Monetary environments and stock returns revisited: A quantile regression approach

We investigate the impact of monetary conditions on stock market returns at different points on the return distributions. Our results reveal no association between stock returns and monetary environments at the lower quantiles. At the upper quantiles, however, we find that expansive monetary conditions lead to significantly larger stock returns. The relationship between returns and monetary conditions at the upper quantiles is also found to be asymmetric, exhibiting a monotonic increase in responsiveness at successive quantiles.     

Debt, interest rates, and integration of financial markets

It is commonly believed that higher budget deficits raise interest rates. However, these crowding out effects of increasing public debt have usually been found to be small or non-existent. One explanation is that on globalised bond markets interest rate differentials are offset due to financial integration. This paper tests crowding out, and measures the degree of integration of government bond markets, using spatial modelling techniques. Our main finding is that the crowding out effect of public debt on domestic long term interest rates is small: a 1% increase in the debt ratio pushes up domestic rates by 2 pp at most. Financial integration implies an important spillover effect via international bond markets, but only between OECD, and in particular EU, countries. The feedback effect from these markets on long term interest rates is as important as the domestic crowding out effect of higher public debt. Emerging markets are not as well integrated into international capital markets, causing a stronger crowding out effect.     

The vanishing role of money in the macro-economy: An empirical investigation for India

The recent de-emphasizing of the role of “money” in both theoretical macroeconomics as well as in the practical conduct of monetary policy sits uneasily with the idea that inflation is a monetary phenomenon. Empirical evidence has, however, been accumulating pointing to an important leading indicator role for money and credit aggregates with respect to long term inflationary trends. Such a role could arise from monetary aggregates furnishing a nominal anchor for inflationary expectations, from their influence on the term structure of interest rates and from their affecting transaction costs in markets. Our paper attempts to assess the informational content role of money in the Indian economy by a separation of these effects across time scales and frequency bands, using the techniques of wavelet analysis and band spectral analysis respectively. Our results indicate variability of causal relations across frequency ranges and time scales, as also occasional causal reversals.     

Analysis of Output Fluctuations in Taiwan: An Application of the IS–MP–AS Model

Extending the IS–MP–AS model, this paper finds that real GDP in Taiwan is positively affected by real depreciation and stock values and negatively associated with the government deficit/GDP ratio, the U.S. federal funds rate, and the expected inflation rate. Therefore, current large and rising government deficits, recent appreciation of the New Taiwan dollar, and gradual increases in the federal funds rate would hurt real output in Taiwan.     

Global financial crisis,corporate governance,and firm survival:: The Russian experience

Using a unique dataset obtained from large-scale panel enterprise surveys conducted in 2005 and 2009, we clarify the survival status of Russian industrial firms before and after the global financial crisis and empirically examine the determinants of firm survival. The estimation of the Cox proportional hazard model provided evidence that the independence of company’s governance bodies, their human resource abundance, and influence over corporate management are statistically significant factors affecting the survival probability of the surveyed firms. In particular, the board of directors and the audit committee are likely to play a vital role in reducing the potential exit risk. We also found that there is a significant difference in the viewpoints of economic logic for firm survival held by independent firms and group companies.     

FOOL THE MARKETS? CREATIVE ACCOUNTING,FISCAL TRANSPARENCY AND SOVEREIGN RISK PREMIA

We investigate the effects of official fiscal data and creative accounting signals on interest rate spreads between bond yields in the European Union. We find that two different measures of creative accounting indeed both increase the spread. The increase of the risk premium is stronger, if financial markets are unsure about the true extent of creative accounting. Moreover, fiscal transparency reduces risk premia. Instrumental variable regressions confirm these results by addressing potential reverse causality problems and measurement bias.     

Global and local determinacy in a one-step forward looking New Keynesian model

In this paper we consider a New Keynesian model for optimal monetary policy in a staggered fashion. We provide the relations of a non linear model of general economic equilibrium, implementing a suitable Taylor-type interest rate rule. We characterize the conditions that guarantee local determinacy and explore conditions under which local bifurcations of the target equilibrium may occur. Afterwards, we argue how local determinacy might be associated with global indeterminacy, providing some numerical examples.     

A methodology for constructing a financial systemic stress index: An application to Greece

The paper develops a financial systemic stress index (FSSI) for Greece. We present a novel methodology for constructing and evaluating a systemic stress index which i) adopts the suggestion of Hollo et al. (2012) [“CISS — A ‘Composite Indicator of Systemic Stress’ in the Financial System” ECB working paper] to incorporate time-varying correlations between different market segments, but uses a multivariate GARCH approach which is able to capture abrupt changes in correlations, shown to be a prerequisite for correctly identifying financial crises, ii) utilizes both market and balance sheet data which is a novel feature for systemic stress indicators and iii) evaluates the FSSI utilizing the results of a survey, conducted among financial experts, in order to construct a benchmark chronology of financial crises for Greece, which in turn is used to investigate whether changes in the FSSI are good leading indicators for financial crises. The results show that the FSSI is able to provide a precise periodization of crises. Our findings suggest that accurate depiction of the systematic nature of stress is pivotal in order to provide proper policy guidance with respect to financial crisis identification.     

Conditional volatility and correlations of weekly returns and the VaR analysis of 2008 stock market crash

Modelling of conditional volatilities and correlations across asset returns is an integral part of portfolio decision making and risk management. Over the past three decades there has been a trend towards increased asset return correlations across markets, a trend which has been accentuated during the recent financial crisis. We shall examine the nature of asset return correlations using weekly returns on futures markets and investigate the extent to which multivariate volatility models proposed in the literature can be used to formally characterize and quantify market risk. In particular, we ask how adequate these models are for modelling market risk at times of financial crisis. In doing so we consider a multivariate t version of the Gaussian dynamic conditional correlation (DCC) model proposed by Engle (2002), and show that the t-DCC model passes the usual diagnostic tests based on probability integral transforms, but fails the value at risk (VaR) based diagnostics when applied to the post 2007 period that includes the recent financial crisis.     

Analysis of non-stationary dynamics in the financial system

Novel data-driven analyses, appropriate for detecting economic instability in non-stationary time series, are developed using functional principal component analysis (fPCA) and Synchrosqueezing. fPCA is applied in a new way, aggregating multiple financial time series to identify periods of macroeconomic instability. Synchrosqueezing, a technique which generates a time-series’ time-dependent spectral decomposition, is modified to develop a new quantitative measure of local dynamical changes and structural breaks. The merit of this integrated technique is demonstrated by analyzing financial data from 1986 to 2012 that includes equity indices, securities and commodities, and foreign exchange. Both procedures successfully detect key historic periods of instability. Moreover, the results reveal distinctions between periods of long-term gradual change in addition to structural breaks. These tools offer new insights into the analysis of financial instability.     

Economic policy uncertainty,financial markets and probability of US recessions

We use probit recession forecasting models to assess the ability of economic policy uncertainty indexes developed by Baker et al. (2013) to predict future US recessions. The model specifications include policy indexes on their own, and in combination with financial variables, such as interest rate spreads, stock returns and stock market volatility. Both in-sample and out-of-sample analysis suggests that the policy uncertainty indexes are statistically and economically significant in forecasting recessions at the horizons beyond five quarters. The index based on newspaper reports emerges as the best predictor, outperforming the term spread at the longer forecast horizons.     

Social status, human capital formation and super-neutrality in a two-sector monetary economy

In this paper, we study how social status affects the impact of monetary policy on the long-run growth rate in a two-sector monetary economy with human capital accumulation, and find that the super-neutrality of money, with regard to the growth rate of the economy depends on the formation of human capital. In an economy with Lucas-type human capital formation, money is super-neutral; however, for an economy in which both physical and human capital are used as inputs for human capital accumulation, the money growth rate will have a positive effect on the long-run economic growth rate. The existence, uniqueness and saddle-path stability of balanced-growth equilibrium are also examined.     

New models of trader beliefs and their application for explaining financial bubbles

One challenging and exigent problem in behavior finance is how to establish verifiable models describing the appearance and burst of price bubbles. Current results are enhanced in this paper through a series of improvement as follows: new models are proposed for describing the return and dividend processes, especially the trader's behavior with the adaptive expectation belief and the bounded rational expectation belief, respectively; with these models, we establish dynamical systems in terms of the price-to-earnings ratio and the forecast-to-earnings ratio; the detailed solution and asymptotic analysis of these equations provide new, elaborate and quantitative explanations for both the formation and disappearance of different price bubbles; inspired by the herd behavior framework, a new random belief evolutionary mechanism is devised to model the belief change between two beliefs; a specific genetic algorithm is designed to efficiently estimate model parameters; simulation and empirical studies are carried out to illustrate the application of new methods. Both theoretical and empirical results sufficiently show the reasonability, practicality, efficiency and robustness of our new models and methods for properly explaining the appearance and burst of different kinds of price bubbles.     

Uniqueness of Markov equilibrium in stochastic OLG models with nonclassical production

A large class of stochastic OLG economies with nonclassical production is shown to possess a unique Markov Equilibrium (ME) which is also the unique sequential equilibrium. Additional properties such as monotonicity, continuity, and smoothness of the ME are also discussed.     

The nonlinear effects of expected and unexpected components of monetary policy on the dynamics of REIT returns

This paper examines empirically whether the expected and unexpected components of monetary policy have nonlinear impacts on the dynamics of REIT returns. Empirical results find the nonlinear response of REIT returns to expected and unexpected components of monetary policy. The unexpected component of monetary policy plays a more prominent role in influencing REIT returns than does the expected component of monetary policy. Specifically, unexpected contractionary monetary policy has a significantly adverse impact on REIT returns, and the adverse effect in a bust market is stronger than in a boom market. In addition, the unexpected monetary policy will also affect the boom-bust dynamics of REIT returns through its effect on the time-varying transition probability matrix. The tightening of the expected and unexpected components of monetary policy will enhance the probability that the REIT market will stay in the bust regime.     

South African stock return predictability in the context data mining: The role of financial variables and international stock returns

In this paper, we examine the predictive ability, both in-sample and the out-of-sample, for South African stock returns using a number of financial variables, based on monthly data with an in-sample period covering 1990:01 to 1996:12 and the out-of-sample period of 1997:01 to 2010:04. We use the t-statistic corresponding to the slope coefficient in a predictive regression model for in-sample predictions, while for the out-of-sample, the MSE-F and the ENC-NEW tests statistics with good power properties were utilised. To guard against data mining, a bootstrap procedure was employed for calculating the critical values of both the in-sample and out-of-sample test statistics. Furthermore, we use a procedure that combines in-sample general-to-specific model selection with out-of-sample tests of predictive ability to further analyse the predictive power of each financial variable. Our results show that, for the in-sample test statistic, only the stock returns for our major trading partners have predictive power at certain short and long run horizons. For the out-of-sample tests, the Treasury bill rate and the term spread together with the stock returns for our major trading partners show predictive power both at short and long run horizons. When accounting for data mining, the maximal out-of-sample test statistics become insignificant from 6-months onward suggesting that the evidence of the out-of-sample predictability at longer horizons is due to data mining. The general-to-specific model shows that valuation ratios contain very useful information that explains the behaviour of stock returns, despite their inability to predict stock return at any horizon. The model also highlights the role of multiple variables in predicting stock returns at medium- to long run horizons.     

The effect of the financial crisis on the retirement plans of older workers in England

This letter revisits the question of how wealth shocks influence retirement behaviour, exploiting the dramatic changes in UK asset prices between 2008 and 2009 as a source of such shocks. We find no evidence that the wealth shocks arising from this recent financial crisis affected the retirement plans of older workers in England.     

Institutions and financial dollarization: Indirect effects based on a policy experiment

We provide evidence that institutional improvements lead to lower levels of financial dollarization through previously unidentified channels. These indirect channels operate in addition to the direct impact identified in the literature and further illustrate the importance of institutions for the extent of banking dollarization.