Does transparency of central banks communication affect credit market? Empirical evidence for advanced and emerging markets

This study examines the effect of the transparency of central banks communication on credit market. In particular, this study investigates how central banks’ effort to provide more detailed information about their objectives regarding the price stability (monetary policy transparency) and financial stability (financial stability transparency) policies are able to mitigate information asymmetry on credit market, through the net interest margin charged by the banks to engage in financial intermediation (credit spread). The findings denote central bank transparency is able to reduce the credit spread. Additionally, the evidence suggests the effect of central bank transparency on the credit spread is greater in emerging markets, where there is less information available on credit market. In brief, transparency in central banks communication is an important tool to mitigate the information asymmetry in the credit market.     

Central bank’s forecasts and lack of transparency: An assessment of the effect on private expectations in a large emerging economy

We analyze whether the Central Bank of Brazil’s Inflation Reports projections influences the private’s inflation expectations. Specifically, we investigate how the central bank’s inflation forecasts affect the private sector’s inflation expectations through a qualitative and quantitative examination of the disagreement measure between them. Furthermore, we appraise if the lack of transparency resulting from the difference between the central bank’s inflation forecasts and the realized inflation affects the private’s inflation expectations. Although the findings confirm the previous studies that point out that the central bank transparency can affect the readjustment of market expectations, the results do not rule out the possibility of the central bank’s forecast and private’s inflation expectations being affected reciprocally.     

The effects of accounting regulations on stock valuation and volatility: Evidence from the banking industry

Banking regulators and market participants learn from price signals in the stock market (e.g., Flannery, Journal of Money, Credit and Banking 30: 273, 1998). Therefore, the system becomes more secure and developed as stock prices become more informative about banks’ financial conditions. Using a sample that includes major banks from 35 countries, this study investigates how accounting regulations affect bank stock valuation and volatility. The evidence suggests that bank stocks have higher valuation and lower volatility in countries that strictly regulate the quality of external audits and financial statement transparency. This study presents a comprehensive picture of the effects of bank accounting regulations on the stock market.     

Do U.S. and Japanese uncertainty shocks play important roles in affecting transition mechanisms of Japanese stock market?

This research investigates the impacts of U.S. and Japanese uncertainty shocks on the transition mechanisms of the Japan stock market dynamics by utilizing the Markov-switching GARCH-jump model with a time-varying transition probability matrix and analyzes the economic policy uncertainty shock of Japan, the economic policy uncertainty shock of the U.S., and the uncertainty shock about the U.S. equity market volatility. The empirical results demonstrate that the Japan stock market responds to most shocks with the exception of the U.S. economic policy uncertainty shock. The equity market volatility shock of the U.S. plays a more crucial role than the economic policy uncertainty shock of Japan. Furthermore, an increase in the U.S. equity market volatility shock reveals totally different signals in different volatile states. It signals an adverse belief about the Japan stock market in a high-volatile state, but signals an optimism viewpoint about the Japan stock market in a low-volatile state. Finally, the impact of the uncertainty shock about the U.S. stock market volatility is stronger in a high-volatile market than in a low-volatile market.     

The federal funds market,excess reserves,and unconventional monetary policy

Following the bankruptcy of Lehman Brothers, interbank borrowing and lending dropped, whereas reserve holdings of depository institutions skyrocketed, as the Fed injected liquidity into the U.S. banking sector. This paper introduces bank liquidity risk and limited market participation into a real business cycle model with ex ante identical financial intermediaries and shows, in an analytically tractable way, how interbank trade and excess reserves emerge in general equilibrium. Investigating the role of the federal funds market and unconventional monetary policy for the propagation of aggregate real and financial shocks, I find that federal funds market participation is irrelevant in response to standard supply and demand shocks, whereas it matters for “uncertainty shocks”, i.e. mean-preserving spreads in the cross-section of liquidity risk. Liquidity injections by the central bank can absorb the effects of financial shocks on the real economy, although excess reserves might increase and federal funds might be crowded out, as a side effect.     

Central bank transparency and financial market expectations: The case of emerging markets

In this paper, we study how central bank transparency influences the formation of money market expectations in emerging markets. The sample covers 25 countries for the period from January 1998 to December 2009. We find, first, that transparency reduces the bias (the difference between the money market rate and the weighted expected target rate over the contract period) in money market expectations. The effect is larger for countries with no exchange rate peg and countries with low income. Second, an intermediate level of transparency is found to have the most favorable influence on money market expectations: neither complete secrecy nor complete transparency is optimal. Finally, all subcategories of the Eijffinger and Geraats (2006) index lead to a smaller bias in expectations, with political transparency having the largest effect.     

Central bank disclosure as a macroprudential tool for financial stability

The Basel Capital Accord (pillar 3) states that disclosure of information (transparency) is essential to financial stability. This study analyzes, through inflation reports, the disclosure of information from the Central Bank of Brazil concerning the credit market. We consider credit risk and capital buffers as measures of financial stability in this analysis. Furthermore, in order to measure the perception of the monetary authority on the credit market, we built two indices based on the central bank’s communication on credit development. We performed a panel data analysis based on a sample of 125 banks for the period from June 1999 to September 2014 (7000 observations). The findings suggest that central bank communication regarding expectations concerning the credit market contributes to financial stability. Therefore, this kind of communication of central banks (about credit development) may constitute an important macroprudential tool to improve financial stability.     

Inflation and output volatility under asymmetric incomplete information

The assumption of asymmetric and incomplete information in a standard New Keynesian model creates strong incentives for monetary policy transparency. We assume that the central bank has better information about its objectives than the private sector, and that the private sector has better information about shocks than the central bank. Transparency has the potential to trigger a virtuous circle in which all agents find it easier to make inferences and the economy is better stabilised. Our analysis improves upon existing work by endogenising the volatility of both output and inflation. Improved transparency most likely manifests itself in falling output volatility.     

Asymmetric volatility spillovers between international economic policy uncertainty and the U.S. stock market

This paper studies the asymmetric spillover effect of important economic policy uncertainty (EPU) on the S&P500 index. We use monthly EPU indexes from Australia, Canada, China, Japan, the U.K. and the U.S. and the realized volatility of the U.S. stock market to study the asymmetric pairwise directional spillovers on the U.S. stock market from 2000 to 2019. We find that S&P500 index volatility is a net recipient of spillovers from important EPU indexes. Japanese EPU has the strongest spillover effect on the U.S. stock markets, while EPU from the U.K. plays a very limited role. By decomposing the volatility into good and bad volatility, we find that the relationship between bad stock market volatility and EPU is stronger than between good volatility and EPU. Time-varying spillover characteristics show that bad volatility reacts more strongly to shocks in EPU following the debt crisis and trade negotiations. Several robustness checks are provided to verify the novelty of these findings.     

A New Index of Independence of 12 European National Central Banks

Abstract

Many countries have recently strengthened the autonomy of their central banks in the effort to protect central bankers from government influences. This article reviews and extends the relevant literature to propose a new ranking of central bank independence in contrast to those originated by Bade and Parking, and Cukierman. The analysis shows a bivariate relationship between independence and inflation rates in 12 European Union countries in the EMS era. However, neither inflation nor its standard deviation had any statistical significance effect on real GDP growth. The procedure reveals that findings are, sometimes, index-specific.     

U.S. uncertainty and Asian stock prices: Evidence from the asymmetric NARDL model

When uncertainty reduces spending among U.S. consumers, it may affect the bottom line stock performance of Asian producers that cater to their needs. Theory predicts that the impact of uncertainty will be asymmetrical: during the two phases of the business cycle, countercyclic shocks will outweigh procyclic shocks, resulting in phase-specific equilibrium price adjustments. We conjecture that relative to recessions, recoveries bring larger long-run price adjustments, a response to pent-up growth potential. This is an extension of existing theories, which predict that recoveries bring overshooting, a transient reaction to pent-up demand. We test for these asymmetric uncertainty effects on 11 Asian stock market indices over the 2000M08 – 2017M02 period. Our independent measures include the economic policy uncertainty index (EPU) of Baker, Bloom, and Davis (2016), the Chicago Board Options Exchange implied volatility index (VIX), and the financial uncertainty indicator (JLN) of Jurado, Ng, and Ludvigson (2015). To characterize asymmetry, we employ the nonlinear autoregressive distributed lag (NARDL) model of Shin, Yu, and Greenwood-Nimmo (2014), in which both short- and long-run nonlinearities are captured through positive and negative partial sum decompositions of the explanatory variable(s). Using the NARDL output, we test three hypotheses. The first, that increases in uncertainty (decreases in uncertainty) result in stock price drops (stock price rises), is broadly supported by our analysis. The second, that equilibrium adjustments following negative countercyclic uncertainty shocks exceed those following positive movements, is supported fully by the EPU analysis and partially by the VIX and JLN analyses. The third hypothesis, that recoveries are characterized by overshooting, is consistent only with the behavior of the Chinese stock responses to EPU and VIX shocks. Our results demonstrate the advantages of the NARDL model in characterizing asymmetry. They suggest that while long-run asymmetry is fairly consistent across countries, short-run asymmetry is more country-specific.     

Economic uncertainty,oil prices,hedging and U.S. stock returns of the airline industry

This paper examines the impacts of economic policy uncertainty and oil price shocks on stock returns of U.S. airlines using both industry and firm-level data. Our empirical approach considers a structural vector-autoregressive model with variables recognized to be important for airline returns including jet fuel price volatility. Empirical results confirm that oil price increase, economic uncertainty and jet fuel price volatility have significantly adverse effect on real stock returns of airlines both at industry and at firm level. In addition, we also find that hedging future fuel purchase has statistically positive impact on the smaller airlines. Our results suggest policy implications for practitioners, managers of airline industry and commodity investors.     

Central bank independence and economic performance in eastern Europe

Following the breakdown of central planning by the early 1990s, transition economies faced varying measures of the need for economic restructuring and stabilisation. This paper examines both the trends in economic performance in eight eastern European countries and the degree of central bank independence (CBI) granted after reforms. The evidence of the paper indicates that both the measures of CBI and the measures of financial market development (FMD) show significant association with macroeconomic variables. Also, the sample exhibits positive association between CBI and measures of FMD.     

Geopolitical risks and stock market dynamics of the BRICS

This paper examines the effect of geopolitical uncertainty on return and volatility dynamics in the BRICS stock markets via nonparametric causality-in-quantiles tests. The effect of geopolitical risks (GPRs) is found to be heterogeneous across the BRICS stock markets, suggesting that news regarding geopolitical tensions do not affect return dynamics in these markets in a uniform way. GPRs are generally found to impact stock market volatility measures rather than returns, and often at return quantiles below the median, indicating the role of GPRs as a driver of bad volatility in these markets. While Russia bears the greatest risk exposure to GPRs in terms of both return and volatility, India is found to be the most resilient BRICS nation in the group. Noting that geopolitical shocks and in particular terrorist incidents are largely unanticipated, our findings underscore the importance of a strong financial sector that can help return the market to stability and an open economy that allows local investors to diversify country-specific risks in their portfolios.     

HIGH‐FREQUENCY ANALYSIS OF FOREIGN EXCHANGE INTERVENTIONS: WHAT DO WE LEARN?

Abstract.  The high-frequency analysis of foreign exchange dynamics is helpful in order to better identify the impact of central bank interventions. Evidence robustly shows that interventions do indeed move the exchange rate level in the desired direction. Interventions increase volatility in the short run as they are regarded as information; but they can reduce volatility overall. Ways of transmission may reach beyond the signalling channel and also include the portfolio balance and a damping channel. Finally, interventions are more successful if they obey certain conditions, such as being coordinated among central banks and going with the market and fundamentals.     

Shifts in volatility driven by large stock market shocks

This paper presents an extension of the stochastic volatility model which allows for level shifts in volatility of stock market returns, known as structural breaks. These shifts are endogenously driven by large return shocks (innovations), reflecting large pieces of market news. These shocks are identified from the data as being bigger in absolute terms than the values of two threshold parameters of the model: one for the negative shocks and one for the positive shocks. The model can be employed to investigate different sources of stock market volatility shifts driven by market news, without relying on exogenous information. In addition to this, it has a number of interesting features which enable us to study the effects of large return shocks on future levels of market volatility. The above properties of the model are shown based on a study for the US stock market volatility.     

Order aggressiveness, pre-trade transparency, and long memory in an order-driven market

Recent empirical research has documented that the state of the limit order book influences stock investors' strategies. Investors place more aggressive orders when the same side of the order book is thicker, and less aggressive orders when it is thinner. We conjecture and demonstrate that this behavior is related to long memories of trading volume, volatility, and order signs in stock markets. We investigate our conjecture in two types of artificial stock markets: a transparent market, in which agents observe all limit orders on both sides of the book and order volumes at those prices before they trade; and a less transparent market, in which agents observe only the best five bid and ask quotes with the depth available at these limit prices. The first market structure resembles certain actual stock exchanges in the level of pre-trade transparency, such as the Australian Stock Exchange, NYSE OpenBook, and the London Stock Exchange, whereas the second market structure is consistent with stock exchanges such as Euronext Paris, the Toronto Stock Exchange, the Tokyo Stock Exchange, and Hong Kong Exchanges and Clearing. We demonstrate that our long memory results are robust with different levels of pre-trade transparency, implying that the strategy constructed by the state of the order book is key for explaining long memories in many actual stock exchanges.     

Evolving United States stock market volatility: The role of conventional and unconventional monetary policies

Despite the econometric advances of the last 30 years, the effects of monetary policy stance during the boom and busts of the stock market are not clearly defined. In this paper, we use a structural heterogeneous vector autoregressive (SHVAR) model with identified structural breaks to analyse the impact of both conventional and unconventional monetary policies on U.S. stock market volatility. We find that contractionary monetary policy enhances stock market volatility, but the importance of monetary policy shocks in explaining volatility evolves across different regimes and is relative to supply shocks (and shocks to volatility itself). In comparison to business cycle fluctuations, monetary policy shocks explain a greater fraction of the variance of stock market volatility at shorter horizons, as in medium to longer horizons. Our basic findings of a positive impact of monetary policy on equity market volatility (being relatively stronger during calmer stock market periods) are also corroborated by analyses conducted at the daily frequency based on an augmented heterogeneous autoregressive model of realised volatility (HAR-RV) and a multivariate k-th order nonparametric causality-in-quantiles framework. Our results have important implications both for investors and policymakers.     

Exchange rate dynamics and their effect on macroeconomic volatility in selected CEE countries

To understand the potential for forming an optimum currency area it is important to investigate the origins of macroeconomic volatility. We focus on the contribution of real exchange rate shocks to macroeconomic volatility in selected Central and Eastern European countries. The contribution of real exchange rate shocks relative to other shocks allows us to evaluate whether the real exchange rate is a source of volatility or a buffer against shocks, as the theory suggests. The identification of the contributions is based on variance decomposition in two-country structural VAR models, which are identified by the sign restriction method. For most of the countries in the sample, shocks are predominantly symmetric relative to their effective counterpart, although the role of non-symmetric shocks is non-negligible. In general, for all the countries considered except Bulgaria and Slovenia, the real exchange rate does not generate large volatility over the business cycle and, with the exception of Bulgaria and Romania, is mostly driven by the non-symmetric shocks. These results are consistent with the real exchange rate having a shock-absorbing nature.     

The effects of foreign exchange and monetary policies in Russia

This paper examines the effects of Russian foreign exchange and monetary policies under conditions of abundant natural resources during the period 1999–2011 using structural VAR models. The results suggest that monetary policy shocks, which are identified as money supply disturbances, have a persistent effect on real output, and more than half of the volatility in real output can be explained by changes in the money supply. Furthermore, the analysis reveals that stock prices are a more significant transmission channel of monetary policy than bank loans.