Equity Fund returns between November 1990 and March 2000. During this timeframe, the Mexican capital market can be characterized by three distinct periods: pre-Peso crisis (November 1990–April 1993), the crisis years (May 1993–December 1996), and a period of recovery following the crisis. We find a statistical increase in correlation of returns from these instruments during the period surrounding the Peso crisis, and show that the correlation preceded the collapse of the Peso by 20 months. We also find that common fundamentals fail to explain the source of this correlation. However, using a regime switching model, state-dependent investor perceptions embedded in the Brady returns can explain the correlation pattern. Our evidence implies that time-varying correlation between debt and equity securities may be driven primarily by state-dependent investor perceptions about bond risk.     

Short-term market timing using the bond–equity yield ratio

This paper takes a new look at the market-timing ability of the bond–equity yield ratio (BEYR). We compare the short-term profitability of a naive strategy based on the extreme values of the BEYR to the short-term profitability of a sophisticated strategy relying on regime switches. In contrast to previous studies, we do not document any major international evidence that these dynamic strategies deliver significantly higher risk-adjusted returns than the buy-and-hold portfolios. Moreover, the profitability of these active strategies is not improved when the equity yield, instead of the BEYR, is used as a criterion to time the market.     

Determinants of Currency Crises in Emerging Markets: The Case of Turkey

This paper investigates possible determinants of currency crises in Turkey. We use three different techniques—namely, the signaling approach, structural model, and Markov switching model with monthly data for the period 1992-2004. The results show that money market pressure index, real-sector confidence index, and public-sector variables are significant in explaining currency crises. Hence, one can say that banking crises lead to currency crises. Central banks' real-sector confidence index may be a good leading indicator for currency crises.     

Emerging Markets and Stock Market Bubbles: Nonlinear Speculation?

Daily returns of stock markets in emerging markets in Asia, Africa, South America, and Eastern Europe from the early 1990s through 2006 are analyzed for the possible presence of nonlinear speculative bubbles. The absence of these is tested for by studying residuals of vector autoregressive-based fundamentals, using the Hamilton regimeswitching model and the rescaled range analysis of Hurst. For the first test, absence of bubbles is rejected for twenty-four countries (except Mexico, Sri Lanka, and Taiwan); for the second test, it is rejected for twenty-six countries (except Malaysia). BDS testing on these residuals after autoregressive conditional heteroskedasticity (ARCH) effects are removed fails to reject further nonlinearity (except for Israel). Policy issues are discussed, noting that what is appropriate varies from country to country and time period to time period.     

中国金融状况指数的构建及其时间演化特征

通过选取利率、汇率、房价和股价等方面的指标,利用VAR广义脉冲响应模型赋权来构建中国金融状况指数,并运用马尔科夫区制转移模型对其进行时间演化特征分析。结果表明:中国金融状况指数具有非线性、周期性和两阶段动态变化特征,且在扩张阶段和紧缩阶段表现出相互变迁的结构性突变。同时,中国金融状况指数在各区制内的平滑概率值较大,均接近于1,说明各区制具有一定的持续性。     

货币政策冲击对股票市场流动性的影响——基于Markov区制转换VAR模型的实证研究

本文首先对货币政策影响股市流动性的机理进行分析,在此基础上,尝试构建了一个新的股票市场流动性指标,通过引入MS-VAR模型,考察了货币政策在不同区制下对股市流动性的动态影响。基于MSIH(3)-VAR(4)模型和累积脉冲响应的结果表明,货币政策扩张有助于提高市场流动性,货币政策收紧,会导致市场流动性降低。但在不同区制下,影响程度存在显著差异,当股市处于膨胀期时,货币政策冲击对市场流动性的影响比股市处于低迷期时表现得更加明显。同时,股市收益率和股市波动率对股市流动性也存在显著影响。     

Rational Inattention in Uncertain Business Cycles

The paper proposes endogenous information choice as a channel through which uncertainty affects price dynamics. I consider a rational inattention model with volatility uncertainty and endogenous information processing capability. According to the model, firms' learning and optimal attention exhibits inertia and asymmetry in response to volatility changes. Firms choose to process more information when uncertainty rises, especially about aggregate conditions, and their pricing behavior changes accordingly. Using a Markov‐switching factor‐augmented vector autoregression (MS‐FAVAR), the paper also documents a significant positive correlation between volatility and firms' responsiveness to macro‐ and microlevel shocks, consistent with model predictions.     

Timing and diversification: A state-dependent asset allocation approach

Abstract

The influence of changing economic environment leads the distribution of stock market returns to be time-varying. A conditionally optimal investment hence requires a dynamic adjustment of asset allocation. In this context, this paper examines the improvement in portfolio performance by simulating portfolio strategies that are conditioned on the Markov regime switching behaviour of stock market returns. Including a memory effect eliminates the empirical shortcoming of discrete state models, namely that they produce a standard and an extreme state in stock returns. So far, this has prevented the regimes from being used as a valuable conditioning variable. Based on a discrete state indicator variable, is presented evidence of considerable performance improvement relative to the static model due to optimal shifting between aggressive and well diversified portfolio structures.