forward foreign exchange rates and risk premia a reappraisal abstract analysis of the relationship between the forward exchange rate and actual exchange rate realizations has been interpreted by many researchers as evidence of the existence of time varying risk premia we interpret the negative covariation between the forward premium and the depreciation in the spot exchange rate as being consistent with an optimal least squares forecast of the future exchange rate based on two highly correlated forecasts the spot rate and the forward rate our results show that when the contemporaneous spot exchange rate is replaced by alternative filters the efficiency of the forward rate is not rejected although the empirical tests do not constitute unequivocal rejection of the hypothesis of time varying risk premia they do demonstrate that an alternative and economically plausible reason exists for previous results

expectations the exchange rate and the current account abstract a critical examination is undertaken of the relationship between the exchange rate and the current account in a small open economy theoretically the correlation between the exchange rate and the current account seems to be ambiguous in particular the association between movements in the exchange rate and the current account is likely to depend in an essential manner on the nature of exogenous disturbances affecting the two variables simultaneously lastly the question of the role of an optimal monetary policy and the choice of an exchange rate regime in an uncertain environment is raised

forecasting foreign exchange rates with an intrinsically nonlinear dynamic speed of adjustment model forecasting foreign exchange rates is an important but difficult process therefore it is important to use a superior forecasting model the paper takes up this criterion and proposes to describe and forecast foreign exchange rates by developing an intrinsically nonlinear model with variable and dynamic speeds of adjustment it is found that the speed of adjusting the random or expected to the equilibrium rate is very slow implying that fiscal policy statistically insignificat and monetary policy statistically significant may be ineffective to induce changes in the adjustment speed we also find that the nonlinear dynamic model improves forecasting performance implying that nonlinearities in the sense of functional forms are exploitable for improved point forecasting of foreign exchange rates

do global risk perceptions influence world oil prices abstract this paper investigates the information transmission mechanism between world oil gold silver dollar euro exchange rate markets and volatility index vix accommodating for global risk perceptions we find that there is a unique long run equilibrium relationship where gold silver exchange rate and risk perceptions appear as long run forcing variables of world oil prices we uncover that global risk perceptions have a significantly suppressing effect on oil prices in the long run we also discover that global risk perceptions play a less important role in explaining the forecast error variance of oil prices in the short run than prices in the alternative investment markets our results also suggest that a shock in risk perceptions of global investors have a negative but short lived initial impact on oil prices

when will occur the crude oil bubbles abstract in this paper we apply a recursive unit root test to investigate whether there exist multiple bubbles in crude oil price the method is best suited for a practical implementation of a time series and delivers a consistent date stamping strategy for the origination and termination of multiple bubbles the empirical result indicates that there exist six bubbles during 1986 2016 when the oil price deviate from its intrinsic value based on market fundamentals specifically oil price contains the fundamentals and bubble components the dates of the bubbles correspond to specific events in the politics and financial markets the authorities should actively fight speculative bubbles or just observe their evolutions and speculation activities may decrease which is favour of the stabilisation of the staple commodities including crude oil price these findings have important economic and policy implications to recognise the cause of bubbles and take corresponding measures to reduce the impact on the real economy cause of the fluctuation of crude oil price

speculative bubbles in recent oil price dynamics evidence from a bayesian markov switching state space approach abstract motivated by repeated spikes and crashes during previous decades we investigate whether the heavily financialized market for crude oil has been driven by speculative bubbles in our theoretical modeling we draw on the convenience yield approach in order to approximate the fundamental value of the oil price we separate the oil price fundamental from the bubble component by expressing a standard present value oil price model in state space form we then introduce two markov regimes into the state space representation in order to distinguish between two distinct phases in the bubble process namely one in which the oil price bubble is a stable process and one in which the bubble explodes we estimate the entire markov switching state space specification using an econometrically robust bayesian markov chain monte carlo mcmc methodology based on inferential techniques designed for statistically separating both markov regimes in the bubble process from each other we find robust evidence for the existence of speculative bubbles in recent oil price dynamics

explaining crude oil prices using fundamental measures abstract oil is the world s most important commodity and improving the understanding of drivers of its price is a longstanding research objective this article analyses real oil prices during 1984 2007 using a monthly dataset of fundamental and market parameters that cover financial markets global economic growth demand and supply of oil and geopolitical measures the innovation is to incorporate proxies for speculative and terrorist activity and dummies for major industry events and quantify price impacts of each new findings are positive links between oil prices and speculative activity bond yields an interaction term incorporating opec market share and oecd import dependence and the number of us troops and frequency of terrorist attacks in the middle east shocks also prove significant with a 6 18 per barrel impact on price for several months

testing the martingale hypothesis in deutsche mark futures with models specifying the form of heteroscedasticity summary we examine the form of heteroscedasticity in deutsche mark futures price data and compare different specifications of the particular way that the variance is changing over time the martingale hypothesis is tested with daily and weekly rates of change of futures prices for the deutsche mark and some evidence is found against this hypothesis in analyses of daily data from 1981 to 1985 this rejection of the martingale hypothesis may be attributed to trading day effects in foreign currency prices and the resulting day of the week patterns in futures prices when the martingale hypothesis is tested with weekly data the null hypothesis is retained

efficiency testing revisited a foreign exchange market with bayesian learning abstract the paper re examines the efficiency hypothesis in the foreign exchange market the traditional efficiency testing equations are reviewed and a more general model is developed that incorporates bayesian revisions of devaluation expectations a number of properties regarding the pattern of the coefficients in efficiency testing equations are established the empirical estimation of the model by using data from the emerging foreign exchange market in greece confirms the properties of the theoretical model

tests of international capm with time varying covariances we perform maximum likelihood estimation of a model of international asset pricing based on capm we test the restrictions imposed by capm against a more general asset pricing model the betas in our capm vary over time as the supplies of assets change and as the conditional covariances or returns on those assets change we let the covariances change over time as a function of macroeconomic data and an alternative model allows the covariances to follow a multivariate arch process we also can identify a modified capm model with measurement error we find that the estimated capm performs much better when variances are not constant over time nonetheless capm is rejected in favour of the lessrestricted model of asset pricing

rational bubbles during poland s hyperinflation implications and empirical evidence abstract it has been argued that the polish hyperinflation at the end of the eighties was too excessive to be attributed to market fundamentals only in this paper a range of indirect non structural and structural tests for rational exploding deterministic and stochastic bubbles are carried out we adopt a new strategy based on the work of hall and sola 1993a which allows for the possibility of switching regimes in the time series properties of the data to allow for both indirect tests and structural tests for the presence of stochastic bubbles

arbitrage cointegration and testing the unbiasedness hypothesis in financial markets we use a no arbitrage cost of carry asset pricing model to show that the existence of coin tegration between spot and forward futures prices depends on the time series properties of the cost of carry we argue that the conditions for cointegration are more likely to hold in currency markets than in commodity markets explaining many of the empirical results in the literature we also use this model to demonstrate why the forward rate forecast error the basis and the forward premium are serially correlated and to develop econometric tests ofthe unbiasedness hypothesis sometimes called the simple efficiency hypothesis in various financial markets the unbiasedness hypothesis is so prevalent in the finance liter ature that many tests for it have been developed we examine four of the common tests and and use our cointegration results to demonstrate why each of these tests should reject the null hypothesis of unbiasedness we find strong support for our hypothesis in the existing empirical literature

optimum consumption and portfolio rules with money as an asset this article generalizes merton s optimum consumption and portfolio rules in continuous time by introducing money as a capital asset and allowing for uncertain inflation assuming that prices are log normally distributed a three funds theorem is derived and the introduction of money is shown not to change the form of the standard inflation adjusted capm but to change the market price of risk the individual s consumption portfolio problem is completely solved under uncertain inflation if his utility function is iso elastic in its arguments comparative statics are used to assess the influence of changes in exogenous parameters on the individual s optimal rules

international asset pricing with time varying risk premia abstract recent empirical evidence that forward exchange rates are biased predictors of future spot rates can also be interpreted as evidence against the hypothesis of a constant risk premium consequently reconciliation of this evidence with efficient international capital markets requires the existence of time varying risk premia this paper modifies kouri s 1977 asset pricing model to allow time varying exected returns on assets eliminates the assumption of a risk free real asset and derives the characteristics of the risk premia in the forward market as well as the equilibrium yield relationships among the equities and riskless nominal bonds of all countries

tests of rational expectations and no risk premium in forward exchange markets abstract this paper tests the simple efficiency hypothesis i e that traders have rational expectations and charge no risk premium in the forward exchange market it uses a statistical procedure which is consistent under a large class of heteroscedasticity and a set of data which takes into account the institutional features of the forward exchange market the results show that this procedure leads to stronger rejections of the simple efficiency hypothesis than do procedures using the standard assumption of homoscedasticity

the world real interest rate stochastic index number perspectives abstract in a recent paper gagnon and unferth 1995 is there a real world interest rate j int money finance 14 845 855 test the hypothesis of real interest rate equality by regressing real interest rates for all major countries on dummy variables for each country and each period we show that this model can be interpreted as an application of the stochastic approach to index numbers this approach leads to estimates of and standard errors for the real rate for the world as a whole which have appealing index number interpretations and foundations we also extend gagnon and unferth s approach by weighting countries to recognise their differing importance in the world economy in terms of relative gdp and trade weighting does not lead to appreciable changes in the results however when the wpi which gives more prominence to goods entering into international trade is used as the deflator our results indicate that real rates are equalized internationally

rational destabilizing speculation positive feedback trading and the oil bubble of 2008 abstract this article examines how the interaction of different participants in the crude oil futures markets affects the crude oil price efficiency normally the commercial market participants such as oil producers and oil consumers act as arbitrageurs and ensure that the price of crude oil remains within the fundamental value range however institutional investors that invest in crude oil to diversify their portfolios and or hedge inflation can destabilize the interaction among commercial participants and liquidity providing speculators we argue that institutional investors can impose limits to arbitrage particularly during the financial crisis when the investment demand for commodities is particularly strong in support we show that commercials hedgers had significantly reduced their short positions leading to the 2008 oil bubble they were potentially aggressively offsetting their short hedges as a result by essentially engaging in a positive feedback trading commercial hedgers at least contributed to the 2008 oil bubble these findings have been mainly overlooked by the existing research

international portfolio diversification with estimation risk international portfolio diversification has long been advocated as a way of enhancing average returns while reducing portfolio risk for the investor who considers diversifying into foreign securities this proposition however relies on the assumption that the required inputs to the classical mean variance analysis are known with certainty typically expected returns variances and covariances are simply replaced by their ex post sample values and the optimal portfolio is derived without mentioning the uncertainty inherent in these parameter values but the rational investor should take this uncertainty into account when forming expectations and probably will consider estimators that are less subject to estimation error than the classical sample mean this paper investigates alternative estimators of expected returns and their implications for the alleged gains from diversification an important observation is the crucial influence that errors in estimating expected returns have on portfolio analysis a closer examiprevious studies of international portfolio diversification have relied on ex post meanvariance analysis without considering the problem of estimation risk typically past averages are substituted for expected returns and no allowance is made for the uncertainty inherent in these parameter values first i demonstrate the shortcomings of such an approach and second i investigate another method of estimating expected returns initially proposed by stein by shrinking the sample averages toward a common mean i find that the out of sample performance of the optimal portfolio is substantially increased one of the implications of this method is that the classical conclusions vastly overestimate the possible gains in average returns instead benefits from diversification are more likely to accrue from a reduction in risk this paper draws on part of my dissertation at the university of chicago i am grateful to arnold zellner michael mussa george constantinides and especially john bilson for useful discussions and comments numerous improvements were also suggested by the referee this research received the generous financial support of the college interuniversitaire d etudes doctorales dans les sciences du management

the role of exchange rates in intertemporal risk return relations abstract this paper investigates the significance of an intertemporal relation between expected returns on countries stock market portfolios and their risk exposures to the world market portfolio we find that the intertemporal risk return relation differs significantly under different currency denominations the slope coefficient is the largest at around seven when the returns are denominated in japanese yen moderate at about five when the returns are denominated in the canadian or us dollars and the smallest at around three when the returns are denominated in pound or euro and its predecessors the ranking of the risk return coefficients across different currency denominations remains the same when we replace country equity indices with global industry portfolios in estimating the intertemporal relations when we change the return frequency from monthly to daily and when we consider different specifications for the conditional covariance process

simulated likelihood estimation of diffusions with an application to exchange rate dynamics in incomplete markets abstract we present an econometric method for estimating the parameters of a diffusion model from discretely sampled data the estimator is transparent adaptive and inherits the asymptotic properties of the generally unattainable maximum likelihood estimator we use this method to estimate a new continuous time model of the joint dynamics of interest rates in two countries and the exchange rate between the two currencies the model allows financial markets to be incomplete and specifies the degree of incompleteness as a stochastic process our empirical results offer several new insights into the dynamics of exchange rates

ownership unbundling in electricity distribution the case of the netherlands this paper addresses the merits of ownership unbundling of distribution networks as exemplified in the case of the netherlands in essence this problem concerns the question of whether the operation and management of electricity distribution networks in this country will evolve into a market driven commodity business or remain a genuine public utility task in order to deal with this problem a framework is developed that enables the classification of different institutional regimes depending on the nature of the institutional regime this case of the netherlands illustrates how certain aspects of the liberalisation of the electricity sector can become vitally important to the continuing process of restructuring

diversifying away the risk of war and cross border political crisis this paper investigates the behavior of crude oil prices government bonds and stock market indices around outbreaks of severe international crises and wars using a constant mean return event study we show that these events are associated with positive and significant abnormal returns on oil and bonds which means that these two asset classes can potentially shelter shareholders from plummeting equity values during international crises a formal safe haven analysis confirms this insight such price movements may reflect a reallocation of funds across asset classes in response to the events as well as shifts in the demand for oil due to precautionary speculative and military motives we also calculate the weights for optimal portfolios which could provide insurance against conflict risk

the term structure of euromarket interest rates an empirical investigation abstract this paper is an empirical investigation of the predictability and co movement of risk premia in the term structure of euromarket interest rates we present regression results which suggest that risk premia in three euromarket term structures and on uncovered foreign asset positions move together we test formally the hypothesis that these risk premia move in proportion to a single latent variable we are unable to reject this hypothesis the single latent variable model can be interpreted as in hansen and hodrick 1983 and hodrick and srivastava 1984 as a specialization of the icapm in which assets have constant betas on a single unobservable benchmark portfolio

currency and credit markets abstract in this paper we focus on two aspects of the relationship between exchange rates and interest rates which have not been widely discussed first the extent to which the forward premia discount in one market can be used to predict the speculative return in the other second the extent to which unanticipated changes in the speculative returns are correlated across markets so that positions in one market can be hedged using positions in the other our results demonstrate that these two linkages are also important factors behind the time variation in speculative risk premia

robust tests for unit roots in the foreign exchange market abstract empirical studies that have tested for unit roots in foreign exchange rate data have assumed independent and identically distributed errors in order to apply dickey fuller test procedures this assumption ignores the temporal dependence of the error sequence present in many simple efficient market tests as discussed in hansen and hodrick 1980 as well as krasker 1980 in this paper we apply unit root test statistics that allow for heterogeneously distributed and mildly dependent error processes and thus provide superior tests of the unit root hypothesis in the case of foreign exchange rates

the efficient hypothesis and deregulation the greek case the impact is examined of the 1988 monetary deregulation in greece on the efficiency of the foreign exchange market a news model reveals that the deregulation of the monetary system contributed to the presence of an efficient foreign exchange market

detecting periodically collapsing bubbles a markov switching unit root test this paper addresses the problem of testing for the presence of a stochastic bubble in a time series in the case that the bubble is periodically collapsing so that the asset price keeps returning to the level implied by the market fundamentals as this is essentially a problem of identifying the collapsing periods from the expanding ones we propose using a generalization of the dickey fuller test procedure which makes use of the class of markov regime switching models the potential of the new methodology is illustrated via simulation and an empirical example is given copyright 1999 john wiley sons ltd

testing the efficiency of the canadian u s exchange market under the assumption of no risk premium the efficiency of the canadian u s exchange market for the current float is examined more extensively than previously semi strong form tests which admit the lagged spot rate as a predictor are considered in addition to the standard weak form test these stronger tests reject the joint null hypothesis of an efficient exchange market and no risk premium for the period ending in october 1976 although not for the entire period for almost every year the current spot rate provided a better forecast of the future spot rate than did the current forward rate there is now an extensive empirical literature on testing the efficiency of various foreign exchange markets see 16 for a survey yet almost all of these tests are weak form tests or tests of the bias of the forward exchange rate as a predictor of the future spot rate such tests in the canadian u s exchange market can be found in the work of porter 20 eastman 5 kaserman 10 kohihagen 11 cornell 3 and levich 14 for the canadian float of the 1950s porter 20 and kaserman 10 found that one could not reject the unbiasedness of the forward rate eastman 5 and kohlhagen 11 rejected the unbiasedness of the forward rate for the floating period although not for the subsequent fixed period but their use of overlapping contracts means that their standard errors are biased cornell 3 and levich 14 found that in terms of the root meansquared error criterion the lagged spot rate and the lagged forward rate predicted the current spot rate equally well for more recent periods this paper examines the efficiency of the canadian u s exchange market for the current float july 1970 to december 1978 in a more extensive way than it has been previously examined from the weak form test the paper proceeds to two semi strong form tests which admit the lagged spot rate as a possible predictor throughout the paper various subperiods are considered in addition to the period as a whole

tests of the foreign exchange risk premium using the expected second moments implied by option pricing abstract this paper utilizes the second moment expectations implied by currency option pricing to demonstrate that these expectations are systematically related to expected return differentials across assets denominated in different currencies because the measured deviations from uncovered interest rate parity are tied to variables which theory links to the risk premium the results provide substantial evidence that a risk premium does indeed exist as opposed to the alternative of a violation of rational expectations however like previous attempts the data do not support an explicit mean variance formulation of the risk premium

the effects of inflation on real interest rates one of the most obvious facts of recent monetary history is that high inflation is associated with high nominal interest rates this association has been interpreted by many as supporting a superneutrality hypothesis that an increase in inflation will not affect real interest rates in the long run however the bulk of the evidence contradicts superneutrality beginning with irving fisher 1896 1930 most empirical investigations have found that fully anticipated inflation has less than a unit effect on nominal interest rates and thus reduces real interest rates even in the longest of runs this has been shown under the assumption that expectations are formed rationally douglas pearce 1979 that they take the form of an arbitrary distributed lag on past inflation rates fisher 1930 william gibson 1970 or that they are accurately represented by the livingstone expectations data pearce kajal lahiri 1976 lawrence summers 1983 attempted to measure the long run effect without an explicit theory of expectations regressing long swings in various nominal interest rates against long swings in inflation over various subintervals from 1860 to 1979 he found coefficients consistently less than unity for the post world war ii era as a whole the coefficients were in the range of 0 5 to 0 75 with standard deviations of 0 08 to 0 33 a few studies have found coefficients close to unity william yohe and denis karnosky 1969 martin feldstein and otto eckstein 1970 gibson 1972 lucas but as several authors have observed thomas sargent 1976 robert shiller 1980 john wood 1981 summers these findings are limited to a particular period of u s history approximately 1953 71 furthermore even a unitcoefficient would contradict superneutrality of the after tax real interest rate which would require a coefficient substantially greater than unity even taking into account the other inflation distortions in the tax system summers calculated that the coefficient ought to lie in the range of 1 3 to 1 5 far higher than observed these empirical findings pose a challenge to traditional monetary theory much of which implies that superneutrality should hold at least approximately for example the model of miguel sidrauski 1967 implies that the real interest rate should equal the marginal product of capital which in the long run should equal the representative household s marginal rate of time preference if this rate of time preference is a constant then in particular it will be independent of the rate of inflation if it is positively related to the household s wealth or utility then inflation can reduce the marginal product of capital somewhat through what are commonly called mundell tobin effects that is higher inflation can reduce the demand for real balances which reduces real wealth which lowers the rate of time preference and leads to further capital accumulation 2 but this real balance effect on saving is commonly recognized to be too small to make department of economics social science centre university of western ontario london canada n6a 5c2 we are grateful to charles adams norman cameron john chilton jacob frenkel david laidler ben mccallum baldev raj brad reid jack weldon john whalley ron winrck and two anonymous referees for helpful discussions and comments on earlier drafts all errors are attributable to transaction costs robert lucas 1980 finds empirical support for the hypothesis which he calls one of the central implications of the quantity theory of money it has also been adopted by a wide range of more eclectic economists as evidenced by its endorsement in two of the most popular macroeconomics textbooks rudiger dornbusch and stanley fischer 1981 pp 454 58 robert j gordon 1978 pp 289 91 2these implications of variable time preference can be drawn almost immediately from the work of hirofumi uzawa 1968 a graphical analysis is presented by david laidler 1969b who focuses on the logically equivalent question of the effects of paying interest on money

exchange rates innovations and forecasting in this paper an ex post forecasting experiment is performed on the basis of a version of the news model of exchange rate determination for several exchange rates the news formulation of monetary exchange rate models leads to relatively accurate ex port exchange rate forecasts at a number of forecasting horizons for a majority of the exchange rates studied however the results do not compare favorably with those obtained from the naive random walk forecasting rule thus the findings in this article provide mixed evidence with regard to a suggestion in the literature that the finding by meese and rogoff that structural models do not even outperform the random walk in an ex post forecasting experiment may be due to the fact that these models were not properly tested in a news framework the forecasting performance of structural exchange rate models has recently received considerable attention meese and rogoff 1983a b have studied the forecasting performance of several important structural exchange rate models while in sample studies of these models usually show quite satisfactory fits meese and rogoff s out of sample results based on instrumental variables estimates were not very encouraging the structural models failed to improve upon the simple random walk forecasting rule even though the models forecasts were based

modelling oil price volatility in this paper we examine the volatility of crude oil price using daily data for the period 1991 2006 our main innovation is that we examine volatility in various sub samples in order to judge the robustness of our results our main findings can be summarised as follows 1 across the various sub samples there is inconsistent evidence of asymmetry and persistence of shocks and 2 over the full sample period evidence suggests that shocks have permanent effects and asymmetric effects on volatility these findings imply that the behaviour of oil prices tends to change over short periods of time

the covariation of risk premiums and expected future spot exchange rates abstract eugene fama 1984 analyzed the variability and the covariation of risk premiums and expected rates of depreciation we employ three statistical techniques that do not suffer from a potential bias in fama s analysis but we nevertheless conffirms his findings in contrast to his interpretation the results are not necessarily at variance with the predictions of a theoretical model of the risk premium increases in expected rates of depreciation of the dollar relative to five foreign currencies are positively correlated with increases in the expected profitability of purchasing these currencies in the forward market and risk premiums have larger variancies than expected rates of depreciation

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

exogenous oil supply shocks how big are they and how much do they matter for the u s economy abstract the paper proposes a new measure of exogenous oil supply shocks the timing the magnitude and the sign of this measure may differ greatly from current state of the art estimates it is shown that only a small fraction of the observed oil price increases during oil crisis periods can be attributed to exogenous oil production disruptions exogenous oil supply shocks cause a sharp drop of u s real gdp growth after five quarters rather than an immediate and sustained reduction in economic growth and a spike in cpi inflation after three quarters overall exogenous oil supply shocks made remarkably little difference for the evolution of the u s economy since the 1970s although they did matter for some historical episodes

the forward exchange rate and macroeconomics abstract this paper discusses the conditions under which a risk premium is incorporated in the forward exchange rate a new condition for the existence of a risk premium is proposed we show that earlier models of the risk premium which emphasize either the role of net foreign investment or of the relative supplies of outside assets are not suited for assessing the effects of changes in macroeconomic policy

the probability distribution of foreign exchange price changes tests of candidate processes this study investigates empirically candidate processes for characterizing foreign exchange price changes measured over limited horizons extant empirical studies find distributions of exchange returns too long tailed and leptokurtic to satisfy normality four processes are investigated here because of their potential to model o bserved discontinuities in exchange rates and nonstationary sample moments as well as their economic appeal the results favor a mixed jump model for all six major trading currencies tested copyright 1988 by mit press

on the effects of sterilized intervention an analysis of weekly data abstract as the recent empirical studies surveyed here illustrate it is very difficult to demonstrate that the exchange rate risk premium depends through a portfolio balance channel on the currency composition of outside assets the existence of a portfolio balance effect is a necessary condition for sterilized intervention to be a genuinely independent tool of monetary policy this paper studies u s canadian data and attempts to improve on earlier studies by using higher frequency weekly data and by implementing an appropriate instrumental variables technique 2s2sls however we still fail to detect evidence of a portfolio balance effect

the unbiasedness hypothesis in the forward foreign exchange market a specification analysis with application to france italy japan the united kingdom and west germany abstract the purpose of this paper is to carry out a specification analysis of a test relation for the unbiasedness hypothesis using thirty day forward foreign exchange data from france italy japan the united kingdom and west germany the results indicate that econometric problems do exist for each country s test equation over the entire sample for each country there is at least one period which admits a statistically adequate regression equation results for these periods show that the null hypothesis of the unbiasedness of the forward rate is rejected for some countries but is retained for others

pitfalls in testing for explosive bubbles in asset prices a number of studies e g robert j shiller 1981 olivier j blanchard and mark watson 1982 kenneth d west 1988 have argued that dividend and stock price data are not consistent with the market fundamentals hypothesis in which prices are given by the present discounted values of expected dividends these results have often been construed as evidence for the existence of bubbles or fads related arguments have been made with respect to gold bonds and foreign exchange a major problem with such arguments e g james hamilton and charles whiteman 1985 is that apparent evidence for bubbles can be reinterpreted in terms of market fundamentals that are unobserved by the researcher behzad t diba and herschel i grossman 1984 1988b and hamilton and whiteman 1985 have recommended the alternative strategy of testing for rational bubbles by investigating the stationarity properties of asset prices and observable fundamentals 1 in essence the argument for equities is that if stock prices are not more explosive than dividends then it can be concluded that rational bubbles are not present since they would generate an explosive component to stock prices 2 using unit root tests autocorrelation patterns and cointegration tests to implement this procedure diba and grossman 1988b p 529 state that the analysis supports the conclusion that stock prices do not contain explosive rational bubbles this paper shows that the above battery of tests is in fact unable to detect an important class of rational bubbles the point is demonstrated by constructing rational bubbles that appear to be stationary when unitroot tests are applied even though they are explosive in the relevant sense simulations show that when such bubbles are present stock prices will not appear to be more explosive than dividends on the basis of these tests even though the bubbles are substantial in magnitude and volatility the presence of rational bubbles in actual stock prices thus remains an open question

intrinsic bubbles the case of stock prices several puzzling aspects of the behavior of united states stock prices may be explained by the presence of a specific type of rational bubble that depends exclusively on aggregate dividends the authors call bubbles of this type intrinsic bubbles because they derive all of their variability from exogenous economic fundamentals and none from extraneous factors intrinsic bubbles provide a more plausible empirical account of deviations from present value pricing than do the traditional examples of rational bubbles their explanatory potential comes partly from their ability to generate persistent deviations that appear to be relatively stable over long periods copyright 1991 by american economic association

the purchasing power of money and nominal interest rates a re examination while it has been known for some time that under uncertainty the original version of the fisher hypothesis is not precisely correct empirical researchers have largely ignored this fact such an omission has possibly resulted in erroneous conclusions concerning other hypotheses most notably the impact of prices on the real economy this paper clarifies some of the previous interpretations of the existing empirical literature and provides a theoretical version of the relation between prices and interest rates empirical tests based on both the livingston survey data and data from time series forecasting models provide support for the fisher effect and the hypothesis that only covariance risk is priced in the treasury bill market one of the basic hypotheses concerning rationality in financial markets is based on statements generally attributed to fisher 18 fisher argued that the nominal or money rate of return on an asset should compensate an investor for his or her required real rate of return and changes in the purchasing power of money for the uncertainty case fisher replaced known purchasing power changes with the expected inflation rate whereas the fisher relationship under certainty is well defined his basic theorem under uncertainty is not precise as fama 15 has argued it is changes in the purchasing power of money not the inflation rate that should concern investors under uncertainty the expected value of one is not by jensen s inequality the inverse of the expected value of the other moreover fama and farber 16 grauer and litzenberger 20 and benninga and protopapadakis 3 have shown that when investors are risk averse the fisher relationship will generally not hold even after adjustment has been made for the distinction between purchasing power changes and the inflation rate in particular these authors show that an adjustment must be made for the fact that the real rate of return on nominal bonds is random while these issues have been discussed in the theoretical literature they have largely been ignored in the empirical work on this topic given the fact that nominal rates do not seem to adjust as rapidly to price changes as fisher hypothesized numerous empirical researchers have expanded the basic fisher model in an attempt to explain this empirical anomaly these extensions include the incorporation of a inflation rate variability and the growth in real output

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

the persistence of the peso problem when policy is noisy abstract the peso problem the market s belief that a discrete event may occur has frequently been blamed for the persistence of on average mistaken forecasts of macroeconomic variables this paper demonstrates how beliefs that a policy process may have switched can induce apparent ex post biased forecasts of exchange rates even after the switch has occurred furthermore during this peso problem period exchange rates may appear to contain a speculative bubble component since they will systematically deviate from the levels implied by observing fundamentals ex post and the conditional variance of exchange rates will exceed the variance implied by observing fundamentals

money bonds and foreign exchange in the theory of finance capital markets provide securities which allow the ownership of productive assets to be allocated among investors according to their willingness to bear risk in exchange for return and independently of their tastes for the productive services provided by the assets this paper uses the theory of finance to study the role of money as a productive asset and the transformation of money into a portfolio asset true to its purpose the capital market provides securities nominal bonds that allow an allocation of the current services of the money supply according to its current productivity and without regard for its future purchasing power risk and an allocation of the future purchasing power risk of the money supply according to the willingness of investors to bear this risk in exchange for return and without regard for investor needs for the future transactions services of money in open

does china factor matter an econometric analysis of international crude oil prices abstract whether china s crude oil imports are the culprit of oil price volatility these years has not been quantitatively confirmed therefore this paper empirically investigates the role of china s crude oil net imports in brent price changes from october 2005 to november 2013 based on an econometric analysis the results indicate that during the sample period china s crude oil imports do not significantly affect brent price changes no matter in the long run or short run therefore the blame for china s crude oil imports to cause the dramatic fluctuations of international oil price has no solid evidence also there exists significant uni directional causality running from the brent price to china s crude oil imports at the 5 level besides the response of the brent price to china s crude oil imports is found positive but slight and the brent price responds more significantly to us dollar exchange rate and oecd commercial inventory than to china s crude oil imports in the short run finally the contribution of china s crude oil imports to brent price movement is about 10 which is less than that of us dollar exchange rate but larger than that of indian crude oil imports or oecd commercial inventory

arch effects and cointegration is the foreign exchange market efficient abstract extensive empirical work has produced mixed evidence regarding the validity of the unbiased efficient expectations hypothesis in the foreign exchange market empirical analysis in this paper via cointegration techniques produces the same inconclusive results for three currency markets namely the ffr us the dm us and the yen us foreign exchange market however when modeling conditional heteroskedasticity of exchange rates through autoregressive conditional heteroskedasticity arch models the results are fairly conclusive the presence of the efficient foreign exchange market hypothesis is found in all these three currency markets

pricing capital assets in an international setting an introduction this paper shows how differences across countries of 1 inflation rates 2 consumption baskets of investors and 3 investment opportunity sets of investors matter when one applies capital asset pricing models in an international setting in particular the fact that countries differ is shown to affect the portfolio held by investors the equilibrium expected returns of risky assets and the financial policies of firms

the term structure of the forward premium abstract most studies of the efficiency of the foreign exchange market focus on a single maturity usually a one month forward exchange rate however one observes that forward contracts of many maturities are simultaneously traded in the foreign exchange market the hypothesis that the foreign exchange market uses all available information has implications for the joint behavior of forward exchange rates of various maturities this paper proposes an equilibrium theory of the term structure of the forward premium the model is tested using data on the german and canadian exchange rates the results indicate that the data are consistent with the theory for germany and inconsistent with the theory for canada

forward foreign exchange rates expected spot rates and premia a signal extraction approach in this paper we implement a methodology to identify and measure premia in the pricing of forward foreign exchange that involves application of signal extraction techniques from the engineering literature diagnostic tests indicate that these methods are quite successful in capturing the essence of the time series properties of premium terms the estimated premium models indicate that premia show a certain degree of persistence over time and that more than half the variance in the forecast error that results from the use of current forward rates as predictors of future spot rates is accounted for by variation in premium terms the methodology can be applied straightforwardly to the measurement of unobservables in other financial markets there exists a growing body of empirical research on premia in the pricing of forward foreign exchange conditional on the hypothesis that the foreign exchange market is efficient or rational the existence of time varying premia has been documented in the literature by fama 6 hansen and hodrick 10 11 hodrick and srivastava 15 16 hsieh 171 and korajczyk 20 frankel 9 fails to identify such premia and domowitz and hakkio 51 obtain different results for different currencies

recent estimates of time variation in the conditional variance and in the exchange risk premium abstract the optimal diversification model of investors portfolio behavior can give a linear relationship between the exchange risk premium and the conditional exchange rate variance this note surveys recent empirical work that allows the conditional variance itself and therefore the risk premium to vary over time in particular it examines the implications of recent empirical estimates for earlier arguments based on the assumption that the conditional variance was constant over time that the exchange risk premium had to be small in magnitude and variability

nominal rigidity and monetary uncertainty in a small open economy temporary nominal rigidity is introduced into a dynamic stochastic general equilibrium model of a small open economy the foreign country is also modelled and is the closed economy counterpart of the domestic country we examine whether a small open economy is more vulnerable than a closed economy to uncertainty over its monetary policy a signal of an increase in future variability which was not previously foreseen as a risk by agents is shown to weaken the current exchange rate and boost current output in the small open economy in the equivalent closed economy it has no effect on current variables

trade in nominal assets monetary policy and price level and exchange rate risk in a previous paper trade in risky assets i have analyzed the pattern of international trade in risky real assets between barter economies relying on the law of comparative advantage and using autarky asset price differences to predict the pattern of asset trade in this paper the analysis is extended to international trade in nominal assets assets with returns paid in currencies between monetary economies the risk chracteristics of real returns on nominal assets depend on price level and exchange rate risk and therefore on monetary policy it is examined how different combinations of monetary policies and exchange rate regimes affect nominal assets return risk characteristics their autarky perices and hence their trade pattern when countries differ with respect to their outputs or their attitudes towards risk when world asset markets are incomplete different monetary policies and exchange rate regimes have dramatic effects on risk characteristics of home and foreign currency bonds and on the trade pattern in these assets as well as on aggregate capital and current accounts

foreign exchange market efficiency tests implications of recent empirical findings abstract the recent empirical literature on the efficiency of the foreign exchange market has been characterized by strikingly contradictory conclusions drawn from similar empirical evidence these contradictions result because 1 different maintained hypotheses are held and 2 different criteria e g micro versus macroeconomic are used to judge the evidence in this survey we organize the empirical literature under several headings the presence of risk premiums empirical regularities in regression tests profitable trading rules and advanced econometric techniques in integrating this material we consider the implications of the current evidence for investors forecasters policy makers and theorists

an analysis of intertemporal pricing for forward foreign exchange contracts an asset pricing model with an unobservable time varying risk premium is used to price forward foreign exchange contracts specifically the term spectrum of forward foreign exchange contracts is examined in order to focus on country specific and maturityspecific information the testable restrictions imposed by the model are consistent with both cross country and cross maturity forward contracts except at the short end of the maturity spectrum for cross country forward exchange rates this indicates that the intertemporal model is relatively robust in valuing forward contracts of different maturities and for different exchange rates but that it may fail when there are significant short term country specific shocks theoretical and empirical studies have demonstrated that the forward exchange rate incorporates a time varying risk premium in addition to an expected future spot exchange rate recent works by fama 9 and hodrick and srivastava 21 reveal the importance of the risk premium by showing that the variability in risk premiums exceeds the variability in expected change in spot exchange rates these results are very general in that they are based on the definition that equates the forward exchange rate to the expected future spot exchange rate and a risk premium term a logical but more demanding next step is to model and conduct specification tests of the risk premium itself the purpose of this paper is to use an intertemporal latent variable assetpricing model ilvm to examine the risk return characteristics of the term structure of forward foreign exchange contracts more specifically the ilvm is used to price various bilateral dollar forward exchange contracts for each maturity as well as the different maturities for each bilateral forward exchange contract the ilvm was first utilized by hansen and hodrick 16 and hodrick and srivastava 20 to examine forward exchange risk premiums the two studies are however confined to just one month forward exchange contracts in addition the studies yield conflicting results the application of the ilvm to other

valuing diversity in energy supply abstract there is renewed interest in the role of supply diversity in promoting energy security this paper explores ways of valuing diversity a possible incentive mechanism for promoting diversity which takes account of underlying disparities between different technology options is developed the mechanism provides a way of trading off cost and diversity and results in an efficient cost diversity frontier by analogy with financial portfolio theory if all technologies are believed to be equally disparate the appropriate mechanism is a levy imposed on market share if the technologies are not equally disparate the levy needs to be adjusted by technology specific multipliers that take account of levels of disparity and patterns of market share the analysis is applied to two stylised situations in the long run equilibrium case the implications of both different patterns of disparity and different values attached to diversity are investigated the paper also explores the implications of applying such a mechanism to the current great britain electricity system the implications in terms of financial flows for both the market as a whole and for individual operators are investigated finally the appropriateness of such a mechanism in the light of other policy goals and possible future research directions is discussed

the effect of exchange rate variability on trade the case of the west african monetary union s imports abstract the west african monetary union during the period of this study 1976 1982 comprised six countries benin burkina faso co te d ivoire niger senegal and togo since their common currency the cfa franc has been pegged to the french franc at an unchanged rate since 1948 the entire nominal exchange rate variability that traders in the region face is due to movements in the french franc with respect to other currencies in the face of exchange rate risk that is not always coverable trade should be adversely affected using three measures of variability in the nominal effective exchange rate index this paper finds that exchange rate variability has not affected the union s real imports or the diversification of trade away from the franc zone

distributed generation and distribution market diversity in europe the unbundling of the electricity power system will play a key role on the deployment of distributed generation dg in european distribution systems evolving towards smart grids the present paper firstly reviews the relevant european union eu regulatory framework specific attention is paid to the concept of unbundling of power distribution sector in europe afterwards the focus is on the current state of penetration of dg technologies in the eu member states and the corresponding interrelations with distribution features a comparison between the unbundling of the distribution and supply markets using econometric indicators such as the herfindahl hirschmann ihh and the shannon wiener isw indices is then presented finally a comparative analysis between these indices and the current level of penetration of distributed generation in most eu is shown policy recommendations conclude the paper

china s oil use 1990 2008 abstract over the past two decades china s oil demand has risen steeply in 1990 it was only about 25 higher than that of 1978 the year economic reform was introduced by 2008 it had reached 396 0 million tons roughly four times the 1978 level making china the second largest oil user worldwide the country became a net oil importer in 1993 and between 1993 and 2008 its net import dependency a yardstick for energy security soared from 7 5 to 50 0 china s increased demand for oil has made the country a global energy player of critical importance although the literature on the global implications of china s oil use has proliferated relatively few studies have attempted to examine how china uses oil hence this study covers every oil consuming facility and sector in china exploring the patterns of and factors involved in oil demand by power plants oil refineries heat plants and gas works and industrial transport agricultural household and commercial sectors it concludes that in virtually all sectors in china oil demand will grow with transport and industry leading the way

term premia on euro rates there are at least two statistically firm results regarding international money and capital markets the first is the theory of interest rate parity is empirically valid for euro interest rates 8 the second is forward exchange rates are poor very likely biased predictors of future spot exchange rates 1 3 10 12 13 the former is a comforting finding in that it assures there are no unexploited arbitrage profits the latter is troubling to some because it might be a symptom of an inefficient market that interest rate parity holds suggests international exchange and money market arbitrageurs are fully exploiting all profit opportunities they are behaving rationally that forward exchange rates fail to predict future spot rates at least unbiasedly suggests the existence of some unknown mechanism which robs predictive ability in a naive rational expectations view of the world the failure of forward rates to be unbiased predictors of future spot rates implies either that there is some difference between interest rate pairs other than inflationary expectations or that forward rates do not capture expected inflation differences in any simple way see 9 this paper addresses the first issue if there are differences in interest rate pairs which do not solely reflect expected inflation divergences this must show up as a difference in real interest rates such could be the result of actual instantaneous real rates of identical risk being unequal in magnitude or what is more likely differences in term premia between interest rate pairs when periods greater than say one day are used in interest rate parity and forward rate prediction tests if there are differential term premia in interest rate pairs of say one month or longer then forward exchange rates will mispredict the future spot exchange rate by that margin

an exploration of the forward premium puzzle in currency markets a standard empirical finding is that expected changes in exchange rates and interest rate differentials across countries are negatively related implying that uncovered interest rate parity is violated in the data this article provides new empirical evidence that suggests that violations of uncovered interest rate parity and its economic implications depend on the sign of the interest rate differentially a framework related to term structure models is developed to account for the puzzling relationship between expected changes in exchange rates and interest rate differentials estimation results suggest that a particular term structure model can account for the puzzling empirical evidence article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a model of international asset pricing under imperfect commodity arbitrage abstract this paper examines the effect of imperfect international commodity arbitrage i e violation of the law of one price modeled as the existence of non traded goods on the structure of purchasing power risk optimal portfolio rules of the risk averse investors and the equilibrium yield relationship among assets the major results of the paper include i there are two separate sources of purchasing power risk i e relative price risk and inflation risk relative price risk is specific to the country in which the investor resides ii in a world of n countries investors may hold n 1 hedge portfolios as vehicles to hedge against purchasing power risk facing different relative prices investors residing in different countries display divergent portfolio behavior iii in equilibrium investors are compensated in terms of excess return for bearing not only the systematic world market risk but also the systematic inflation and relative price risks

inflation risk and asset market disturbances the mean variance model revisited abstract this paper empirically re investigates the international capm model in constrast to previous studies by frankel 1982 and frankel and engel 1984 the estimation model does not require that there be no asset market disturbances also rather than requiring purchasing power parity or that the only source of inflation uncertainty arise from a weighted average of exchange rate changes as in the previous studies inflation risk is simply measured as the uncertain component in the consumer price index of each country to allow for these additional sources of uncertainty an alternative estimation method is derived to identify the covariance constraints

imperfect information some implications for modelling the exchange rate abstract within a broader setting of rational expectations where agents do not fully know the parameter values of the model expectations errors from past observable and persistent shocks will lead to systematic effects in particular observable lagged current account shocks will affect the exchange rate within a mundell flemming model even where there is perfect capital mobility moreover the process of agents learning unknown parameter values and revising the values of the forecast parameters would suggest the use of a variable coefficient estimation method to capture the data generating process outside strong form rational expectations

does a correct parameter estimate tell a better story about foreign exchange market efficiency abstract this paper demonstrates that the estimated parameters in previous research with wrong signs and absurd sizes do not indicate market inefficiency and market behavior as they appear to in the real world where forecasting errors are substantially large a correct or an unreasonable parameter estimate renders almost identical results specifically we demonstrate that an absolutely unbiased predictor is irrelevant empirically and the unknowingly pursuit of absolute unbiasedness is misleading what needs to be verified is a sufficiently unbiased predictor which may appear to be incredibly biased under the circumstances with expected specified probabilistic errors

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

effects of monetary disturbances on exchange rates with risk averse speculation abstract this paper develops a macroeconomic model in which domestic and foreign bonds are perfect substitutes on a covered basis but in which speculators are assumed to be risk averse we analyze the effects of various transitory and permanent disturbances on the economy and show how the existence of the risk premium known to exist under such conditions has important implications for macroeconomic behavior most of our attention is devoted to how the economy responds to temporary and permanent changes in the money and bond supplies and in the central bank s forward market position the effects of disturbances in the foreign price level and interest rate are also briefly discussed

testing for efficiency and rationality in foreign exchange markets a review of the literature and research on foreign exchange market efficiency and rationality with comments abstract this paper specifies two var models for testing efficiency and expectations in foreign exchange markets the sufficient conditions for efficiency and rational expectations by imposing restrictions on the var parameters are derived based on these models issues on testing efficiency and rationality are discussed with reference to previous empirical studies in the area

crude oil risk forecasting new evidence from multiscale analysis approach fluctuations in the crude oil price allied to risk have increased significantly over the last decade frequently varying at different risk levels although existing models partially predict such variations so far they have been unable to predict oil prices accurately in this highly volatile market the development of an effective predictive model has therefore become a prime objective of research in this field our approach albeit based in part on previous research develops an original methodology in that we have created a risk forecasting model with the ability to predict oil price fluctuations caused by changes in both fundamental and transient risk factors we achieve this by disintegrating the multi scale risk structure of the crude oil market using variational mode decomposition normal and transient risk factors are then extracted from the crude oil price using variational mode decomposition and modelled separately using the quantile regression neural network qrnn model both risk factors are integrated and ensembled to produce the risk estimates we then apply our proposed risk forecasting model to predicting future downside risk level in three major crude oil markets namely the west taxes intermediate wti the brent market and the opec market the results demonstrate that our model has the ability to capture downside risk estimates with significantly improved precision thus reducing estimation errors and increasing forecasting reliability

diversity and security in uk electricity generation the influence of low carbon objectives abstract we explore the relationship between low carbon objectives and the strategic security of electricity in the context of the uk electricity system we consider diversity of fuel source mix to represent one dimension of security robustness against interruptions of any one source and apply two different diversity indices to the range of electricity system scenarios produced by the uk government and independent researchers our results show that low carbon objectives are uniformly associated with greater long term diversity in uk electricity generation with reference to data on wind generation we also consider the impact of source variability on a second dimension of security the reliability of generation availability we conclude that this does not undermine our fundamental conclusion that low carbon scenarios are associated with greater strategic security of supply in uk electricity we discuss reasons for this result explore sensitivities and briefly discuss possible policy instruments associated with diversity and their limitations

on some international parity conditions an empirical investigation abstract this paper investigates weak semi strong and strong forms of the following international parity conditions a uncovered interest parity b the hypothesis of equal ex ante real interest rates and c ex ante purchasing power parity the main results are as follows using data which roughly cover the 1975 1984 decade we find little evidence in favor of the strong form of the parity conditions under consideration however most test results are consistent with the weak forms finally regarding the semi strong forms the results are mixed

on the biasedness of forward foreign exchange rates irrationality or risk premia in this article the authors reconsider the k a froot and j a frankel 1989 results on the sources of forward discount bias they question the economic validity of some estimation restrictions that they impose and thus are led to question some of their results the authors employ a new exchange rate survey database that includes european monetary system currencies and use univariate and pooling estimation techniques that impose fewer restrictions than those of froot and frankel to test their hypotheses they find that the bias in the forward discount is attributable to both the failure of rational expectations and the existence of time varying risk premia copyright 1994 by university of chicago press

diversity and ignorance in electricity supply investment addressing the solution rather than the problem the need for diversity has been cited as a rationale for important recent investment decisions in the uk electricity supply sector it is invoked as the principal argument for continuing major government intervention yet there exists no formal analytical basis for the concept why is diversity good what is meant by diversification what is it that must be diversified what trade off should be struck between diversity and other measures of performance the resulting ambiguity causes confusion and is vulnerable to special pleading despite this this paper argues that diversification offers a superior alternative to probabilistic approaches towards uncertainty and ignorance in electricity supply investments and proposes a formal analytical approach a quantitative index of diversity is borrowed from information theory and used to derive a value for the government s implicit willingness to pay for diversity in the uk electricity supply mix this is then applied in a pilot exercise to the problem of optimizing the diversity and financial performance of the supply portfolio although provisional the results are relevant to the government s forthcoming nuclear review particularly in assessing the relative levels of support for nuclear power and renewable energy

rationality of survey data and tests for market efficiency in the foreign exchange markets abstract this paper tests the rational expectations hypothesis reh and the market efficiency hypothesis meh in the foreign exchange markets using survey data on expectations our results show that the spot exchange rates expected exchange rates and the forward rates all follow a random walk process hence the cointegration theory is employed to test the reh and meh all the test statistics support the reh but fail to support the meh we use survey data on expectations to identify the causes behind this failure of the meh jel f31 g14

oil price dynamics and speculation a multivariate financial approach abstract this paper assesses empirically whether speculation affects oil price dynamics the growing presence of financial operators in the oil markets has led to the diffusion of trading techniques based on extrapolative expectations strategies of this kind foster feedback trading that may cause considerable departures of prices from their fundamental values we investigate this hypothesis using a modified capm following shiller 1984 and sentana and wadhwani 1992 first a univariate garch 1 1 m is estimated assuming the risk premium to be a function of the conditional oil price volatility the single factor model however is outperformed by the multifactor icapm merton 1973 which takes into account a larger investment opportunity set analysis is then carried out using a trivariate ccc garch m model with complex nonlinear conditional mean equations where oil price dynamics are associated with both stock market and exchange rate behavior we find strong evidence that oil price shifts are negatively related to stock price and exchange rate changes and that a complex web of time varying first and second order conditional moment interactions affects both the capm and feedback trading components of the model despite the difficulties we identify a significant role played by speculation in the oil market which is consistent with the observed large daily upward and downward shifts in prices a clear evidence that it is not a fundamental driven market thus from a policy point of view given the impact of volatile oil prices on global inflation and growth actions that monitor speculative activities on commodity markets more effectively are to be welcomed

the 2008 oil bubble causes and consequences abstract we argue that the 2008 oil bubble was directly and indirectly created by the federal reserve in response to deflationary risks that resurfaced after the housing bubble burst and the resulting credit crisis of 2008 deflationary risks first appeared after the dot com bubble burst in 2000 and after the terrorist attacks on september 11 2001 manipulation of the us dollar value has been one of the key emergency tools in the fed s arsenal during the entire period from 2000 to 2008 the us dollar has been falling while the price of crude oil has been rising with the culmination in july 2008 if other global central banks embrace the fed s anti deflationary strategies the consequences could be dire for the global economy potentially resulting in an ultimate gold bubble

currency preferences purchasing power risks and the determination of exchange rates in an optimizing model most recent research on the theory of exchange rate determination treats the exchange rate as the relative price of two assets domestic money and foreign money the value of an asset depends on the distribution of its return however most of the research has dealt with models in which there is no uncertainty the present paper focuses on questions that cannot be addressed in a world of certainty because in such a world an asset is never risky it investigates how purchasing power risks affect the determination of exchange rates this investigation is pursued in a fairly general optimizing model the present research is related to some recent work in international economics and in financial economics it follows the approach of obstfeld 1981 and stockman 1980 in that it uses an optimizing model and takes into account the role of government transfers in the flow budget constraint of individuals as in calvo and rodriguez 1977 stockman 1980 and others the fact that holdings of foreign monies are useful to domestic individuals is taken into account finally the paper uses techniques developed in papers in the finance literature which build on merton s 1973 asset pricing model and use a concept of equilibrium developed in