A reduced form framework for modeling volatility of speculative prices based on realized variation measures

Building on realized variance and bipower variation measures constructed from high-frequency financial prices, we propose a simple reduced form framework for effectively incorporating intraday data into the modeling of daily return volatility. We decompose the total daily return variability into the continuous sample path variance, the variation arising from discontinuous jumps that occur during the trading day, as well as the overnight return variance. Our empirical results, based on long samples of high-frequency equity and bond futures returns, suggest that the dynamic dependencies in the daily continuous sample path variability are well described by an approximate long-memory HAR–GARCH model, while the overnight returns may be modeled by an augmented GARCH type structure. The dynamic dependencies in the non-parametrically identified significant jumps appear to be well described by the combination of an ACH model for the time-varying jump intensities coupled with a relatively simple log-linear structure for the jump sizes. Finally, we discuss how the resulting reduced form model structure for each of the three components may be used in the construction of out-of-sample forecasts for the total return volatility.     

Multinational risk and performance outcomes: Effects of knowledge intensity and industry context

A multinational presence can diversify corporate business activities and provide access to diverse overseas resources. This can enhance operational flexibility and create new business propositions that increase responsiveness to global market changes. Establishing an international corporate structure may also require irreversible investments and impose maintenance and processing costs that contravene the implied resilience and agility benefits. We distinguish between downside risk and upside potential as the relevant outcome measures to assess the implied advantages of multinationality. Consistent with the rationales of the OLI paradigm, we argue that multinational reach particularly in knowledge-based industries can reduce downside risk and enhance upside potential. These results introduce more nuances to the ongoing debate about multinational risk and performance effects. Based on a large cross-sectional dataset, we find that flexibility and responsiveness thrives on a multinational presence among firms operating in information-driven knowledge businesses. In contrast, internationalizing firms in capital-based network services display adverse risk effects.     

Deutsche Mark–Dollar Volatility: Intraday Activity Patterns, Macroeconomic Announcements, and Longer Run Dependencies

This paper provides a detailed characterization of the volatility in the deutsche mark–dollar foreign exchange market using an annual sample of five-minute returns. The approach captures the intraday activity patterns, the macroeconomic announcements, and the volatility persistence (ARCH) known from daily returns. The different features are separately quantified and shown to account for a substantial fraction of return variability, both at the intraday and daily level. The implications of the results for the interpretation of the fundamental "driving forces" behind the volatility process is also discussed.     

Determinants of the Physical Demand for Gold: Evidence from Panel Data

Although the role of gold in the world economy has declined since the gold standard was abandoned, it remains important as a central bank reserve, a hedge against risks, a barometer of geopolitical uncertainty, and an input for jewellery. While portfolio demand for gold has been well studied, determinants of physical demand are less understood. Certain emerging‐market countries such as China and India import substantial amounts of gold, with several factors that may contribute: low financial development, need for precautionary savings and/or strong cultural valuation of gold itself. This article uses panel data on gold imports of 21 countries to examine determinants of physical demand. We find that determinants of physical demand differ from those of portfolio demand, and that they differ between the developed and developing worlds.     

Exploring longitudinal risk‐return relationships

We study a longitudinal fit model of adaptation and its association with the longitudinal risk‐return relationship. The model allows the firm to adjust its position in response to partial learning about a changing environment characterized by two path‐dependent processes—a random walk and a stochastic trend. Computational simulations at low levels of learning in both environmental contexts are consistent with empirical data. However, the results are also consistent when firm behavior appears to be mindless in the form of a random walk. Hence, both imperfect learning and a mindless random walk can lead to the inverse longitudinal risk‐return relationships observed empirically. We discuss this apparent paradox and the possible resolution between mindless and conscious behavior as plausible causes of the longitudinal Bowman Paradox. Copyright © 2014 John Wiley & Sons, Ltd.     

Export diversification and real exchange rate in emerging Latin America and Asia: A South–North vs. South-South decomposition

The present paper examines the directional causality between export diversification and real exchange rate in the middle-income countries of Asia and Latin America over the period from 1995 to 2013. Additionally, we investigate asymmetries in the causality issue by examining the direction across trading partners.

Our empirical results show that there is a two-way causality between the two variables when we look at the sample as a whole. A causal link running from the real exchange rate to export diversification is consistent with the standard literature but it is not systematic at all. The reverse causation is very appealing and challenges the standard argument on exchange rate determination. When the causality issue is investigated by treating export markets differently, our findings at the aggregate level are confirmed in exports destined for the advanced countries. The analysis for ‘South-South’ trade only shows a unidirectional link from the real exchange rate to changes in export diversification. The same tests performed at the individual countries level reveal a heterogeneous causality across trading partners.     

Intergenerational redistribution and risk sharing with changing longevity

Trend increases in longevity are a global phenomenon challenging the fiscal sustainability of current welfare arrangements. Policy proposals abound and often build on implicit assertions concerning intergenerational equity. This paper offers a simple but manageable OLG model with endogenous retirement and cohort-specific longevity to address intergenerational redistribution and risk sharing. While it is well known that a utilitarian planner strives for consumption smoothing, it is shown that healthy ageing calls for work smoothing in the sense that retirement ages increase with longevity. Hence, cohorts with higher longevity should contribute to their larger consumption needs via later retirement, although it is shown that the planner still front-loads some financing (pre-saving). Stochastic longevity raises the issue of intergenerational risk sharing, which implies that cohorts turning out to have a high longevity are compensated at the expense of cohorts turning out to have a relatively short longevity.     

Uncertainty and Investment: Evidence from Australian Firm Panel Data

This paper investigates the key drivers of fixed firm investment of listed non‐financial companies in Australia over the period from 1987 to 2009. A Tobin's q model of investment is augmented to account for the effect of economic uncertainty on the investment decision. The effects of Tobin's q, sales and cash flows on firm investment rate are also analysed and discussed. Consistent with existing literature, this research finds clear evidence of negative effects of both macroeconomic and firm idiosyncratic uncertainty on Australian firm investment. However, evidence also shows that firm‐specific uncertainty is more important in explaining firm investment than macroeconomic uncertainty.     

Prices and Information Under Imperfect Competition

Imperfectly competitive product markets cannot be informationally efficient as private information has strategic implications interfering with price adjustment. This is illustrated in a duopoly model with sequential price setting where private information either leads to prices not being adjusted to all available information or to adjusted but biased prices.