does institutional shareholder activism stimulate corporate information flow abstract activist shareholders have an incentive to communicate and cooperate with other major shareholders however the impact of their activity on information flow surrounding targeted firms is largely unknown we explore this aspect using a prolific proponent labor unions following the mailing of proxies containing union sponsored shareholder proposals trading volume increases significantly and at issue bond yield spreads of targeted firms are lower compared to matched firms subsequent difference in differences analyses show that stock prices of targeted firms become more informative as a result of activism affirming the intuition that activism results in a reduction of differential information between outside investors

disorderly adjustments to the misalignments in the korean won this paper estimates the equilibrium exchange rates for korea s real effective rates using clark and macdonald s 1999 behavioural equilibrium exchange rate beer approach the estimation result suggests that the real exchange rate was substantially overvalued during the period prior to the currency crisis of 1997 98 the subsequent adjustment however was disorderly in the sense that the real exchange rate overshot its long run equilibrium value there was also a large deviation from the beer indicating that the sharp depreciation was not an equilibrium phenomenon

profitability of time series momentum abstract we propose a continuous time heterogeneous agent model consisting of fundamental momentum and contrarian traders to explain the significant time series momentum we show that the performance of momentum strategy is determined by both time horizon and the market dominance of momentum traders specifically when momentum traders are more active in the market momentum strategies with short long time horizons stabilize destabilize the market and meanwhile the market under reacts over reacts in short run long run this provides profit opportunity for time series momentum strategies with short horizons and reversal with long horizons when momentum traders are less active in the market they always lose the results provide an insight into the profitability of time series momentum documented in recent empirical studies

testing for the absence of expected real profits from forward market speculation abstract this paper tests for the absence of expected real profits from forward market speculation it contrasts with the literature that has considered opportunities for expected nominal profit from speculation that is profits denominated in one of the currencies these studies assume money illusion on the part of market participants but this paper does not empirical results fail to find evidence of unexploited real profit opportunities

social capital and institutional trust evidence from bolivia s popular participation decentralisation reforms this article uses bolivia s emblematic process of decentralisation popular participation to explore the elusive relationship between interpersonal and institutional trust as central components of social capital the evidence corroborates the notion that basic social interaction and more complex institutional settings are strongly co related such as the trust that individuals place in their governments and institutions the data also shows that social capital has a direct effect on civic activism and political behaviour at the individual level the notion of social capital is present throughout the analysis as this type of capital allows observing and measuring changes in social structures that affect more complex institutional arrangements

is social capital declining in the united states a multiple indicator assessment despite a great deal of interest in a possible decline of social capital in the united states scholars have not reached a consensus on the trend this article improves upon previous research by providing a model of social capital that has explicit links to theories of social capital and that analyzes multiple indicators of social capital over a 20 year period the results do not consistently support putnam s claim of a decline in social capital showing instead some decline in a general measure of social capital a decline in trust in individuals no general decline in trust in institutions and no decline in associations

the use of flow analysis in foreign exchange exploratory evidence abstract this paper provides questionnaire evidence on the role of flow analysis for professional traders and fund managers this evidence suggests that besides fundamental information and technical analysis the analysis of flows provides an independent third type of information for professionals the view that flows can be used to learn about fundamentals is not consistent with the data instead evidence indicates that flows more likely provide insight into semi fundamental private information

the speculative efficiency hypothesis the hypothesis that forward prices are the best unbiased forecast of future spot prices is often presented in the economic and financial analysis of futures markets this paper considers the hypothesis independently of its implications for rational expectations or market efficiency and in order to stress this fact the term speculative efficiency is used to characterize the state envisaged under the hypothesis if a market is subject to efficient speculation the supply of speculative funds is infinitely elastic at the forward price that is equal to the expected future spot price the expected future spot price is a market price determined as the solution to the underlying rational expectations macroeconomic model although the paper is primarily concerned with testing this hypothesis in the foreign exchange market the methodology introduced in the paper is of general application to all futures markets this abstract was borrowed from another version of this item

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

the influence of fundamentals on exchange rates findings from analyses of news effects as we survey the literature of macroeconomic news in the foreign exchange market we can by now look back on nearly 30 years of research the first studies which analysed news effects on exchange rates were established in the early 1990s see for example dornbusch almost at the same time meese and rogoff published their influential paper revealing the forecasting inferiority in exchange rates of structural models against the random walk this finding has shocked the pillars of exchange rate economics and thus cast general suspicion on research focusing on fundamentals in this field the eventual rising popularity of event studies can partly be attributed to the re establishment of the raison d etre of exchange rate economics this work focuses on systematically surveying this literature with particular respect to its primary goal i e shedding light on the analytical value of fundamental research thus its major findings are first fundamental news does matter whereas non fundamental news matters to a lesser degree second news influences exchange rates via two separated channels i e incorporating common information into prices directly or indirectly based upon order flow third with a few exceptions the impact of fundamental news on exchange rates is fairly stable over time

the collapse of purchasing power parities during the 1970 s one of the striking facts concerning the relationship beiveen prices and exchange rates during the 1970 s has been the dismal performance of the predictions of the simple versions of the purchasing power parity doctrine ppp that doctrine in its absolute version states that the equilibrium exchange rate between domestic and foreign currencies equals the ratio of domestic to foreign price levels the relative version of the doctrine relates equilibrium changes in exchange rates to changes in the ratio of domestic to foreign prices during the 1970 s short run changes in exchange rates bore little relationship to short run differentials in national inflation rates and frequently divergences from purchasing power parities have been cumulative this paper reviews and analyzes the empirical record of exchange rates and prices during the 1970 s and the analysis is based on the experience of the dollar pound the dollar frecch franc and the dollar dm exchange rates section 2 presents the evidence on ppp during the 1970 s and contrasts it with the evidence from the 1920 s a period during which the doctrine held up reasonably well this analysis is relevant for assessing whether the flexible exchange rate system was successful in providing national economies with an added degree of insulation from foreign shocks and whether it provided policymakers with an added instrument for the conduct of macroeconomic policy the evidence regarding devia tions from purchasing power parities is also relevant for determining whether there is a case for managed float section 3 attempts to explain what went wrong with

tax morale and prosocial behaviour evidence from a palestinian survey the first empirical investigation is conducted into the relationship between prosocial behaviour and tax morale in the context of state capacity building as in the palestinian territories we consider public spirit a positive attitude adopted by citizens for the benefit of the community and associational activity individuals engagement in voluntary activities two major expressions of prosocial behaviour and estimate their impact on palestinians tax morale intrinsic motivation to pay taxes the empirical analysis employs a unique palestinian public opinion survey conducted in 2007 in the west bank and the gaza strip by using a bivariate probit model we find that tax morale increases with public spirit but it is lower among palestinians involved in associational activities predicted conditional probabilities indicate that public spirit has more impact when the respondent has low confidence in the institutions and in the rule of law finally more public spirit is required for a self employed person in order to deal with tax compliance than for a worker in the public sector unless the worker in the public sector has lower confidence in the institutions and in the rule of law than the self employed person

a dynamic analysis of moving average rules abstract the use of various moving average ma rules remains popular with financial market practitioners these rules have recently become the focus of a number empirical studies but there have been very few studies of financial market models where some agents employ technical trading rules of the type used in practice in this paper we propose a dynamic financial market model in which demand for traded assets has both a fundamentalist and a chartist component the chartist demand is governed by the difference between current price and a long run ma both types of traders are boundedly rational in the sense that based on a fitness measure such as realized capital gains traders switch from a strategy with low fitness to the one with high fitness we characterize the stability and bifurcation properties of the underlying deterministic model via the reaction coefficient of the fundamentalists the extrapolation rate of the chartists and the lag length used for the ma by increasing the intensity of choice to switching strategies we then examine various rational routes to randomness for different ma rules the price dynamics of the ma rule are also examined and one of our main findings is that an increase of the window length of the ma rule can destabilize an otherwise stable system leading to more complicated even chaotic behaviour the analysis of the corresponding stochastic model is able to explain various market price phenomena including temporary bubbles sudden market crashes price resistance and price switching between different levels

cognitive ability and earnings performance evidence from double auction market experiments abstract our goal in this paper is to understand how heterogeneity in people s cognitive ability leads to different market behavior and thus different market performance to do this subjects with heterogeneous working memory capacity wmc were placed in a double auction environment to compete against artificial traders we considered two treatments which differ in the artificial traders the artificial traders are truth telling in the first treatment but demonstrate adaptive trading behavior in the second one our results show that working memory capacity has a significantly positive effect on subjects market performance and the performance gap caused by cognitive ability while narrowing over time remains significant by the end of experiment we find that differences in subjects performance resulted from their behavior high wmc subjects were better at exploiting extra profit opportunities and avoiding unprofitable transactions and they tended to underbid more than those with lower wmc among the five constituent abilities of wmc we find that it is distinctive abilities which contribute to the overall significance in these two treatments for the treatment involving truth telling traders the relevant factor is the ability of simultaneous processing and storing information whereas for the treatment involving adaptive traders the only one that matters is subjects ability to coordinate elements into structures

dealer balance sheets and bond liquidity provision abstract do regulations decrease dealer ability to intermediate trades using a unique dataset of dealer bond level transactions we link changes in liquidity of individual u s corporate bonds to dealers transaction activity and balance sheet constraints we show that prior to the financial crisis bonds traded by more levered institutions and institutions with investment bank like characteristics were more liquid but this relationship reverses after the financial crisis in addition institutions that face more regulations after the crisis both reduce their overall volume of trade and have less ability to intermediate customer trades

a note on exchange rate expectations and nominal interest differentials a test of the fisher hypothesis this note tests the hypothesis that nominal interest differentials between similar assets denominated in different currencies can be explained entirely by the expected change in the exchange rate over the holding period this proposition often called the fisher open hypothesis or the hypothesis of perfect asset substitutability has been a major component of recent theories of exchange rate determination and has important implications for monetary policy 1 the fisher hypothesis differs from the covered interest parity theorem enunciated by keynes 11 while covered interest parity equates the nominal interest differential between financial centers to a known premium or discount on forward foreign exchange and is thus in principle riskless fisher parity involves risk in an essential way the two conditions are equivalent only when forward exchange rates equal expected future spot rates recent theoretical work for example that of grauer litzenberger and stehle 8 kouri 12 and frankel 6 shows that this need not be the case when market participants are risk averse thus while covered interest parity must always hold exactly in an informationally efficient asset market with no transactions costs fisher parity need not nominal interest differentials may reflect risk premia in addition to expected exchange rate movements 2 it should be emphasized at the outset that the tests conducted in this paper are really joint tests of the fisher hypothesis and a weak form of foreign exchange market informational efficiency levich 14 has argued that tests of market efficiency are always joint tests involving some hypothesized structure of normal equilibrium returns below we assume informational efficiency and instead test fisher s hypothesized arbitrage condition that nominal interest differentials equal expected percentage changes in exchange rates

information spillovers in asset markets with correlated values we study information spillovers in a dynamic setting with privately informed traders and correlated asset values a trade of one asset or lack thereof can provide information about the value of other assets the information content of trading behavior is endogenously determined in equilibrium we show that this endogeneity leads to multiple equilibria when the correlation between asset values is suciently high the

noise trading and delayed exchange rate overshooting abstract a number of empirical studies have reported that exchange rates show a delayed overshooting in response to a monetary policy shock this finding is puzzling economic theory suggests that overshooting should occur immediately after the shock i e with no delay this paper uses a new open economy macroeconomics model with pricing to market behavior to analyze whether noise trading in the foreign exchange market helps to explain the delayed overshooting puzzle to this end the implications of noise trading for the effects of a monetary policy shock on the nominal and on the real exchange rate are analyzed

estimation of financial agent based models with simulated maximum likelihood abstract this paper proposes a general computational framework for empirical estimation of financial agent based models for which criterion functions have unknown analytical form for this purpose we adapt a recently developed nonparametric simulated maximum likelihood estimation based on kernel methods in combination with the model developed by brock and hommes 1998 which is one of the most widely analysed heterogeneous agent models in the literature we extensively test the properties and behaviour of the estimation framework as well as its ability to recover parameters consistently and efficiently using simulations key empirical findings indicate the statistical insignificance of the switching coefficient but markedly significant belief parameters that define heterogeneous trading regimes with a predominance of trend following over contrarian strategies in addition we document a slight proportional dominance of fundamentalists over trend following chartists in major world markets

using survey data to test standard propositions regarding exchange rate expectations survey data provide a measure of exchange rate expectations superior to the forward rate in that no risk premium interferes we estimate extrapolative adaptive and regressive models of expectations static or random walk expectations and bandwagon expectations are rejected current appreciation generates the expectation of future depreciation because variables other than the contemporaneous spot rate receive weight in comparing expectations to the process governing the spot rate we find statistically significant bias no variable is as ubiquitous in international financial theory and yet as elusive empirically as investors expectations regarding exchange rates in the past expectations have been modeled in an ad hoc way often by using the forward exchange rate there is however a serious problem with using the forward discount as the measure of the expected change in the exchange rate in that the two may not be equal the gap that may separate the forward discount and expected depreciation is generally interpreted as a risk premium most of the large empirical literature testing the unbiasedness of the forward exchange rate for example has found it necessary either arbitrarily to assume away the existence of the risk premium if the aim

trading heterogeneity under information uncertainty abstract instead of heuristical heterogeneity assumption in the current heterogeneous agent models hams we derive the trading heterogeneity by introducing information uncertainty about the fundamental value to a ham conditional on their private information about the fundamental value agents choose different trading strategies when optimizing their expected utilities this provides a micro foundation to heterogeneity and switching behavior of agents we show that the ham with trading heterogeneity originating from the incomplete information performs equally well if not better than existing hams in generating bubbles crashes and mean reverting prices the simulated time series matches with the s p 500 in terms of power law distribution in returns volatility clustering and long memory in volatility

assessing the credibility of a target zone evidence from the ems this paper provides some new evidence on the credibility of the exchange rate mechanism erm of the european monetary system ems the study differs from previous research in the literature in three main respects first the main contribution is the use of several credibility indicators some of which have never been applied before to all of the currencies under study this allows one to strengthen the results obtained in this paper second a longer period than that of previous studies is analysed covering the complete ems history third a comparison has been made of the prediction qualities of the different indicators in order to explore their ability to capture the main erm events realignments changes in the fluctuations bands and speculative pressures fourth the indicators are applied to the experience of the new modified erm linking the currencies of non euro area member states to the euro showing the relevance of this approach in the near future with the enlargement of the european union

financial regulatory reform after the crisis an assessment this is a survey of progress with the postcrisis global g20 reform of the financial system in five key areas of new regulation 1 making financial institutions more resilient 2 ending too big to fail 3 making derivatives markets safer 4 transforming shadow banking and 5 improving trade competition and market transparency the resiliency reforms particularly bank capital regulations have been increasingly successful in improving financial stability but have been accompanied by some reduction in secondary market liquidity i review specific areas where reforms are far from complete or have even been counterproductive this paper was accepted by gustavo manso finance conflict of interest statement the author s webpage at http www stanford edu duffie provides related research and disclosure of potential conflicts of interest

asset pricing and foreign exchange risk econometric evidence for the g 7 abstract this paper uses an error correction model ecm to examine the dynamic behavioural relationship between the excess returns of foreign exchange and the variables that measure the stock market risk factor the test results for the major currencies of the g 7 over the period january 1982 to january 1994 support the hypothesis that the excess foreign exchange returns are related to relative risks of the two national equity markets and hence supports the notion of a risk premium in foreign exchange markets in addition we find evidence of non monotonic adjustment in some of the equations with respect to the us dollar which suggests some short run exchange rate overshooting

animal spirits heterogeneous expectations and the amplification and duration of crises we introduce a simple equilibrium model of a market for loans households lend to firms and form expectations about their loan default probability under heterogeneous expectations with switching between forecasting strategies driven by reinforcement learning even a small fraction of pessimistic traders has a large aggregate effect causing a heterogeneous expectations risk premium i e significantly higher contract rates for loans and significantly lower output our stylized model illustrates how animal spirits and heterogeneous expectations may lead to aconfidence loss and to financial instability amplifying the magnitude of economic crises and slowing down recovery

intertemporal profitability and the stability of technical analysis evidences from the hong kong stock exchange this study investigates the impact of market integration on the profitability of two simple and popular technical trading rules the simple moving average sma and the trading range break trb in hong kong using data from 1972 to 2006 we find that the sma 1 50 consistently outperforms the market before the integration of stock exchanges in 1986 under the 1 50 rule a variable length moving average performs better than the fixed length moving average rule by 2 5 to 5 annual before transaction costs because it includes the information of the first 9 days into investors decision the results are robust to the out of sample tests for the validity of the profitability of the trading rules the returns of the trading range break rules are insignificant over the 35 year span our results support the conjecture that stock market integration may lead to better information efficiency the findings of significant pre 1986 profits and insignificant post 1986 profits contradict previous findings that r

behavioral heterogeneity in u s inflation dynamics in this article we develop and estimate a behavioral model of inflation dynamics with heterogeneous firms in our stylized framework there are two groups of price setters fundamentalists and rando

can bank be a source of contagion during the 1997 asian crisis abstract this paper tests whether bank can be a source of contagion during the 1997 asian crisis using asset return data from a crisis country thailand in particular i examine whether thai banking sector can produce contagion effects in both conditional means and volatilities of its foreign exchange and stock markets during the crisis after controlling economic fundamentals the test results show that contagion in mean effects appear to be multidirectional since return shocks emanating from any one of the three markets can sweep across all markets but contagion in volatility effects are mainly driven by the negative return shocks originating in the banking sector overall the empirical evidence indicates that the past return shocks emanating from banking sector have significant impact not only on the volatilities of foreign exchange and aggregate stock markets but also on their prices suggesting that bank can be a major source of contagion during the crisis

chasing trends at the micro level the effect of technical trading on order book dynamics abstract technical traders attempt to exploit trends in market prices and the order flow despite this little is known about how these traders behave in a micro structure context we consider a model of an order book based financial market the market contains two groups informed traders and technical traders a numerical technique is used to identify a markov perfect equilibrium of the trading game and so determine the optimal strategies we find that technical trading rules are profitable and allow traders to increase their returns the effect of technical traders on the market however is ambiguous they decrease volatility and pricing errors but also increase trading costs despite primarily acting as liquidity suppliers

a laboratory experiment on the heuristic switching model abstract we present results from the first laboratory experiment on the seminal heuristic switching model introduced by brock and hommes 1997 1998 subjects choose between two alternatives a sophisticated and stabilizing but costly heuristic and a destabilizing but cheap heuristic and are paid according to the performance of the chosen heuristic aggregate choices determine the evolution of a state variable and consequently the performance of both heuristics theoretically an increase in the costs for the stabilizing heuristic generates instability and leads to endogenous fluctuations in both the state variable and the fraction of agents using that heuristic we vary the costs of the stabilizing heuristic in the experiment and find that the predictions of the heuristic switching model are partially confirmed for low costs the dynamics are stable for high costs the dynamics initially are unstable and exhibit the type of bubbles and crashes emblematic for the heuristic switching model however over time the pattern of bubbles and crashes disappears and the dynamics become more stable we estimate a standard discrete choice model on aggregate choice data and observe that subjects have a tendency to become less sensitive to payoff differences when the environment is less stable which has important implications for the application of heuristic switching models

exchange rates and fundamentals new evidence from real time data abstract this paper analyses the link between economic fundamentals and exchange rates by investigating the importance of real time data we find that economic news in the united states germany and the euro area have been a driving force behind daily us dollar euro dem exchange rate developments in the period 1993 2003 the larger importance of us macroeconomic news is at least partly explained by their earlier release time compared to corresponding german and euro area news the exchange rate is also shown to respond more strongly to news in periods of large market uncertainty and when negative or large shocks occur overall the model based on real time data explains about 75 of the monthly directional changes of the us dollar euro exchange rate although it does not explain well the magnitude of the exchange rate changes

the relation between stock prices and inflationary expectations the international evidence this paper provides empirical evidence on the relation between stock returns and inflationary expectations for nine countries over the period 1971 80 the fisherian assumption that real returns are independent of inflationary expectations is soundly rejected for each major stock market of the world using interest rates as a proxy for expected inflation our data provide consistent support for the geske and roll model whose basic hypothesis is that stock price movements signal negative revisions in inflationary expectations finally a weak real interest rate effect was found for some of these countries

experiments on percolation of information in dark markets in dark markets order submissions are bilateral and transaction prices are known only to the trading counterparties here we study to what extent the information aggregation theory proposed by duffie and collaborators predicts outcomes in a laboratory version of such markets we find that prices aggregate the available information but not in the strict sense of the theory where prices converge exponentially fast to average private signals prices instead fluctuate within bands around this average the band widths reflect in the best case the precision of the average signal and otherwise the precision of a single private signal

testing the validity of the monetary model for asean with structural break this study examines the validity of the long run structural relations underlying the monetary exchange rate model for malaysia singapore the philippines and thailand take into consideration the possibility of structural change we examined the models using recent developed techniques of testing unit root and cointegration with a structural break our findings of three cointegrating relations among the variables in the system were further identified by testing theoretical restrictions on the cointegrating equations the long run relationships were able to be interpreted according to the theory hence support the long run validity of the monetary exchange rate model

financial returns and efficiency as seen by an artificial technical analyst abstract we introduce trading rules which are selected by an artificially intelligent agent who learns from experience an artificial technical analyst these rules restrict the data mining concerns associated with the use of simple technical trading rules as model evaluation devices and are good at recognising subtle regularities in return processes the relationship between the efficiency of financial markets and the efficacy of technical analysis is investigated and it is shown that the artificial technical analyst can be used to provide a quantitative measure of market efficiency we estimate this measure on the djia daily index from 1962 to 1986 and draw implications for the optimal behaviour of certain classes of investors it is also shown that the structure of technical trading rules commonly used is consistent with utility maximisation for risk neutral agents and in a myopic sense even for risk averse agents

charts noise and fundamentals in the london foreign exchange market this paper presents some empirical evidence on the prevalence perceived importance and nature of chartist or technical analysis in the london foreign exchange market if noise traders see e g de long et al i987 are defined as those speculators who do not base their trading strategies on a consideration of market fundamentals then it clearly encompasses those traders who employ chart analysis i e those who base their strategies on the analysis and extrapolation of past price movements alone

optimal currency hedge ratios and interest rate risk abstract the objective of this article is to provide a framework for the interpretation of the optimal currency hedge ratios on foreign investments taking into account interest rate risk this is made possible by using a continuous time setting in the spirit of merton 1969 we focus on the importance of the interest rate differential forward basis in setting the optimal currency hedge because of the influence of interest rates on exchange rates more specifically we consider two discount bonds a domestic and a foreign one which follow stochastic processes possibly correlated with the other state variables of the model it is shown that the optimal hedge ratio can be split into five components a a macro economic component which is a function of the volatility of the interest rate differential and its covariance with currency movements this term depends on the currency considered but not on the asset being hedged b an asset specific term which is directly related to the covariance of the foreign currency asset return with exchange and interest rate movements c a speculative term function of the investor s risk preference and of the conditional risk premium on the exchange rate and d two stochastic opportunity set hedging terms the analysis of the optimal hedge ratio is illustrated on the period december 1970 1989 for stock and bond investments in seven countries jel g15 f31

markets transparency and the corporate bond market for decades corporate bonds primarily traded in an opaque environment quotations which indicate prices at which dealers are willing to transact were available only to market professionals most often by telephone prices at which bond transactions were completed were not made public the u s corporate bond market became much more transparent with the introduction of the transaction reporting and compliance engine trace in july 2002 beginning that date bond dealers were required to report all trades in publicly issued corporate bonds to the national association of security dealers which in turn made transaction data available to the public in this paper we describe trading protocols in the corporate bond market and assess the impact of the increase in transparency on the market we review how trace has affected the costs that corporate bond investors paid to bond dealers for their transactions we canvass the opinions of a variety of finance professionals and consider articles in the trade press to obtain a broader view of the impact of transparency on the corporate bond market

sell side debt analysts and debt market efficiency we explore sell side debt analysts contributions to the efficiency of securities markets we document that debt returns lag equity returns less when debt research coverage exists which is consistent with debt analysts facilitating the process by which available information is impounded in debt prices the effect of debt research on the debt market s lag is incremental to but comparable in magnitude to hedge fund ownership s effect no such effect exists for credit rating agencies we also find that the dissemination of debt reports has an immediate effect on return volatility in both markets which is consistent with debt analysts providing new information to securities markets increased return covariation suggests that this information impacts the pricing of debt and equity in the same direction a large percentage of debt reports do not induce any immediate debt market return reaction but do induce an equity return reaction which is consistent with new information being provided despite the absence of a debt market reaction finally there is a systematic variation in the debt market s trading and return reactions to debt research timely reports and those by high reputation brokers induce a quicker trading response thus enhancing liquidity whereas only timely reports induce a greater return response this study illuminates the institutional underpinnings of debt market efficiency and it has important implications for information content tests in the debt market where trading is limited

tests of different monetary aggregates for the monetary models of the exchange rate in five asean countries this study examines the usefulness of divisia money relative to simple sum money for exchange rate modelling in a period of rapid financial deregulation this comparison is conducted using the monetary model of the exchange rate in the long run modelling the divisia money is significantly superior to simple sum money in the case of malaysia and the philippines while indifferent for indonesia singapore and thailand

expectation formation in the foreign exchange market a time varying heterogeneity approach using survey data using consensus economics survey data on jpy usd and gbp usd exchange rate expectations for the 3 and 12 month horizons over the period november 1989 december 2012 we first show that expectations fail the conventional tests of unbiasedness and do not exhibit a learning process towards rationality our approach is consistent with the economically rational expectations theory feige and pearce 1976 which states that information costs and agents aversion to misestimating future exchange rates determine the optimal amounts of information on which they base their expectations the time variability of the cost aversion ratios justifies at the aggregate level a representation of expectations as a linear combination of the traditional extrapolative adaptive and regressive processes augmented by a forward market component whose parameters are allowed to change over time this mixed expectation model with unstable heterogeneity is validated by our kalman filter estimation results for the two currencies and

trust in large organizations several authors suggest that trust is an important determinant of cooperation between strangers in a society and therefore of performance of social institutions we argue that trust should be particularly important for the performance of large organizations in a cross section of countries evidence on government performance participation in civic and professional societies importance of large firms and the performance of social institutions more generally supports this hypothesis moreover trust is lower in countries with dominant hierarchical religions which may have deterred networks of cooperation trust hold up remarkably well on a cross section of countries this abstract was borrowed from another version of this item

exchange rate theory and practice this volume grew out of a national bureau of economic research conference on exchange rates held in bellagio italy in 1982 in it the world s most respected international monetary economists discuss three significant new views on the economics of exchange rates rudiger dornbusch s overshooting model jacob frenkel s and michael mussa s asset market variants and pentti kouri s current account portfolio approach their papers test these views with evidence from empirical studies and analyze a number of exchange rate policies in use today including those of the european monetary system

common stock returns real activity money and inflation some international evidence abstract this paper tests whether the negative relationship between real stock returns and inflation in the united states is in fact proxying for a positive relationship between stock returns and real activity variables in six major industrial countries over 1966 1979 consistent with fama s proxy effect hypothesis we document a negative relationship between inflation and real activity and a positive one between real stock returns and real activity variables real activity variables dominate money growth rates and expected and unexpected inflation in explaining real stock returns a puzzling result that still remains is the positive role of money and the negative role of expected inflation in explaining these real stock returns in all major industrial countries

exchange rate management in the same week that the pound sterling and the italian lira were forced by speculative pressures to suspend their participation in the exchange rate mechanism erm of the european monetary system ems a study was published which concluded that exchange market intervention was a far more potent instrument for managing exchange rates than the conventional wisdom had held catte galli and rebecchini i 992 a i shall argue in this paper that far from providing instant refutation of the new optimism regarding the potency of intervention what we currently understand about exchange rate theory is consistent with both the tumult in the exchange markets in september i992 and the new optimism the paper seeks to draw the implications of current knowledge for what exchange rate management can and cannot hope to accomplish the first section of the paper reviews where exchange rate theory stands a second section discusses what we know about the possibility of managing exchange rates and how that ties in with the theory the final section explores how exchange rate management needs to vary depending on whether it is intended to use the exchange rate as a nominal anchor or to limit misalignments in a more keynesian approach to policy design

learning and price discovery in a search market we introduce learning into an otherwise standard two sided search and bargaining market there is uncertainty about the price distribution due to uncertainty about an underlying exogenous state of relative demand in the high state buyers are on the long side otherwise they are on the short side in equilibrium prices are on average higher in the high state individual agents learn about the distribution while searching agents typically start out by experimenting with a tough bargaining position buyers may initially insist on a low price and sellers on a high price after successive failures to trade agents become increasingly pessimistic about the market conditions and soften their bargaining stance when frictions are small equilibrium transaction prices are approximately market clearing despite aggregate demand being unknown thus the search and bargaining procedure enables price discovery in a decentralized market

the informational role of bond analysts this study uses a large sample of sell side bond analysts reports to examine the properties of recommendations provided by bond analysts and the impact of these recommendations on bond securities first we document that the distribution of bond analysts buy hold and sell recommendations is skewed positively but less so than the distribution of equity analysts recommendations the positive skewness in bond analysts recommendations is greater for

are foreign exchange forecasts rational new evidence from survey data abstract tests of rationality in foreign exchange markets have been inconclusive because of disagreement over the relevant asset pricing model this paper uses a newly available set of data on foreign exchange expectations to directly test the rationality of four foreign currency markets overall the results reject the rational expectations hypothesis

a test for speculative bubbles in the sterling dollar exchange rate 1981 84 the u s dollar price of the u k pound sterling is tested for a speculative bubble defined as a period with a nonzero median in excessreturns a nonparametric procedure is developed which controls for data mining over the period of flexible exchange rates and finds a negative bubble in the excess return to holding sterling rather than dollar assets during the period 1981 84 possible interpretations arebootstrap equilibria rational bubbles nonsym metric fundamentals and nonrational expectations copyright 1986 by american economic association

macroeconomic and stock market interactions with endogenous aggregate sentiment dynamics abstract this paper studies the implications of heterogeneous capital gain expectations on output and asset prices we consider a disequilibrium macroeconomic model where agents expectations on future capital gains affect aggregate demand agents beliefs take two forms fundamentalist and chartist and the relative weight of the two types of agents is endogenously determined we show that there are two sources of instability arising from the interaction of the financial with the real part of the economy and from the heterogeneous opinion dynamics two main conclusions are derived on the one hand perhaps surprisingly the non linearity embedded in the opinion dynamics far from the steady state can play a stabilizing role by preventing the economy from moving towards an explosive path on the other hand however real financial interactions and sentiment dynamics do amplify exogenous shocks and tend to generate persistent fluctuations and the associated welfare losses we consider alternative policies to mitigate these effects

testing the uncovered interest parity using traded volatility a time varying risk premium and heterogeneous expectations abstract this paper carries out an empirical investigation of an extended version of flood and marion s 2000 self fulfilling risk predictions an application to speculative attacks journal of international economics 50 245 268 uip model which incorporates a nonlinear time varying risk premium that depends on both the expected variance of the future exchange rate and the relative worldwide private holdings of domestic and foreign government bonds a novel contribution of our paper is the use of traded currency volatility which is directly observable in the market place to measure expectations about the future volatility of the exchange rate another contribution is the explicit modelling of heterogeneous exchange rate expectations formed by forward looking fundamentalists and backward looking chartists our overall empirical evidence provides strong support for the extended nonlinear uip model we also investigate for the first time the role of traded volatility in the dynamic behaviour of exchange rates and find that high currency volatility is likely to produce oscillatory and unstable exchange rate paths

the quality of bank forecasts the dollar pound exchange rate 1990 1993 abstract a general framework for examining the quality of currency forecasts is described this framework incorporates existing accuracy measures and modifies them to give components of accuracy that are appropriate for statistically derived and judgementally based forecasts the framework is described and applied to one week ahead us uk forecasts from three major banks over a three year period between 1990 and 1993 the results suggest that while overall forecast performance was poor some aspects of the predictions could still be useful in a practical setting

further evidence on exchange rate expectations abstract this paper considers a previously unexploited survey data set of exchange rate expectations which allows us to focus on differences between ems and dollar exchange rates we corroborate the earlier finding in the literature that exchange rate forecasts are not rational and that agents do not use all available information efficiently although extrapolative and adaptive expectations formation mechanisms describe non ems exchange rate expectations to a certain extent ems exchange rates forecasts seem to follow long run fundamentals more closely and would suggest that agents believe that ems exchange rate expectations undershoot their long run equilibrium values jel f31

social capital and the dynamics of trust in government it is well understood that trust in government responds to the performance of the president congress and the economy despite improved government performance however trust has never returned to the levels witnessed in the 1950s and 1960s social capital may be the force that has kept trust low if so we need to assess the relative contributions of both government performance and social capital at the macro level using macrolevel data the analysis here is designed to capture the variation over time in both social capital and government performance and let them compete to explain the macro variation in trust the empirical results demonstrate that both government performance and social capital matter but that social capital appears to be the force which accounts for the decline in trust over the last 40 years

dynamics of moving average rules in a continuous time financial market model within a continuous time framework this paper proposes a stochastic heterogeneous agent model ham of flnancial markets with time delays to unify various moving average rules used in discrete time hams the time delay represents a memory length of a moving average rule in discrete time hams intuitive conditions for the stability of the fundamental price of the deterministic model in terms of agents behavior parameters and memory length are obtained it is found that an increase in memory length not only can destabilize the market price resulting in oscillatory market price characterized by a hopf bifurcation but also can stabilize an otherwise unstable market price leading to stability switching as the memory length increases numerical simulations show that the stochastic model is able to characterize long deviations of the market price from its fundamental price and excess volatility and generate most of the stylized facts observed in flnancial markets

explaining dispersion in foreign exchange expectations a heterogeneous agent approach this paper combines survey forecasts with a heterogeneous agent model to examine the dispersion of expectations of participants in the foreign exchange market we find distinct variations in the level of dispersion and document that dispersion arises because of the combined effect of market participants holding private information and attaching different weights to fundamental technical and carry trade analyses we estimate a heterogeneous agent model on the survey forecasts and show that the weight attached to the three forecast rules is adjusted over time in response to the relative importance of the rules in the actual foreign exchange market the weights are related to market circumstances the switching model is finally shown to outperform the random walk model in an out of sample forecast exercise

experimental evidence on inflation expectation formation using laboratory experiments within a new keynesian sticky price framework we study the process of inflation expectation formation we focus on adaptive learning and rational expectations contrary to the previous literature that mostly studied simple heuristics using a test for rational expectations that allows heterogeneity of expectations we find that we cannot reject rationality for about 40 of subjects more than 20 of subjects are also best described by adaptive learning models where they behave like econometricians and update their model estimates every period however rather than using a single forecasting model switching between models describes their behavior better switching is more likely to occur when experimental economy is in a recession

an empirical examination of heterogeneity and switching in foreign exchange markets using a unique dataset of survey expectations this paper examines the extent to which the classical fundamentalist chartist dichotomy is valid for the foreign exchange market by applying a recursive selection algorithm 1 respondents are classified into the two groups and 2 the forecasting models are endogenously determined within the groups a large part of the variation in expectations can be explained by the fundamentalist chartist distinction switching however takes place between a naive and a sophisticated model that consists of both fundamentalist and chartist elements the sophisticated model is increasingly used as the forecast horizon increases

transparency and liquidity a study of block trades on the london stock exchange under different publication rules this article examines whether reducing a market s transparency by delaying the publication of prices for block trades has any impact on liquidity the analysis uses a sample of 5987 blocks from the london stock exchange that cover three different publication regimes immediate 1987 88 90 minutes 1991 92 and 24 hours 1989 90 delaying publication does not affect the time taken by prices to reach a new level which is rapid under all regimes spreads differ across years but their size relates more closely to market volatility than to speed of publication there is therefore no gain in liquidity from delayed publication

the us monetary performance prior to the 2008 crisis this article uses a structural vector autoregressive svar approach to study the different shocks to the monetary performance in the two decades of the us economy prior to the 2008 financial crisis by using the federal fund rate as a measure of change in the monetary policy this study shows that interest rate expectation is informative about the future movement of federal fund rate and the anticipated monetary policy should be one of the crucial reasons in causing monetary and financial deterioration in the us economy this article discusses a possible conjecture of a low interest rate trap when a persistent and prolonged low interest rate regime led to financial instability

an investigation of customer order flow in the foreign exchange market this paper examines the effect that heterogeneous customer orders flows have on exchange rates by using a new propreitary dataset of weekly net order flow segmented by customer type across nine of the most liquid currency pairs we make three contributions first we investigate the extent to which order flow can help to explain exchange rate movements over and above the influence of macroeconomic variables second we look at the usefulness of order flow in forecasting exchange rate movements at longer horizons than those generally considered in the microstructure literature finally we address the question of whether the out of sample exchange rate forecasts generated by order flows can be employed profitably in the foreign exchange markets

using financial prices to test exchange rate models a note the purpose of this note is to illustrate how tests of exchange rate models can be conducted using financial prices rather than macroeconomic data all empirical tests of exchange rate models have met with limited success so far a major problem encountered is the poor quality of the macroeconomic data used most of the data suffer from large measurement error or cannot even be measured directly for example these models often require measures of changes in expected real activity or in monetary policy such variables can only be poorly estimated from time series models on industrial production or money supply the innovation in this paper is to use financial prices such as stock prices instead of the traditional macroeconomic data there exists convincing empirical evidence that stock returns forecast changes in economic activity as measured by industrial production real growth in gnp employment rate or corporate profits fama 5 and geske and roll 8 in the domestic context stock prices have been used to test the relation between economic activity and inflation e g fama 5 geske and roll 8 and solnik 12 in the same spirit stock returns are used in this paper as proxies for changes in economic activity to test the relation between exchange rates and economic activity interest rates are determined by monetary policies and changes in interest rates are used in this article as indicators of monetary shocks the approach used is introduced in section i while the empirical results are presented in section ii the data cover the eight major western countries over the recent period of flexible exchange rates july 1973 to december 1983

the roles of nominal exchange rate and relative price adjustments in ppp reversion this paper investigates the roles of the nominal exchange rate and relative prices in restoring purchasing power parity ppp by estimating their dynamics with a bivariate threshold vector error correction model our empirical results suggest a threshold cointegrating relationship between the nominal exchange rate and relative prices however these two variables play different roles in restoring ppp the nominal exchange rate adjusts to restore ppp only outside the threshold band within the band ppp is restored mainly through adjustments in relative prices

technical analysis and the spanish stock exchange testing the rsi macd momentum and stochastic rules using spanish market companies the aim of this research is to examine the result of the application of the indicators relative strength index rsi moving average convergence divergence macd momentum and stochastic in different companies of the spanish continuous market by using these indicators it is intended to give purchase and sale recommendations to small investors the generation of great capital gains depends on the type of the stock exchange company and the indicator which is being used in addition this research solves the problems in case of ambiguity in the indicators for the traders

random perturbations of deterministic equilibria abstract this paper examines whether a small random deviation from a non random policy process will destabilize the equilibrium exchange rate the results focus on exchange rate dynamics when the government maintains a target zone or makes unanticipated deviations from a policy rule with rational expectations small random shocks do not create large deviations from the policy rule exchange rate if agents are approximately rational large deviations between exchange rates are possible

the effects of japanese interventions on fx forecast heterogeneity we investigate the determinants of forecast heterogeneity in the jpy usd market using panel data from consensus economics we find that past exchange rate volatility increases forecast dispersion while foreign exchange intervention of the japanese ministry of finance dampens expectation heterogeneity

stable classes of technical trading rules technical analysis includes a huge variety of trading rules this fact has always been a serious hindrance to the large number of market efficiency studies implemented either to demonstrate the profitability of market beating systems or to deny their operational feasibility for evident reasons it is practically impossible and theoretically weak to systematically analyse the entire body of all trading rules we therefore propose a novel method to form natural classes of trading rules which are found to be robust to changing market scenarios in particular groups are formed adopting a similarity measure based on the investing signals of the trading rules our clustering methodology adopts a markov chain bootstrapping technique to generate differentiated scenarios preserving volume and price joint distributional features an application is developed on a sample of 674 trading rules results show that six groups here identified as trading styles are sufficient to explain the large portion of the investing

tests of the rational expectations hypothesis this paper reviews evidence on the structure of anticipation from a number of empirical studies jack muth s rational expectations hypothesis is compared with a variety of alternative models including ferber s law the implicit expectations model of edwin mills and muth s new errors in the variables model the cumulative evidence is of such strength as to compel the suspension of belief in the concept of rational expectations this implies that it is a mistake to proceed under the maintained hypothesis that expectations are rational instead it is necessary to test the sensitivity of empirical and theoretical results to alternative assumptions about the structure by which anticipations are generated copyright 1986 by american economic association

corporate bond market transaction costs and transparency using a complete record of u s over the counter otc secondary trades in corporate bonds we estimate average transaction costs as a function of trade size for each bond that traded more than nine times between january 2003 and january 2005 we find that transaction costs decrease significantly with trade size highly rated bonds recently issued bonds and bonds close to maturity have lower transaction costs than do other bonds costs are lower for bonds with transparent trade prices and they drop when the trace system starts to publicly disseminate their prices the results suggest that public traders benefit significantly from price transparency