Forward discount dynamics in integrated markets

This paper models the excess return or forward discount (premium) dynamics in integrated markets. Its decomposition at different time frequencies suggests that both stochastic and fundamental processes, as well as exogenous random shocks, are relevant for the determination of the forward discount (premium) over time. A stochastic process within a time-dependent parabolic well appears to capture the empirical findings of the literature and provides the means for the derivation of the equilibrium pricing formula for the forward discount. The mathematical solution that determines the relationship between the stochastic process and the trend allows for an interpretation of the reasons why, in some cases, expectational error appears to be correlated with the forward discount (premium) but not with the forward risk premium. Finally, estimations of the forward discount are carried out using the proposed model, which seems to support the data well.     

资本积累与最优银行规模

本文回顾了近半个多世纪以来有关收入和财富分配持续性不平等的原因及其动态演化方面的理论,包括收入和财富分布的随机过程模型、新古典框架下不平等的动态演化理论、人力资本投资对持续性不平等的影响、不完全资本市场下持续性不平等的动态演化、经济增长中持续性不平等的动态演化以及其他各种机制对不平等动态演化的影响等。论文还对有关持续性不平等理论的发展脉络和内在演化逻辑进行了梳理,并在此基础上对现有文献进行了总体评述,并对今后研究的发展方向作了简单讨论。     

Households' Preferences and Exchange Rate Overshooting

Abstract

This paper uses a ‘New-Open-Economy Macroeconomic’ model to study the effect of a shock to Households' preferences on exchange rate dynamics. The special features of the model are that Households' preferences exhibit a ‘catching-up with the Joneses’ effect and that international financial markets are imperfectly integrated. Results of numerical simulations of the model demonstrate that these features imply that, in an otherwise standard ‘New-Open-Economy Macroeconomic’ model, a shock to Households' preferences can give rise to an overshooting of the exchange rate.     

Monetary policy and exchange rate dynamics in the Spanish economy

As the Spanish economy gets more integrated in international markets, the real exchange rate becomes a key determinant of the monetary transmission. In this paper we trace out the dynamic response of prices, output and the exchange rate following a monetary policy shock. We estimate a structural VAR model whose identification scheme is based on the long run properties common to a large class of models. The results suggest that a small model with efficient asset markets plus nominal inertia and long run monetary neutrality, captures the essential features of the monetary transmission mechanism in Spain. The interest rate shock is well identified and the exchange rate overshoots its long run value. There are no signs of liquidity puzzle nor of price puzzle or exchange rate puzzle either.     

Learning,Large Deviations,And Recurrent Currency Crises*

This article studies a version of Obstfeld's (Journal of International Economics 43 (1997), 61–77) “escape clause” model. The model is calibrated to produce three rational expectations equilibria. Two of these equilibria are E‐stable and one is unstable. Dynamics are introduced by assuming that agents must learn about the government's decision rule. It is assumed they do this using a stochastic approximation algorithm. It turns out that as a certain parameter describing the sensitivity of beliefs to new information gets small, the algorithm converges to a small noise diffusion process. The dynamics of exchange rate changes are then characterized using large deviation techniques from Freidlin and Wentzell (Random Perturbations of Dynamical Systems, Second Edition, Berlin: Springer‐Verlag, 1998). These methods describe the sense in which the limiting distribution of exchange rate changes is approximated by a two‐state Markov‐Switching process, where the two states correspond to the two E‐stable equilibria. The model is calibrated to the exchange rate histories of Argentina, Brazil, and Mexico. Currency crises in these countries resemble the predicted “escape routes” of the model. A key feature of these escape routes is that expectations of a devaluation erupt suddenly, without large contemporaneous shocks. This is consistent with evidence showing that crises are often poorly anticipated by financial markets.     

Dynamic complexity in a stochastic rationing model

We have constructed a simple discrete-time macroeconomic model founded on individuals' stochastic optimizing behavior. Actual transactions are carried out in a sequence of disequilibrium markets in which the level of aggregate trade is the lesser of aggregate demand and supply, and in which the individual faces all-or-nothing basis stochastic rationing. In such environments, the actual transaction an individual obtains is generally different from the expectation he forms. This difference is a source of macro-dynamics. The paper demonstrates that, through the interactions of individuals in different markets, the expectation adjustment process is inherently nonlinear and generates complex dynamics involving chaos.I am indebted to Professors Richard Day, James Dulgeroff, Hajime Hori, Osamu Kamoike, Masahiro Okuno-Fujiwara, Makoto Towada, Makoto Yano, and two referees of this Journal for helpful comments and many constructive suggestions to improve the quality of this paper substantially. I am grateful to financial support from Tohyo Trust Bank. All remaining errors are my responsibility.     

Evolution of Walrasian equilibrium in an exchange economy

We study the stochastic stability of a dynamic trading process in an exchange economy. We use a simplified version of a trading model à la Shapley and Shubik (J Polit Econ 85:937–968, 1977). Two types of agents equipped with Leontief preferences trade goods in markets by offering endowments, and actual trades occur at market clearing prices. Better behavior tends to spread through the same type of agents by imitation, and agents also make mistakes occasionally. We provide a sufficient condition for the perturbed dynamic process to have a unique stochastically stable state that is a Walrasian equilibrium allocation. In this sense, we give a rationale for Walrasian behavior.     

Are Indian rice exporters able to price discriminate? Empirical evidence for basmati and non-basmati rice

The role of exchange rate fluctuations on the pricing behaviour of Indian rice exporters in their major destination markets is examined using the pricing-to-market (PTM) model. The analysis was undertaken in a context where India has emerged as a leading exporter of rice in the world market. The study distinguishes between basmati and non-basmati rice in the analysis as the destination markets differ across these two varieties. One of the key contributions of this study is that it undertakes an analysis under 3 exchange rate models, they are: nominal, real and commodity-specific exchange rates. The results from our analysis indicated the presence of non-competitive pricing behaviour of India’s rice exporters in majority of destination markets due to both the market-specific characteristics as well as exchange rate-induced effects. The amplification of exchange rate effects was more prominent in commodity-specific exchange rate model whereas local currency stabilization was more prominent under nominal and real exchange rate models. Furthermore, the analysis showed that the commodity-specific exchange rate better predicts the PTM behaviour of rice exporters.     

Random Walk or Bandwagon: Some Evidence From Foreign Exchanges in the 1980s

The predicitive performance of the bandwagon expectations model foe weekly spot exchange rates over the 1980–6 period is evaluated. Empirical results generally indicate the presence of significant bandwagon effects in the exchange rate dynamics, as found in survey expectations data. Specifically, we find the the bandwagon forecasting scheme can improve the forecasting accuracy in terms of both mean squared errors and market timing upon the random walk and vector autoregressive models. The results illustrate that bandwagon expectations can be rational, and the exchange rate appears to follow a more general integrated process than a random walk.     

Exchange rate and price level determination in a stochastic equilibrium model

This paper analyzes a stochastic general equilibrium model of the open economy under floating exchange rates. It is shown that increased integration of the domestic economy with the rest of the world—whether integration is considered from the viewpoint of financial or commodity markets—has differential impacts upon price and exchange rate variability with the impacts depending further upon the source of variability.     

Exchange Rate Pass-Through in Vertically Related Markets

The paper provides a theoretical framework which addresses exchange rate pass-through within the setting of vertically related markets. In particular, foreign firms' price adjustment in response to an exchange rate shock is evaluated. This permits study of the importance of cost effects of the exchange rate shock. Recent empirical evidence indicated the relevance of these cost effects. It is shown that one can decompose the effects of an exchange rate shock on the final goods market into direct and indirect components. The indirect effect works through the input market. The degree of pass-through then depends on the relative importance of direct and indirect effects, which in turn depends on the nature of vertical structures and strategic firm behavior. It is shown that the institutional aspects of vertically related markets play a role in explaining incomplete price adjustments in both intermediate and final goods markets and the failure of PPP in the short run.     

Empirical mode decomposition–based least squares support vector regression for foreign exchange rate forecasting

To address the nonlinear and non-stationary characteristics of financial time series such as foreign exchange rates, this study proposes a hybrid forecasting model using empirical mode decomposition (EMD) and least squares support vector regression (LSSVR) for foreign exchange rate forecasting. EMD is used to decompose the dynamics of foreign exchange rate into several intrinsic mode function (IMF) components and one residual component. LSSVR is constructed to forecast these IMFs and residual value individually, and then all these forecasted values are aggregated to produce the final forecasted value for foreign exchange rates. Empirical results show that the proposed EMD-LSSVR model outperforms the EMD-ARIMA (autoregressive integrated moving average) as well as the LSSVR and ARIMA models without time series decomposition.     

Stability and bifurcation in a simple heterogeneous asset pricing model

Stability and bifurcation analysis of deterministic systems has been widely used in modeling financial markets. We develop a simple pricing model with two types of rational traders, fundamentalists and chartists, in order to study well price behavior in financial markets, we use student t distribution to replace traditional normal distribution to describe fundamental price process. We study the stability and bifurcation of the underling deterministic system and use numerical simulation to study the dynamic of the stochastic system, including autocorrelations structures and high kurtosis of the returns. It is found that the fundamental price becomes stable (unstable) when the activities from both types of traders are balanced (unbalanced).     

A general equilibrium pricing model with speculation,quantity risk,price risk and foreign exchange risk

This paper develops a general equilibrium model where prices and foreign exchange rates are endogenous and based upon more fundamental determinants. Speculative behavior leading to position taking in claims on foreign risky commodities is explained. It is shown that in a multicurrency environment with less than complete markets and sequential trading opportunities, heterogenous expectations instigate this behavior; speculation occurs only when news (new information) is anticipated to emerge which can lead to a revision in prices and foreign exchange rates. However, it is contended that although foreign exchange risk and price risk do exist in such a market, they are results of the underlying and inescapable quantity risk. Furthermore, in well functioning markets, the risk that emanates from position taking in state contingent claims on foreign commodities and which influences final consumption is quantity risk. The distinction drawn between the three types of risks and the hierarchy established among the three markets with which these risks are associated has implications for international financial management, especially as it pertains to multinational corporations' foreign exchange exposure management.     

Observable restrictions of general equilibrium models with financial markets

This paper examines whether general equilibrium models of exchange economies with incomplete financial markets impose restrictions on prices of commodities and assets given the stochastic processes of dividends and aggregate endowments. We show that the assumption of time-separable expected utility implies restriction on the cross-section of asset prices as well as on spot commodity prices. However, a relaxation of the assumption of time separability will generally destroy these restriction.     

Jumps in foreign exchange rates and stochastic unwinding of carry trades

Tails in the distribution of JPY/USD exchange rate returns are well approximated by an exponentially dampened power-law. Distribution parameter estimates indicate that yen appreciation jumps belong to a Levy process with unbounded variation, suggesting that same mechanism may be responsible for fluctuations in normal times as well as rare crashes. In contrast, yen depreciation jumps have a well defined second moment suggesting a Gaussian regime. In addition, extreme episodes of yen appreciation are larger and more persistent than episodes of yen depreciation. The asymmetry is magnified and power-law tails are more elongated during times of higher interest rate differential between U.S. and Japan and higher level of VIX indicating that carry trade may be the driver. We propose a model of strategic carry trader behavior that in equilibrium generates exponentially dampened power-law distribution of jumps in foreign exchange along with “up by the stairs down by the elevator” dynamics arising from the assymetries between negative and positive jumps.     

Price dynamics in an exchange economy

The pure exchange model is the foundation of the neoclassical theory of value, yet equilibrium predictions and price adjustment dynamics for this model remained untested prior to the experiment reported in this paper. With the exchange economy replicated several times, prices and allocations in most experiment sessions adjust toward the competitive equilibrium in continuous double auction trading, though adjustment is much slower than in previous commodity flow (or perishable good) double auction market experiments. Price adjustment is evaluated by comparing its extent within each market replication (or trading period) to its extent across trading periods. More price adjustment occurs within trading periods than across trading periods, so price adjustment data are evaluated with the disequilibrium Hahn process model (Hahn and Negishi in Econometrica 30:463–469, 1962) of within-period trades. This paper introduces a stochastic version the Hahn process model and demonstrates that a linear approximation to this stochastic model yields an autoregressive process with a near unit root when the adjustment rate is low. In effect, the autoregressive price adjustment model studied extensively by time series econometricians over the past 30 years can be viewed as a reduced form of a stochastic disequilibrium exchange economy price adjustment model. Estimation of the model demonstrates that price adjustment in the exchange economy experiment is considerably slower than in economies without income effects, which suggests that the price discovery process may be a significant factor in the slow adjustment documented by applied econometricians.     

Nonlinear adjustment of the real exchange rate towards its equilibrium value: A panel smooth transition error correction modelling

We study the nonlinear dynamics of the real exchange rate towards its behavioral equilibrium value (BEER) using a Panel Smooth Transition Regression model framework. We show that the real exchange rate convergence process in the long-run is characterized by nonlinearities for emerging economies, whereas industrialized countries exhibit a linear pattern. Moreover, there exists an asymmetric behavior of the real exchange rate when facing an over- or an undervaluation of the domestic currency. Finally, our results suggest that the real exchange rate may be unable to unwind alone global imbalances.     

Volatility spillovers and determinants of contagion: Exchange rate and equity markets during crises

We study the hourly volatility spillover between the equity markets of New York (DJI), London (FTSE 100) and Tokyo (N225) and their exchange rates (USD, EUR, GBP and JPY) for the period of 2001 through 2013 covering the non-crises period, the global financial crisis and the euro debt crisis. First, we find a general increase in spillover between the equity and exchange rate markets during the crisis periods. Second, pure contagion (attributable to irrational investors’ behavior) and fundamental contagion (measured by macroeconomic fundamentals) explains the increased spillover between the FTSE 100, N225 to the DJI during the global financial crisis and from the exchange rate markets to the DJI during the euro debt crisis.     

Local Currency Pricing versus Producer Currency Pricing: Direct Evidence from German Exporters

Abstract. In new open-economy macroeconomic models, the assumption on the pricing behavior of firms in international trade plays a central role. Whether firms apply producer currency pricing (PCP) or local currency pricing (LCP) crucially affects, for example, the design of optimal monetary policy or the choice of the optimal exchange rate system. However, empirical evidence has so far been mixed and is furthermore mostly of an indirect nature. This paper draws direct evidence on the price-setting behavior of German exporters from a questionnaire-based survey. We find that PCP applies in more integrated markets. Differences between LCP firms and PCP firms mainly exist with respect to the use of mark-ups and in the validity of the law of one price for their respective products.