Intraday effect of news on emerging European forex markets: An event study analysis

We analyze the impact of euro zone/German and U.S. macroeconomic news announcements and the communication of the monetary policy settings of the ECB and the Fed on the forex markets of new EU members. We employ an event study methodology to analyze intraday data from 2011–2015. Our comprehensive analysis of the wide variety of macroeconomic information during the post-GFC period shows that: (i) macroeconomic announcements affect the value of the new EU country exchange rates, (ii) the origin of the announcement matters, (iii) the type of announcement matters, (iv) different types of news (good, bad or neutral) result in different reactions, (v) markets react not only after the news release but also before, (vi) when the U.S. dollar is the base currency the impact of the news is larger than in the case of the euro, (vii) announcements on ECB monetary policy result in stronger effects than those of the Fed, (viii) temporary inefficiencies are present in new EU country forex markets, (ix) new EU country exchange rates react differently to positive US news during the EU debt crisis compared to the rest of the period.     

Economic policy uncertainty effects for forecasting future real economic activity

Recently introduced measures for economic policy uncertainty (EPU), included in the data from 1997 to 2016, have a role in forecasting out-of-sample values for future real economic activity for both the euro area and UK economies. The inclusion of EPU measures, either for the US, the UK or for overall European economies, improves the forecasting ability of models based on standard financial market information, especially for the period before the 2008 global crisis. However, during and after the crisis period, the slope of the yield curve and excess stock market returns improves the out-of-sample forecast performance the most compared to an AR-benchmark model. Hence, the EPU information is important in times of normal business cycles, but might contain similar information components to financial market return variables during turbulent crisis periods in the financial markets and in the real economy.     

The macroeconomic impact of economic uncertainty and financial shocks under low and high financial stress

External financial frictions might increase the severity of economic uncertainty shocks. We analyze the impact of aggregate uncertainty and financial condition shocks using a threshold vector autoregressive (TVAR) model with stochastic volatility during distinct US financial stress regimes. We further examine the international spillover of the US financial shock. Our results show that the peak contraction in euro area industrial production due to uncertainty shocks during a financial crisis is nearly-four times larger than the peak contraction during normal times. The US financial shocks have an influential asymmetric spillover effect on the euro area. Furthermore, the estimates reveal that the European Central Bank (ECB) is more cautious in implementing a monetary policy against uncertainty shocks while adopting hawkish monetary policies against financial shocks. In contrast, the Fed adopts a more hawkish monetary policy during heightened uncertainty, whereas it acts more steadily when financial stress rises in the economy.     

Determinants of European stock market integration

We analyse the determinants of stock market integration among EU member states for the period 1999–2007. First, we apply bivariate DCC-MGARCH models to extract dynamic conditional correlations between European stock markets, which are then explained by interest rate spreads, exchange rate risk, market capitalisation, and business cycle synchronisation in a pooled OLS model. By grouping the countries into euro area countries, “old” EU member states outside the euro area, and new EU member states, we also evaluate the impact of euro introduction and the European unification process on stock market integration. We find a significant trend toward more stock market integration, which is enhanced by the size of relative and absolute market capitalisation and hindered by foreign exchange risk between old member states and the euro area. Interest rate spreads and business cycle synchronisation are also significant factors in explaining equity market integration.     

Sovereign rating changes—Do they provide new information for stock markets?

The purpose of this paper is to examine the impact of sovereign rating changes on international financial markets using a comprehensive database of 42 countries, covering the major regions in the world over the period 1995–2003. In general, we find that rating agencies provide stock and foreign exchange markets with new tradable information. Specifically, rating upgrades (downgrades) significantly increased (decreased) USD denominated stock market returns and decreased (increased) volatility. Whereas the mean response is contributed evenly by the local currency stock returns and exchange rate changes that make up the USD returns, only the foreign exchange volatility was behind the USD denominated return volatility. In addition, we find significant asymmetric effects of rating announcements. The market responses – both return and volatility – are more pronounced in the cases of downgrades, foreign currency debt, emerging market debt, and during crisis periods. This study has important policy implications for international investors’ asset allocation plans and for regulatory bodies such as the Basel Committee who increasingly rely upon Moody's, Standard and Poor's and Fitch's ratings for their regulatory regimes.     

Factors influencing bank risk in Europe: Evidence from the financial crisis

We use a dynamic panel data model to analyze bank-specific and macroeconomic determinants of bank risk for a large sample of commercial banks operating in the euro area. The selected time span, from 2001 to 2012, considers the impact of the on-going financial and economic crisis on the Eurozone banking system. Our results indicate that capitalization, profitability, efficiency and liquidity are inversely and significantly related to bank risk. However, the recourse to wholesale funding by banks seems to increase their risk. We also find that less-concentrated markets, lower interest rates, higher inflation rates and a context of economic crisis (with a falling GDP) increase bank risk.     

Price effects of steel commodities on worldwide stock market returns

We analyze the price effects of steel commodities on stock market returns in emerging and developed economies. These commodities have recently attained increased media exposure due to the rise in the U.S. steel import tariffs, which pose the threat of reducing global demand for steel products and, consequently, lowering prices abroad. However, little has been investigated on the impact of steel commodity prices on worldwide stock market returns. By performing structural VAR and GARCH techniques on a weekly-frequency time series from 2002 to 2015, we find positive and statistically significant effects of linear and non-linear steel commodity price shocks on real stock returns in the commodity markets. In the highly diversified financial markets such as U.S. and Germany, real stock returns do not significantly respond to steel commodity price shocks, although we find highly significant positive responses from developed economies such as Australia, Japan and South Korea. Results are robust to different model specifications. Our evidence suggests that higher tariffs on steel imports represent a larger disadvantage to commodity markets which are more largely impacted by steel commodity prices. We provide economic policy implications based on recent literature.     

The impact of VIX on China’s financial market: A new perspective based on high-dimensional and time-varying methods

Based on the new perspective of high-dimensional and time-varying methods, this paper analyzes the contagion effects of US financial market volatility on China’s nine financial sub-markets. The results show evidence of non-linear Granger causality from the US financial volatility (VIX) to the China’s financial markets. Increased US financial volatility has a negative next-day impact on the stock, bond, fund, interest rate, foreign exchange, industrial product and agricultural product markets, and a positive next-day impact on the gold and real estate markets. US financial volatility has the greatest impact on industrial product market, following by stock, agricultural product, fund, real estate, bond, gold, foreign exchange, and interest rates. Major risk events such as the global financial crisis can cause an enhanced contagion effect of US financial volatility to China's financial markets. This paper supports the achievements of China's actions to prevent and resolve major financial risks in the period of the COVID-19 epidemic.     

Low interest rate policy and the use of reserve requirements in emerging markets

This paper sheds light on the link between the interest rate policy in large advanced economies with international funding and reserve currencies (the United States and the euro area) and the use of reserve requirements in emerging markets. Using reserve requirement data for 28 emerging markets from 1998 to 2012, we provide evidence that emerging market central banks tend to raise reserve requirements when interest rates in international funding markets decline or financial inflows accelerate, most likely to preserve financial stability. In contrast, when global liquidity risk rises and funding from the large advanced economies dries up, emerging markets lower reserve requirements.     

Agent-based financial markets and New Keynesian macroeconomics: a synthesis

We combine a simple agent-based model of financial markets and a New Keynesian macroeconomic model with bounded rationality via two straightforward channels. The result is a macroeconomic model that allows for the endogenous development of business cycles and stock price bubbles. We show that market sentiments exert important influence on the macroeconomy: Impulse-response functions of macroeconomic variables become more volatile which makes the effect of a given shock hard to predict. We also analyze the impact of different types of financial transaction taxes that are currently debated among policy makers (FTT, FAT, progressive FAT) and find that such taxes are well suited to stabilize the economy and raise funds from the financial sector as a contribution to the enormous costs created during the recent crisis. Our simulations suggest that the FTT leads to higher tax revenues and better stabilization results then the FAT. However, the FTT might also create huge distortion if set too high, a threat which the FAT does not imply.     

Institutional Reforms and Investor Reactions to CSR Announcements: Evidence from an Emerging Economy

This study contributes to the limited established empirical research on the impact and relevance of corporate social responsibility (CSR) in the capital markets of emerging economies. We conducted an event study to demonstrate how the timing of CSR announcements by firms that have aligned their strategies to newly instituted social regulations in South Africa influenced stock prices. Using a unique dataset of publicly listed South African enterprises that undertook CSR initiatives during the ten year period from 1996 to 2005, we found that investor reactions to CSR announcements concluded during the late phase of institutional reforms are viewed positively by investors. Furthermore, CSR announcements of substantive monetary value result in significantly higher shareholder returns.     

Varianzquotiententests und Random Walk Verhalten internationaler Aktienmärkte

Variance ratio tests can be considered the state-of-the-art methodology for testing stock markets for random walk behavior. This article reviews recent developments in the area. Furthermore, it analyzes whether the recent financial crisis has influenced the random walk behavior of international stock markets. Our findings based on individual and multiple variance ratio tests can be summarized as follows: (i) There appears to be less evidence against the random walk hypothesis in industrialized markets than there is in emerging markets. (ii) Industrialized countries’ stock market behavior seems to be less affected by the financial crisis than the one of emerging markets. (iii) The choice of individual or multiple variance ratio test does not crucially influence our main conclusions.     

The emerging market crisis and stock market linkages: further evidence

This study examines the long‐run price relationship and the dynamic price transmission among the USA, Germany, and four major Eastern European emerging stock markets, with particular attention to the impact of the 1998 Russian financial crisis. The results show that both the long‐run price relationship and the dynamic price transmission were strengthened among these markets after the crisis. The influence of Germany became noticeable on all the Eastern European markets only after the crisis but not before the crisis. We also conduct a rolling generalized VAR analysis to confirm the robustness of the main findings. Copyright © 2006 John Wiley & Sons, Ltd.     

国际金融市场波动溢出效应与动态相关性

在DCC GARCH、DCC EGARCH、DCC TGARCH方法下,采用中、美、日、德、英等国家1993年1月至2013年12月的金融数据,实证得出如下结论：样本国市场利率和股指波动率呈现尖峰、肥尾、有偏的特征,更为符合t分布。样本国市场利率波动表现出显著的溢出效应、杠杆效应和联动效应。样本国股指波动率对中国股指波动率的溢出效应趋于增强,特别在美国金融危机后。样本国利率波动对中国股指波动率具有一定的溢出效应和杠杆效应,但影响程度非常低。治理世界性金融风险,各国当局应加强政策协调性,合理进行风险分担。     

The impact of ADR activity on stock market liquidity: Evidence from Latin America

This paper examines the impact of ADR activity on liquidity of four major Latin American stock markets. We construct a measure of ADR activity in U.S. markets for a sample of ADRs trading during January 2003–December 2010, which is subsequent to the financial liberalization episodes and currency crises that shocked emerging markets in the 1990s. The sample lists 164 depositary receipt programs (Levels I, II, and III): 16 from Argentina, 81 from Brazil, 19 from Chile, and 48 from Mexico. Using System GMM methods to handle the potential effects from stock market development on economic growth and ADR issuance, we find that higher ADR turnover in U.S. markets has positive effects on domestic market turnover, particularly for issuance of exchange-listed (Levels II and III) ADRs. This positive relationship is not a statistical artifact created by the global financial crisis of 2008.     

Market perception of sovereign credit risk in the euro area during the financial crisis

We study market perception of sovereign credit risk in the euro area during the financial crisis. In our analysis we use a parsimonious CDS pricing model to estimate the probability of default (PD) and the loss given default (LGD) as perceived by financial markets. In our empirical results the estimated LGDs perceived by financial markets stay comfortably below 40% in most of the samples. Global financial indicators are positively and strongly correlated with the market perception of sovereign credit risk; whilst macroeconomic and institutional developments were at best only weakly correlated with the market perception of sovereign credit risk.     

MONETARY TRANSMISSION MECHANISM IN CENTRAL AND EASTERN EUROPE: SURVEYING THE SURVEYABLE

Abstract.  This paper surveys recent advances in empirical studies of the monetary transmission mechanism, with special attention to Central and Eastern Europe (CEE). Our results indicate that the strength of the exchange rate pass-through substantially declined over time mainly due to a fall in inflation rates and to some extent due to the so-called composition effect. The asset price channel is weak and is likely to remain weak because of shallow stock and private bond markets and because of low stock and bond holdings of domestic households. House prices may become an exception with booming mortgage lending and with high owner occupancy ratios. While the credit channel could be a powerful channel of monetary transmission – as new funds raised on capital markets are close to zero in CEE – it is actually not, as both commercial banks and non-financial corporations can escape domestic monetary conditions by borrowing from their foreign mother companies. The moderately good news, however, is that those banks and firms are influenced by monetary policy in the euro area because their parent institutions are themselves subjected to the credit channel in the euro area.     

Testing for financial spillovers in calm and turbulent periods

In this paper, we investigate financial spillovers between stock markets during calm and turbulent periods. We explicitly define financial spillovers and financial contagion in accordance with the literature and construct statistical models corresponding to these definitions in a Markov switching framework. Applying the new testing methodology based on transition matrices, we find that spillovers from the US stock market to the UK, Japanese and German markets are more frequent when the latter markets are in a crisis regime. However, we reject the hypothesis of strong financial contagion from the US to the other markets.     

Frontier stock market integration and the global financial crisis

This paper examines the stock market integration between frontier and leading markets, focusing on the periods of pre and post global financial crisis. Using time-series analysis, the results mostly support leading markets can Granger-cause frontier markets. Frontier markets in different regions have distinct relationships with leading markets. Population growth, industry value, interest rate, tax rate, and tariff of the frontier markets significantly influence the integration between both markets. Energy, gross national income, stock traded value, and high-technology exports of leading markets saliently influence the integration. Finally, the global financial crisis impacts the relationship between the frontier and leading markets and changes the determinants of stock market integration.     

On the Real Effect of Financial Pressure: Evidence From Firm‐Level Employment During the Euro‐Area Crisis

Using a large panel of mainly unquoted euro‐area firms over the period 2003–2011, this paper examines the impact of financial pressure on firms’ employment. The analysis finds evidence that financial pressure negatively affects firms’ employment decisions. This effect is stronger during the euro area‐crisis (2010–2011), especially for firms in the periphery compared to their counterparts in non‐periphery European economies. When we introduce firm‐level heterogeneity, we show that financial pressure appears to be both statistically and quantitatively more important for bank‐dependent, small and privately held firms operating in periphery economies during the crisis.