Momentum and mean reversion across national equity markets

Numerous studies have separately identified mean reversion and momentum. This paper considers these effects jointly. Our empirical model assumes that only global equity price index shocks can have permanent components. This is motivated in a production-based asset pricing context, given that production levels converge across developed countries. Combination momentum-contrarian strategies, used to select from among 18 developed equity markets at a monthly frequency, outperform both pure momentum and pure contrarian strategies. The results continue to hold after corrections for factor sensitivities and transaction costs. They reveal the importance of controlling for mean reversion in exploiting momentum and vice versa.     

Mean reversion in annual earnings and its implications for security valuation

This article documents the long-horizon mean reverting character of annual earnings and tests the implications of such mean reversion for security valuation. First, both theory-based and nonparametric measures of earnings persistence decrease as the estimation order increases, revealing 40 percent less long-horizon persistence than expected under the commonly used random walk model. Second, the return responses to the earnings shocks are more closely related across firms to the higher-order measures of persistence that reflect significant long-horizon mean reversion. Third, the persistence measure derived from classical valuation theory outperforms the generic measure in explaining the return responses. Taken as a whole, these results provide evidence for significant mean reversion in the higher-order properties of earnings and for the stock market incorporating these properties in a manner consistent with classical valuation theory.     

Gender Diversity Index. Measuring persistence

This paper deals with the analysis of the Gender Diversity Index (GDI), which is an Index developed by Solactive AG and is calculated and distributed by this provider. The index tracks the performance of developed world companies that are successfully working towards gender diversity as part of their CSR (Corporate Social Responsibility) strategy, and we measure its degree of persistence by using fractional integration or I(d) techniques. Using daily data from 8 December 2010 until 16 December 2020, the results indicate that the series is highly persistent with an order of integration lower than, though very close to 1. However, an interesting result is obtained by estimating d recursively across subsamples. The differencing parameter moves around 0.92 until 23 March 2020, with the series displaying a very small degree of mean reversion behaviour until that date. After that period, however, we observe an increase in the estimate of d, which stabilizes around 0.97 after 5 May 2020, though now the series presents evidence of a lack of mean reversion, with the shock having a permanent effect on the series. Thus, it seems that the sanitary crisis due to Covid-19 has had a clear effect in the degree of persistence of the GDI data.     

On the time series measure of conservatism: a threshold autoregressive model

In this note we propose an alternative test specification for Basu’s (1997) time series measure of conservatism that is related to the threshold unit root test of Enders and Granger (1998). We argue that a regression of changes in earnings on the lagged levels—rather than lagged changes—, including an interaction term for negative values, has three conceptual advantages compared to the conventional setup: (1) a smooth, non-oscillating impulse-response pattern to an unexpected shock in earnings (2) a more efficient estimate of persistence in the long run and (3) it can be extended to higher order autoregressive processes. We apply both approaches to a common dataset of firms from the S&P500 index. We confirm the conventional finding that negative shocks are transitory and display stronger mean reversion than positive shocks. However, while most of the literature reports mixed evidence on positive shocks, we find clear evidence that positive shocks are transitory as well. In a Monte Carlo simulation we explain this finding by documenting that larger standard errors in the Basu specification can lead to incorrect inference when the decision between persistent and transitory shocks is close.     

Monetary Shocks in a Model with Skill Loss

Unemployment shows persistent and long‐lasting responses to nominal and real shocks. Standard real business cycle models with search frictions but a homogeneous labor force are able to generate some volatility and persistence, but not enough to match the empirical evidence. Moreover, empirical studies emphasize the importance of the heterogeneity of the unemployment pool to fully understand unemployment dynamics. In particular, in most European countries the incidence of long‐term unemployment is large and well known. One of the possible causes/consequences of long‐term unemployment is the skill deterioration of the unemployment pool. In this paper, we introduce the skill loss mechanism, and therefore a heterogeneous labor force, in a New Keynesian framework with search frictions. Calibrating the model for the Spanish economy, we show that while the skill loss mechanism helps to explain the magnitude of the response of unemployment to monetary shocks, it does not improve the performance of the homogeneous worker model in terms of the persistence of the response, especially for short‐ and long‐term unemployment.     

Análisis de la histéresis del desempleo en México ante shocks macroeconómicos

This research presents the behavior of the Mexican unemployment rate and shows the dependence with own history and macro variables. The concept of hysteresis or persistence tries to separate this inertia in the unemployment rate and some macroeconomic and endogenous factors. The results show a high inertia in the Mexican labor market, justified by the monetary levels and the dependence of the investment levels, considering the shocks of exports that affect the unemployment in the long term.     

Analysis of the hysteresis of unemployment in Mexico in the face of macroeconomic shocks

This research presents the behavior of the Mexican unemployment rate and shows the dependence with own history and macro variables. The concept of hysteresis or persistence tries to separate this inertia in the unemployment rate and some macroeconomic and endogenous factors. The results show a high inertia in the Mexican labor market, justified by the monetary levels and the dependence of the investment levels, considering the shocks of exports that affect the unemployment in the long term.     

Exchange rate mean reversion from real shocks within an intertemporal equilibrium model

The post Bretton Woods era has been characterized by real exchange rates that exhibit mean reversion, with mixed evidence as to whether this reversion is partial (PPP never holds) or essentially complete. This paper generates these stylized facts theoretically by synthesizing a simple intertemporal open economy model with the elasticities approach to the current account. A central feature of the model is the existence of non-traded goods. The model can generate partial or approximately complete mean reversion for the real exchange rate (depending on parameter values) if innovations in output are made up of permanent and temporary components. In addition, temporary output shocks generate a type of hysteresis wherein the short-run path for the exchange rate permanently alters its long-run equilibrium value.     

The Behavior of Interest Rates

The evidence in Fama and Bliss (1987) that forward interestrates forecast future spot interest rates for horizons beyonda year repeats in the out-of-sample 1986–2004 period.But the inference that this forecast power is due to mean reversionof the spot rate toward a constant expected value no longerseems valid. Instead, the predictability of the spot rate capturedby forward rates seems to be due to mean reversion toward atime-varying expected value that is subject to a sequence ofapparently permanent shocks that are on balance positive tomid-1981 and on balance negative thereafter.     

Money and economic activity,inventories and business cycles

Incomplete information is a necessary condition for any real effects produced by monetary impulses. An alternative to the local-global inference problem is explored in this paper. Agents are confronted with permanent and transitory shocks. Even with full knowledge about the stochastic structure their best perception at any particular time will usually be erroneous. Prices for each period are set at the beginning of the period on the basis of market conditions. The realization of the shock process thus creates a short-run ‘disequilibrium’ absorbed by inventory adjustments. This adjustment translates perceived transitory monetary shocks into serially correlated output movements. The analysis proceeds within the context of rational expectations It offers a generalization of equilibrium analysis in two respects. Prices are always in equilibrium relative to perceived conditions, but they do not reflect all ongoing shocks. Quantity adjustments reflect the perceived transitory shocks. The framework used involves moreover a stock-flow interaction operated by inventory adjustments. The stock-flow interaction imposes at any time a future expected adjustment path (for price-level and quantities) to the system's unique stock equilibrium. A major implication of the analysis resolves a puzzle experienced in a recent paper by Robert Hall. It reconciles intertemporal substitution with lagged effects of monetary impulses. It also reconciles small and inconclusive cyclic movements in real wages with the occurrence of production function and large variations in unemployment. Lastly, the nature of the inference problem determined by the pattern of incomplete information produces serially correlated movements conditioned on large permanent shocks.     

Emerging market business cycles: Learning about the trend

Emerging market business cycles feature a higher variability of consumption relative to output and a strongly countercyclical trade balance. An equilibrium business cycle model in which agents learn to distinguish between the permanent and transitory components of total factor productivity shocks using the Kalman filter accounts for these features. Calibrated to Mexico, the model accounts for the behavior of consumption and the trade balance for a wide range of variability and persistence of permanent shocks relative to transitory shocks. Estimation for Mexico and Canada suggests more severe informational frictions in emerging markets than in developed economies.     

Does oil price have similar effects on the exchange rates of BRICS?

Motivated by the crucial status of oil price and exchange rates in world finance and economy, we apply daily data from August 2005 to February 2019 to investigate the impact of oil price shocks on the exchange rate of BRICS countries. This paper first adopts a new framework and EEMD method to decompose oil shocks and exchange rate series, respectively. With these econometric methods, the final research variables in this paper are constructed, including two types of oil shocks and three kinds of exchange rate series. The ARDL approach and VAR model are then employed to detect the influence of oil shocks on exchange rates in different frequencies, corresponding to the stationarity of series. The evidence, based on the original exchange rate series reveals that two oil price shocks can produce different effects on net oil-importing countries and net oil-exporting countries, while the results from different frequencies show that exchange rates will have a significant response to oil shocks only at a high frequency. It is worth noting that China is a unique case in BRICS, the relations between its exchange rate and oil price shocks is far insignificant than that of the other countries.     

Uncertainty shocks and unemployment dynamics in U.S. recessions

What are the effects of uncertainty shocks on unemployment dynamics? We answer this question by estimating non-linear (Smooth-Transition) VARs with post-WWII U.S. data. The relevance of uncertainty shocks is found to be much larger than that predicted by standard linear VARs in terms of (i) magnitude of the reaction of the unemployment rate to such shocks, and (ii) contribution to the variance of the prediction errors of unemployment at business cycle frequencies. The ability of different classes of DSGE models to replicate our results is discussed.     

The behaviour of the real exchange rate: Evidence from regression quantiles

We test for mean reversion in real exchange rates using a recently developed unit root test for non-normal processes based on quantile autoregression inference in semi-parametric and non-parametric settings. The quantile regression approach allows us to directly capture the impact of different magnitudes of shocks that hit the real exchange rate, conditional on its past history, and can detect asymmetric, dynamic adjustment of the real exchange rate towards its long run equilibrium. It, therefore provides a detailed mapping of the real exchange rate behaviour, while being a robust alternative to previous unit root tests. The latter is confirmed by a simulation analysis comparing the power of the alternative tests. As concerns the real exchange rate, our results suggest that large shocks tend to induce strong mean reverting tendencies in the exchange rate, with half lives less than one year in the extreme quantiles. Mean reversion is faster when large shocks originate at points of large real exchange rate deviations from the long run equilibrium. However, in the absence of shocks no mean reversion is observed. Finally, we report asymmetries in the dynamic adjustment of the RER.     

Asymmetric Labor Market Institutions in the EMU and the Volatility of Inflation and Unemployment Differentials

How does the asymmetry of labor market institutions affect the adjustment of a currency union to shocks? To answer this question, this paper sets up a dynamic currency union model with monopolistic competition and sticky prices, hiring frictions, and real wage rigidities. In our analysis, we focus on the differentials in inflation and unemployment between countries, as they directly reflect how the currency union responds to shocks. We highlight the following three results. First, we show that it is important to distinguish between different labor market rigidities as they have opposite effects on inflation and unemployment differentials. Second, we find that asymmetries in labor market structures tend to increase the volatility of both inflation and unemployment differentials. Finally, we show that it is important to take into account the interaction between different types of labor market rigidities. Overall, our results suggest that asymmetries in labor market structures worsen the adjustment of a currency union to shocks.     

Labor‐Market Institutions and Long‐Term Effects of Youth Unemployment

Graduating from a school during a time of adverse economic conditions has a persistent, harmful effect on workers’ subsequent employment opportunities. An analysis of panel data from OECD countries during the 1960–2010 periods reveals that a worker who experiences a 1 percentage point higher unemployment rate while the worker is 16–24 years old has a 0.14 percentage point higher unemployment rate at ages 25–29 years and 0.03 percentage points higher at ages 30–34 years. The persistence of this negative effect is stronger in countries with stricter employment protection legislation. A composite index for labor‐market rigidity is constructed and the index is shown to have positive correlation with the persistence. Moderating macroeconomic fluctuations is more important in countries that have more persistent labor‐market entry effects on subsequent outcomes.     

Joint Dynamics of House Prices and Foreclosures

This paper studies the joint transitional dynamics of the foreclosures and house prices in a standard life‐cycle incomplete markets model with housing and a realistic long‐term mortgage structure. We calibrate our model to match several long‐term features of the U.S. housing market, and analyze the effects of several unexpected and permanent shocks on the house price and the foreclosure rate both across the steady states and along the transition between the steady states. We examine permanent, unexpected shocks to the risk‐free interest rate, the minimum down‐payment ratio, and unemployment. During the transition, these shocks create large movements in house prices. More importantly, the foreclosure dynamics are quite significant along the transition compared to the steady‐state changes, and there are strong feedbacks between foreclosures and house prices. We assess the effects of a temporary reduction in the risk‐free interest rate, which has moderate effects on house prices but little effect on foreclosure dynamics. We also study the effects of an ex ante macroprudential policy, which establishes a minimum down‐payment requirement at a higher threshold. Such a macroprudential policy helps substantially stabilize both house prices and foreclosures.     

The Relationships between Permanent and Transitory Movements in U.S. Output and the Unemployment Rate

This paper estimates the permanent and transitory movements in U.S. output and the unemployment rate and the relationships between them. The results suggest that permanent movements in U.S. output and the unemployment rate are important for explaining overall fluctuations. Further, the correlation between changes in these series arises in large part due to the relationship between their permanent components.     

Large market shocks and abnormal closed-end-fund price behaviour

This paper investigates the short-term price behaviour of closed-end funds following eight large market-wide shocks. The findings, from a sample of 63 funds continuously traded on the London Stock Exchange, indicate that prices overreact relative to equilibrium given by net asset values. The speed of reversion in discounts following market-wide shocks is slower than that following fund-specific shocks of a similar magnitude. The post-shock persistence in discounts is related more to the ease of arbitrage rather than to liquidity, as proxied by fund size, or to the speed of recovery in the broader market. The discount decays more slowly for those funds that are difficult to arbitrage.     

Labor Market and Financial Shocks: A Time-Varying Analysis

We estimate a time-varying VAR model to analyze the effects of a financial shock on the U.S. labor market. We find that a tightening of financial conditions is highly detrimental to the labor market. We show that while negative financial shocks have been responsible for increases in unemployment, our model does not find significant contributions of financial shocks during periods of expansion. The source of this asymmetry is the time-varying standard deviation of the identified shock, which is higher in times of financial distress; on the other hand, we find that the transmission mechanism does not significantly change over time.