Further Evidence on Foreign Exchange Market Efficiency: An Application of Cointegration Tests

This study extends and expands the body of evidence related to foreign exchange market efficiency by employing the single-equation cointegration test proposed by Phillips and Ouliaris [19], and the Johansen [12] 1991 Full Information Maximum Likelihood procedure for a system of equations. Through the use of these updated techniques and a global data set, the authors are able to more carefully test for the presence of cointegrating relationships and examine the consistency of the results in three trading locations. The results are quite consistent across locations and are highly supportive of efficiency in the global foreign exchange market.     

Existence of equilibrium configurations of competitive firms on an infinite two-dimensional space

This paper analytically examines the existence of equilibrium configurations of competitive firms on an infinite two-dimensional space. It is shown that the Löschian configuration (a regular-hexagonal lattice) and a square lattice are in global equilibrium; the Löschian configuration is in the strongest global equilibrium among the regular lattices (in this sense, spatial competition leads to the social optimum); and the so-called back-to-back configuration is not in equilibrium. These results are in marked contrast to those obtained from a one-dimensional model, implying that spatial equilibrium configurations in a two-dimensional space should not be inferred only from one-dimensional models frequently employed in spatial economics.     

Political Measures for Strategic Environmental Policy with External Effects

This paper investigates an environmental policy designed to reduce the emission of pollutants under uncertainty, with the agent problem as an optimal stopping problem. We first analyze the two cases in which there are one agent and two competing agents by following Ohyama and Tsujimura (2005). When we consider a model of strategic agents, we need to analyze the external economic effect that is peculiar to an agent’s environmental policy implementation. Then, to improve and resolve these external effects, we examine three alternative political measures, comprising an environmental subsidy, an environmental tax and an emission trading system. The results of the analysis indicate that the environmental subsidy and environmental tax promote environmental policy. However, they do not create an incentive to be the leader. On the other hand, an emissions trading system not only promotes environmental policy but also creates an incentive for leadership.This paper was previously circulated under the title “Political Measures for Strategic Environmental Policy with Induced Effects”. The authors would like to thank Masaaki Kijima for helpful comments. The authors would also like to thank Alistair Munro and two anonymous referees providing detailed comments and suggestions. This research was partially supported by Daiwa Securities Group Inc. The second-named author was partially supported by the Ministry of Education, Culture, Sports, Science and Technology, Grant-in-Aid for Scientific Research (B) (2), 16310118.     

IS THE TOKYO SPOT FOREIGN EXCHANGE MARKET CONSISTENT WITH THE EFFICIENT MARKET HYPOTHESIS?

Recent Studies in the area of foreign exchange market efficiency have employed time series analysis to test for the absence of long-run equilibrium or cointegration relationships among the exchange rates for the major currencies. Cointegration directly violates the weak form of the Efficient Market Hypothesis in a speculative efficient market (Granger, 1986). In this study, we address the efficiency of the Tokyo spot foreign exchange market while updating the test procedures developed by Phillips and Ouliaris (1990), Johansen and Juselius (1990) and Johansen (1991). Cointegration is found to be absent, showing that the Tokyo spot market is consistent with the efficient market hypothesis.     

Diversification Benefits of Japanese Real Estate Over the Last Four Decades

This paper studies the benefits of diversifying into real estate and other assets that typify the wealth held by Japanese investors. We examine movements in mean variance frontiers by employing spanning tests to assess the statistical significance of frontier shifts. We also investigate the impact of shifts in mean variance frontiers before and after the precipitous decline in Japanese real estate and stock market values that began in 1990. Spanning tests show that real estate, short and long-term bonds, and Japanese equity provide significant diversification benefits. We find that mean variance frontiers shift after 1990. Statistically significant shifts are also economically important as measured by Sharpe ratio changes. Although significant, the portfolio weights on Japanese real estate are relatively small compared to their composition found in surveys of Japanese household wealth.     

Examining impulse response functions in cointegrated systems

A system of reduced forms with cointegrated variables may be estimated in two ways: as a vector autoregression in levels, or as a vector error correction model. The latter is a restricted version of the former. If there is cointegration, imposing this restriction will yield more efficient estimates. However, at short horizons, vector error correction estimates are known to perform poorly relative to those from a vector autoregression. We examine how this property affects impulse response functions. A Monte Carlo experiment, and an example, suggest that impulse response functions of the two models are similar at short horizons, but different at long horizons. This suggests that the loss of efficiency from vector autoregression estimation is not critical at the commonly used short horizon. Our results complement parallel arguments focusing on forecast errors made by Clements and Hendry (1995), Hoffman and Rasche (1996), and Lin and Tsay (1996).     

The effect of exchange rate changes on Japanese consumption exports

This paper investigates how exchange rates affect Japanese exports. This is difficult because many of Japan's exports are used to produce goods for re-export. An appreciation in the importing country that decreases exports can decrease its imported inputs from Japan. To avoid this bias we examine consumption exports. Using a panel dataset of Japan's consumption exports to 17 countries over the 1988–2009 period, we find exchange rate elasticities of about one. These results indicate that the large swings in the value of the yen over the last decade have caused large swings in the volume of Japanese exports.     

A dynamic von Thünen model with a demand function

This paper examines the dynamic processes of agricultural land use in the context of the von Thünen model. Consumers purchase agricultural goods to maximize their utility levels; farmers plant agricultural goods only once in a year and they decide their land use according to the last year's prices. In this context, it is first shown that land use is generally unstable for a broad class of utility functions, although the equilibrium land use is achieved in a very specific case. Second, it is shown that under a certain condition, land use changes cyclically with 2-year intervals.     

A theoretical comparison of the opportunity and gravity models

This paper compares the opportunity model with the gravity model from a theoretical view- point. First, based on a reexamination of Schneider's model, the ‘perceived opportunity model’ is proposed as a generalization of Schneider's model. Second, the similarity of the opportunity and gravity models is examined. In particular the condition of the opportunity model behaving like the gravity model is presented. Third, the difference of these models is investigated in terms of certain general model-theoretic properties. The behavioral ‘sensitivity’ of each model to spatial configuration changes is revealed by these properties.     

Nonparametric prediction for the time-dependent volatility of the security price

In this paper we consider a continuous time model for the security price with the time-dependent volatility. It is shown that the non-normality and non-linear dependency of the short-term return, the major characteristics observed on many financial assets, can be incorporated into our model. In order to evaluate the option price formula on the model we propose a nonparametric predictor for the volatility function without reference to a specific functional form. We examine the so-called continuous record asymptotics and show that the proposed predictor is asymptotically minimax for a wide class of the volatility functions. One of the most important results is that the application of the Black-Scholes method can be justified by plugging the proposed predictor in the standard Black-Scholes formula even if the volatility changes over time.