Interest rate dynamics and volatility transmission in the European short term interest rate market

This paper investigates the price and volatility relationship in European short-term interest rate markets. Cointegration analysis is used to analyse the long and short run relationship and a GARCH BEKK model is estimated to analyse the volatility transmission between the markets. The stability of the long run relationship is also examined using Bai and Perron (Econometrica 66(1),47–78, 1998, J Appl Econ 18(1):1–22, 2003) structural break methodology. The results show that the relationship between the EURIBOR spot deposit rate and the EURIBOR future contract has changed significantly since 2001 and several structural breaks are present in the 13 year sample period. During periods where there is a long run relationship present the spot deposit rate generally leads the future rate in price discovery. In the short run there is bi-directional causality present between the markets. There is also significant evidence of volatility transmission from the spot market to the futures market throughout the sample period.     

Long‐run relations in European electricity prices

This paper analyses the interdependencies existing in wholesale electricity prices in six major European countries. The results of a robust multivariate long‐run dynamic analysis reveal the presence of four highly integrated central European markets (France, Germany, the Netherlands and Austria). The trend shared by these four electricity markets appears to be common also to gas prices, but not to oil prices. The existence of a common long‐term dynamics among electricity prices and between electricity prices and gas prices can be explained by the similarity of the market design across Europe and by the same marginal generation technology. Since standard unit root and cointegration tests are not robust to the peculiar characteristics of electricity prices time series, we also develop a battery of robust inference procedures that should assure the reliability of our results. Copyright © 2009 John Wiley & Sons, Ltd.     

Inflation,output and stock prices: evidence from Latin America

Research in economics and finance documents a puzzling negative relationship between stock returns and inflation rate in markets of industrialized economies. The present study investigates this relationship for the developing markets of Peru and Chile. Fama's model of linkages between inflation and real economic activity constitutes the theoretical framework of this paper. The study tests whether the negative relationship between equity returns and inflation is a result of a ‘proxy effect’, namely, a negative relationship between inflation and real economic activity. The evidence for Peru and Chile does not provide strong support for Fama's hypothesis. It is shown that the negative relationship between the real stock returns and unexpected inflation persists after purging inflation of the effects of the real economic activity. The long‐run equilibrium between stock prices and general price levels is weak, as indicated by the findings of the Johansen and Juselius co‐integration tests. However, in both economies, stock prices and general price levels seem to show a strong long‐run equilibrium with the real economic activity. These findings suggest that in the long‐run, Fama's propositions A and B are supported for Peru and Chile. The disparity between traditional regression and co‐integration test results suggest that it may be prudent to re‐examine the proxy effect in the framework of a long‐run relationship before denying its validity. Copyright © 1999 John Wiley & Sons, Ltd.     

Interdependence between Eastern and Western European stock markets: Evidence from intraday data

We analyze comovements among three stock markets in Central and Eastern Europe and, in addition, interdependence which may exist between Western European (DAX, CAC, UKX) and Central and Eastern European (BUX, PX-50, WIG-20) stock markets. The novelty of our paper rests mainly on the use of 5-min tick intraday price data from mid-2003 to early 2005 for stock indices and on the wide range of econometric techniques employed. We find no robust cointegration relationship for any of the stock index pairs or for any of the extended specifications. There are signs of short-term spillover effects both in terms of stock returns and stock price volatility. Granger causality tests show the presence of bidirectional causality for returns as well as volatility series. The results based on a VAR framework indicate a more limited number of short-term relationships among the stock markets.     

International stock market integration: Central and South Eastern Europe compared

We examine the international stock market comovements between Western Europe vis-à-vis Central (Czech Republic, Hungary and Poland) and South Eastern Europe (Croatia, Macedonia and Serbia) using multivariate GARCH models in the period 2006–2011. Comparing these two groups, we find that the degree of comovements is much higher for Central Europe. The correlation of South Eastern European stock markets with developed markets is essentially zero. An exemption to this regularity is Croatia, with its stock market displaying a greater degree of integration toward Western Europe recently, but still below the levels typical for Central Europe. All stock markets fall strongly at the beginning of the global financial crisis and we do not find that the crisis altered the degree of stock market integration between these groups of countries.     

Cointegration, causality and the transmission of shocks across wheat market in Pakistan

This paper uses quarterly price data and examines the transmission of shocks across different spatially separated locations besides identifying causality among these locations. Johansen and Juselius’s (Econ. Stat., 52, 160–210, 1990) multivariate cointegration procedure identified two cointegrating vectors among these locations. Following Toda and Yamamoto (J. Econom., 66, 225–250, 1995), causality tests showed only one bi-directional causality and it was between Peshawar and Hyderabad locations. Faisalabad and Sargodha appeared independent (i.e. exogenous) market locations in price discovery process. Peshawar market showed maximum (i.e. 5) number of significant links. The generalized impulse response functions, though, suggested similar (cyclical) pattern of responses across the markets, but their time profile, which provides insight into the system’s speed of convergence to long run equilibrium path, varied with different level of extent and persistency. Responses to shock originating in consumption markets (i.e. Karachi, Peshawar and Lahore) remained short lived; whereas the shocks stemming from surplus wheat producing locations (i.e Multan, Sargodha and Faisalabad) produced long and more persistent responses.      

Interrelations in market fears of U.S. and European equity markets

We examine interdependence between the implied volatilities of U.S. and five European markets in an integrated multivariate system that allows interactions in the first and second moments of volatility processes. Our results find significant interactions in the variance-covariance matrix of VIX and European volatilities which persist and facilitate risk transmission. Changes in U.S. and Eurozone volatilities are important drivers of risk shocks in European markets. VIX and European volatilities have predictive ability for each other. Further, VIX shocks contribute significantly to the prediction error of European risk shocks, but not vice versa. Risk transmission from U.K. markets to U.S. and European markets intensified around the Brexit vote. Also, VIX shocks added significantly more to European risks during the global financial crisis. Our results highlight the potential weakness of risk transmission models that ignore the second-moment risk transmission channel and have implications for volatility trades, portfolio diversification strategies, and hedging the cross-market risks.     

Optimal dynamic pricing for sports games with habitual attendance

This paper provides a theoretical analysis of the optimal pricing decisions of a sports team that maximizes lifetime profits in sports markets where game attendance is habit‐forming for sports fans. The long‐run equilibrium price and attendance level are found to be greater than the counterparts of the static framework, respectively. The infinite horizon model shows that the pricing strategy of the firm brings about an upward‐crossing of two different dynamic price paths where the price path with stronger habit formation initially stays below, catches up, and ultimately rises above the price path with weaker habit formation. It is worth noting that the upward‐crossing phenomenon is not fully understood in a finite‐period model. Copyright © 2008 John Wiley & Sons, Ltd.     

The migration response to local labour market shocks: Evidence from EU regions during the global economic crisis

The global economic crisis has strongly affected Europe's economic geography. This study investigates the role of local labour market disparities in determining regional net in‐migration rates. While only a weak link is detected in the precrisis period, the local labour market context of migration grows significantly stronger during the crisis. Decompositions of the estimation results show that changes in migration rates are firstly a result of widened disparities across European regions throughout the crisis. However, also behavioural adjustment processes occur, e.g. an orientation of migrants towards urban areas and away from regions with persistently high long‐run unemployment rates.     

A multivariate unobserved component analysis of US housing market

This study explores price dynamics and price relationships in the US housing market with a focus on four regions: Northeast, Midwest, South, and West. It applies a multivariate state-space model to identify the common trends and common cycles in US regional markets. The study finds that the principal source of secular price variability in the Northeast and West markets is due to two common stochastic trends, while a large share of transitional price variability in the Northeast, West and Midwest originates from three common stochastic cycles. The study estimates the relationships between the common unobserved components and economic variables and finds that unemployment, federal funds rate, corporate default risk, economic expansion, unanticipated inflation in the construction market are significant underlying economic phenomena that impact the evolution of the common movements in both the short run and the long run housing dynamics. Authorship is equally shared between the authors.     

An analysis of dependence between Central and Eastern European stock markets

We examine the dependence structure between four Central and Eastern European (CEE) stock markets (Czech Republic, Hungary, Poland and Romania) using static and dynamic copula functions with different forms of tail dependence. We find evidence of positive dependence between all CEE stock markets, although this dependence is stronger between the Hungarian, Czech and Polish markets than between these markets and the Romanian market. We also find evidence of symmetric tail dependence, although not for the Hungarian and Czech markets. The dependence is time-varying and intensified after the onset of the recent global financial crisis. These results confirm that CEE stock markets are gradually coupling, a fact that has risk management implications for policymakers and investors.     

ECONOMETRIC MODELS OF ASYMMETRIC PRICE TRANSMISSION

Abstract In this paper, we review the existing empirical literature on price asymmetries in commodities, providing a way to classify and compare different studies that are highly heterogeneous in terms of econometric models, type of asymmetries and empirical findings. Relative to the previous literature, this paper is novel in several respects. First, it presents a detailed and updated survey of the existing empirical contributions on price asymmetries in the transmission mechanism linking input prices to output prices. Second, this paper presents an extension of the traditional distinction between long‐run and short‐run asymmetries to new categories of asymmetries, such as: contemporaneous impact, distributed lag effect, cumulated impact, reaction time, equilibrium and momentum equilibrium adjustment path, regime effect, regime equilibrium adjustment path. Each empirical study is then critically discussed in the light of this new classification of asymmetries. Third, this paper evaluates the relative merits of the most popular econometric models for price asymmetries, namely autoregressive distributed lags, partial adjustments, error correction models, regime switching and vector autoregressive models. Finally, we use the meta‐regression analysis to investigate whether the results of asymmetry tests are not model‐invariant and find which additional factors systematically influence the rejection of the null hypothesis of symmetric price adjustment. The main results of our survey can be summarized as follows: (i) each econometric model is specialized to capture a subset of asymmetries; (ii) each asymmetry is better investigated by a subset of econometric models; (iii) the general significance of the F test for asymmetric price transmission depends mainly on characteristics of the data, dynamic specification of the econometric model, and market characteristics. Overall, our empirical findings confirm that asymmetry, in all its forms, is very likely to occur in a wide range of markets and econometric models.     

Business,housing, and credit cycles

We use multivariate unobserved components models to estimate trend and cyclical components in gross domestic product (GDP), credit volumes, and house prices for the USA and the five largest European economies. With the exception of Germany, we find large and long cycles in credit and house prices, which are highly correlated with a medium‐term component in GDP cycles. Differences across countries in the length and size of cycles appear to be related to the properties of national housing markets. The precision of pseudo real‐time estimates of credit and house price cycles is roughly comparable to that of GDP cycles.     

Are the stock and real estate markets integrated in China?

This paper examines the dynamic short-run and long-run co-movement between the real estate and stock markets in China by employing a continuous wavelet method. We use gross domestic product and M2 (broad money supply) as control variables to eliminate the common factors of the two markets and to identify the real nexus between them. The empirical results show that the co-movement between real estate and stock prices is weak in the short run, except during the financial crisis period. Since the stock market is highly volatile, while real estate prices are relatively stable, the two markets are less correlated in the short run. The results also show that real estate prices affect stock prices in the long run, which supports the existence of a credit-price effect in China. Real estate prices remained very high in most time periods. Enterprises and individuals can obtain funds from bank loans to invest in the stock market, thus raising stock prices. These findings indicate that the two markets are generally segmented in the short run but are integrated in the long run. The stabilization of the real estate market is critical for stability in the stock market, but not vice versa. Additionally, investments in the two markets may not provide a high level of risk dispersion in the long run in China.

     

House price convergence in euro zone and non-euro zone countries

This study investigates whether single currency use increased house price convergence among various countries. First, the panel unit root test results indicate that the house prices in euro zone countries were more correlated than the house prices in non-euro zone countries. Second, the house prices in various European countries converged towards the house prices in Germany, which uses the single currency, rather than towards those in the United Kingdom, indicating that single currency use increased the influence of the German housing market on other markets. Finally, the log t regression model, a new convergence test, was employed and determined that the house prices in various European countries were not converging before 1992 but began to do so after that year. After the euro was implemented as an official currency, the house prices in various countries converged towards a consistent level. On the basis of the relative transition paths, this study determines that the differences among housing markets in various countries have continuously decreased since 1992. The empirical results indicate that the law of one price is applicable to tradable goods and that single currency use can integrate housing markets, which include non-tradable goods.     

Speculation in the Oil Market

The run‐up in oil prices since 2004 coincided with growing investment in commodity markets and increased price co‐movement among different commodities. We assess whether speculation in the oil market played a role in driving this salient empirical pattern. We identify oil shocks from a large dataset using a dynamic factor model. This method is motivated by the fact that a small‐scale vector autoregression is not informationally sufficient to identify the shocks. The main results are as follows. (i) While global demand shocks account for the largest share of oil price fluctuations, speculative shocks are the second most important driver. (ii) The increase in oil prices over the last decade is mainly driven by the strength of global demand. However, speculation played a significant role in the oil price increase between 2004 and 2008 and its subsequent collapse. (iii) The co‐movement between oil prices and the prices of other commodities is mainly explained by global demand shocks. Our results support the view that the recent oil price increase is mainly driven by the strength of global demand but that the financialization process of commodity markets also played a role. Copyright © 2014 John Wiley & Sons, Ltd.     

Financial contagion vulnerability and resistance: A comparison of European stock markets

This paper investigates contagion to European stock markets associated with seven big financial shocks between 1997 and 2002. We apply methods using heteroscedasticity-adjusted correlation coefficients to discriminate between contagion, interdependence and breaks in stock markets relationships. The analysis focuses on a comparison between developed Western European markets and emerging stock markets in Central and Eastern Europe. We find modest evidence of significant instabilities in cross-market linkages after the crises. The Central and Eastern European stock markets are not more vulnerable to contagion than Western European markets.     

Euro conversion and return dynamics of European financial markets: a frequency domain approach

Using a frequency domain approach, we compare the spectra of equity market index returns for the 12 Euro-zone countries, the UK, the US, and Japan, over several time frames before and after the introduction of the Euro. In the immediate aftermath of the Euro-introduction, we find a reduced volatility over all frequencies, in which no strong cyclical components are present. However, in the long run, equity markets exhibit a volatility increase: the larger European equity markets develop dynamics that exhibit strikingly similar patterns, while the smaller European equity markets appear to follow dynamics closely resembling white noise. The similarity in dynamics is a likely candidate to explain the increase in correlation among the European markets. Furthermore, the European equity markets initially exhibited dynamics that resembled those of the US, while after the introduction of the Euro, the dynamics of the European Markets exhibits patterns similar to those found the UK. This suggests a change in the dynamic interdependency between the UK and the European markets and an increased convergence of UK market behavior with that behavior dominant in the Euro-zone. The findings may provide important implications for investors seeking to take advantage of international diversification.     

Trader matching and the selection of market institutions

We analyze a stochastic dynamic learning model with boundedly rational traders who can choose among trading institutions with different matching characteristics. The framework allows for institutions featuring multiple prices (per good), thus violating the “law of one price.” We find that centralized institutions are stochastically stable for a broad class of dynamics and behavioral rules, independently of which other institutions are available. However, some decentralized institutions featuring multiple prices can also survive in the long run, depending on specific characteristics of the underlying learning dynamics such as fast transitions or optimistic behavior.