Make Trade Not War?

This paper analyses theoretically and empirically the relationship between military conflicts and trade. We show that the conventional wisdom that trade promotes peace is only partially true even in a model where trade is economically beneficial, military conflicts reduce trade, and leaders are rational. When war can occur because of the presence of asymmetric information, the probability of escalation is lower for countries that trade more bilaterally because of the opportunity cost associated with the loss of trade gains. However, countries more open to global trade have a higher probability of war because multilateral trade openness decreases bilateral dependence to any given country and the cost of a bilateral conflict. We test our predictions on a large data set of military conflicts on the 1950–2000 period. Using different strategies to solve the endogeneity issues, including instrumental variables, we find robust evidence for the contrasting effects of bilateral and multilateral trade openness. For proximate countries, we find that trade has had a surprisingly large effect on their probability of military conflict.     

Foreign Exchange Fixings and Returns around the Clock

The U.S. dollar appreciates in the run-up to foreign exchange (FX) fixes and depreciates thereafter, tracing a W-shaped return pattern around the clock. Return reversals for the top nine traded currencies over a 21-year period are pervasive and highly statistically significant, and they imply daily swings of more than one billion U.S. dollars based on spot volumes. Using natural experiments, we document the existence of a published reference rate determines the timing of intraday return reversals. We present evidence consistent with an inventory risk explanation whereby FX dealers intermediate unconditional demand for U.S. dollars at the fixes.     

Testing the Predictive Power of Dividend Yields

This paper reexamines the ability of dividend yields to predict long-horizon stock returns. We use the bootstrap methodology, as well as simulations, to examine the distribution of test statistics under the null hypothesis of no forecasting ability. These experiments are constructed so as to maintain the dynamics of regressions with lagged dependent variables over long horizons. We find that the empirically observed statistics are well within the 95% bounds of their simulated distributions. Overall there is no strong statistical evidence indicating that dividend yields can be used to forecast stock returns.     

FISCAL SUSTAINABILITY AND THE FISCAL REACTION FUNCTION FOR SOUTH AFRICA: ASSESSMENT OF THE PAST AND FUTURE POLICY APPLICATIONS

How does the South African government react to changes in its debt position? In investigating this question, this paper estimates fiscal reaction functions using various methods (ordinary least squares, threshold autoregressive, state‐space modelling and vector error‐correction model). This paper finds that since 1946, the South African government has run sustainable fiscal policy by reducing the primary deficit or increasing the surplus in response to rising debt. Looking ahead, this paper considers the use of fiscal reaction functions to forecast the debt/gross domestic product (GDP) ratio and gauging the likelihood of achieving policy goals with the aid of probabilistic simulations and fan charts.     

Integration vs. Segmentation in the Canadian Stock Market

This paper examines the issue of integration versus segmentation of the Canadian equity market relative to a global North American market. We compare the international and domestic versions of the CAPM, and find that integration, or the mean-variance efficiency of the global market index, is rejected by the data. Segmentation is the preferred model, based on a maximum likelihood procedure correcting for thin trading. We further divide the sample into securities that are interlisted in Canada and the U.S., and those that are not. Integration is rejected for both groups, which indicates that the source of segmentation can be traced to legal barriers based on the nationality of issuing firms.     

FIRM RESTRUCTURING AND THE OPTIMAL SPEED OF TRADE REFORM

We study the consequences and optimality of alternative speedsof trade liberalization when investment (restructuring) activitieshelp firms learn their true level of efficiency and determinesurvival prospects In contrast to the existing literature, wefind that a gradual trade reform might be preferred when authoritiesare more preoccupied with the longer term. We also show thatcosts of business closures have an ambiguous impact on the optimalpace of liberalization.     

Higher Order Expectations in Asset Pricing

We examine formally Keynes' idea that higher order beliefs can drive a wedge between an asset price and its fundamental value based on expected future payoffs. We call this the higher order wedge, which depends on the difference between higher and first order expectations of future payoffs. We analyze the determinants of this wedge and its impact on the equilibrium price in the context of a dynamic noisy rational expectations model. We show that the wedge reduces asset price volatility and disconnects the price from the present value of future payoffs. The impact of the higher order wedge on the equilibrium price can be quantitatively large.     

Growth versus Margins: Destabilizing Consequences of Giving the Stock Market What It Wants

We develop a model in which a firm can devote effort either to increasing sales growth, or to improving per-unit profit margins. If the firm's manager cares about the current stock price, she will favor the growth strategy when the market pays more attention to growth numbers. Conversely, it can be rational for the market to weight growth measures more heavily when it is known that the firm is following a growth strategy. This two-way feedback between firms' strategies and the market's pricing rule can lead to excess volatility in real variables, even absent any external shocks.     

Ratcheting Up: Linked Technology Adoption in Supply Chains

It is generally assumed that a firm will adopt complementary technologies simultaneously. Apparel industry data indicate that, because of the close links between suppliers and retailers, there was a ratchet-up adoption of complementary information technologies. The consequence was that a rapid regime shift occurred without explicit coordination or planning. One implication is that the study of technology adoption may need to be more widely conceptualized to incorporate the relationships between upstream manufacturers and downstream retailers.