International stock return predictability: Is the role of U.S. time-varying?

This study investigates the predictability of 11 industrialized stock returns with emphasis on the role of U.S. returns. Using monthly data spanning 1980:2–2014:12, we show that there exist multiple structural breaks and nonlinearities in the data. Therefore, we employ methods that are capable of accounting for these and at the same time date stamping the periods of causal relationship between the U.S. returns and those of the other countries. First we implement a subsample analysis which relies on the set of models, data set and sample range as in Rapach et al. (J Finance LXVIII(4):1633–1662, 2013). Our results show that while the U.S. returns played a strong predictive role based on the OLS pairwise Granger causality predictive regression and news-diffusion models, its role based on the adaptive elastic net model is weak. Second, we implement our preferred model: a bootstrap rolling window approach using our newly updated data on stock returns for each countries, and find that U.S. stock return has significant predictive ability for all the countries at certain sub-periods. Given these results, it would be misleading to rely on results based on constant-parameter linear models that assume that the relationship between the U.S. returns and those of other industrialized countries are permanent, since the relationship is, in fact, time-varying, and holds only at specific periods.     

Whose policy uncertainty affects trade flows between Japan and the U.S.?

Previous studies mostly assumed that the effects of policy uncertainty on trade flows are symmetric. In this article, we add to this literature by arguing and demonstrating that the effects could be asymmetric. Since asymmetry analysis requires using non-linear models, such models yield a more significant outcome than linear models. We show this by considering the trade flows of 66 two-digit U.S. exporting industries to Japan and 59 two-digit Japanese exporting industries to the United States. While both the linear and non-linear models predicted short-run effects of the U.S. and Japanese policy uncertainty on exports of most industries, the long-run effects were significantly different. In the long run, while the linear model predicted no significant effects of either uncertainty measure, the non-linear model 12 (14) U.S. exporting industries that were affected by changes in the Japanese (the U.S.) policy uncertainty measure and six (10) Japanese exporting industries that were affected by changes in the Japanese (the U.S.) policy uncertainty measure. Several large industries were among the affected industries.     

Pursuing the wrong options? Adjustment costs and the relationship between uncertainty and capital accumulation

Abel and Eberly (1999) prove that uncertainty has an ambiguous effect on long run capital accumulation in a real options model. We show that, with adjustment costs quadratic in investment, more uncertainty reduces capital and this effect may be large.     

Is it all about competence? The human capital of U.S. presidents and economic performance

This paper explores the extent to which human capital improves the economic policy competence of US presidents. Several recent studies have used international data to test similar hypotheses. However, international studies suffer from a variety of comparability issues, not all of which can be avoided through fixed effects and error correction. The US results developed in this paper suggest that both career paths and education have significant effects on a president’s economic policy judgment, particularly in the period after the Civil War. However, the paper also suggests that more than good economic management skills are required to win national elections.     

Is Trade Liberalization an Important Cause of Increasing U.S. Wage Inequality? The Interaction of Theory and Policy

The majority of mainstream economists believe that globalization and trade liberalization have had a minor role in increasing U.S. wage inequality. A minority argues that capital mobility and outsourcing indicate a larger effect. This paper first surveys these views, and then argues that how we understand the policy consequences of trade liberalization helps determine the character of our analysis of the issue itself. Thus, a shift in policy perspective, to consider the "equity costs" of trade liberalization in terms of eroded U.S. labor market institutions, produces a larger framework for analyzing the consequences of globalization and trade liberalization than is available in traditional comparative advantage efficiency reasoning. From this wider perspective, trade liberalization has likely had a greater impact on U.S. wage inequality than even the minority mainstream position allows.     

Can gold hedge and preserve value when the US dollar depreciates?

This paper examines gold's hedging and value-preserving properties against fluctuations in the US dollar. We propose a likelihood ratio test that draws a distinction between hedging and safe-haven characteristics on the basis of the conditional dependence structure under different market conditions. Our evidence, based on an analysis of data for US dollar exchange rates with a broad set of currencies, indicates that gold can serve as a hedge against US dollar depreciation but is a weak safe haven against extreme US dollar movements. These results have implications for risk management and hedging strategies.     

The Analysis of U.S. Deposit Insurance System and the Enlightenment to China

U.S. deposit insurance system has important and deep influence on the building and operating of the deposit insurance system for many countries in the world. Based on the analysis of the development stage and status quo of the U.S. deposit insurance system, this paper suggests that China should learn from the experience of U.S. deposit insurance system, to build and perfect the laws of deposit insurance system, and the mandatory, the scope, the insurance premium, and the top insurance amount of the deposit insurance system should be stated, and the deposit insurance agencies should maintain their independence and restrain the moral hazard. Only in that way can the deposit insurance system of China be built and perfected.     

Who upholds the surging gold price? The role of the central bank worldwide

Who upholds the surging gold price? Conventional wisdom suggests that the depreciation of the exchange rate, inflation and economic turmoil are the suspects. Nonetheless, while these factors cease, why does the gold price still stay around hikes? The gold market belongs to a global arena. Different from other commodities, its participants include the national central banks worldwide. However, surprisingly, the role played by these tremendous market participants’ gold holdings on the gold price has been ignored in past empirical works. This research focuses on central banks’ gold holdings to explore who upholds the surging gold price. Several interesting outcomes are derived. First, our empirical evidence shows an inverse phenomenon relative to news reports from the mass media that the gold holdings of central banks worldwide in fact continuously descend. Second, the mainstream countries of the world have not played a main role in the rising trend of the gold price in the recent decade; instead, newly emerging industrialized countries’ central banks’ gold holdings show their significant power in explaining causality to gold price fluctuations. Third, the reason for the persistent gold buying behaviour of emerging economies may be because the increase in the gold price delivers a kind of short squeeze effect to the central banks of emerging countries.     

Is fiscal policy always counter- (pro-) cyclical? The role of public debt and fiscal rules

We investigate the reaction of fiscal policy to the business cycle in a panel of 56 developed, emerging and developing economies over 1990–2011. While we strengthen the established finding that fiscal policy is counter-cyclical, additional outcomes emerge from this study. We reveal a non-linear response of fiscal policy to the business cycle, conditional upon the outstanding debt stock. Interestingly, when the public debt-to-GDP ratio goes beyond our endogenously estimated threshold of 87%, fiscal policy turns pro-cyclical. To tackle this effect, we explore the role of fiscal rules (FR). We unveil heterogeneous impacts among FR, as only some of them may mitigate fiscal policy procyclicality in high-debt contexts.     

Is the price of gold to gold mining stocks asymmetric?

If an asymmetric relation exists between the prices of gold and gold mining stocks, then these firms possess real option characteristics, and therefore, a premium should be added to their valuation. This article examines this proposition, by firstly, using quantile regressions, which are ideally suited to examine asymmetries, and secondly, by accounting for endogenously determined structural breaks in the data. Our findings provide no support for an asymmetric relation. Furthermore, we also show that out-of-sample forecasting shows there is no causality from the gold price to the prices of those gold mining shares used in the sample.     

Do immigrants affect the profile of U.S. exporters?

We highlight that an increase in the stock of immigrants corresponds with greater numbers of U.S. firms that engage in exporting to foreign markets. Our results are obtained from the estimation of a multi-level mixed effects model. Overall, the effect of immigrants is relatively larger among small- and medium-sized enterprises and is smaller among large-sized enterprises. There are, however, considerable differences, both in the magnitude and in nature of the observed effects of immigrants on manufactured and non-manufactured goods exporters of comparable size categories. Similarly, heterogeneity is found in the effects of immigrants on the numbers of small-, medium-, and large-sized exporters across home country cohorts that are grouped by World Bank income classifications and by broad regional classifications of destination markets. These findings imply that immigration has the potential to alter the profile of domestic firms involved in exporting.     

Improving the predictability of the oil–US stock nexus: The role of macroeconomic variables

In this study, we revisit the oil–stock nexus by accounting for the role of macroeconomic variables and testing their in-sample and out-of-sample predictive powers. We follow the approaches of Lewellen (2004) and Westerlund and Narayan (2015), which were formulated into a linear multi-predictive form by Makin et al. (2014) and Salisu et al. (2018) and a nonlinear multi-predictive model by Salisu and Isah (2018). Thereafter, we extend the multi-predictive model to account for structural breaks and asymmetries. Our analyses are conducted on aggregate and sectoral stock price indexes for the US stock market. Our proposed predictive model, which accounts for macroeconomic variables, outperforms the oil-based single-factor variant as well as the constant returns (historical average) model for both in-sample and out-of-sample forecasts. We find that it is important to account for structural breaks in our proposed predictive model, although asymmetries do not seem to improve predictability. In addition, we show that it is important to pre-test the predictors for persistence, endogeneity, and conditional heteroscedasticity, particularly when modeling with high-frequency series. Our results are robust to different forecast measures and forecast horizons and are useful for making effective hedging decisions in the US stock market.     

U.S. Pensions in the 2000s: The Lost Decade?

The last three decades saw a sharp decline in traditional defined benefit (DB) pensions and a corresponding rise in defined contribution (DC) plans. Using the Survey of Consumer Finances from 1983 to 2010, I find that after robust gains in the 1980s and 1990s, pension wealth experienced a marked slowdown in growth from 2001 to 2007 and then fell in absolute terms from 2007 to 2010. Median augmented wealth (the sum of net worth, pensions, and Social Security wealth) advanced slower than median net worth from 1983 to 2007 and its inequality rose more, as DB wealth fell off. However, from 2007 to 2010, the opposite occurred. While median wealth plummeted by 41 percent and inequality spiked by 0.032 Gini points, median augmented wealth fell by only 21 percent and its Gini coefficient rose by only 0.009 points. The differences are due to the moderating influence of Social Security wealth.     

Is the exchange rate a shock absorber or a source of shocks? Evidence from the U.S.

We examine the stabilization role of the exchange rate in the U.S. economy using a factor augmented vector autoregression model. We find that exchange rate shock explains a large fraction of the variation in exchange rate and transmits major disturbances to the real economy. Further, we find that demand and supply shocks explain less than a quarter of the exchange rate movement. We provide robust evidence that although the exchange rate plays some role as a shock absorber, its role as an independent source of shocks is more dominant for the U.S. economy. The foreign exchange market breeds its own shocks which are destabilizing not only to the value of the dollar but to the overall economy as well. Our results suggest that policymakers need to take foreign exchange market fluctuations into account when making macroeconomic policy decisions.     

Bilateral capital flows and the exchange rate: The case of the U.S.A. vis-à-vis Canada,France, West Germany and the U.K.

After a preliminary test (with generally negative results) of the interest parity assumption, an eclectic portfolio adjustment approach, which determines an exchange pressures variable (under a régime of a managed float) is constructed, for bilateral comparisons between the United States and its major trading partners taken individually. This approach to bilateral capital flows and managed exchange rate determination appears to function reasonably well, as judged by the empirical results. Interestingly, factors specific to individual exchange markets appear to play important roles in explaining bilateral capital flows and cross exchange rates, which would not occur in a Walrasian world, with global market clearing.     

How are gold returns related to stock or bond returns in the U.S. market? Evidence from the past 10-year gold market

Although the gold market over the past decade has been soaring relative to its prior history, there have been few studies on the relationship between the gold market and other major financial markets based on the past decade of data. To re-investigate how the gold market interacts with the stock market and the bond market, we re-visit economic and financial characteristics of gold using the past 10-year data in terms of co-integration, causality, predictive power, and extreme returns. We find that while gold returns are not co-integrated with stock returns and bond returns, gold returns have a unidirectional causality with both of them. Also, we discover that gold returns have some predictive power on subsequent short-term stock returns. Under extreme market scenarios, it turns out that gold returns tend to deteriorate more simultaneously with bond returns than stock returns. This means that gold can better serve as a safe haven for stock in a relative sense during temporary market downturns.     

The relationship between start-up motive and earnings over the course of the entrepreneur’s business tenure

We investigate whether the start-up motive is related to the entrepreneur’s earnings, and whether the relationship between the entrepreneur’s business tenure (i.e., the time the entrepreneur is running the business) and his earnings depends on the start-up motive. We employ a unique longitudinal data base providing information on start-up motive and earnings for 7902 entrepreneurs in the EU-15 countries, where 12 different start-up motives are distinguished. We classify these 12 motives in three broad categories of opportunity, necessity and other start-up motives. Our analysis shows that, first, earnings of necessity entrepreneurs are significantly lower than those of opportunity entrepreneurs, irrespective of the type of necessity motive. Second, these differences remain rather stable over the course of the entrepreneur’s business tenure, i.e., these differences are of a permanent nature. Third, we do not find evidence for earnings differences within the broad category of necessity entrepreneurs (i.e., between the different types of necessity motives).     

Does the version of the Penn World Tables matter? An analysis of the relationship between growth and volatility

Abstract .  The Penn World Tables (PWT) are an important data source for cross-country comparisons in economics. The PWT have undergone several revisions over time. This paper documents how countries' output growth rates change across four publicly available versions of the PWT. We show that for some countries the magnitude of the differences is significant and/or the sign of the growth rates changes across versions. Using as an example Ramey and Ramey (1995) , who found growth volatility has a significant negative effect on growth, we demonstrate that conclusions based on one version of the PWT may not hold under another version.     

The role of uncertainty in the euro crisis – an application of liquidity preference theory

The world financial crisis triggered a rediscovery of the active role fiscal policy can play as a remedy in such situations. During the euro crisis, escalating funding costs in a number of southern eurozone member states and Ireland have called this strategy into question. One interpretation of the euro crisis concentrated on the public debt trends in those countries. Opposing this view, the main point of this contribution is to elaborate the link between rising interest rates on sovereign bonds in the euro crisis and a major feature of the financial crisis – a subdued degree of investor confidence after the Lehman collapse. Theoretically, this link is developed with reference to Keynes’ liquidity preference theory. The high explanatory power of measures for the degree of confidence in financial markets as well as detrimental effects of fiscal austerity on the evolution of sovereign yield spreads are demonstrated empirically by means of panel regressions and supplementary correlation analyses.