On the predictability of the distribution of excess returns in currency markets

This paper investigates the predictability of foreign exchange (FX) volatility and liquidity risk factors on returns to the carry trade, an investment strategy that borrows in currencies with low interest rates and invests in currencies with high interest rates. Previous studies have suggested that this predictability could have been spuriously accounted for due to the persistence of the predictors. The analysis uses a predictive quantile regression model developed by Lee (2016) that allows for persistent predictors. We find that predictability changes remarkably across the entire distribution of currency excess returns. Predictability weakens substantially in the left tail once persistence is accounted for, implying a moderate negative predictive relation between FX volatility risk and carry trade returns. By contrast, it becomes stronger in the right tail. Furthermore, we provide evidence that FX volatility risk still dominates liquidity risk after controlling for persistence. These findings suggest that the persistence of the predictors needs to be taken into account when one measures predictability in currency markets. Finally, out-of-sample forecast performance is also presented.     

Is econometrics useful for private policy making? A case study of replacement policy at an auto rental company

The goal of this paper is to illustrate the potential usefulness of econometrics as a tool to assist private policy makers. We provide a case study and detailed econometric analysis of the automobile replacement policy adopted by a large car rental company. Unlike public policy making–where the benefits from using econometric models and “science-based” approaches to policy making are hard to quantify because the outcomes of interest are typically subjective quantities such as “social welfare”–in the case of firms there is an objective, easily quantifiable criterion for judging whether policy A is better than policy B: profits. We introduce and estimate an econometric model of the rental histories of individual cars in the company’s fleet. Via stochastic simulations, we show that the model provides a good approximation to the company’s actual operations. In particular, the econometric model is able to reproduce the extraordinarily high rates of return that the company obtains on its rental cars, with average internal rates of return between purchase and sale of approximately 50%. However, the econometric model can simulate outcomes under a range of counterfactual vehicle replacement policies. We use the econometric model to simulate the profitability of an alternative replacement policy under pessimistic assumptions about the rate maintenance costs would increase and rental rates would have to be decreased if the company were to keep its rental cars longer than it does under the status quo. Depending on the vehicle type, we find that the company’s expected discounted profits would be between 6% to over 140% higher under the suggested alternative operating strategy where vehicles are kept longer and rental rates of older vehicles are discounted to induce customers to rent them. The company found this analysis to be sufficiently convincing that it undertook an experiment to verify the predictions of the econometric model.     

Weak identification robust tests in an instrumental quantile model

We develop a testing procedure that is robust to identification quality in an instrumental quantile model. In order to reduce the computational burden, a multi-step approach is taken, and a two-step Anderson–Rubin (AR) statistic is considered. We then propose an orthogonal decomposition of the AR statistic, where the null distribution of each component does not depend on the assumption of a full rank of the Jacobian. Power experiments are conducted, and inferences on returns to schooling using the Angrist and Krueger data are considered as an empirical example.     

Financial crisis and stock market efficiency: Empirical evidence from Asian countries

This paper empirically investigates the effects of the 1997 financial crisis on the efficiency of eight Asian stock markets, applying the rolling bicorrelation test statistics for the three sub-periods of pre-crisis, crisis, and post-crisis. On a country-by-country basis, the results demonstrate that the crisis adversely affected the efficiency of most Asian stock markets, with Hong Kong being the hardest hit, followed by the Philippines, Malaysia, Singapore, Thailand and Korea. However, most of these markets recovered in the post-crisis period in terms of improved market efficiency. Given that the evidence of nonlinear serial dependencies indicates equilibrium deviation resulted from external shocks, the present findings of higher inefficiency during the crisis are not surprising as in the chaotic financial environment at that time, investors would overreact not only to local news, but also to news originating in the other markets, especially when the news events were adverse.     

Revenge Exacerbates the Effects of Interpersonal Problems on Mentors’ Emotional Exhaustion and Work‐Family Conflict: A Self‐Defeating Perspective

Drawing on conservation of resources theory, this study examined the link between negative mentoring experiences (i.e., interpersonal problems) perceived by mentors and their work‐family conflict (WFC) by focusing on the mediating role of emotional exhaustion and the moderating role of revenge. The results of a field survey of 187 mentors in China supported all of our hypotheses, indicating that interpersonal problems perceived by mentors were positively related to their WFC. This relationship was also found to be mediated by the mentors’ emotional exhaustion. In addition, revenge against protégés was found to moderate the main effect of interpersonal problems on emotional exhaustion and the indirect effect of interpersonal problems on WFC. Specifically, revenge exacerbated the positive relationship between interpersonal problems and emotional exhaustion. Further, emotional exhaustion mediated the indirect effect of interpersonal problems on WFC when the level of revenge was high, but not when it was low. The findings of this study provide insightful theoretical contributions and managerial implications that indicate new directions for research related to mentoring and work‐family relationships. © 2016 Wiley Periodicals, Inc.     

Quantile forecasts of daily exchange rate returns from forecasts of realized volatility

Quantile forecasts are central to risk management decisions because of the widespread use of Value-at-Risk. A quantile forecast is the product of two factors: the model used to forecast volatility, and the method of computing quantiles from the volatility forecasts. In this paper we calculate and evaluate quantile forecasts of the daily exchange rate returns of five currencies. The forecasting models that have been used in recent analyses of the predictability of daily realized volatility permit a comparison of the predictive power of different measures of intraday variation and intraday returns in forecasting exchange rate variability. The methods of computing quantile forecasts include making distributional assumptions for future daily returns as well as using the empirical distribution of predicted standardized returns with both rolling and recursive samples. Our main findings are that the Heterogenous Autoregressive model provides more accurate volatility and quantile forecasts for currencies which experience shifts in volatility, such as the Canadian dollar, and that the use of the empirical distribution to calculate quantiles can improve forecasts when there are shifts.     

The Effectiveness of Regulation Fair Disclosure: Evidence from an Emerging Market

The effect of corporate disclosure in emerging markets is not clearly predictable because of the prevalent information leakage prior to disclosure. We empirically examine the effectiveness of Regulation Fair Disclosure (Reg FD) in reducing information asymmetry among equity traders in an emerging market. Specifically, we test whether fair disclosure activity is negatively related to the probability of informed trading (PIN). Multivariate tests on a sample of listed companies in Korea subject to Reg FD reveal the following: (1) more frequent disclosure under Reg FD is related to lower information asymmetry, and (2) this relation differs across the types of disclosure, with the effect of qualitative disclosures on the PIN being weaker than that of quantitative disclosures. Evidence also indicates that the negative association between fair disclosure activities and information asymmetry is more (less) pronounced for firms with poorer (better) information environments where selective information leakage is more (less) likely. The results are robust to sensitivity tests. Our findings have implications for disclosure regulations in emerging markets, given that the existing literature casts doubt on the effectiveness of corporate disclosure in such markets.     

Do Conspicuous Consumers Pay Higher Housing Premiums? Spatial and Temporal Variation in the United States

This study is the first to examine the relationship between conspicuous demand and housing price dynamics. We hypothesize that conspicuous consumers would want high‐end homes to signal their wealth and this housing consumption behavior would induce greater deviations from fundamental house prices. We test this by using a unique dataset that matches the consumers’ appetite for nonhousing luxury goods from Google Insights for Search to housing premiums that they pay for high‐end houses in U.S. Metropolitan Statistical Areas (MSAs) during 2004–2011. The estimation results demonstrate that controlling for a wide range of MSA demographic and economic characteristics, conspicuous demand has a significant, positive relationship with housing premiums. This relationship varies spatially and temporally. Conspicuous demand has a stronger relationship with a price increase in high‐end homes in MSAs with a steady, higher housing premium than in MSAs with a volatile, lower premium during the boom period. In MSAs with a steady, higher housing premium, the relationship remains significant even during the bust period, potentially contributing to maintaining higher housing premiums.     

Fixed Investment and Economic Growth in China

This paper attempts to investigate empirically the investment-growth relationship in China. Using the exogeneity framework pioneered by Engle et al. (1983) and Engle and Hendry (1993), we find that fixed investment is a key determinant of China's economic growth, which, surprisingly, has not been rigorously examined in the literature. The super exogeneity test results suggest that there exists a robust (or structurally invariant) relationship between capital formation and income growth, thereby giving credence to policy evaluation.