Calibrating an algorithm for estimating transactions from FXFX exchange rate quotes

In this paper we investigate the efficiency of a class of transaction-generating algorithms, originally suggested in Bollerslev and Domowitz (1993). Our comparison utilizes real transaction data recorded over Reuters D2000-2 electronic broking system for 7 h in June 1993 and transaction data generated from FXFX quotations over an identical period. Results suggest that, at this high-frequency data sampling, the performance of these transaction-generating algorithms is poor, with the most likely explanation of this outcome due to the high-frequency characteristics of FXFX spreads and quotation intensity.     

A framework for assessing financial stability?

I worked as a consultant in the Financial Stability Department (FSD) of the Bank of England for several years (2002–2004). In this paper I reflect on issues relating to the work of such an FSD, starting with the difficulty of defining or measuring ‘financial stability’. Stress tests are commonly used, but, for an FSD, should relate to the system as a whole, not just to individual institutions. FSDs need to assess the probability, virulence and speed of occurrence of potential shocks. There is a need to develop appropriate analytical models. The focus on capital adequacy has diverted attention from concern about having sufficient liquidity.     

Towards a measure of financial fragility

The paper proposes a measure of financial fragility that is based on economic welfare in a general equilibrium model calibrated against UK data. The model comprises a household sector, three active heterogeneous banks, a central bank/regulator, incomplete markets, and endogenous default. We address the impact of monetary and regulatory policy, credit and capital shocks in the real and financial sectors and how the response of the economy to shocks relates to our measure of financial fragility. Finally we use panel VAR techniques to investigate the relationships between the factors that characterise financial fragility in our model, i.e. banks’ probabilities of default and banks’ profits – to a proxy of welfare.      

House prices, money, credit, and the macroeconomy

This paper assesses the links between money, credit, house prices,and economic activity in industrialized countries over the lastthree decades. The analysis is based on a fixed-effects panelvector autoregression, estimated using quarterly data for 17industrialized countries spanning the period 1970–2006.The main results of the analysis are the following. (i) Thereis evidence of a significant multidirectional link between houseprices, monetary variables, and the macroeconomy. (ii) The linkbetween house prices and monetary variables is found to be strongerover a more recent sub-sample from 1985 to 2006. (iii) The effectsof shocks to money and credit are found to be stronger whenhouse prices are booming.     

Adjustment Mechanisms in a Currency Area

Both the euro-area and the United States suffered an initially quite similar housing and financial shock in 2007/8, with several states in both regions being particularly badly affected. Yet there was never any question that the worst hit US states would need a special bail-out or leave the dollar area, whereas such concerns have worsened in the euro-area. We focus on three badly affected states, Arizona, Spain and Latvia, to examine the working of relative adjustment mechanisms within the currency region. We concentrate on four such mechanisms, relative wage adjustment, migration, net fiscal flows and bank flows. Only in Latvia was there any relative wage adjustment. Intra-EU migration has increased, but is more costly for those involved in the EU (than in the USA). Net federal financing helped Arizona and Latvia in the crisis, but not Spain. The locally focussed structure of banking amplified the crisis in Spain, whereas the role of out-of-state banks eased adjustment in Arizona and Latvia. The latter reinforces the case for an EU banking union.     

China's Financial Development

At the China Development Forum in Beijing, March 2002, I was asked to be discussant to Governor Dai Xianlong, but his paper, as in most cases, was not made available beforehand, so my own comments had to be made independently. Following that event, I can now remark on the Forum as well as reproducing my discussant paper. In this latter, I emphasize the importance of developing professional skills, greater competition and the application, through regulation, of appropriate incentives for the continued improvement of China's financial system.