Testing for volatility spillover between the British pound and the euro

This paper examines volatility spillover between two nominal U.S. dollar exchange rates: the British pound and the euro. Using the residual cross-correlation approach, we observe that the euro Granger-causes the British pound in variance, whereas the British pound does not Granger-cause the euro in variance. Our findings support unidirectional volatility spillover from the euro to the British pound; thus, the euro volatility has a one-sided impact on the British pound volatility. Moreover, the findings suggest that euro traders succeed in the efficient processing of information derived from the British pound.     

Official interventions and the forward premium anomaly

This paper presents evidence that the forward premium anomaly intensifies during those times when a central bank intervenes. A model of exchange rate determination is presented to explain this and other features of the dollar–deutschemark and dollar–yen markets. In the model, the forward premium anomaly is caused by surprise central bank interventions in the foreign exchange market. Because interventions are pure surprises, the violations of uncovered interest parity that they create do not represent ex ante profit opportunities. Simulations of the model are found to match the forward premium anomaly and several other notable features of the data. The model also provides a theoretical basis for ARCH effects in exchange-rate returns.     

The euro and pound volatility dynamics: An investigation from conditional jump process

This paper investigates the variations of the volatility of euro and pound after the introduction of euro. A GARJI model is employed to analyze the impact of the news arrivals on the exchange rate volatility. The results are robust to the data-splitting schemes and indicate: (1) the conditional variance of euro is larger than that of pound. (2) The stability of euro exchange rates has made progress in recent years, which is accomplished by the decreases in the jump innovations. This paper supports the arguments on the determinants of exchange rate stability claimed by Mundell (1998) and Mussa (2000).     

Testing for intraday interdependence and volatility spillover among the euro, the pound and the Swiss franc markets

To examine intraday interdependence and volatility spillover among the euro, the pound and the Swiss franc, we employ the varying-correlation model of multivariate generalized autoregressive conditional heteroskedasticity. Our main findings are (1) return volatility in the euro spills into the pound and the Swiss franc; and (2) these markets are highly integrated with the euro, and the degree of interdependence is state-dependent: euro news has a simultaneous impact on the pound and the Swiss franc, and co-movements of these currencies and the euro become much higher in proportion to the arrival of news of the euro.     

Forward interest rate premium and asymmetric adjustment: Evidence from 16 countries

This paper examines the ability of the forward premium to provide an unbiased estimate of the future spot rate allowing for potential asymmetries. Extant evidence suggests that forward rates provide a biased predictor of future spot rates. Examining the forward premium for 16 countries, only for 2 countries does the linear expectations hypothesis holds. For the remaining countries, results generally support the view that the larger the forward premium the better a predictor for future spot rates it is, however, this result is not unique across all countries. Furthermore, although the asymmetric model improves data fit over the linear model, only in four cases does the model support an unbiased predictor interpretation. Further research is therefore required to understand the nature of this relationship, not least given the importance of correctly priced forward and long rates in terms of expected returns to future investments and the conduct of monetary policy.     

Estimating the equity premium

Accurate estimation of the equity premium (the expected difference between the returns to a well-diversified stock market portfolio and a riskfree asset) is of central importance in many applications of finance theory including project appraisal and portfolio selection. The standard approach is to take the average observed excess returns to the market over some recent time period (sometimes referred to as the ex post equity premium) and apply this as an unbiased estimate of the ex ante equity premium. The paper reviews the problems associated with such an approach and contrasts it with alternative theoretical techniques.     

The European fiscal reform and the plight of the euro

This paper presents the background and development of the global crisis of 2007–2008 and subsequent developments that are current today. It distinguishes four phases of the crisis: sub-prime mortgage crisis, soaring dollar and the Lehman Brothers fiasco, US and global recession, and, finally, European debt crisis. In the above context, the benefits and costs of joining the Eurozone are presented with special emphasis on the Polish perspective. The need for fiscal reforms and concerns regarding Eurozone institutions are addressed.The paper has been prepared based on the keynote speech by Robert Mundell during the 17th Global Finance Conference held in Poznan, Poland in June 2010. The speech presented was made possible in part by support from the Polish Financial Supervision Authority.An early version of the paper has been previously published in the Poznan University of Economics Review.     

A meta-analysis of the equity premium

The equity premium is a key parameter in asset allocation policies. There is a vigorous debate in the literature regarding the actual measurement of the equity premium, its size and the determinants of its variation. This study aims to take stock of this literature by means of a meta-analysis. We identify how the size of the equity premium depends on the way it is measured, along with its evolution over time and its variation across regions in the world. We find that the equity premium is significantly lower if measured by ex ante methods rather than ex post, in more recent periods, and for more developed countries. In addition, looking at the underlying fundamentals, we find that larger volatility in GDP growth tends to raise the equity premium while a higher nominal interest rate has a negative impact on the equity premium.     

The jackknife and the variance part of the credibility premium

Introduction and summary

Much of the recent literature in credibility theory has concentrated on the expected value part of Bühlmann's (1970) decomposition of the credibility premium. The expected value part is the Bayes rule for the mean relative to squared error loss and its linearization does not present any problems in terms of estimating the so-called structural parameters.     

Sovereign risk and belief-driven fluctuations in the euro area

Sovereign risk premia in several euro area countries have risen markedly since 2008, driving up credit spreads in the private sector as well. We propose a New Keynesian model of a two-region monetary union that accounts for this “sovereign risk channel.” The model is calibrated to the euro area as of mid-2012. We show that a combination of sovereign risk in one region and strongly procyclical fiscal policy at the aggregate level exacerbates the risk of belief-driven deflationary downturns. The model provides an argument in favor of coordinated, asymmetric fiscal stances as a way to prevent self-fulfilling debt crises.     

The sentiment premium and macroeconomic announcements

Limits to arbitrage imply that market-wide investor sentiment should be a priced factor in the US equity market. While previous studies (Baker and Wurgler in J Financ 61:1645–1680, 2006) focus on the factor loading on market-wide investor sentiment, we study its factor premium in the present paper. This is important, because both factor loadings and premiums are required to estimate expected returns on stocks, which are essential for capital budgeting, portfolio evaluation, investment, and risk analysis decisions. If overpricing is more prevalent than underpricing (Stambaugh et al. in J Financ Econ 104:288–302, 2012), the premium on market-wide investor sentiment should be negative. Furthermore, the sentiment premium should be particularly significant on days without macroeconomic announcements, because there is a lack of information about the state of the economy at such times. We test these hypotheses in this paper, and find supporting evidence. Our findings have important theoretical as well as practical implications.     

The rise and rise of the share premium account

Share premiums now constitute a substantial proportion of UK company equity but rarely featured on nineteenth century company balance sheets. This paper discusses when and why this changed and why the definition of the share premium account as company capital took nearly a century to reach the statute books. From 1855 to 1948 any surplus above par on issued shares could be treated at the directors' discretion, including appropriation for the payment of dividends. This freedom was removed in the Companies Act 1948 (s. 56), after the Cohen Committee recommended that share premiums should normally be treated as share capital and employed in a very limited range of transactions. The paper outlines the accounting and legal history of the share premium account and argues that the growth of share premiums was due to a tax avoidance loophole, open from 1889 to 1973, which permanently changed company practice on share issues after 1920. The effect of legal restrictions on the use of the share premium account is also addressed. One possible future consequence of the loss of economic significance of the nominal value of a share is the total abolition of both this and the share premium account by adoption of no par value (npv) shares, a change which has recently been adopted in Australia and is again under consideration in the UK.     

Current account imbalances and financial integration in the euro area

While the current account of the euro area as a whole has remained almost balanced in the past two decades, several member countries have sizeable deficits or surpluses. In this paper, we interpret these imbalances as indicators of net capital flows among the euro-area countries. We distinguish between balances against the euro zone and the rest of the world and examine these for the EU-15 countries. We find that for euro members the net flows follow differences in per-capita incomes, even before the introduction of the euro. Our results show further that with the introduction of the common currency the elasticity with respect to per-capita incomes of net capital flows within the euro area has increased for the members of the euro zone. This increase can neither be observed for the flows between the euro members and the rest of the world nor for the flows between the countries that stayed outside the monetary union and the euro zone. We interpret this as evidence for increasing financial integration in the euro area. There is also some evidence suggesting that the introduction of the euro has led to some financial diversion.