Evaluating international consumption risk sharing gains: An asset return view

International consumption risk sharing studies often generate counterfactual implications for asset return behavior with potentially misleading results. We address this contradiction using data moments of consumption and asset returns to fit a canonical international consumption risk sharing framework. Introducing persistent consumption risk, we find that its correlation across countries is more important for risk sharing than that of transitory risk. To identify these risk components, we jointly exploit the comovement of equity returns and consumption. This identification implies high correlations in persistent consumption risk, suggesting a strong degree of existing risk sharing despite low consumption correlations in the data.     

The risk premium and long-run global imbalances

This study proposes that heterogeneous household portfolio choices within a country and across countries offer an explanation for global imbalances. We construct a stochastic growth multi-country model in which heterogeneous agents face the following restrictions on asset trade. First, the degree of US equity market participation is higher than that of the rest of the world. Second, a fraction of households in each country maintains a fixed share of equity in its portfolios. In our calibrated model, which matches the US net foreign asset position and the equity premium, the average US household loads up more aggregate risk than the average foreign household by investing in risky assets abroad and issuing risk-free assets. As a result, the US is compensated by a high risk premium and runs trade deficits even as a debtor country. The long-run average trade deficit in our model accounts for 50% of the observed US trade deficit.     

Target zones in theory and history: Credibility, efficiency, and policy autonomy

An experiment with an exchange-rate band in Austria-Hungary in the early 20th century provides a rare opportunity to discuss critical aspects of the theory of target zones. Providing a new derivation of the target zone model as a set of nested hypotheses, the inference is drawn that policy credibility and market efficiency were paramount in the success of the Austro-Hungarian experience.     

Does the currency regime shape unhedged currency exposure?

This paper examines how unhedged currency exposure of firms varies with changes in currency flexibility. A sequence of four time periods with alternating high and low currency volatility in India provides a natural experiment in which changes in currency exposure of a panel of firms is measured, and the moral hazard versus incomplete markets hypotheses tested. We find that firms carried higher currency exposure in periods when the currency was less flexible. Our results support the moral hazard hypothesis: that low currency flexibility encourages firms to hold unhedged exposure in response to implicit government guarantees.     

International portfolio flows and exchange rate volatility in emerging Asian markets

This paper investigates the effects of equity and bond portfolio inflows on exchange rate volatility using monthly bilateral data for the US vis-a-vis seven Asian developing and emerging countries (India, Indonesia, Pakistan, the Philippines, South Korea, Taiwan and Thailand) over the period 1993:01–2015:11. GARCH models and Markov switching specifications with time-varying transition probabilities are estimated in addition to a benchmark linear model. The evidence suggests that high (low) exchange rate volatility is associated with equity (bond) inflows from the Asian countries toward the US in all cases, with the exception of the Philippines. Therefore, capital controls could be an effective tool to stabilise the foreign exchange market in countries where flows affect exchange rate volatility.     

Real estate valuation,current account and credit growth patterns,before and after the 2008–9 crisis

We explore the stability of the conditioning variables accounting for the real estate valuation before and after the crisis of 2008–9, in a panel of 36 countries, recognizing the crisis break. We validate the robustness of the association between the real estate valuation and lagged current account patterns, both before and after the crisis. The most economically significant variable in accounting for real estate valuation changes turned out to be the lagged real estate valuation appreciation (real estate inflation minus CPI inflation), followed by lagged declines of the current account/GDP, lagged domestic credit/GDP growth, and lagged equity market valuation appreciation (equity market appreciation minus CPI inflation). A one standard deviation increase in lagged real estate appreciation is associated with a 10% increase in the present real estate appreciation, larger than the impact of a one standard deviation deterioration in the lagged current account/GDP (5%) and of the lagged domestic credit/GDP growth (3%). The results are supportive of both current account and credit growth channels, with the momentum channels playing the most important role. Smaller current account/GDP surpluses or larger deficits may serve as warning signals, especially when coinciding with credit expansion and real estate appreciation during the past several quarters.     

The pricing of sentiment risk in European stock markets

This paper studies whether sentiment is rewarded with a significant risk premium in the European stock markets. We examine several sentiment proxies and identify the Economic Sentiment Indicator from the EU Commission as the most relevant sentiment proxy for our sample. The analysis is performed for the contemporaneous excess returns of EA-11 stock markets in the period from February 1999 to September 2015. We apply a conditional multi-beta pricing model in order to track the variation of the sentiment risk premium over time. The results demonstrate a positive significant relationship between sentiment and contemporaneous excess returns which is consistent with previous studies. The calculated sentiment risk premium is significant as well but negative implying that an investment in EA-11 countries over the examined time period – that is bearing sentiment risk – would have been unattractive to the investors on average.     

What expenditure does Anglosphere foreign borrowing fund?

This paper examines the extent to which foreign borrowing funds private investment, consumption and government expenditure in the United States, the United Kingdom, Australia, and New Zealand (the Anglosphere), advanced economies which have been the world's largest international borrowers since 1990. Using a bivariate predictive regression model, we estimate the relative importance of these expenditure aggregates as predictors of their external deficits, and hence foreign borrowing. Overall, based on quarterly macroeconomic data for the period 1990–2011, the evidence suggests that foreign borrowing has not financed higher household consumption in these economies over recent decades, with the possible exception of the United States. While results concerning government spending are mixed due to policy reaction, business cycle and public-private saving offset effects, strong results for private investment augur well for the sustainability of this grouping's foreign borrowing.     

Fatal attraction: Using distance to measure contagion in good times as well as bad

This paper proposes a new measure of contagion that is good at anticipating future vulnerabilities. Building on previous work, it uses correlations of equity markets across countries to measure contagion, but in a departure from previous practice measures contagion using the relationship of these correlations with distance. Also in contrast to previous work, our test is good at identifying periods of “positive contagion,” in which capital flows to emerging markets in a herd-like manner largely unrelated to fundamentals. Identifying such periods of “fatal attraction” is important as they provide the essential ingredients for subsequent crises and rapid outflows of capital.     

Can a real business cycle model without price and wage stickiness explain UK real exchange rate behaviour?

This paper establishes the ability of a Real Business Cycle model to account for UK real exchange rate behaviour. The model is tested by the method of indirect inference, bootstrapping the errors to generate 95% confidence limits for a time-series representation of the real exchange rate, as well as for various key data moments. The results suggest RBC models can explain real exchange rate movements.