Oil and US stock market shocks: Implications for Canadian equities

Oil and US stock market shocks are relevant to Canadian equities because Canada is an oil exporter exposed to market developments in the wider continent. We evaluate how the relationship between Canadian stock market indices and such external shocks change under extraordinary events. To do this, we subject statistically identified oil and S&P 500 market shocks to a surprise filter, which detects shocks with the greatest magnitude occurring over a given lookback period, and an outlier filter, which detects extrema shocks that exceed a normal range. Then, we examine how the dependence structure between shocks and Canadian equities change under the extreme surprise and outlier episodes through various co-moment spillover tests. Our results show co-moments beyond correlation are important in reflecting the changes occurring in the relationships between external shocks and Canadian equities in extreme events. Additionally, the differences in findings under extreme positive and negative shocks provide evidence for asymmetric spillover effects from the oil and US stock markets to Canadian equities. Moreover, the observed heterogeneity in the relationships between disaggregated Canadian equities and shocks in the crude oil and S&P 500 markets are useful to policy-makers for revealing sector-specific vulnerabilities and provide portfolio diversification opportunities for investors to exploit.     

Spillovers between Bitcoin and other assets during bear and bull markets

This article contributes to the embryonic literature on the relations between Bitcoin and conventional investments by studying return and volatility spillovers between this largest cryptocurrency and four asset classes (equities, stocks, commodities, currencies and bonds) in bear and bull market conditions. We conducted empirical analyses based on a smooth transition VAR GARCH-in-mean model covering daily data from 19 July 2010 to 31 October 2017. We found significant evidence that Bitcoin returns are related quite closely to those of most of the other assets studies, particularly commodities, and therefore, the Bitcoin market is not isolated completely. The significance and sign of the spillovers exhibited some differences in the two market conditions and in the direction of the spillovers, with greater evidence that Bitcoin receives more volatility than it transmits. Our findings have implications for investors and fund managers who are considering Bitcoin as part of their investment strategies and for policymakers concerned about the vulnerability that Bitcoin represents to the stability of the global financial system.     

Global Investment Environment of the Post‐Quantitative Easing World: The ‘new‐old’ and ‘new‐new’ Normal

Global markets since late 2007 are not ‘normal’, where normal means market conditions we would expect to observe going forward in the absence of any new economic shocks. Financial markets have been dominated by extraordinary central bank policies that were created to deal with challenging market conditions reflecting heightened risk aversion and illiquidity. Markets in the future will have some characteristics that look more like the market conditions observed in the pre‐crisis period, which I call the ‘new‐old normal’ and other conditions that differ from the past, which I call the ‘new‐new normal’. I first review what happened during the financial crisis in terms of developments in three asset classes, equities, fixed income and currencies, to place the forward‐looking view in proper context. Then the transition period from the quantitative easing (QE) era of exceptional monetary policy to post‐QE markets is discussed. Post‐transition, we will see some features of the post‐QE world that will resemble pre‐crisis market conditions, the ‘new‐old normal’ with higher policy interest rates, wider cross‐country interest differentials, lower cross‐asset return correlations and a resurgence of the importance of cross‐country differences in fundamentals in international investing. However, some features of the post‐QE investment environment will be unlike anything observed in the past: the ‘new‐new normal’ with reduced liquidity and more days of exceptionally large volatility and asset price moves due to regulatory effects resulting in a reduced ability of market‐makers to provide inventory buffers for counterparties and electronic trading venues that shut down trading in high volatility periods; low inflation; flatter yield curves; and emerging markets providing less opportunity for diversification gains as they converge to developed financial market characteristics.     

FINANCIAL MARKET INTEGRATION AND BUSINESS CYCLE VOLATILITY IN A MONETARY UNION

This paper uses a dynamic general equilibrium two‐country sticky‐price model to analyze the implications of financial market integration for the propagation of asymmetric productivity and government spending shocks in a monetary union. Financial market integration has a small effect on the propagation of these shocks if households can only trade in risk‐free bonds. However, financial market integration has a more substantial effect on the propagation of these shocks in a monetary union with a complete market for state‐contingent claims. This result indicates that it may be important to account for threshold effects in empirical analyses of the impact of financial market integration on business cycle volatility in a monetary union.     

The spillover effect of the US uncertainty on emerging economies: a panel VAR approach

The article quantifies the spillover effects of the United States’ (US) uncertainty shocks on emerging economies, using a panel VAR model. We find that the US uncertainty shocks are the risks, and hence drop the capital inflow, investment, consumption, export and output of emerging economies. This also induces a depreciation of emerging market currencies. As a result, our model predicts a fall in short-term interest rate of emerging economies to react against the US uncertainty shocks. Our findings partly help explain the slow recovery of the world economy after the 2008–2009 global financial crisis.     

SYNCHRONIZATION OF ECONOMIC SHOCKS BETWEEN GULF COOPERATION COUNCIL AND UNITED STATES,EUROPE, JAPAN,AND OIL MARKET: CHOICE OF EXCHANGE RATE REGIME†

Using a structural vector autoregression (SVAR) with block exogeneity, this study examines the impacts of external shocks originating from the United States, the European Union, Japan, and the oil market as well as those of the regional shocks, on the oil‐rich countries of the Gulf Cooperation Council (GCC), viewed as a prospective monetary union. It takes into account the implications of the shock impacts for selecting an appropriate common exchange rate arrangement. The SVAR variance decomposition and impulse response analyses strongly underscore the relative impacts of the global shocks over the regional ones. The findings imply that the world's two major currencies, the U.S. dollar and the euro, should figure highly in a GCC's common basket of currencies. Accordingly, a transitional movement to a more flexible exchange rate arrangement such as a basket peg may be desirable for these trade‐dependent economies in the long run, as is argued in the optimal currency literature for developing countries. (JEL E52, O52, C22)     

The Impact of a Disorderly Resolution of Global Imbalances on Global Wealth

Partly reflecting structural advantages such as liquidity and strong investor protection, foreigners have built up extremely large positions in US (as well as other dollar‐denominated) financial assets. This paper describes the impact on global wealth of an unanticipated shock to US financial markets. For every 10 per cent decline in the dollar, US equity markets, and US bond markets, total wealth losses to foreigners could amount to about 5 percentage points of foreign GDP. Four stylized facts emerge: (i) foreign countries, particularly emerging markets, are more exposed to US bonds than to US equities; (ii) over time US exposure has increased for most countries; (iii) on average, US asset holdings of developed countries and emerging markets (scaled by GDP) are very similar; and (iv) based on their reserves position alone, wealth losses of emerging market governments could on average amount to about 2¾ percentage points of their GDP.     

Financial Globalization,International Business Cycles and Consumption Risk Sharing*

In spite of two decades of financial globalization, consumption‐based indicators do not seem to signal more international risk sharing. We argue that the fraction of idiosyncratic consumption risk that gets shared among industrialized countries has actually increased considerably over the period 1980–2000 and, in particular, during the 1990s—from around 30 to more than 60 percent. However, standard consumption‐based measures of risk sharing—such as the volatility of consumption conditional on output or international consumption correlations—have been unable to detect this increase because consumption has also been affected by the concurrent decline in the volatility of output growth in most industrialized countries since the 1980s. First, the volatility of output at business‐cycle frequencies has declined by more than has the volatility of permanent fluctuations. Since consumption reacts mainly to permanent shocks, it appears more volatile in relation to current changes in output. This effect seems to have offset the tendency of financial globalization to lower the volatility of consumption conditional on output. Second, because the variability of permanent global shocks has also fallen, international consumption correlations have also generally not increased as financial markets have become more integrated.     

Estimating the direct impact of bank liquidity shocks on the real economy: Evidence from letter‐of‐credit import transactions in Colombia

This study identifies and provides an estimate of the impact of bank liquidity shocks on real economic activity by exploring letter‐of‐credit import transactions in Colombia during the 2008 to 2009 global financial crisis. The detailed dataset on letter‐of‐credit transactions allows for exploiting within‐importer–exporter variation across issuing banks. The study finds substantial effects of bank liquidity shocks on letter‐of‐credit import transactions: banks that were more vulnerable to adverse liquidity shocks—proxied by the ex ante reliance on wholesale funding or borrowings from foreign banks—reduced letter‐of‐credit issuances more in both intensive and extensive margins. The study also confirms that it had real effects: importer–exporter pairs that relied more on letter‐of‐credit transactions experienced a greater reduction in their total imports in response to adverse bank liquidity shocks.     

Portfolio allocation and international risk sharing

Abstract We show that recent explanations of the consumption‐real exchange rate anomaly that rely on goods and financial market frictions are not robust to introducing just one additional international asset. When portfolios are selected optimally, international trade in two nominal bonds implies a consumption‐real exchange rate correlation that is too high compared with the data even when there are many shocks. Monetary policy specification plays a potentially important role for the degree of risk sharing provided by nominal bonds, both in the benchmark model with only tradable and non‐tradable sector supply shocks and also in the model that allows for news.     

Oil currencies in the face of oil shocks: what can be learned from time-varying specifications?

While the oil currency property is clearly established from a theoretical viewpoint, its existence is less clear-cut in the empirical literature. We investigate the reasons for this apparent puzzle by studying the time-varying nature of the relationship between real effective exchange rates of five oil exporters and the real price of oil in the aftermath of the oil price shocks of the last two decades. Accordingly, we rely on a time-varying parameter VAR specification, which allows the responses of real exchange rates to different oil price shocks to evolve over time. We find that the reason of the mixed results obtained in the empirical literature is that oil currencies follow different hybrid models in the sense that oil countries’ real exchange rates may be driven by one or several sources of oil price shocks that furthermore can vary over time. In addition to structural changes affecting oil countries, structural changes arising from the oil market itself through the various, time-varying sources of oil price shocks are found to be crucial.     

Do credit shocks matter? A global perspective

This paper examines the importance of credit market shocks in driving global business cycles over the period 1988:1–2009:4. We first estimate common components in various macroeconomic and financial variables of the G-7 countries. We then evaluate the role played by credit market shocks using a series of VAR models. Our findings suggest that these shocks have been influential in driving global activity during the latest global recession. Credit shocks originating in the United States also have a significant impact on the evolution of world growth during global recessions.     

Evaluating international financial integration under leverage constraints

The global financial crisis has undermined many economists' views about the benefits of open financial markets. Anecdotal evidence seems to indicate that financial linkages may propagate shocks during crises. This paper develops a simple two-country model in which financial liberalisation across countries takes place in the presence of credit market distortions within countries. Countries may be subject to macro risk coming from productivity shocks and direct shocks to the credit system (‘financial shocks’). Three different degrees of financial linkages between countries are examined. It is shown that the type of financial integration is critical for both macroeconomic outcomes and welfare. In particular, financial integration in bond markets alone may increase aggregate consumption volatility and reduce welfare. Financial integration in both bond and equity markets generates high positive co-movement across countries, but is welfare-improving.     

Global imbalances,cross-market linkages,and the financial crisis: A multivariate Markov-switching analysis

Based on multivariate Markov-switching models, this paper presents new results on the interactions between global imbalances, credit spreads, housing markets, macroeconomic variables, commodities and equities during Q1-1987/Q1-2011. We show that rising global imbalances and the uncontrolled development of the US mortgage and housing markets have been deeply destabilizing the economy, with various shocks impacting subsequently equity markets and macroeconomic variables. But we also uncover, surprisingly, that the cross-market linkages with the commodity markets are strong. Finally, we identify that the US housing market lies at the epicenter of the crisis through its multiple and highly significant interactions with the other variables in the system (including the global imbalances). Sub-samples and alternative time series estimates are provided to check the statistical congruency of the various models.     

Cryptocurrencies and Cagan’s model of hyperinflation

The drivers of the prices of Bitcoin and Ethereum are studied within a framework based on Cagan’s model of hyperinflation. In the model, the prices of the cryptocurrencies are driven by stochastic adoption and velocity shocks as well as endogenous expectations of future prices. The model is estimated with data for prices, transaction volumes, and money supplies. A majority of price fluctuations in both currencies can be attributed to shocks in adoption, velocity shocks are much less important. The money demand sensitivity to expected price changes is estimated to be larger for Bitcoin than for Ethereum, and both have higher sensitivity than fiat currencies during episodes of hyperinflation.     

Regional spillovers across transitioning emerging and frontier equity markets: A multi-time scale wavelet analysis

The episodic wave of crises experienced across the global financial markets over the past two decades has raised questions surrounding the vulnerability of transitioning emerging and frontier equity markets to exogenous shocks. These markets, by design, have lacked the institutional or financial architecture supporting their capital base compared to more established markets. We make the initial attempt to examine four such stock markets (Saudi Arabia, UAE, South Africa and Israel). We perform multi-timescale analysis using wavelet-based time and frequency decompositions in order to investigate (i) whether the shocks transmitted were pure contagion or fundamental-based and (ii) also whether the dynamic evolution of stock market integration was mainly short-term or long-term. We find that prior to the 2008/09 US subprime crisis, the shocks generated pure contagion in contrast to the subprime crisis that reveals evidence supportive of fundamental-based contagion. Further, when exploring the dynamics of market integration, we find that integration strengthens over time as opposed to any immediate short-term outcome. This supports policies engendered to promote stock market resiliency and stability.     

Stock,Energy and Currency Effects on the Asymmetric Wheat Market

The purpose of this paper is to explore the effects of financial and currency indicators on wheat futures prices. The results suggest that the stock market, and particularly the S&P 500, positively influence the wheat market, a fact that is attributed to the wealth effect and the modern portfolio management in the context of international markets’ integration. There is also evidence that the energy markets affecting the supply and demand side exert significant impact on the wheat market. Furthermore, the results show that the shocks of the U.S. dollar/yen exchange rate are transmitted to the wheat market. Finally, the structural analysis of wheat prices’ volatility support the hypothesis of the asymmetric conditional variance, as it appears to be more volatile in response to positive shocks caused by higher wheat prices, contrary to the respective results of the equities market.     

The role of global financial conditions for credit supply in EMU periphery countries

The article analyses the role of global financial conditions for credit supply and growth performance in individual member states of the European Monetary Union (EMU). In line with the risk-taking channel of monetary policy, we find that in the short run, the Fed and European Central Bank (ECB) interest rate policy compensate for changes in global risk assessment thereby supporting net private credit flows to the European periphery. However, in later periods, a worsened risk sentiment weighs on credit flows to these countries. In contrast, EMU core countries are generally less affected by global financial shocks. This asymmetric influence of global conditions on EMU member states are smoothed by the uniform access of commercial banks to the Eurosystem’s open market operations in conjunction with the redistribution of liquidity via the TARGET mechanism.     

On the detection of extreme movements and persistent behaviour in Mediterranean stock markets: a wavelet-based approach

We combine the global Hurst exponent and Morlet wavelet multi-resolution analysis (MRA) to investigate the dynamic behaviour of six selected stock markets in the Mediterranean region. Specifically, we employ the resonance coefficients and their power spectra to identify potential extreme movements and long-term dependence in stock returns. Using weekly data for the period 2005 to 2010, our results reveal that the wavelet MRA is able to reconstruct the effects of major extreme shocks on stock returns of studied markets, such as the Asian financial crisis, the 9/11 terrorist attacks and the 2007–2009 financial crisis. Moreover, the wavelet-based global Hurst exponent indicates the presence of long-term dependencies in stock returns of all the considered markets, except for France where the anti-persistent behaviour is detected. Overall, our findings are useful to assess the stock market efficiency and provide new insights into stock market dynamics over different time scales.     

Bilateral portfolio dynamics during the global financial crisis

There has been considerable bilateral variation in the pattern of portfolio capital flows during the global financial crisis: for a given destination, investors from different countries adjusted their holdings to different degrees. We show that the size of the initial bilateral holding, geographical distance, common language, the level of trade and common institutional linkages help to explain the pattern of adjustment. These bilateral factors are more important for equities than for bonds and for investors from developing countries than for investors from advanced countries.