EURANDOM: a decade of European stochastics

Conception, founding, start-up and development of EURANDOM are described by Willem van Zwet, Frank den Hollander (former scientific directors of EURANDOM) and Wim Senden (former managing director of EURANDOM).     

Interest expectations and exchange rates news

Using a new survey data set ofmatched exchange rate and interest rate expectations for eight currencies relative to the German mark, we examine empirically the relationship between exchange rate returns, news and risk premia. News on interest differentials enters significantly in equations for the difference between the spot rate and the lagged forward rate for the British pound, Japanese yen, Spanish peseta and the US dollar. An unexpected rise in the interest rate differential tends to strengthen the domestic exchange rate. For each of these currencies, we also find significant effects of our ex-ante measure of the risk premium. In addition, we investigate the effect of lagged interest rate differentials as proxy for the risk premium and find that they do not capture time-varying risk premia as is widely suggested in the literature, but probably capture a peso-problem, learning about a policy change, a market-inefficiency or a combination of these factors.     

Self-adapting control charts

When the distributional form of the observations differs from normality, standard control charts are often prone to serious errors. Such model errors can be avoided by using (modified) nonparametric control charts. Unfortunately, these control charts suffer from large stochastic errors caused by estimation. In between these two types are the so-called parametric control charts. All three of them, as well as a combined chart, which chooses one of the three control charts according to the appropriate model assumption on the underlying distribution are discussed in this paper. The data indicate which of the three control charts to select. Readymade formulas for the several control charts are presented accompanied by an application on real data. Apart from bias removal, criteria based on exceedance probability and semi-variance are investigated.     

German stock market dynamics

This article estimates generalized ARCH (GARCH) models for German stock market indices returns, using weekly and monthly data, various GARCH specifications and (non)normal error densities, and a variety of diagnostic checks. German stock return series exhibit significant levels of second-order dependence. Our results clearly demonstrate that for both weekly as well as monthly return series the Student-t distribution is superior to the standard normal distribution. In particular, the estimated GARCH-t models appear to be reasonably successful in accounting for both observed leptokurtosis and conditional heteroskedasticity from German stock return movements.     

Measuring common cyclical features during financial turmoil: Evidence of interdependence not contagion

This paper develops a test of contagion in financial markets by considering a measure of co-movement based on the notion of common cycles to detect short-run co-movements between a set of time series. We apply our methodology to the international effects of the 1994 Mexican peso crisis and the 1997 Asian crisis. Our results can be interpreted as evidence of a high level of market co-movement during all states of the world and, therefore, question the hypothesis of shift-contagion in the transmission of financial shocks during the 1997 Asian crisis, and to a lesser extent, the 1994 Mexican crisis.     

Heterogeneity of agents and exchange rate dynamics: Evidence from the EMS

We develop and estimate a dynamic heterogeneous agent model for the EMS period. Our empirical results suggest that the existence of heterogeneous interacting agents is indeed a possible explanation for the dynamics of exchange rates during the EMS. We find strong evidence of heterogeneous boundedly rational beliefs, and the fact that agents switch between these beliefs. Moreover, we show that the dynamic heterogeneous agent model outperforms the random walk and the static heterogeneous agents’ model in out-of-sample forecasting in the large majority of country-horizon combinations.     

Regulating the Platform Economy: How to Protect Workers While Promoting Innovation

The rise of the platform economy has made it a topic of great interest among European policymakers, as evidenced by the European Commission’s 2016 Communication “A European agenda for the collaborative economy”. The regulatory challenges facing policymakers are manifold, ranging from taxation to competition policy to worker protection. Furthermore, many basic aspects of the platform economy are unclear, such as its size, the number of workers who take part in it and, indeed, its very definition. What types of regulation are necessary to ensure that the benefits of the platform economy are maximised for all Europeans? How can the productivity gains associated with the platform economy be distributed throughout society? Perhaps most importantly, how can policymakers support innovation while also protecting consumers, workers and communities?