Confirming Management Earnings Forecasts, Earnings Uncertainty, and Stock Returns

In this study we examine the association among confirming management forecasts, stock prices, and analyst expectations. Confirming management forecasts are voluntary disclosures by management that corroborate existing market expectations about future earnings. This study provides evidence that these voluntary disclosures affect stock prices and the dispersion of analyst expectations. Specifically, we find that the market's reaction to confirming forecasts is significantly positive, indicating that benefits accrue to firms that disclose such forecasts. In addition, although we find no significant change in the mean consensus forecasts (a proxy for earnings expectations) around the confirming forecast date, evidence indicates a significant reduction in the mean and median consensus analyst dispersion (a proxy for earnings uncertainty). Finally, we document a positive association between the reduction of dispersion of analysts' forecasts and the magnitude of the stock market response. Overall, the evidence suggests that confirming forecasts reduce uncertainty about future earnings and that investors price this reduction of uncertainty.     

Are Bilateral Remittances Countercyclical?

By putting together a relatively large data set on bilateral remittances of emigrants, this paper is able to shed light on the important hypothesis of smoothing. The smoothing hypothesis is that remittances are countercyclical with respect to income in the worker’s country of origin (the recipient of the remittance), while procyclical with respect to income in the migrant’s host country (the sender of the remittance). The econometric results confirm the hypothesis. This affirmation of smoothing is important for two reasons. First, it suggests that remittances should be placed on the list of criteria for an optimum currency area. Second, it brings into doubt plans by governments in some developing countries to harness remittances for their own use, in that government spending in these countries generally fails the test of countercyclicality which remittances pass.     

The Endogenity of the Optimum Currency Area Criteria

A country' suitability for entry into a currency union depends on a number of economic conditions. These include, inter alia , the intensity of trade with other potential members of the currency union, and the extent to which domestic business cycles are correlated with those of the other countries. But international trade patterns and international business cycle correlations are endogenous. This paper develops and investigates the relationship between the two phenomena. Using thirty years of data for twenty industrialised countries, we uncover a strong and striking empirical finding: countries with closer trade links tend to have more tightly correlated business cycles.     

The diversifiability of exchange risk

Discussions of the determinants of the spot or forward exchange rate frequently argue that holders of foreign assets that are subject to exchange risk must be compensated by a risk premium. This paper shows that much of exchange risk is diversifiable. If there are no outside assets and the value of the currency is uncorrelated with the value of other forms of wealth, then all exchange risk is diversifiable; there is no risk premium. More generally, there is a risk premium, but it need not be related to foreign indebtedness or to the variability of the exchange rate as commonly presumed.     

Who drives real interest rates around the Pacific Rim: the USA or Japan?

This paper investigates the relative influence of US and Japanese real interest rates in the determination of local Pacific Rim rates, where influence is defined by the presence of common stochastic trends. Furthermore, the degree to which long-run real interest parity holds is examined. The cointegration testing methodology of Johansen (1988) is adopted for this analysis, which allows for multiple cointegrating vectors. The results indicate that Hong Kong, Malaysia and Taiwan are linked with both the USA and Japan (in terms of cointegration and positive covariation), while only Singapore is solely linked with the USA. On the other hand Korea, and perhaps Indonesia and Thailand appear to be more closely linked with Japan. Real interest parity holds for only the following interest rate pairs: USA-Singapore, USA-Taiwan and Japan-Taiwan.     

The effect of excessively elastic expectations on exchange-rate volatility in the Dornbusch overshooting model

Bilson has described the empirical finding that the forward exchange rate overestimates the speed of return to equilibrium as a finding of ‘excessive speculation’, and has drawn implications for the volatility of the exchange rate. The present paper pursues this tack within the sticky-price monetary model made famous by Dornbusch. It is shown theoretically that if the market overestimates the speed of adjustment, the degree of overshooting is reduced. In this sense ‘excessive speculation’ leads to reduced volatility.     

Why interest rates react to money announcements: An explanation from the foreign exchange market

When the Fed announces a money supply greater than had been expected, interest rates rise. Why? One explanation is that the market raises its estimate of the future rates of money growth and inflation, and bids up nominal interest rates. We offer contrary evidence: on such days the dollar appreciates, not depreciates. An alternative explanation is that the market perceives the change in the money stock as a transitory fluctuation that the Fed will reverse in the future. The anticipated future tightening raises today's real interest rate, causes a capital inflow, and appreciates the dollar, the result in fact observed.     

Systematic Managed Floating

Open Economies Review - A majority of countries neither freely float their currencies nor firmly peg. But most of the remainder in practice also don’t obey such well-defined intermediate...