Oil shocks and stock volatility: new evidence via a Bayesian,graph-based VAR approach

ABSTRACT

This article examines the temporal dependence between three oil shocks and realized volatility in the stock markets of G20 countries between 1994 and 2019. By applying a novel, graphical, Bayesian VAR (BGVAR) model, we calculate unidirectional linkages of oil and stock volatility with a full and segmented sample. The results suggest an overall causality from stock volatility to oil shocks. For certain short, specific periods, the causal direction reverses. Depending on the country and the source of an oil shock, the magnitude and type of the effect can vary considerably. Specific oil-market shocks occur most often in our full sample. In a time-varying structure, oil supply shocks’ impact on stock volatility is more prominent, and net oil-importing countries’ responses to these shocks are greater than for oil-exporting countries. In addition, we find that relationship dynamics can capture market information, such as global economic growth during the 2008–2009 financial crisis.     

COOPERATIVE FIRMS AND THE CRISIS: EVIDENCE FROM SOME ITALIAN MIXED OLIGOPOLIES

We investigate how cooperative firms reacted to the current crisis. This allows us to compare the behaviour of cooperative and conventional firms facing exogenous shifts in demand. After a short survey of a stream of theoretical literature, we analyze a large group of Italian production cooperatives in the periods 2003–2010 and 1994–2011 and we contrast co‐ops behaviour with the overall trend in the industries in which they operate. Our sample's evidence suggests that the cooperative's behaviour has a stabilizing effect on employment with respect to shocks in output demand. Unlike profit‐maximizers, cooperative firms seem to be adjusting pay more than employment when facing shocks. Production co‐ops look better equipped than their profit‐maximizing counterparts in tackling the long recession also because they have been very cautious in their profit policies over time. Unlike conventional firms, they have significantly increased their own equity during ‘good’ years instead of distributing large dividends to their members.     

Structural VAR models for Malaysian monetary policy analysis during the pre- and post-1997 Asian crisis periods

This article conducts an in-depth investigation into building a Structural Vector Autoregression (SVAR) model and analysing the Malaysian monetary policy. Considerable attention is paid to: (i) the selection of foreign, policy and target variables; (ii) establish identifying restrictions and improve the estimates of impulse response functions; (iii) assess the importance of intermediate channels in transmitting monetary policy mechanism; and (iv) the way in which the 1997 Asian financial crisis affected the working of monetary policy. Malaysia is an interesting small open economy to study because, following this crisis, the government imposed capital and exchange rate control measures. The overall results suggest that the crisis and the subsequent major shift in the exchange rate regime have significantly affected the Malaysian ‘Black Box’. In the pre-crisis period, domestic variables appear to be more vulnerable to foreign monetary shocks. Further, the exchange rate played a significant role in transmitting the interest rate shocks, whereas credit and asset prices helped to propagate the money shock. In the post-crisis period however, asset prices play a more domineering role in intensifying the effects of both interest rate and money shocks on output, and the economy was insulated from foreign shocks.     

Twin deficits and fiscal spillovers in the EMU's periphery. A Keynesian perspective

The objective of this paper is to shed light on the twin deficit hypothesis in Southern Europe and the MENA region, taking into account fiscal spillovers from the core during the global crisis. Using Godley and Lavoie (2007)'s baseline model, we first show that fiscal shocks from a core region could aggravate macroeconomic imbalances in the periphery. We then gather data from the period 1977–2016 for ten MENA and peripheral EMU countries, and model the twin deficit hypothesis in the presence of fiscal spillover with a P-VARX methodology. Our results highlight that fiscal balance, current account, and GDP growth rates in the EMU's periphery are negatively affected by fiscal consolidations in the core. Fiscal discipline in surplus countries is tantamount to a ‘beggar thy neighbor’ effect on the periphery, in times of crisis. We discuss the implications of our results to propose further international coordination of macroeconomic policies.     

Monetary Rules:A Preliminary Analysis*

This paper examines the effects of three simple rules for monetary policy in an econometric model of the Australian economy. Its main contribution is to examine such rules under a range of exogenous shocks to the economy. rather than over a particular historical episode. A second contribution is to show that, in the model used, the money supply may be controlled by variations in interest rates under official control. However. lags of two to four quarters are involved for the shocks considered in the paper. The results are consistent, in the short run, with those obtained by Poole—that is, it is sensible to fix the money supply when the shocks are ‘real’ and to fix the interest rate when the shocks are ‘financial’. In the medium to long run. however, it is shown that the variability of inflation and unemployment may be less when money is controlled even for a financial shock. These conclusions are strengthened if allowance is made for the ‘underwriting’ problem.     

Managed Exchange Rates*

Managed exchange rates have become a tool of macroeconomic stabilization policy. Much of the previous emphasis on parametrically chosen exchange rate regimes has missed the advantages of a strategy of a variable target exchange rate when the central bank tries to maintain equilibrium output in the face of various shocks to the economy. Based on a standard IS-LM-AS macromodel, optimal combinations of exchange rate and money supply changes are found that insulate the economy against all stipulated shocks. However, these combinations vary from one shock to another; therefore recognition signals are necessary. Continuous information on some variables allows the central bank to identify shocks if they can be guaranteed to occur individually, but not otherwise. As a second-best strategy, ‘defensively managed exchange rates’ appear suitable. The paper also discusses some side effects and other practical difficulties of a managed exchange rate as an automatic stabilizer.     

What happens when the Kiwi flies? Sectoral effects of exchange rate shocks on the New Zealand economy

We use a data-rich approach, a factor-augmented vector autoregression (FAVAR), to identify idiosyncratic exchange rate shocks and examine the effects of these shocks on different sectors of the New Zealand economy. We find that an unexpected shock to the exchange rate has significant effects on relatively tradable sectors of the economy. Whilst this is expected, relatively ‘more’ non-tradable sectors of the economy are also influenced by shocks to the exchange rate, presumably due to their linkages to more trade-exposed sectors. We also find that exchange rate shocks explain a small proportion of overall business cycle variability, implying that the exchange rate acts as a buffer rather than as a source of shock.     

The effect of financial liberalization on banking sector stability

Several studies indicate that financial liberalization increases likelihood of a financial crisis without distinguishing between a normal period, unstable period preceding the onset of banking panics and crisis/post period. We explain in this paper the relationship between financial liberalization and banking sector vulnerability. Then, we argue that banking sector turmoil is most likely to occur after an intermediate degree of liberalization. Using a recently updated dataset for financial reforms, we find an inverted U-shaped relationship between liberalization and the likelihood of banking crisis for a sample of 49 countries between 1980 and 2010. We used a multinomial logit model in order to take into account what is called the ‘post crisis bias’. We ask whether the relationship remains when institutional characteristics of countries and dynamic effects of liberalization are considered. The empirical results indicate that the relationship between liberalization and banking sector stability depends strongly on the strength of capital regulation and supervision. With very weak regulation and supervision, the probability of banking crises is increasing with liberalization but this relationship is reversed as regulation and supervision become significant. The most important type of liberalization in relation to banking crises seems to be operational. A policy implication is that positive growth effects of liberalization can be achieved without increasing the risk of a banking fragility if appropriate institutions are developed.     

DETECTING SHIFT AND PURE CONTAGION IN EAST ASIAN EQUITY MARKETS: A UNIFIED APPROACH

We test for contagion between pairs of East Asian equity markets over the period 1990–2007. We develop an econometric methodology that allows us to test for both ‘shift’ and ‘pure’ contagion within a unified framework. Using both Hong Kong and Thailand as potential shock sources, we find strong evidence of both types of contagion. Therefore, during episodes of high volatility, equity returns are influenced by changes in the transmission of common shocks and additionally by the diffusion of idiosyncratic shocks through linkages that do not exist during normal times.     

Bank loan supply shocks and leverage adjustment

We investigate the effect of bank loan supply shocks on firms’ leverage adjustment. We show that the impact of bank shocks is larger for firms with greater dependence on financially troubled banks. We measure firms’ pre-crisis loan dependence on troubled banks by using matched firm–bank loan data. Using the boom-bust cycle from 1987 to 2014 in Japan as a quasi-experiment, we find that financially constrained firms adjust their leverage slower during credit-crunch periods than during other periods. During credit-crunch periods following banking crisis, firms associated with failing banks or with banks that have a limited capacity to supply loans show a slower adjustment than other firms. Bank shocks have significant effects on small firms’ adjustment but not on that of large firms. These results are robust when we consider demand-side effects and perform other robustness tests. Our results imply that bank shocks have a persistent effect on borrowers’ leverage.     

Predicting US county economic resilience from industry input-output accounts

Resilience is defined as a system’s ability to initially resist and then recover from a shock. Here we apply this concept to examine the performance of U.S. counties during the Great Recession. The response of local economies to manmade and natural shocks is hypothesized to depend on the centrality of local industries within the economy, or how well connected they are to the other industries. We first calculate a centrality value for each industry using the national Input-Output accounts. We then ‘step down’ these values to the county level using industry employment data. We then test empirically whether local economies containing more centralized industries were more resilient, using a resilience measure that compares the local employment rebound and decline during the Great Recession. Our results suggest that measures of economic centrality adopted from the study of complex networks provide new insights when applied to the fields of regional science and spatial analysis, and economic growth more generally.     

Sources of fluctuations in hours worked for Canada,Germany, Japan and the U.S.: a sign restriction VAR approach

This study empirically examines the sources of fluctuations in hours worked in Canada, Germany, Japan and the U.S. It is particularly motivated by Galí’s (1999) VAR study, which demonstrates that a positive technology shock reduces hours worked, at least in the short run. However, in the present study, a technology shock is identified without recourse to Galí’s long-run restriction, which has been subject to active controversy. Furthermore, this study uncovers other important sources of fluctuations in hours worked to reflect the concern, raised by numerous studies, that technology shocks leave most variations in hours worked unexplained. Specifically, there are six shocks underlying our model, and they are identified using a set of sign restrictions. The empirical results confirm that in all four countries, a positive technology shock significantly reduces hours worked. This technology shock, along with labor supply and demand shocks, accounts for most of the short-term variations in hours worked. As the forecasting horizon increases, technology and demand shocks become less important, whereas labor supply shocks contribute to explaining the bulk of long-run variations in hours worked. Finally, the empirical relevance of Galí’s long-run identification restriction is tested and the results are related to those obtained using the sign restriction model.     

Charter value,risk-taking and systemic risk in banking before and after the global financial crisis of 2007-2008

ABSTRACT

We investigate how bank charter value affects risk for a sample of OECD banks by using standalone and systemic risk measures before, during, and after the global financial crisis of 2007–2008. Prior to the crisis, bank charter value is positively associated with risk-taking and systemic risk for very large ‘too-big-too-fail’ banks and large U.S. and European banks but such a relationship is inverted during and after the crisis. A deeper investigation shows that such a behaviour before the crisis is mostly relevant for very large banks and large banks with high growth strategies. Banks’ business models also influence this relationship. We find that for banks following a focus strategy, higher charter value amplifies both standalone and systemic risk for large U.S. and European banks. Our findings have important policy implications and cast doubts on the relevance of the uniform more stringent capital requirements introduced by Basel III.     

The spillover effect of the US uncertainty on emerging economies: a panel VAR approach

The article quantifies the spillover effects of the United States’ (US) uncertainty shocks on emerging economies, using a panel VAR model. We find that the US uncertainty shocks are the risks, and hence drop the capital inflow, investment, consumption, export and output of emerging economies. This also induces a depreciation of emerging market currencies. As a result, our model predicts a fall in short-term interest rate of emerging economies to react against the US uncertainty shocks. Our findings partly help explain the slow recovery of the world economy after the 2008–2009 global financial crisis.     

A strong hysteretic model of Okun’s Law: theory and a preliminary investigation

This paper presents a ‘strong hysteretic’ version of Okun’s Law, that is, a version of the law in which ‘history matters.’ In this version of the link between fluctuations in unemployment and growth, the most important past growth shock exerts an influence on the current unemployment rate. A theoretical framework is proposed in order to lay the foundations of this version of Okun’s Law. In this framework, the hysteresis property arises because a large number of heterogeneous firms discontinuously adjust their activity levels in response to fluctuations in the rate of growth. The foundations having been laid, a method for empirically testing our hysteretic Okun’s Law is presented. An algorithm permits construction of a hysteresis operator, which synthesizes, for every moment, the growth shocks that have remained in the memory bank of the unemployment rate. Empirical tests are conducted to assess the empirical relevance of this version of Okun’s Law, as compared to the more familiar linear relationship. Empirical results consistent with hysteresis are found for several of the countries in our sample.     

Trade integration and synchronization of shocks*

According to the European Commission (1990 ), closer integration leads to less frequent asymmetric shocks and to more synchronized business cycles between countries. However, for Krugman (1993 ) closer integration implies higher specialization and, thus, higher risks of idiosyncratic shocks. Drawing on the evidence from a group of transition countries, this paper tries to determine whose argument is supported by the data. This is done by confronting estimated time‐varying coefficients of supply and demand shock asymmetry with indicators of trade intensity and exchange rates. We find that (i) an increase in trade intensity leads to higher symmetry of demand shocks: the effect of integration on supply shock asymmetry varies from country to country; and (ii) a decrease in exchange rate volatility has a positive effect on demand shock convergence. The results confirm ‘The European Commission view’ and also the argument by Kenen (2001 ) according to which the impact of trade integration on shock asymmetry depends on the type of shock.     

Using Romer and Romer's new measure of monetary policy shocks to identify the AD and AS shocks

This article re-examines the series of (exogenous) Federal Funds Rate (FFR) shocks created by Romer and Romer (2004) for the period 1969:01–1996:12. We hypothesize that if Romer and Romer have constructed a reasonable set of monetary policy shocks, then including them in a small Vector Autoregression (VAR) should help to identify other structural shocks that affected the United States economy during their sample period. Using a sample period of 1971:01–1996:12 we are easily able to identify both an Aggregate Demand (AD) shock and an Aggregate Supply (AS) shock without imposing any sign or long-run restrictions. We present historical decompositions that allow us to compare the relative importance of these shocks with that of the exogenous monetary policy shocks in explaining output fluctuations during the 1973–1975, 1980–1984 and 1990–1991 business cycle episodes.     

Impacts of China's crash on Asia-Pacific financial integration: Volatility interdependence,information transmission and market co-movement

This paper examines the price and volatility dynamics between China and major stock markets in the Asia-Pacific, investigating the effects of the Chinese stock market crash (2015–2016) for the first time. Employing the Bayesian VAR and BEKK GARCH, we observe that price and volatility spillover behaviours are different during the stable and stress periods. Particularly, price spillovers from China to other regional markets are more significant during a bullish period, showing that ‘good news’ emanating from China has strong impacts on its neighbours during better market condition. In the turbulent period, we observe strong shock spillover effects and enhanced volatility spillovers from China to most Asia-Pacific stock markets. This is because China, as an important trading partner and strategic financial centre shows to exert significant influence on the Asia-Pacific region through various economic channels. We also find that the Asia-Pacific stock markets spill over their shocks to China during the crisis, indicating that China is becoming more integrated with the regional financial markets.     

The effects of economic policy uncertainty on China’s economy: evidence from time-varying parameter FAVAR

ABSTRACT

This article explores the effects of China’s economic policy uncertainty (EPU) on its fiscal policy, monetary policy and a wide range of macro-economic variables using a time-varying parameter FAVAR model. Based on monthly data from 07/2003 to 08/2017, the time-varying structure of the model allows us to capture the time-varying characteristics of the macro-economic variables and which channel is relevant. Empirical results reveal that the reaction of monetary and fiscal policies to EPU is highly asymmetric across macro-economic circumstances. Loose monetary and fiscal policies are adopted in response to EPU shocks during the financial crisis, while policies are moderately tightened after the crisis. The China Interbank Offered Rate (Chibor) responds more sensitively and severely than M2 to EPU shocks. Additionally, EPU shocks have a significant and negative impact on economic growth, consumption, exchange rates, bonds and the stock market, but showing a positive impact on credit, real estate and fixed asset investment (which might be due to China’s special economic market environment and the high investment return). The results indicate that EPU shocks significantly affect macroeconomic fundamentals through precautionary savings and financial market channels but lose their effectiveness through a ‘real options’ effect.     

Macroeconomic tail risk,currency crises and the inter-war gold standard

We introduce macroeconomic tail risk into the canonical global game model of currency crises. The exchange rate peg is attacked if fundamentals reach a critical threshold, or if there is a sufficiently large public shock. Large shocks generate doubt amongst investors about both the state of the world and about what others know, giving rise to multiple equilibria. We find a non-monotonic relationship between tail risk and the probability of (a fundamentals-based) crisis and show how this effect depends on the magnitude and direction of public shocks. We consider the implications of policy intervention and identify conditions under which active intervention produces doubt about the level of fundamentals and, hence, how others will respond. Our analysis clarifies how financial contagion in Europe precipitated the sterling crisis of 1931.