the forecasting ability of correlations implied in foreign exchange options abstract this paper evaluates the forecasting accuracy of correlations derived from implied volatilities in dollar mark dollar yen and mark yen options from january 1989 to may 1995 as a forecast of realized correlation between the dollar mark and dollar yen implied correlation is compared against three alternative forecasts based on time series data historical correlation riskmetrics exponentially weighted moving average correlation and correlation estimated using a bivariate garch 1 1 model at the 1 month and 3 month forecast horizons we find that implied correlation outperforms often significantly these alternative forecasts in combinations implied correlation always incrementally improves the performance of other forecasts but not the converse in certain cases historically based forecasts contribute no incremental information to implied forecasts the superiority of the implied correlation forecast holds even when forecast errors are weighted by realized variances reflecting correlation s contribution to the dollar variance of a multicurrency portfolio

fixing exchange rates a virtual quest for fundamentals abstract fixed exchange rates are less volatile than floating rates but the volatility of macroeconomic variables such as money and output does not change very much across exchange rate regimes this suggests that exchange rate models based only on macroeconomic fundamentals are unlikely to be very successful it also suggests that there is no clear tradeoff between reduced exchange rate volatility and macroeconomic stability

central bank intervention and risk in the forward market abstract a two country inter temporal asset pricing model is developed which implies that central bank foreign exchange intervention affects the forward exchange risk premium the model is estimated from daily foreign exchange intervention data for the us german and japanese central banks considerable empirical support is found for the theoretical model with intervention influencing the risk premium in the forward market purchases of dollars by the federal reserve bank are found to be associated with excess denominated returns there is evidence that intervention has increased rather than reduced exchange rate volatility

intervention policy of the boj a unified approach intervening in the fx market implies a complex decision process for central banks monetary authorities have to decide whether to intervene or not and if so when and how since the successive steps of this procedure are likely to be highly interdependent we adopt a nested logit approach to capture their relationships and to characterize the prominent features of the various steps of the intervention decision process our estimations based on japanese data from 1991 to 2004 indicate that the bank of japan i mainly reacted to deviations of the exchange rate with respect to fundamentals and ii tended to favour secrecy when its credibility was low we also provide new insights on the so called secrecy puzzle by modeling explicitly the risk for a secret intervention to be detected our results have important implications in terms of exchange rate policy such as the emergence of a trade off between intervention size communication policy and secrecy our results tend to provide some explanation for the observed persistence of ineffective intervention policy during some sub periods c 2008 elsevier b v all rights reserved

gross versus net equalization scheme in a federation with decentralized leadership this paper compares the impact of two equalization transfer schemes on regional budgetary choices a gross equalization scheme where ex post transfers to regions are financed from federal tax revenues and a net equalization scheme where region to region ex post transfers allocated by the federal government are self financed the net equalization scheme reduces ex post federal intervention and should therefore be favored over the gross equalization scheme in order to reduce opportunistic regional behaviour in addition the two equalization schemes differently affect the composition of public expenditures the gross equalization scheme generates an upward distortion of the amount of capital public expenditures whereas the net equalization scheme generates a downward distortion of the amount of current public expenditures compared to the optimum a welfare analysis reveals that incentives to use a net equalization scheme are strengthened for a sufficiently high number of regions

impact of food safety information on us poultry demand the impact of poultry product recall events on consumer demand in the us was empirically tested for four major categories of poultry broiler young chicken eggs turkey and other chicken mature or nonbroiler chicken from 2000 to 2004 poultry food safety inspection service fsis recall events had a consistent positive impact on demand for turkey but no significant impact on other types of poultry products united states department of agriculture usda fsis recall as a complement to food labelling did not undermine poultry consumption but promoted turkey demands on the contrary media recall undermined poultry demands moreover it demonstrated that turkey consumers were a special behaviour group of poultry consumers

the message in weekly exchange rates in the european monetary system mean reversion conditional heteroscedasticity and jumps weekly rates of the european monetary system ems vis a vis the deutsche mark from april 1979 to march 1991 are modeled as a combined ma 1 garch 1 1 jump process the moving average ma part accounts for mean reversion required for the rates to stay inside the target zone the generalized autoregressive conditional heteroscedasticity garch part accounts for changing volatility whereas the jump process models parity changes and other erratic movements using an adjusted pearson chi squared goodness of fit test we find similar results for the bernoulli and the poisson jump processes in those cases in which the bernoulli normal distribution does not pass the goodness of fit test a mixture of three normals does finally the ma 1 garch 1 1 bernoulli jump models are jointly estimated assuming a constant contemporaneous correlation matrix for the disturbances and a common jump probability for all the currencies

bailouts in federations is a hard budget constraint always best this article analyses hard and soft budget constraints in a federation where there is a moral hazard problem between the central and the regional governments regional governments can avoid a bailout from the center by exerting costly effort in this setting a hard budget constraint is not always optimal because it can provide excessive incentives for high effort and thus discourage investment that is socially efficient thus a hard budget constraint can imply the opposite kind of inefficiency that emerges under a soft budget constraint where the common pool problem can give rise to inefficiently low effort and overinvestment

does tax competition soften regional budget constraint this paper analyses the impact of both horizontal and vertical tax competition on central government transfers towards regions as well as on the softness of the regional budget constraint we show that tax interactions have no impact on the optimal central government grant whereas they harden the regional budget constraint when the regional debt is not too heavy

interest rate volatility and the term structure a two factor general equilibrium model we develop a two factor general equilibrium model of the term structure the factors are the short term interest rate and the volatility of the short term interest rate we derive closed form expressions for discount bonds and study the properties of the term structure implied by the model the dependence of yields on volatility allows the model to capture many observed properties of the term structure we also derive closed form expressions for discount bond options we use hansen s generalized method of moments framework to test the cross sectional restrictions imposed by the model the tests support the two factor model there are essentially two approaches to the modeling of the term structure of interest rates in continuous time the equilibrium approach pioneered by

international evidence on crude oil price dynamics applications of arima garch models abstract we examine the usefulness of several arima garch models for modeling and forecasting the conditional mean and volatility of weekly crude oil spot prices in eleven international markets over the 1 2 1997 10 3 2009 period in particular we investigate the out of sample forecasting performance of four volatility models garch egarch and aparch and figarch over january 2009 to october 2009 forecasting results are somewhat mixed but in most cases the aparch model outperforms the others also conditional standard deviation captures the volatility in oil returns better than the traditional conditional variance finally shocks to conditional volatility dissipate at an exponential rate which is consistent with the covariance stationary garch models than the slow hyperbolic rate implied by the figarch alternative

fiscal competition and the pattern of public spending much attention has been given to the impact of fiscal competition on the level of public expenditure but relatively little to the impact on its composition using a broadly familiar and reasonably rich model of fiscal competition in the presence of mobile capital this paper establishes a systematic bias in public spending patterns starting from the non cooperative equilibrium and holding tax rates constant welfare would be improved by a coordinated reduction in the provision of local public inputs and a corresponding increase in the public provision of local public goods benefiting immobile consumers c 1997 elsevier science s a

distinguishing between stochastic and deterministic behavior in foreign exchange rate returns further evidence abstract the nature of non linear dependence in hourly exchange rate returns is scrutinized while the brock dechert and scheinkman bds test results reject i i d behavior various correlation dimension estimates reveal little evidence in favor of a low dimensional attractor in the time series

should central bankers talk to the foreign exchange markets in this paper we study the role of official statements and speeches given by central bank authorities in charge of foreign exchange policy we investigate the impact of statements that comment on and confirm such interventions on the day of the intervention on the two major foreign exchange markets over an extended period 1989 2003 we also study the impact in terms of policy effectiveness of central bank communication before the actual operations our results suggest that appropriate speeches clarifying the current intervention policy can have marginally virtuous effects both in terms of exchange rate level and exchange rate volatility this leads us to conclude that in general actual interventions on the market should still be employed provided that official statements are used to clarify the nature and purpose of these interventions c 2008 elsevier ltd all rights reserved

impacts of meat product recalls on consumer demand in the usa the impact of meat product recall events on consumer demand beef pork poultry and other consumption goods in the usa is tested empirically beef pork and poultry recall indices are constructed from both the food safety inspection service s meat recall events and from newspaper reports over the period 1982 1998 following previous product recall studies recall indices are incorporated as shift variables in consumers demand functions estimating an absolute price version of the rotterdam demand model findings indicate that food safety inspection service s meat recall events significantly impact demand and newspaper reports do not moreover although elasticities related to recall events are significant they are small in magnitude relative to price and income effects any favourable effects on the demands of meat substitutes for a recall are offset by a more general negative effect on meat demand the general negative effect indicates a shift out of meat to non meat consumption goods

the statistical properties of daily foreign exchange rates 1974 1983 abstract this paper examines the statistical properties of daily rates of change of five foreign currencies from 1974 to 1983 the main purpose is to discriminate between two competing explanations for the observed heavy tails of the distribution that the data are independently drawn from a heavy tail distribution which remains fixed over time and that the data come from distributions which vary over time evidence point to the rejection of the first hypothesis further investigations show that the rejection can be attributed to changing means and variances in the data which can be described by a simple statistical model

the intra day impact of communication on euro dollar volatility and jumps abstract in this paper we examine the intra day effects of verbal statements and comments on the fx market uncertainty using two measures continuous volatility and discontinuous jumps focusing on the euro dollar exchange rate we provide empirical evidence of how these two sources of uncertainty matter in measuring the short term reaction of exchange rates to communication events talks significantly trigger large jumps or extreme events for approximately an hour after the news release continuous volatility starts reacting prior to the news intensifies around the release time and stays at high levels for several hours our results suggest that monetary authorities generally tend to communicate with markets on days when uncertainty is relatively severe and higher than normal disentangling the us and euro area statements we also find that abnormal levels of volatility are mostly driven by the communication of the euro area officials rather than us authorities

how responsive is business capital formation to its user cost an exploration with micro data abstract the response of business capital formation to its user cost is critical to evaluating tax reform deficit reduction and monetary policy evidence for a substantial user cost elasticity however is sparse most evidence has been based on aggregate data although several recent studies with firm level data report substantial effects with a particularly rich micro dataset containing over 26 000 observations this paper explores what can be learned about the user cost elasticity while the results depend to some extent on the specification and econometric technique various diagnostics lead us to prefer a precisely estimated but small elasticity of approximately 0 25 this paper is dedicated to the memory of robert eisner who labored early and ably on uncovering the determinants of investment spending and highlighting the importance of the question found in the title of this paper

central bank interventions and exchange rate band regimes abstract this paper presents an endogenous switching regression model for the exchange rate process where the switch is defined by the central bank criteria functions for intervening we study the signal effect of interventions on the exchange rate using norwegian daily data on official interventions we first find that interventions seemed to have been more effective in moving the exchange rate in the expected desired direction in the regime when the exchange rate was kept away from the edges of the band this type of intervention regime also reduces significantly the conditional volatility of the exchange rate thus when the exchange rate was near the weakest edge of the currency band its conditional variance was significantly larger than when it was moving around its central parity finally we show that in order to obtain consistent estimates intervention variables cannot enter as exogenous variables in the conditional mean or conditional variance of the exchange rate

mitigating contagion risk by investing in the safety of rivals abstract firms often benefit when an unfavorable event befalls a rival usually through a shift in demand but sometimes negative especially catastrophic events adversely affect an entire industry we refer to such phenomena as contagion and note that each firm faces not only its own direct risks but also the contagion risks imposed by rivals who for example avoid strong safety measures because investment cost exceeds expected loss the conclusion of this paper is that in the extreme case low risk firms may benefit from investing in safety improvements for their higher risk rivals for example a firm that over complies with safety requirements may benefit from investing in safety improvements in a rival that complies with regulations at a minimal level this research explores conditions under which such a contagion risk mitigation strategy is profitable our findings indicate that for a low risk firm there is a threshold above which such an investment would be profitable in a market where price sensitivity to a rival s safety is close to zero a low risk firm can decrease this threshold by extending the investment horizon the investment is less likely to pay off when firms compete on quantity as opposed to price we also show that below a threshold market price a third firm that is neutral neither needs investment nor invests may be put at a cost disadvantage when this contagion risk mitigation strategy is implemented

the incentive effect of fiscal equalization transfers on tax policy abstract a theoretical analysis considers the impact of a typical system of redistributive fiscal equalization transfers on the tax effort of local jurisdictions more specifically it shows that the marginal contribution rate i e the rate at which an increase in the tax base reduces those transfers might be positively associated with the local tax rate while the volume of grants received is likely to be inversely related to the tax rate these predictions are tested in an empirical analysis of the tax policy of german municipalities in order to identify the incentive effect the analysis exploits discontinuities in the rules of the fiscal equalization system as well as policy changes the empirical results support the existence of an incentive effect suggesting that the high marginal contribution rates induce the municipalities to set significantly higher business tax rates compared with a situation without fiscal equalization

forecasting volatility of crude oil markets abstract this article investigates the efficacy of a volatility model for three crude oil markets brent dubai and west texas intermediate wti with regard to its ability to forecast and identify volatility stylized facts in particular volatility persistence or long memory in this context we assess persistence in the volatility of the three crude oil prices using conditional volatility models the cgarch and figarch models are better equipped to capture persistence than are the garch and igarch models the cgarch and figarch models also provide superior performance in out of sample volatility forecasts we conclude that the cgarch and figarch models are useful for modeling and forecasting persistence in the volatility of crude oil prices

rotten kids purity and perfection bergstrom has shown that becker s rotten kid theorem holds in a world of two commodities if their utilities are transferable the present paper identifies a further circumstance in which the theorem is valid we show that it also holds in the absence of transferable utility if the externalities are assumed to take the form of a single pure public good

do macro economic news announcements affect the volatility of foreign exchange rates some evidence from australia this paper investigates the role of australian macro economic announcement news on five major australian dollar aud exchange rates specifically the daily changes of the exchange rates are modelled to ascertain the existence and the nature of the news effects in the conditional mean and variance of the changes it is found that a higher than expected current account deficit and unemployment rate announcements depreciated the aud and an unexpectedly higher gdp growth announcement appreciated it current account deficit cpi and unemployment news announcements significantly raised the conditional volatility of the changes of the aud on the days of their announcements except for the bp aud for the cpi news and there is some evidence of retail sales news reducing it in general the evidence is consistent with a view that a release of new information creates uncertainty in the markets due to a lack of consensus on the effects of the particular news announcement and the necessary course of action in add

optimality free mobility and the regional authority in a federation abstract this paper examines the efficiency properties of a federation characterized by strategically competing regions and freely mobile homogeneous individuals analyses of this economy have concluded that achieving a pareto optimal will require intervention by a national authority this paper makes one basic point the nash equilibrium of regional authority behavior is pareto optimal the implication is that there is no role for a national authority in either providing interregional transfers or correcting for decentralized provision of public goods the nash equilibrium involves samuelson public goods provision and regions purchasing preferred population distributions with optimal interregional transfers

deutsche mark dollar volatility intraday activity patterns macroeconomic announcements and longer run dependencies this paper provides a detailed characterization of the volatility in the deutsche mark dollar foreign exchange market using an annual sample of five minute returns the approach captures the intraday activity patterns the macroeconomic announcements and the volatility persistence arch known from daily returns the different features are separately quantified and shown to account for a substantial fraction of return variability both at the intraday and daily level the implications of the results for the interpretation of the fundamental driving forces behind the volatility process is also discussed the efficient market hypothesis contends that financial asset prices provide rational assessments of fundamental values and future payoffs by implication price changes should reflect the arrival and processing of all relevant new information however the proportion of return variability that can be ascribed to public news announcements is low for example cutler poterba and summers 1989 find that even the largest daily price changes in the stock market generally cannot be associated with any significant economic news 1 moreover proxies for the flow of public information e g the number of news items released by reuter s news service berry and hiowe 1994 or dow jones company mitchell and mulherin 1994 explain little of the overall variation thus if private information is ruled out proponents of rational price formation have to assert the existence of important news items

too big or too small a synthetic view of the commitment problem of interregional transfers abstract there is a growing body of literature on the commitment problem of interregional transfers the problem occurs because of an ex post bailout by a central government leading to ex ante adverse incentive consequences for a local government however different models have yielded different economic consequences the local government may be too large overspending and or overborrowing or it may be too small raising less of its own revenue in the presence of interregional spillovers the equilibrium may yield a pareto efficient outcome the present paper aims to synthesize these models developing a simple decentralized leadership model a critical question concerns what decision is made ex ante by the local government namely public expenditure or tax collection with the remaining policy instrument being residual adjusted by ex post transfers we discuss how different scenarios affect the equilibrium outcome

on the long term effectiveness of exchange rate communication and interventions abstract exchange rate communication has come to play an increasingly important role as a policy tool for monetary authorities over the past decade the paper assesses the strategies and the long term effectiveness of communication as well as actual interventions the empirical results for the g3 economies indicate that communication has not only exhibited a significant contemporaneous effect on exchange rates but also has moved forward exchange rates up to a horizon of 6 months in the desired direction moreover communication is found to reduce exchange rate volatility and uncertainty whereas actual interventions tend to raise it overall this underlines a key difference between these two policy tools and suggests that communication tends to be a fairly effective policy tool over the medium term

the risk premium of volatility implicit in currency options this article provides an empirical investigation of the risk neutral variance process and the market price of variance risk implied in the foreign currency options market there are three principal contributions first the parameters of heston s mean reverting square root stochastic volatility model are estimated using dollar mark option prices from 1987 to 1992 second it is shown that these implied parameters can be combined with historical moments of the dollar mark exchange rate to deduce an estimate of the market price of variance risk these estimates are found to be nonzero time varying and of sufficient magnitude to imply that the compensation for variance risk is a significant component of the risk premia in the currency market finally the out of sample test suggests that the historical variance and the hull and white implied variance contain no more information than that imbedded in the heston implied variance

multivariate nearest neighbour forecasts of ems exchange rates exchange rate modelling has been a persistent puzzle for international economists forecasts from popular models for the exchange rate generally fail to improve upon the random walk out of sample while a multivariate nonparametric approach provides useful information about exchange rates the model produces forecasts superior to the random walk for only one of the three ems currencies examined using a statistic developed in mizrach 1991 i find that the forecast improvement a 4 5 percent reduction in mean squared error for the lira in daily returns is not statistically significant a cross validation exercise suggests that the improvement is also not robust

intraday effects of foreign exchange intervention by the bank of japan abstract we examine the effects of intervention by the bank of japan using intraday data from oct 1 1992 to sept 30 1993 news related to the bank of japan s intervention in the jpy market was retrieved from reuters headlines we find that jpy volatility varies significantly differently across periods from 1 h before to 1 h after reuters intervention reports results from arch models show that intervention by the bank of japan has a positive and significant impact on jpy volatility particularly at high frequencies 5 and 10 min intervals we also find that our intervention proxy has the largest effect upon high frequency volatility 30 to 45 min prior to reuters reports

market responses to publicly provided information the case of automative safety over the last 25 years the federal government has become increasingly involved in the provision of information on automobile quality and safety its release of national highway traffic safety administration data on occupant crash survivablity is a prominent example this paper examines the impact of the agency s crash test results on the sales growth of tested automobile lines finding no impact the crash data is then compared to privately collected insurance industry data on actual bodily injury claims by car line these data sets show little consistency based on these findings we conclude that consumers s apparent disregard of government crash test data may well be rational

why do central banks intervene abstract intervention by central banks in terms of buying and selling foreign currency has been a major activity in recent years this paper investigates the motivations for such policy and the evidence for its effectiveness we use high quality daily data on the dollar amounts of intervention by the central banks of the us and germany we also use information on agreed g7 target levels for the dm and yen nominal exchange rates daily nominal dollar exchange rate returns are well described as a martingale garch process and we find little evidence that the different types of intervention have had much effect on the conditional mean of exchange rate returns there is some evidence that intervention is associated with slight increases in the volatility of exchange rate returns while little evidence is found for the effectiveness of intervention the motivations are more clear in particular from the application of probit analysis we find that the probability of intervention is determined by the magnitude of the deviation of the nominal exchange rate from the agreed target level and to a lesser extent by the current volatility of exchange rates

pure public goods and income redistribution in a federation with decentralized leadership and imperfect labor mobility abstract we examine the non cooperative provision of a pure public good by regional governments in a federation similar to the european union where regional governments are stackelberg leaders and the central government is a stackelberg follower a federation with decentralized leadership the center makes interregional income transfers after it observes the contributions to the pure public good imperfectly mobile workers react to regional and central governments policies by establishing residence in their most preferred region despite the degree of labor mobility we show that the pure public good and interregional transfers are generally allocated efficiently in a federation with decentralized leadership

understanding the soft budget constraint we propose a clarification of the notion of a soft budget constraint a concept widely used in the analysis of socialist transitional and market economies our interpretation is broad enough to embrace most existing approaches to soft budget constraint phenomena and provides a classification of their causes and consequences in light of this interpretation we then review the theoretical literature on the subject and compare it with those on other dynamic commitment problems in economics

samaritan versus rotten kid another look abstract we set up a two stage game with sequential moves by one altruist and n selfish agents the samaritan s dilemma rotten kid theorem states that the altruist can only reach her first best when the selfish agents move after before the altruist we find that in general the altruist can reach her first best when she moves first if and only if a selfish agent s action marginally affects only his own payoff the altruist can reach her first best when she moves last if and only if a selfish agent cannot manipulate the price of his own payoff

redistribution and regional development under tax competition abstract this paper considers how capital tax competition affects transfer and development policies in the presence of regional income disparity in each country development policies determine the number of rich poor regions that do not engage in production activities while transfer policies redistribute income between rich and poor regions the mix of transfer and development policies is inefficient under tax competition conditional on the equilibrium tax rate too much revenue is spent on development policies and too little on transfer policies this analysis of the expenditure mix implies that development policies are used as a means of regional redistribution even if transfer policies are efficient instruments for this purpose moreover it is shown that the overall level of public expenditure may be too high because of the possibility of over development

a conditional variance model for daily deviations of an exchange rate a model for the distribution of daily deviations of an exchange rate is suggested the distribution is gaussian with a variance that depends on previous deviations the model is applied to the exchange rate of the u s dollar to special drawing rights

conditional covariances and direct central bank interventions in the foreign exchange markets abstract in this paper we investigate the effects of central bank interventions cbis on the ex post correlation and covariance of exchange rates using a multivariate garch model with time varying conditional covariances we estimate the effects of cbis on both the variances and covariance between the yen and the deutsche mark the euro in terms of the us dollar our results suggest that coordinated cbis not only tend to increase the volatility of exchange rates but also explain a significant amount of the covariance between the major currencies we show that this result can be useful for short run currency portfolio management

the impact of fx central bank intervention in a noise trading framework abstract in this paper we analyse the effectiveness of the direct central bank interventions using a new effectiveness criterion to this aim we investigate the effects of central bank interventions cbi in a noise trading model with chartists and fundamentalists we first estimate a model in which chartists extrapolate past returns and fundamentalists forecast a mean reverting dynamics of the exchange rate towards a fundamental value then we investigate the role of central bank interventions for explaining the switching properties between the two types of agents we find evidence that in the medium run interventions increase the proportion of fundamentalists and therefore exert some stabilizing influence on the exchange rate

student t distribution based var mgarch an application of the dcc model on international portfolio risk management significant second moment transmission effects and obvious time varying patterns of correlation coefficients among major equity and currency markets in the us japan and the uk are found to exist such observations inspire the time varying setting of dynamic conditional correlation coefficients in mgarch models on the other hand the multivariate student t distribution is suitable for analysing the visible leptokurtosis that is common in financial markets both are important for international portfolio risk management thus a comparison on the hedging efficiency of hypothetical portfolios consisting of stock and currency future positions is conducted in order to justify the multivariate student t distribution based on the dcc mgarch model

central bank intervention and foreign exchange rates new evidence from figarch estimations abstract in this paper we investigate the effects of official interventions on the short run evolution and volatility of exchange rates to this aim we rely on a new measure of volatility implied by the figarch model that outperforms the traditionally used garch one it is found that central bank interventions exert an incorrectly signed effect on the levels of exchange rates and tend to increase their volatility in the short run in general our results also show that the traditional garch estimations tend to underestimate the effects in terms of volatility

federalism and the soft budget constraint the government s incentives to bail out inefficient projects are determined by the trade off between political benefits and economic costs the latter depending on the decentralization of government two effects of federalism are derived first fiscal competition among local governments under factor mobility increases the opportunity costs of bailout and thus serves as a commitment device the competition effect second monetary centralization together with fiscal decentralization induces a conflict of interests and thus may harden budget constraints and reduce inflation the checks and balance effect the authors analysis is used to interpret china s recent experience of transition to a market economy copyright 1998 by american economic association

on jump processes in the foreign exchange and stock markets exchange rates exhibit systematic discontinuities even after allowingfor conditional heteroskedasticity in the diffusion process the results are much more significant in theforeign exchange market than in the stock market which suggests differences in the structure of these markets finally this jump component is shown to explain some of the empirically observed mispricings in the currency options market the objective of this article is to analyze and compare the empirical distribution of returns in the stock market and in the foreign exchange market there are a number of reasons why a better understanding of the stochastic processes driving prices in these markets would be useful many financial models rely heavily on the assumption of a particular stochastic process while relatively little attention is paid to the empirical fit of the postulated distribution as a result models like option pricing models are applied indiscriminately to various markets such as the stock market and the foreign exchange market when the underlying processes may be fundamentally different the foreign exchange market for instance is characterized by active exchange rate man

a fresh look at the rotten kid theorem and other household mysteries gary becker s rotten kid theorem asserts that if all family members receive gifts of money income from a benevolent household member then even if the household head does not precommit to an incentive plan for family members it will be in the interest of selfish family members to maximize total family income i show by examples that the rotten kid theorem is not true without assuming transferable utility i find a simple condition on utility functions that is necessary and sufficient for there to be the kind of transferable utility needed for a rotten kid theorem while restrictive these conditions still allow one to apply the strong conclusions of the rotten kid theorem in an interesting class of examples

oral interventions versus actual interventions in fx markets an event study approach the article assesses whether exchange rate communication or oral intervention has been an effective policy tool for monetary authorities to influence exchange rates it employs an event study methodology that identifies intervention clusters or events for the euro dollar and the dollar yen exchange rates the article finds that both oral intervention events and actual intervention events have been highly successful over the short to medium run the article shows that the success of intervention events is related to market conditions and to the coordination among policy makers it also finds that the success of communication and actual interventions is largely unrelated to monetary policy thus suggesting that interventions primarily function through a coordination channel

a theoretical approach to sterilized foreign exchange intervention in this paper we survey prominent theories that have shaped the literature on sterilized foreign exchange interventions we identify three main strands of literature 1 that which deems interventions futile 2 that which requires some market friction i e limited arbitrage in order for interventions to be effective and 3 that which advocates the use of interventions as long as they convey signals on the stance of future monetary policy we contribute to the literature in three important ways first by reviewing new theoretical models that have surfaced within the last decade second by further penetrating into the theory of interventions in order to analyze the key features that make each model distinct and third by only focusing on sterilized operations which allows us to sidestep the effects induced by changes in the stock of money supply in addition the models that we present comprise both a macro and microstructure approach so as to provide a comprehensive view of the theory behind exchange rate intervention

pigou tiebout property taxation and the underprovision of local public goods abstract pigou s proposition that the use of distorting taxes rather than neutral head taxes reduces public service levels is examined in this paper a simple model with a national system of competing local governments is utilized to demonstrate that the use of a distorting property tax on mobile capital decreases the level of residential public services the case where public services are an intermediate producer good is also considered

short run fluctuations in foreign exchange rates evidence from the data 1973 1979 abstract the paper examines the statistical properties of daily changes in foreign exchange fx rates for nine currencies it finds that these changes are leptokurtotic i e have long tailed and sharp peaked histograms the evidence suggests that this leptokurtosis does not arise from an underlying paretian stable distribution nor from a stationary mixture of normal distributions but rather from normal processes with time varying parameters this finding casts doubt on the validity of many standard techniques t stats arima methods some moving statistics for estimating the time varying parameters are also presented

modeling heteroscedasticity in daily foreign exchange rates this article estimates autoregressive conditionally heteroscedastic arch and generalized arch garch models for five foreign currencies using 10 years of daily data a variety of arch and garch specifications a number of nonnormal error densities and a comprehensive set of diagnostic checks it finds that arch and garch models can usually remove all heteroscedasticity in price changes in all five currencies goodness of fit diagnostics indicate that exponential garch with certain nonnormal distributions fits the canadian dollar extremely well and the swiss franc and the deutsche mark reasonably well only one nonnormal distribution fits the japanese yen reasonably well none fit the british pound

implied exchange rate distributions evidence from otc option markets abstract this paper uses a rich new dataset of option prices on the dollar mark dollar yen and key ems cross rates to extract the entire risk neutral probability density function pdf over horizons of 1 and 3 months we compare three alternative smoothing methods cubic splines an implied binomial tree trimmed and untrimmed and a mixture of lognormals for transforming option data into the pdf despite their methodological differences the three approaches lead to a similar pdf clearly distinct from the lognormal benchmark and typically characterized by skewness and leptokurtosis we then document a striking positive correlation between skewness in these pdfs and the spot rate the stronger a currency the more expectations are skewed towards a further appreciation of that currency we interpret this finding as a rejection that innovations in these exchange rates are independent of the level or characteristic of a credible target zone explicit or implicit instead this positive correlation is consistent with target zones with endogenous realignment risk we discuss two interpretations of our results on skewness when a currency is stronger the actual probability of further large appreciation is higher or because of risk such states are valued more highly

does food safety information impact u s meat demand a theoretical model of consumer response to publicized food safety information on meat demand is developed with an empirical application to u s meat consumption evidence is found for the existence of pre committed levels of consumption seasonal factors time trends and contemporaneous own and cross commodity food safety concerns the average demand response to food safety concerns is small especially in comparison to price effects and to previous estimates of health related issues this small average effect masks periods of significantly larger responses corresponding with prominent food safety events but these larger impacts are short lived with no apparent food safety lagged effects on food safety concerns in the united states have dramatically increased in the past decade with regard to incidences of contaminated meat products concerns have arisen because contaminated meat products can result in serious risk to the well being and health of consumers contamination comes from a myriad of sources including but not limited to outbreaks of listeria monocytogenes escherichia coli e coli and salmonella centers for disease control and prevention food safety problems are not isolated to the united states as other unsafe contaminates in meats have emerged across the world including highly publicized outbreaks of bovine spongiform encephalopathy bse in europe the potential impacts of publicized food safety events on consumer s demand for meat products in the united states include own effects on the demand for the contaminated meat involved as well as cross effects impacting the demand for other meats the objective of this article is to investigate whether publicized food safety concerns surrounding beef pork and poultry chicken and turkey have impacted meat consumption food safety indices are constructed separately for beef pork and poultry

american garch employee stock option valuation abstract we implement a flexible simulation based approach for the fair value of employee stock option eso that accounts for the vesting period departure risk and voluntary suboptimal early exercise we introduce garch effects on the underlying asset and we analyze the price bias with respect to the constant volatility case we also perform a sensitivity analysis with respect to changes in several eso characteristics we compare this valuation with fas 123 method revealing a fas overvaluation finally we value a real eso plan providing the confidence intervals for the estimated eso prices

central bank intervention and exchange rate volatility abstract this paper explores the effects of foreign exchange intervention by central banks on the behavior of exchange rates the g 3 central banks have undertaken an unprecedented number of both coordinated and unilateral intervention operations in the last 10 years existing empirical evidence on the effectiveness of intervention is mixed studies using data from the 1970s suggest that intervention operations that do not affect the monetary base have at most a short lived influence on exchange rates but more recent studies indicate that the intervention operations that followed the plaza agreement influenced both the level and variance of exchange rates this paper examines the effects of us german and japanese monetary and intervention policies on dollar mark and dollar yen exchange rate volatility over the 1977 1994 period the results indicate that intervention operations generally increase exchange rate volatility this is particularly true of secret interventions which are those undertaken by central banks without notification of the public overt interventions in the mid 1980s appear to have reduced exchange rate volatility but in other periods and for the 1977 1994 period as a whole central bank intervention is associated with greater exchange rate volatility

attachment to home and efficient purchases of population in a fiscal externality economy abstract this paper examines the efficiency properties of an economy characterized by strategically competing regions and individuals with varying degrees of attachment to home in an otherwise standard fiscal externality setting regional authorities may make interregional transfers in purchasing preferred populations however there is a range of distributions of resources over which neither region makes transfers nevertheless all equilibrium allocations resulting from the nash behavior of regional authorities including those that involve no transfers are efficient therefore in contrast to the standard conclusions of the fiscal externality literature there is no efficiency role for a central authority

tax competition in a fiscal union with decentralized leadership this paper examines capital tax competition in the presence of an interstate transfer policy without federal commitment lack of commitment implies that local tax policy is chosen prior to federal transfers the paper s main result is that ex post federal policy neutralizes horizontal fiscal externalities insulating tax policy from capital mobility federal policy however introduces a new source of inefficiency unrelated to tax competition specifically ex post transfer payments prove to be equivalent to an interstate revenue sharing system which may render federal intervention in the presence of fiscal externalities welfare deteriorating relative to tax competition

exchange rates and fundamentals co movement long run relationships and short run dynamics abstract the present study builds upon the seminal work of engel and west 2005 and in particular on the relationship between exchange rates and fundamentals the paper discusses the well known puzzle that fundamental variables such as money supply and interest rate provide help in predicting changes in floating rates it also tests the theoretical result of engel and west 2005 that in a rational expectations present value model the asset price manifests near random walk behaviour if the fundamentals are i 1 and the factor for discounting future fundamentals is near one the study explores the direction and nature of causal interdependencies among the most widely traded currencies in the world their country specific fundamentals and their us differentials a new var vecm garch multivariate filtering approach is implemented whilst linear and nonlinear non causality is tested and validated on simulated and empirical data the evidence implies that there is no indication of a prevailing causal behaviour and when nonlinear effects are accounted for the pattern of leads and lags changes over time the variations in this linkage can be attributed to parameter instability in structural models which may have little effect on fx forecastability over short horizons yet it is significant for long run cointegrating relationships while it is difficult to reconcile these findings with the rational expectations hypothesis the theory of consistent expectations or bounded rationality matches simulation and empirical findings more efficiently overall fundamentals may be important determinants of fx rates however there may be some other unobservable variables driving the currency rates that current asset pricing models have not yet captured

the conditional heteroscedasticity of the yen dollar exchange rate this paper examines the conditional heteroscedasticity of the yen dollar exchange rate a model is constructed by extending the asymmetric power autoregressive conditional heteroscedasticity model to a process that is fractionally integrated it is found that unlike the equity markets the appreciation and depreciation shocks of the yen against the dollar have similar effects on future volatilities although the results reject both the stable and the integrated models our analysis of the response coefficients of the past shocks and the application of the models to the estimation of the capital requirements for trading the currencies show that there are no substantial differences between the fractionally integrated models and the stable models 1998 john wiley sons ltd

the effects of automobile recalls on the severity of accidents the number of automobile recalls in the united states has substantially increased over the last two decades and after a record of over 30 million cars recalled in 2004 in the last few years it has consistently reached between 15 and 17 million and in 2010 alone 20 million cars were recalled toyota s recall crisis in 2010 illustrates how recalls can affect a large number of american drivers and the defects connected to them can result in loss of life and serious accidents however in spite of the increase in public concern over recalls and the loss of property and life attached to them there is no empirical evidence of the effect of vehicle recalls on safety this paper investigates whether vehicle recalls reduce accidental harm measured by the severity of injuries in vehicle accidents the results of our analysis show that if a recall for a new year model is issued then the severity of injuries of accidents continuously diminishes during the first year after the recall something we do not find among cars not subject to recalls this is because defects are repaired over time but also because drivers react by driving more carefully until the defects are fixed to minimize the losses attached to having dangerously defective cars on our roads both quick and timely recall issuance are needed and more detailed information on defects should be delivered to owners of defective vehicles the latter can be made possible through simple but important policy changes by the u s government regarding recall information sharing with drivers and insurance companies jel l51 l62

overlapping soft budget constraints abstract our paper identifies a potential problem with decentralization at a time when its virtues are widely extolled we show that responsibility for equalization at multi levels within a decentralized federation creates an overlapping equalization policy that can worsen fiscal discipline contrary to qian and roland 1998 we also show in our set up that fiscal competition among regional rescuers does not act as a commitment device to harden the local budget constraint

the effectiveness of central bank intervention evidence from turkey this article investigates the effectiveness of central bank intervention on the conditional variance and the mean of the exchange rate returns in turkey during the float period the daily exchange rates are studied within an exponential general autoregressive conditional heteroskedastic egarch framework little evidence is found for the effectiveness of intervention operations empirical results suggest that foreign exchange fx selling auctions increase exchange rate volatility however a reverse causality relationship detected between one day past sales of fx auctions and exchange rate returns which is supportive of leaning against the wind behaviour of the central bank contradicts its announcements also the central bank of turkey cbt tends to intervene through fx selling auctions when one day past volatility is higher

second generation fiscal federalism the implications of fiscal incentives abstract first generation fiscal federalism fgff studies the performance of decentralized systems under the assumption of benevolent social planners second generation fiscal federalism sgff studies performance based on the fiscal and political incentives facing subnational officials the paper focuses on three aspects of sgff first it considers the design of intergovernmental transfers while fgff emphasizes correcting vertical and horizontal equity sgff emphasizes the importance of fiscal incentives for producing local economic prosperity sgff extends fgff approaches by showing how non linear transfer systems can produce both equalization and high marginal fiscal incentives to produce local economic growth second the paper raises the fiscal incentive approach showing how different tax systems produce different fiscal incentives for political officials to choose policies third the paper discusses the interaction of democracy and fiscal federalism

the effect of intervention frequency on the foreign exchange market the japanese experience abstract this paper examines the effects of the frequency of foreign exchange intervention on exchange rate volatility japanese intervention is characterized by differences in the frequency of intervention there are high and low frequency intervention periods using the garch methodology this paper models the changes in the yen dollar exchange rate with the frequency of intervention from april 1991 to december 2005 as the focal explanatory variable the empirical results show that high frequency intervention stabilizes the exchange rate by reducing exchange rate volatility and that low frequency intervention is more effective

official central bank interventions and exchange rate volatility evidence from a regime switching analysis in this paper we investigate the effect of central bank interventions on the weekly returns and volatility of the dem usd and yen usd exchange rate returns in contrast with previous analyses we allow for regime dependent specifications and investigate whether official interventions can explain the observed volatility regime switches it is found that depending on the prevailing volatility level coordinated central bank interventions can lead to either a stabilizing or a destabilizing effect our results lead us to challenge the usual view that such interventions always imply increases in volatility c 2002 elsevier b v all rights reserved

a high frequency assessment of the ecb securities markets programme policy impact studies often suffer from endogeneity problems consider the case of the european central bank ecb securities markets programme if eurosystem interventions were triggered by sudden and strong price deteriorations looking at daily price changes may bias downward the correlation between yields and the amounts of bonds purchased simple regressions of daily changes in yields on quantities often give insignificant or even positive coefficients and therefore suggest that securities markets programme smp interventions have been ineffective or worse counterproductive we use high frequency data on purchases of the ecb securities markets programme and sovereign bond quotes to address the simultaneity and endogeneity issues we propose a vector autoregressive var framework estimated at several frequencies to better measure the smp impact and its persistence our results show that smp interventions have been effective in reducing yields of government bonds for the countries under the program

a note on intraday foreign exchange volatility and the informational role of quote arrivals abstract the conditional variance for five different hourly foreign exchange rates is modeled using a garch model with the number of incoming quotes as a regressor in the conditional variance equation we find that the number of quotes is positively and significantly related to the volatility of all rates examined the empirical findings support the conjecture of a time consuming information process

a multivariate latent factor decomposition of international bond yield spreads a factor analysis of long term bond spreads is performed by decomposing international interest rate spreads into national and global factors the factors are latent and are assumed to have garch type specifications as well as exhibiting serial dependence an indirect estimator is used to compute estimates of the unknown parameters the sampling performance of this estimator is investigated and compared with an alternative direct estimator based on the kalman predictor the factor model is applied to weekly data on long bond spreads between five countries australia japan germany canada and the uk and the usa over the period 1991 to 1999 the resulting factor decomposition is used to examine the international investor s optimal portfolio decision in a mean variance framework copyright 2000 john wiley sons ltd

a structural threshold model of the exchange rate under optimal intervention abstract by considering a social trade off between targeting the exchange rate and minimizing intervention costs nonlinear exchange rate dynamics can be captured by a structural threshold model this article provides a theory based empirical exchange rate model and shows how to put the model into an empirical investigation to estimate the structural threshold model we propose a two step procedure which separately estimates the permanent and temporary fundamentals of the foreign exchange market a demonstration of our approach is applied to 1981q3 2008q3 taiwan s foreign exchange market with a brief review of its monetary policies and central bank given prior estimation results are consistent with theoretical predictions and many intervention operations of taiwan s central bank are successfully identified

statistical distributions and the identification of currency crises abstract we use extreme value theory to identify periods of currency crisis for a broad cross section of asian european and latin american countries we argue that our methodology improves upon the more conventional methodology for defining currency crises because fewer parametric assumptions need to be satisfied we compare the incidence of currency crises using the conventional method with the incidence obtained using our method we conclude that identifying currency crises using extreme value theory is a good alternative to the conventional method

the price variability volume relationship on speculative markets this paper concerns the relationship between the variability of the daily price change and the daily volume of trading on the speculative markets our work extends the theory of speculative markets in two ways first we derive from economic theory the joint probability distribution of the price change and the trading volume over any interval of time within the trading day and second we determine how this joint distribution changes as more traders enter or exit from the market the model s parameters are estimated by fiml using daily data from the 90 day t bills futures market the results of the estimation can reconcile a conflict between the price variability volume relationship for this market and the relationship obtained by previous investigators for other speculative markets this paper concerns the relationship between the variability of the daily price change and the volume of trading on speculative markets previous empirical studies 2 3 6 12 14 16 of both futures and equity markets always find a positive association between price variability as measured by the squared price change ap2 and the trading volume 2 there are two explanations for the relationship clark s 2 explanation which is secondary to his effort to explain why the probability distribution of the daily price change is leptokurtic emphasizes randomness in the number of within day transactions in clark s model the daily price change is the sum of a random number of within day price changes the variance of the daily price change is thus a random variable with a mean proportional to the mean number of daily transactions clark argues that the trading volume is related positively to the number of within day transactions and so the trading volume is related positively to the variability of the price change the second explanation is due to epps and epps 6 their model examines the mechanics of within day trading the change in the market price on each within day transaction or market clearing is the average of the changes in all of the traders reservation prices epps and epps assume there is a positive relationship between the extent to which traders disagree when they revise their reservation prices and the absolute value of the change in the market price that is an increase in the extent to which traders disagree is associated with a larger absolute price change the price variability volume relationship arises then because the volume of trading is positively related to the extent to which traders disagree when they revise their reservation prices

the liability of good reputation a study of product recalls in the u s automobile industry in this paper we explore opposing theoretical claims about how organizational reputation affects market reactions to product defects on the one hand good reputation could be a disadvantage because expectations about product quality are more likely to be violated by defects in highly reputed products on the other hand a good reputation could be an advantage because of strong inertial effects on reputation orderings we empirically test these competing hypotheses using data on product recalls in the u s automobile industry from 1975 to 1999 our results support for the idea that reputation can be an organizational liability in that highly reputed firms suffer more market penalty as a result of their product recalls we also propose that the reputational effects are moderated by two important factors substitutability and generalism specialism our results show that having few substitutes with an equivalent level of reputation or a focused product identity stemming from specialism buffers the negative market reactions to product recalls we conclude with a discussion on the implications of these results for institutional reputation and status theories

when do central bank interventions influence intra daily and longer term exchange rate movements this paper examines dollar interventions by the g3 since 1989 and the reasons that trader reactions to these interventions might differ over time and across central banks market microstructure theory provides a framework for understanding the process by which sterilized central bank interventions are observed and interpreted by traders and how this process in turn might influence exchange rates using intra daily and daily exchange rate and intervention data the paper analyzes the influence of interventions on exchange rate volatility finding evidence of both within day and daily impact effects but little evidence that interventions influence longer term volatility

stock returns and volatility most asset pricing models postulate a positive relationship between a stock portfolio s expected returns and risk which is often modeled by the variance of the asset price this paper uses garch in mean models to examine the relationship between mean returns on a stock portfolio and its conditional variance or standard deviation after estimating a variety of models from daily and monthly portfolio return data we conclude that any relationship between mean returns and own variance or standard deviation is weak the results suggest that investors consider some other risk measure to be more important than the variance of portfolio returns