The impact of monetary policy on asset prices

Estimating the response of asset prices to changes in monetary policy is complicated by the endogeneity of policy decisions and the fact that both interest rates and asset prices react to numerous other variables. This paper develops a new estimator that is based on the heteroskedasticity that exists in high-frequency data. We show that the response of asset prices to changes in monetary policy can be identified based on the increase in the variance of policy shocks that occurs on days of FOMC meetings and of the Chairman's semi-annual monetary policy testimony to Congress. The identification approach employed requires a much weaker set of assumptions than needed under the “event-study” approach that is typically used in this context. The results indicate that an increase in short-term interest rates results in a decline in stock prices and in an upward shift in the yield curve that becomes smaller at longer maturities. The findings also suggest that the event-study estimates contain biases that make the estimated effects on stock prices appear too small and those on Treasury yields too large.     

The price and quantity of residential land in the United States

One can conceptualize a house as a bundle comprising a reproducible tangible structure and a non-reproducible plot of land. When the value of a home is decomposed this way, land capitalizes the market value of a home's location. We develop a formal relationship between the dynamics of house prices, structures costs and land prices, and thereby construct the first constant-quality price and quantity indexes for the aggregate stock of residential land in the United States. In a range of applications we show that these series can shed light on trends, fluctuations and regional variation in the price of housing.     

The impact of interest rates,income, and employment upon regional housing prices

The objective of this article is to identify important differences in the way new housing prices react to local and national economic factors. The study finds that regional housing prices react uniformly to certain national economic factors, such as mortgage rates. On the other hand, local factors such as population shifts, employment, and income trends often have a unique impact on housing prices. The study rejects the hypothesis of a single national housing market in favor of one that allows for broad national trends to be superimposed upon unique regional markets.     

Price setting, price dispersion, and the value of money: or, the law of two prices

We study models combining search, money, price posting, and preference shocks. We show how these features interact to influence the price level and price dispersion. First, price-posting equilibria exist with valued fiat currency. Second, although both are possible, price dispersion is more common than a single price. Third, we prove that generically there cannot be more than two prices. We provide intuition for this law of two prices, show it also holds in some nonmonetary search models, and discuss variations of the assumptions under which it may not hold.     

The unsung impact of currency risk on the performance of international real property investment

The paper revisits the currency risk debate to ascertain the statistical significance of currency risk on the return of international real property investment, especially in a period of increased exchange rate volatility. After statistical analyses of the returns of a portfolio of office investments in seven Asia Pacific cities over the 1986 to 2007 period, it was found that currency risk had a statistically significant positive impact on the performance of the portfolio of office investments. This is confirmed by the results of stochastic dominance test. If the results of this study are verified by subsequent studies, and the past reliably presages the future, they would imply that investors holding portfolios of real property investments in the sample markets might not need to be unduly concerned with currency risk.     

Real estate prices: An international study of seasonality's sentiment effect

The current study shows that real estate prices in several countries reveal a significant and persistent seasonality, where the highest rates of return are obtained in the spring and early summer, and the lowest rates of return are obtained in the fall. This seasonality is explained by a joint effect of the change in the number of daylight hours and the latitude of the area zone under consideration. Notably, latitude affects real estate prices above and beyond the effect of the change in the number of daylight hours, which by itself is a function of latitude. This joint effect is robust to the two explanations for seasonality given in the literature: the Matching Theory and the Bargaining Power Hypothesis, as well as to several macroeconomic variables. The effect also conforms to the well-known Seasonal Affective Disorder (SAD), which has been found in other studies to affect people's health, their risk attitude, and consequently their risk perception and investment decisions which, in turn, affect asset prices.     

The economics of options-implied inflation probability density functions

Recently a market in options based on consumer price index inflation (inflation caps and floors) has emerged in the US. This paper uses quotes on these derivatives to construct probability densities for inflation. We study how these probability density functions respond to news announcements and find that the implied odds of deflation are sensitive to certain macroeconomic news releases. We also estimate empirical pricing kernels using these option prices along with time series models fitted to inflation. The options-implied densities assign considerably more mass to extreme inflation outcomes (either deflation or high inflation) than do their time series counterparts. This yields a U-shaped empirical pricing kernel, with investors having high marginal utility in states of the world characterized by either deflation or high inflation.     

The impact of macroeconomic news on quote adjustments, noise, and informational volatility

We study the impact of the arrival of macroeconomic news on the informational and noise-driven components in high-frequency quote processes and their conditional variances. We decompose bid and ask returns into a common (“efficient return”) factor and two market-side-specific components capturing market microstructure effects. The corresponding variance components reflect information-driven and noise-induced volatilities. We find that all volatility components reveal distinct dynamics and are positively influenced by news. The proportion of noise-induced variances is highest before announcements and significantly declines thereafter. Moreover, news-affected responses in all volatility components are influenced by order flow imbalances.     

The effect of reference point prices on mergers and acquisitions

Prior stock price peaks of targets affect several aspects of merger and acquisition activity. Offer prices are biased toward recent peak prices although they are economically unremarkable. An offer's probability of acceptance jumps discontinuously when it exceeds a peak price. Conversely, bidder shareholders react more negatively as the offer price is influenced upward toward a peak. Merger waves occur when high returns on the market and likely targets make it easier for bidders to offer a peak price. Parties thus appear to use recent peaks as reference points or anchors to simplify the complex tasks of valuation and negotiation.     

The effect of real rates of interest on housing prices

During the late 1970s, U.S. house prices were appreciating rapidly even though mortgage interest rates were climbing. Recently, interest rates have eased but prices have moderated. This study examines the role of appreciation expectations in overcoming the negative effects of nominal mortgage interest rates on house prices. Expectations of future appreciation are important determinants of house sales prices, remaining influential during periods of declining and moderating real prices, not just when prices are rising. The real rate of interest, as viewed by the homebuyer, is the mechanism for affecting change in housing price levels. Because the nominal interest rate is slow to reflect changes in expectations, these real rates vary over time. This ebb and flow of real interest rates appears to explain market price levels. Nominal rates play a role as well, primarily in the formation of appreciation expectations.     

Constructing a financial fragility index for emerging countries

This article proposes a novel framework to construct a financial fragility index (FIX) of an emerging country from five main variables by combining the methods of principal component analysis and dynamic conditional correlations. The main contribution of the FIX is the time-varying weighting scheme of the variables and it is demonstrated for a leading emerging market, Turkey. A comparison with the classic principal component approach on forecasting economic activity-expectations and a policy making application are presented.     

The impact of consumer behavior on financial security of households in Poland

The paper applies the concept of identity to investigate whether consumer behavior matters for a household's financial security. It is assumed that considerable part of households may express their identity through status-oriented consumption. The research is carried out in two steps. First, the index of financial security is built and used to determine the level of financial security experienced by working-age families in Poland. Second, the simulation results based on an econometric model are employed to find the answer to the question: Does financial insecurity result more from the need to manifest consumption at the higher level than average in an income-group of which people are members, or people want to be distinguishable inside their own income-group but they do not identify with a group having consumption at visibly higher level, or from the need to improve self-image by bringing own consumption closer to the pattern of a group with higher wealth status of which they are not members? The source of data is the 2005-2009 Households Budget Surveys in Poland. The findings offer empirical evidence for the relevance of consumer behavior for financial security of households in Poland. Considerable part of households expresses identity through conspicuous consumption. Both groups of households, the insecurity rich and the insecurity poor, accept the same ranking of status goods: a car on the first position, next homes (housing and equipment) and clothes on the third place. Status-oriented consumption creates life beyond means and pushes even relatively rich households towards financial insecurity.     

Overbidding in fixed rate tenders: The role of exposure risk

The fixed rate tender is one of the main procedures used by central banks in the implementation of their monetary policies. While academic research has largely dismissed the procedure owing to its tendency to encourage overbidding, central banks such as the ECB and the Bank of England have continued using it. We investigate this apparent conflict by considering an auction-theoretic setting with private information about declining marginal valuations. Since overbidding entails exposure risk, an equilibrium may exist even if bids are costless and the intended volume is pre-announced. In fact, the allotment quota may be strictly below one with certainty. Also with adaptive expectations, overbidding need not escalate. However, the resulting allocation is typically inefficient. Empirical proxies of exposure risk are significant in both euro and sterling operations. Our findings have implications, in particular, for the potential reintroduction of pro rata allotment in the main refinancing operations of the Eurosystem.     

Dependence and mean reversion in stock prices: The case of the MENA region

This paper provides empirical evidence on the long memory behavior of the stock markets of Egypt, Jordan, Morocco, and Turkey. To test for long memory in the returns and volatility, we employ the modified rescaled range statistic R/S proposed by Lo [Lo, A.W., 1991. Long-term memory in stock market prices. Econometrica 59, 1279–1313] and the recently proposed rescaled variance V/S statistic developed by Giraitis et al. [Giraitis, L., Kokoszka, P.S. Leipus, R., Teyssiere, G., 2003. Rescaled variance and related tests for long memory in volatility and levels. J. Econ. 112, 265–294]. Further analysis is conducted by employing the ARFIMA (p, d, q) model to estimate the long memory parameters. Egypt and Morocco show evidence of long memory in the return series, while Jordan and Turkey display negative persistence. For the volatility series, long memory is conclusively demonstrated for all markets. Then, we compare the forecasting performance of ARMA and ARFIMA models and find that the ARFIMA model outperforms in out-of-sample forecasting of the markets. Our results should be useful to regulators, practitioners and derivative market participants, whose success depends on the ability to forecast stock price movements in these markets.     

The impact of FX central bank intervention in a noise trading framework

In this paper, we analyse the effectiveness of the direct central bank interventions using a new effectiveness criterion. To this aim, we investigate the effects of central bank interventions (CBI) in a noise trading model with chartists and fundamentalists. We first estimate a model in which chartists extrapolate past returns and fundamentalists forecast a mean reverting dynamics of the exchange rate towards a fundamental value. Then, we investigate the role of central bank interventions for explaining the switching properties between the two types of agents. We find evidence that in the medium run, interventions increase the proportion of fundamentalists and therefore exert some stabilizing influence on the exchange rate.     

The role of speculation in international futures markets on commodity prices

The role of futures contracts on spot prices has been one of the key focus areas of research since the recent surge in commodity prices and increase in the volatility of commodity returns. However, no consensus arises from this literature, and hence it is difficult to link the use of futures contracts in agricultural commodities by non-hedgers and the growing food insecurity within developing countries. The purpose of this paper is to highlight causal relationships from futures contracts to spot prices of underlying assets, namely agricultural commodities. As research that focus on exchange-traded funds do not provide any clear conclusions, we focus on the imbalance between short- and long-open positions, this imbalance being caused by the exchange traded funds’ participation in futures markets. In this paper, we estimate relationships between financial variables including indicators for speculation in futures markets and the returns of cocoa, corn, soybean, wheat, coffee, rice, and sugar on a weekly basis from 1998 to 2013. Significant results lead to Granger-causality tests that in turn validate the hypothesis of a positive impact of speculation in futures markets to returns on the underlying commodities.     

The impact of macroeconomic uncertainty on non-financial firms' demand for liquidity

This paper empirically investigates whether changes in macroeconomic volatility affect the efficient allocation of non-financial firms' liquid assets. We argue that higher uncertainty will hamper managers' ability to accurately predict firm-specific information and induce them to implement similar cash management policies. Contrarily, when the macroeconomic environment becomes more tranquil, each manager will have the latitude to behave more idiosyncratically as she can adjust liquid assets based on the specific requirements of the firm, bringing about a more efficient allocation of liquid assets. Our empirical analysis provides support for these predictions.     

The impact of geographic diversification on firm performance

This paper empirically examines the economic effects of both corporate industrial and geographic diversifications. Using a sample of 28,050 firm-year observations from 1990 to 1998, we find that industrial and geographic diversifications are associated with firm value decrease. Consistent with Denis et al. [Denis, D. J., Denis, D. K., and Yost, K. (2002). Global diversification, industrial diversification, and firm value. Journal of Finance, 57, 1951-1979], the costs of corporate diversification may outweigh the benefits of diversification. We find that geographically diversified firms have higher R&D expenditures, advertising expenses, operating income, ROE and ROA than industrially diversified firms. In addition, higher R&D expenditures create value for multi-segment global firms, but not for single-segment global firms. This result implies that there exists an interaction effect between industrial and geographic diversification. We also examine the effects of agency cost issues, as characterized by the diversification discount, on both industrial and geographic diversification. Consistent with the agency explanation, firms with high equity-based compensation are associated with higher firm value than firms with low equity-based compensation. Also, we find that firms with a higher insider ownership percentage are associated with higher excess value.     

The impact of monetary policy shocks on stock prices: Evidence from Canada and the United States

Using structural VAR models with short-run restrictions appropriate for Canada and the United States, we empirically examine whether trade and financial market openness matter for the impact on and transmission to stock prices of monetary policy shocks. We find that, in Canada, the immediate response of stock prices to a domestic contractionary monetary policy shock is small and the dynamic response is brief, whereas in the United States, the immediate response of stock prices to a similar shock is relatively large and the dynamic response is relatively prolonged. We find that these differences are largely driven by differences in financial market openness and hence different dynamic responses of monetary policy shocks between the two countries that we model in this paper.     

The statistical evolution of prices on the Istanbul stock exchange

This study documents the statistical properties of the stock returns on the Istanbul Stock Exchange (ISE) for the January 1988 to December 1999 period and tries to assess the evolution of the underlying stochastic structure over this time period. It also investigates empirically the relative efficiency of the ISE to test whether the rapid development of this market over the last decade caused it to become a relatively more efficient market. This is accomplished through a number of parametric and non-parametric tests of the random walk hypothesis using daily, weekly and monthly observations of the value-weighted ISE-100 index series. The emphasis is more on the evolution of the price process than on static tests of a random walk model as such. The findings indicate that the price mechanism in the ISE has evolved into a more informationally efficient process in little more than a decade of existence.