Excess comovements between the euro/US dollar and pound sterling/US dollar exchange rates

ABSTRACT

The aim of this article is to discuss excess comovements of the euro/US dollar and pound sterling/US dollar exchange rates, i.e. we look for comovements of exchange rates which are stronger than implied by the fundamentals. The results of the empirical analysis provide evidence that excess comovements exist for the two exchange rates. A long-run analysis of correlations can verify that a link exists between the correlation dynamics of exchange rates, relative inflation rates, long-term interest rates, economic sentiments and money supply. We find that common movements of money supply, prices and economic sentiments each play a major role in comovements of the exchange rates. From the investigation of the two exchange rates, we conclude that macroeconomic fundamentals can account for the comovement but that common non-fundamental factors also have major significance for the exchange rates.     

RELATIONSHIPS AMONG STRATEGIC COMMODITIES AND WITH FINANCIAL VARIABLES: A NEW LOOK

We examine the comovements among the prices of four strategic commodities that have long, adequate daily series: oil, gold, silver, and copper as a group. We also explore their causal relationships with two commodity-relevant macrofinancial variables: interest and exchange rates as an expanded group to shed some light on the prediction behaviors of those individual commodity prices relative to the selected financial variables. In the expanded group, the selected interest rate can provide a transmission link between commodity prices and the dollar exchange rate. The results and their policy implications are discussed at length . ( JEL C51, E27, Q43)     

Have food and financial markets integrated?

This article analyses comovements and discusses possibly greater market integration between aggregate food commodity and stock prices in the period 1990 to 2012. Return correlations, price return distributions, cointegration and Granger-causalities are tested in subsamples on monthly FAO Food Price Index and MSCI World Stock Market Index. Empirical results suggest that while there is only weak indication of greater comovements concurrent with structural changes such as changed agricultural policies, new demand due to growth in emerging markets and energy mandates and the financialization of food markets since the early 2000s, they did start to increase substantially in particular during the financial stress of the Lehman crisis and the Great Recession. While structural changes may have amplified price linkages across markets, results do not suggest that they are the key factors for greater price comovements. Instead, the effects of the late-2000s recession as a time of great economic weakness and uncertainty may have changed concurrently the behaviour of both food and financial market participants, such that different market prices exhibit large comovements.     

International transmission of business cycles: Evidence from dynamic correlations

We exploit dynamic correlations to estimate determinants of output comovement between OECD countries. Trade intensity, financial integration, and specialization patterns have significantly different effects on comovements at different frequencies. This sheds more light on previous results based on statistical filters.     

Common trends and common cycles among interest rates of the G7-countries

Both, from a macroeconomic modeling perspective, as well as for a policy point of view, there has recently been a renewed interest in the cyclical and long-run comovement of interest rates. In this paper we re-investigate the long- and short-run comovements in the G7-countries by conducting tests for cointegration, common serial correlation and codependence with nominal and real interest rates, using quarterly data from 1975 to 2010. Overall, we find only little evidence of comovements. Common trends are occasionally observed, but the majority of interest rates are not cointegrated. Although some evidence for codependence of higher order is found in the pre-Euro area sample, common cycles appear to exist only in rare cases. We argue that some earlier, more positive findings are difficult to reconcile due to differing assumptions about the underlying stochastic properties of interest rates. We conclude that they cannot be generalized for all interest rates, time periods, and reasonable alternative estimation procedures.     

Business cycle comovement in the G-7: common shocks or common transmission mechanisms?

What are the sources of macroeconomic comovement among G-7 countries? Two main candidate explanations may be singled out: common shocks and common transmission mechanisms. In the article it is shown that they are complementary, rather than alternative, explanations. By means of a large-scale Factor Vector Autoregressive (FVAR) model, allowing for full economic and statistical identification of all global and idiosyncratic shocks, it is found that both common disturbances and common transmission mechanisms of global and country-specific shocks account for business cycle comovement in the G-7 countries. Moreover, spillover effects of foreign idiosyncratic disturbances seem to be a less important factor than the common transmission of global or domestic shocks in the determination of international macro-economic comovements.     

Capital account liberalization and dynamic price discovery: evidence from Chinese cross-listed stocks

We analyse the effects of a recent financial reform (Shanghai-Hong Kong Stock Connect) that enables cross-market investment between Hong Kong and Shanghai stock exchanges. Using a VECM, we find that the reform announcement considerably narrows the equilibrium level of price disparity and strengthens the price comovement of shares that are cross-listed in both markets. The estimated equilibrium relationship is in support of the relative law of one price. We find that both markets adjust in response to a disequilibrium in price disparity, leading to a sizeable error correction activity. The Shanghai market contributes to approximately two-thirds of the price discovery process. Competition and informativeness of trading affect the relative role of price discovery in each market. Finally, the reform implementation reinforces the long-run cointegration relationship and strengthens the short-run price comovements of cross-listed stocks despite the widening price disparity during the period.     

Time-frequency comovement among green financial assets and cryptocurrency uncertainties

The high energy consumption and carbon footprints have raised environmental and sustainable concerns of green investors and policymakers. This study explores comovements between three green and socially responsible financial assets, S&P global clean energy index (GCEI), S&P green bonds index (GB), DJ sustainability world index (DJSWI) and four cryptocurrency uncertainty/attention indices cryptocurrency policy uncertainty index, Central Bank Digital Currencies Uncertainty Index, Central Bank Digital Currencies Attentions Index and Index of Cryptocurrency Environmental Attention using the bivariate wavelet coherence approach. The findings show that GCEI, GB, DJSWI returns have consistent positive comovement with all cryptocurrency uncertainty/attention indices in the medium-term, suggesting their time-varying leading role. Evidence of negative coherences shows that higher cryptocurrency uncertainties/attentions lead to lower green financial asset returns, reflecting the adverse impact of higher uncertainties/attention on the trust of green and sustainable investors. The above empirical findings offer up-to-date insights for guiding policymakers, and regulators, enabling them in environmental policy development. Furthermore, socially responsible investors can make better investment judgments by considering the environmental concerns in the cryptocurrency marketplaces.     

国际大宗商品价格会影响我国CPI吗——基于BVAR模型的分析

研究表明国际商品价格会显著影响我国CPI。因此,在制定调控物价的措施时,应关注国际大宗商品价格因素对我国价格水平的影响,其中尤其需要关注国际原材料价格的变动。此外,价格传导机制具有滞后性,因而防范通胀比治理通胀更重要。     

Stock Prices and Exchange Rates in Australia: Are Commodity Prices the Missing Link?

There are still significant gaps in our knowledge of the relationship between stock prices and exchange rates; not least, the ambiguity about the sign of the coefficient linking them. One explanation which we explore in the Australian context in this paper is the omission of commodity prices. We show that a relationship which omits commodity prices performs poorly but, once commodity prices are added, our results are plausible and robust. We also throw light on the commodity‐currency issue: the link from the exchange rate to commodity prices is stronger and more consistent than that in the opposite direction.     

Global macroeconomic uncertainty

We empirically identify global macroeconomic uncertainty using a dynamic factor model, where the conditional variances of all factors are modeled as stochastic volatility processes. Applying this methodology to OECD data, we find the early 1970s and early 1980s recessions as well as the recent Great Recession of the late 2000s to be associated with increases in uncertainty at the global level, but heightened uncertainty during the early 1990s and 2000s slowdowns to be mostly confined to the national levels. We also find that global uncertainty unambiguously lowers national growth rates and raises national inflation rates, and that key macroeconomic variables like oil, commodity and stock prices as well as global liquidity act as drivers of the global dimension of uncertainty.     

Cointegration relationships and hedonic pricing of differentiated commodities: an application to price dynamics in the US dairy sector

This study investigates the implications of hedonic pricing for price dynamics of differentiated commodities. A conceptual model of hedonic pricing is developed under a Leontief technology, showing how commodity prices reflect the underlying value of their components. Implications for the existence of cointegration relationships among commodity prices are derived. An application to the pricing and dynamics of selected US dairy commodities is presented. It provides evidence on the role of component valuation in the dynamics of dairy commodity prices in the short run as well as in the long run. Distinguishing between market regime and government regime (when the government price support is active), the analysis finds significant differences in dairy price dynamics between the two regimes.     

Formal targets, central bank independence and inflation dynamics in the UK: A Markov-Switching approach

We examine inflation and uncertainty in the UK with a version of the Markov Switching model, which allows for changes in the variance as well as in the mean and persistence of a series. We find that the UK’s attempts at exchange rate pegs in the form of shadowing the deutschmark and entering the ERM were ineffective, and in the latter case counterproductive in lowering inflation uncertainty. The 1981 budget, however, greatly lowered uncertainty, and the adoption of a formal inflation target also had a palpable, negative impact on inflation uncertainty. As a suggestive exercise, we examine inflation uncertainty in the US, and find that, over 2005–2008, in the absence of an inflation target, uncertainty rose in the US, while uncertainty remained low in the UK over this period of rising commodity prices and financial turmoil.     

Comovement among returns of the private Chilean pension system

Abstract

The measurement of comovement among economic variables is key in several areas of economics and finance. This article examines the comovement among Pension Fund Administrators (AFPs) in the Chilean private pension system from 2005 to 2016. We use several statistical methods to assess the comovement among the returns during this period. We found evidence of strong comovement among the returns of all AFPs; the higher the percentage of risk rate of the investment instrument, the higher the comovement was. The introduction of a new AFP in 2010 did not change the comovement patterns. The comovement analysis study shows that the quality attributes of the products offered by the AFPs are homogeneous, supporting the idea that concentrated markets with homogeneous products could incentivize tacit collusive behavior, which could distort the functioning of the pension market, thereby affecting the aggregate well-being of workers.     

Macroeconomic Synchronization Between G3 Countries

This paper studies the existence of a world business cycle by examining quarterly and annual comovements in production, prices and interest rates in the three main world economies: Germany, Japan and the US. In accordance with earlier studies, contemporaneous relationships clearly dominate short-term dynamics. The evidence indicates the existence of strong comovements in prices and long-term interest rates, and, to a lesser degree, in GDP and short-term interest rates. They are, however, rather unstable over time.     

The dynamic causality between commodity prices,inflation and output in China: a bootstrap rolling window approach

In this article, we empirically study the time-varying bilateral causality between commodity prices, inflation and output in China. We first perform a series of parameter stability tests and find strong evidence of instability in the parameters estimated for Granger causality tests. We then use the bootstrap rolling window approach to test the causality and find that the causality from commodity prices to both inflation and output is time-varying in the entire sample period and asymmetric in different phases of the business cycle. We also find evidence of the causality from both inflation and output to commodity prices in certain sub-periods. Further discussion on the cost-price mechanism through which the economy fluctuates cyclically suggests that the dynamic causality between commodity prices and inflation contributes to understanding the nature of economic fluctuations and to forecasting economic crises. Overall, our results provide a new perspective to disentangle economic fluctuations.     

Time–frequency relationship between US output with commodity and asset prices

Commodity and asset prices have a well-documented effect on economic growth as manifested through various channels. At the same time, the business cycle influences the commodity and asset prices. Whereas empirical evidence on the effect of commodity and asset prices on the long-run economic growth is ambiguous, most of the previous researches highlight a positive correlation in the short run. The aim of this article is to disentangle the short- and long-run co-movements between US historical business cycles and commodity and asset prices over the period 1859–2013. For this purpose, we use a time–frequency approach and we test the historical influence of oil, gold, housing and stock prices over the output growth. In contrast to other studies, we control for the effect of other prices and monetary conditions, using the wavelet partial coherency. In line with the previous works, we discover that co-movements between economic growth and commodity and assets prices manifest especially in the short run. We also find that stock returns and housing prices have a more powerful effect on the US economic growth rate than the oil and gold prices. The long-run co-movements are documented especially around the World War II. Finally, when controlling for the influence of the interest rate, inflation and other commodity and asset prices, co-movements become weaker in the short run. In general, the oil and housing prices lead the GDP growth, the US output leads the gold prices, while there is no clear causality direction between business cycle and stock prices.     

AUSTRALIAN COMMODITY EXPORT PASS-THROUGH AND FEEDBACK CAUSALITY FROM COMMODITY PRICES TO THE EXCHANGE RATE

Commodity export pass-through is examined for Australia in an attempt to determine whether Australia is a price-taker in its commodity export trade. This is undertaken for seven categories of Australia's main commodity good exports. We also determine if there is feedback causality from particular world commodity prices back to the exchange rate as is often hypothesised for commodity good intensive exporting countries. It is found that Australian commodity good export pass-through is complete for the goods which are relatively less important in its export trade but is incomplete (although high) for the goods which are most important in its export trade. There is significant feedback causality to the exchange rate from the world price of coal and wheat, two of Australia's most important commodity good exports over the 1980s and early 1990s.     

The comovement between exchange rates and stock prices in the Asian emerging markets

This study investigates the comovement between exchange rates and stock prices in the Asian emerging markets. The sample covers major institutional changes, such as market liberalization and financial crises, so as to examine how the short-term and long-term relations change after such events. The autoregressive distributed lag (ARDL) model proposed by Pesaran et al. (2001) is adopted, which allows us to deal with structural breaks easily, and to handle data that have integrals of different orders. Interest rates and foreign reserves are also included in the analysis to reduce potential omitted variable bias. My empirical results suggest that the comovement between exchange rates and stock prices becomes stronger during crisis periods, consistent with contagion or spillover between asset prices, when compared with tranquil periods. Furthermore, most of the spillovers during crisis periods can be attributed to the channel running from stock price shocks to the exchange rate, suggesting that governments should stimulate economic growth and stock markets to attract capital inflow, thereby preventing a currency crisis. However, the industry causality analysis shows the comovement is not stronger for export-oriented industries for all periods, such as industrials and technology industries, thus implying that comovement between exchange rates and stock prices in the Asian emerging markets is generally driven by capital account balance rather than that of trade.     

Energy price transmissions during extreme movements

This paper investigates price transmissions across European energy forward markets at distinct maturities during both normal times and extreme fluctuation periods. To this end, we rely on the traditional Granger causality test (in mean) and its multivariate extension in tail distribution developed by Candelon, Joëts, and Tokpavi (2013). Considering forward energy prices at 1, 10, 20, and 30 months, it turns out that no significant causality exists between markets at regular times whereas comovements are at play during extreme periods especially in bear markets. More precisely, energy prices comovements appear to be stronger at short horizons than at long horizons, testifying an eventual Samuelson mechanism in the maturity prices curve. Diversification strategies tend to be more efficient as maturity increases.