short run exchange rate uncertainty in latin america this paper to obtain an ex ante measure of exchange rate uncertainty in 11 latin american countries as a preliminary issue the purchasing power parity ppp condition is tested using engle and granger two step procedure and johansen method the argument is that exchange rate uncertainty could be lower if ppp holds in the long run the expected exchange rate uncertainty is estimated according to an extended version of the autoregressive conditionally heteroscedastic arch model the results show that the arch adjusment produces more efficient estimates in seven countries and that the acceptance of ppp has little effect on exchange rate uncertainty

developing a stress testing framework based on market risk models the basel 2 accord requires regulatory capital to cover stress tests yet no coherent and objective framework for stress testing portfolios exists we propose a new methodology for stress testing in the context of market risk models that can incorporate both volatility clustering and heavy tails empirical results compare the performance of eight risk models with four possible conditional and unconditional return distributions over different rolling estimation periods when applied to major currency pairs using daily data spanning more than 20 years we find that stress test results should have little impact on current levels of foreign exchange regulatory capital

institution induced productivity differences and patterns of international capital flows abstract this paper studies theoretically how the cross country differences in the institutional quality iq of the domestic credit markets shape the patterns of international capital flows when such iq differences cause productivity differences across countries iq affects productivity by changing productivity agency cost trade offs across heterogeneous investment projects which have opposite effects on the investment and capital flows from exogenous productivity differences the overall effect of iq could generate u shaped responses of the investment and capital flows this means that capital could flow from middle income to low income and high income countries and starting from a low iq a country could experience both growth and a current account surplus after an institutional reform more generally the results here offer some cautions when interpreting the evidence on the role of productivity and institutional differences on capital flows and question the validity of using financial frictions as a proxy for the quality of financial institutions

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

sectoral shocks and aggregate fluctuations abstract this paper presents a multisector dynamic general equilibrium model of business cycles with a distinctive feature aggregate fluctuations are driven by independent sectoral shocks the model hypothesizes that trade among sectors provides a strong synchronization mechanism for these shocks due to the limited but locally intense interaction that is characteristic of such input trade flows limited interaction characterized by a sparse intermediate input use matrix reduces substitution possibilities among intermediate inputs which strengthens comovement in sectoral value added and leads to a postponement of the law of large numbers in the variance of aggregate value added the chief virtue of this model is that reliance on implausible aggregate shocks is not necessary to capture the qualitative features of macroeconomic fluctuations building on horvath 1998 review of economic dynamics 1 781 808 which establishes the theoretical foundation for the relevance of limited interaction in the context of a stylized multisector model this paper specifies a more general multisector model calibrated to the us 2 digit standard industrial code economy simulations prove the model is able to match empirical reality as closely as standard one sector business cycle models without relying on aggregate shocks

growth via external public debt and capital controls this paper analyzes strategies for economic growth in a small open overlapping generations economy that has access to perfect international capital markets and is characterized in autarky by multiple locally stable stationary equilibria the study designs a growth scheme consisting of external public debt and controls on private capital outflows this policy permits the economy to move from a low to a high output stationary equilibrium the policy may be pareto welfare improving if it is gradualistic and if the economy s rate of convergence to the better equilibrium is faster than the rate of debt accumulation copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

evaluating interval forecasts a complete theory for evaluating interval forecasts has not been worked out to date most of the literature implicitly assumes homoskedastic errors even when this is clearly violated and proceed by merely testing for correct unconditional coverage consequently i set out to build a consistent framework for conditional interval forecast evaluation which is crucial when higher order moment dynamics are present the new methodology is demonstrated in an application to the exchange rate forecasting procedures advocated in risk management

forecasting portfolio value at risk with nonparametric lower tail dependence estimates abstract we propose to forecast the value at risk of bivariate portfolios using copulas which are calibrated on the basis of nonparametric sample estimates of the coefficient of lower tail dependence we compare our proposed method to a conventional copula garch model where the parameter of a clayton copula is estimated via canonical maximum likelihood the superiority of our proposed model is exemplified by analyzing a data sample of nine different bivariate and one nine dimensional financial portfolio a comparison of the out of sample forecasting accuracy of both models confirms that our model yields economically significantly better value at risk forecasts than the competing parametric calibration strategy

the inflation output variability tradeoff and monetary policy evidence from a garch model this paper empirically investigates the taylor curve volatility tradeoff in light of the stochastic behavior of the conditional variances of output and inflation stressing structural instability between periods before and after the 1979 1982 monetary policy regime change i implement a bivariate generalized autoregressive conditional heteroskedasticity model to capture the output inflation variability tradeoff and to explore the plausible impact of a change in the federal funds rate on the two conditional volatilities i further evaluate the impacts of anticipated and unanticipated policy actions measured by two alternative policy reaction functions one from a vector autoregression based reduced form equation and another based on the taylor rule in addition to showing a volatility tradeoff relationship the empirical model reveals different magnitudes of policy effects on output and inflation volatility across the two sample periods

liquidity adjusted intraday value at risk modeling and risk management an application to data from deutsche borse abstract this paper develops a high frequency risk measure the liquidity adjusted intraday value at risk livar our objective is to explicitly consider the endogenous liquidity dimension associated with order size by reconstructing the open limit order book of deutsche borse changes in the tick by tick ex ante frictionless return and actual return are modeled jointly the risk related to the ex ante liquidity premium is then quantified our model can be used to identify the impact of ex ante liquidity risk on total risk and to provide an estimation of the var for the actual return at a point in time in our sample liquidity risk can account for up to 32 of total risk depending on order size

conditional exchange rate volatility and the volume of foreign trade evidence from seven industrialized countries there has long been a concern over the volatility of exchange rates and their impact on the volume of foreign trade however very little attention has been paid to the choice of an appropriate volatility variable as well as the proper specification of the trade equation the sample standard deviation of the exchange rate has been used as a proxy for exchangerate uncertainty in empirical studies that examine the effects of exchange rate uncertainty on the volume of foreign trade see for example akhtar and hilton 1 and gotur 27 these studies have provided conflicting evidence on this issue it has been argued that use of the sample standard deviation is inappropriate because the empirical distribution of exchange rates is not normal 22 10 in this regard subsequent empirical research 12 36 40 41 11 has employed a moving standard deviation of the rate of change of the exchange rate as a proxy for exchange rate uncertainty chowdhury 11 obtained a clear pattern of results that support the hypothesis that the higher volatility of exchange rates led to a reduction in international trade transactions after the breakdown of the bretton woods system in march 1973 other studies have reported ambiguous results 2 the moving standard deviation used in these studies has been criticized in the literature for a ignoring relevant information on the random process generating exchange rates 18 b underestimating the effect of volatility on decisions 52 c distorting the measurement of the volatility variable by smoothing the series 9 and d injecting an element of arbitrariness into the calculation through decisions about the order m of the moving average 43 3

necessary conditions for infinite horizon discounted two stage optimal control problems abstract in many situations in economics one would like to analyse the optimal timing of switching between alternative and consecutive regimes a natural framework for such an analysis seems to be one of multi stage optimal control problems where the switching instants between regimes are endogenously determined the existing literature considers only the case of two stage optimal control problems with finite horizon however in many cases it seems more appropriate to consider a problem with an infinite horizon by deriving the appropriate necessary conditions for such a problem we generalise the methodology in analysing endogenous regime switches

the international monetary system an analysis of alternative regimes abstract this is an exercise in the positive economics of alternative monetary regimes the behavior of output and prices is compared using a stochastic specification which allows asymptotic variances to be obtained without difficulty free floating of exchange rates together with national money supply targets is analyzed first with and without the presence of fads in the exchange rate two alternatives for monetary coordination are then considered first is mckinnon s proposal to fix nominal exchange rates and stabilize aggregate monetary growth or average inflation second is williamson s system of target zones for stable real exchange rates complemented by nominal income targets for fiscal policy

the level and quality of value at risk disclosure by commercial banks in this paper we study both the level of value at risk var disclosure and the accuracy of the disclosed var figures for a sample of us and international commercial banks to measure the level of var disclosures we develop a var disclosure index that captures many different facets of market risk disclosure using panel data over the period 1996 2005 we find an overall upward trend in the quantity of information released to the public we also find that historical simulation is by far the most popular var method we assess the accuracy of var figures by studying the number of var exceedances and whether actual daily vars contain information about the volatility of subsequent trading revenues unlike the level of var disclosure the quality of var disclosure shows no sign of improvement over time we find that var computed using historical simulation contains very little information about future volatility

endogenous risk in a portfolio balance rational expectations model of the deutschemark dollar rate abstract a portfolio balance model of the dm s rate under rational expectations is specified in which systematic risk induced deviations from uncovered interest parity are allowed this leads to a reduced from containing a potentially time varying risk premium which we approximate and estimate using an arch in mean approach the maximum likelihood estimator and a lagrande multiplier test for arch in mean are developed the estimation results indicate a small but non negligible time varying risk premium

the inflation and output variability tradeoff evidence from a garch model abstract this paper empirically investigates the possibility of a tradeoff between the variability of inflation and output gap over the period 1960 1997 in light of a bivariate garch model there is strong evidence of temporal instability in the garch process and the variability tradeoff is more apparent for the post october 1979 subperiod the slope of the tradeoff nevertheless appears to be considerably flat

sensitivity of the bank stock returns distribution to changes in the level and volatility of interest rate a garch m model abstract the objective of this paper is to employ the generalized autoregressive conditionally heteroskedastic in the mean garch m methodology to investigate the effect of interest rate and its volatility on the bank stock return generation process this framework discards the restrictive assumptions of linearity independence and constant conditional variance in modeling bank stock returns the model presented here allows for shifts in the volatility equation in response to the changes in monetary policy regime in 1979 and 1982 to be estimated arch garch and volatility feed back effects are found to be significant interest rate and interest rate volatility are found to directly impact the first and the second moments of the bank stock returns distribution respectively the latter also affects the risk premia indirectly the degree of persistence in shocks is substantial for all the three bank portfolios and sensitive to the nature of the bank portfolio and the prevailing monetary policy regime

a quantile framework for analysing the links between inflation uncertainty and inflation dynamics across countries in contrast to the conventional conditional mean approaches this study uses quantile regression techniques to present some new statistical evidence on the links between inflation uncertainty and the level of inflation with cross sectional data from 90 countries during the period 1961 to 2006 the results suggest that positive inflation shocks have stronger impact on inflation uncertainty which varies across the quantiles furthermore popular time series models are evaluated for their ability to reproduce measures of uncertainty and indicate similar results regarding the relationships between inflation and inflation uncertainty

self fulfilling expectations speculative attack and capital controls this paper examines the endogenous implementation of capital controls in the context of a fixed exchange rate regime it is shown that if there exists a nonzero probability that the policymaker s response to a significant decrease in official foreign reserves will be the introduction of controls a speculative attack may occur even when current and expected monetary policy is consistent with a permanently viable control free fixed exchange rate regime consequently capital controls may be the outcome of self fulfilling expectations rather than the result of imprudent economic policies copyright 1993 by ohio state university press

from value at risk to stress testing the extreme value approach this article presents an application of extreme value theory to compute the value at risk of a market position in statistics extremes of a random process refer to the lowest observation the minimum and to the highest observation the maximum over a given time period extreme value theory gives some interesting results about the distribution of extreme returns in particular the limiting distribution of extreme returns observed over a long time period is largely independent of the distribution of returns itself in financial markets extreme price movements correspond to market corrections during ordinary periods and also to stock market crashes bond market collapses or foreign exchange crises during extraordinary periods an approach based on extreme values to compute the var thus covers market conditions ranging from the usual environment considered by the existing var methods to the financial crises which are the focus of stress testing univariate extreme value theory is used to compute the var of a fully aggregated position while multivariate extreme value theory is used to compute the var of a position decomposed on risk factors 2000 elsevier science b v all rights reserved

collapsing exchange rate regimes in the presence of a parallel market this paper develops a model of an economy where the fixed exchange rate is overvalued and coexists with a parallel market for foreign currency such a situation persists because the parallel marker is used by the central authorities as an instrument to delay policy changes using the haitian experience this paper estimates a rationing parameter of foreign currency in the official market which translates the extent of tolerance of the parallel market the paper also produces estimates of onestep ahead probability of devaluation rationing has been severe and the probability of collapse has reached high levels during the period studied

capital flight north south lending and stages of economic development why capital does not necessarily flow from capital rich countries to capital poor countries as conventional international trade theory would predict this paper studies this question in a dynamic model that incorporates an asymmetric information structure similar to the structure in gertler rogoff as long as the degree of asymmetric information in the capital market is identical between the north and the south then both regions will converge to a steady state with the same capital intensity and the income gap between them will be eventually eliminated however if the asymmetric information exists only in the south the income discrepancy between the north and the south will be magnified by international capital movements and the timing of capital market liberalization in the south needs to be decided with extreme caution authors

effects of legislation events on us gaming stock returns and market turnings abstract the deregulation of casino gaming has becomea new trend across the us since the beginning of this decade but from the mid 1990s on the voice of tightened regulation is lifted up by the public while the cyber casino online gambling business is also developing its own customer base this study examines various federal and state legislation events regarding casino gaming regulation and deregulation and finds that the announcement effects on stock portfolio returns vary across different types of gaming companies on average gaming equipment suppliers and small casino operators are found to react to legislation events more significantly compared with those large casino firms furthermore since the casino gaming business is believed to be highly sensitive to the economic upturns and downturns this paper also investigates the impacts on the risk adjusted return alpha and the systematic risk beta of gaming stocks across bull up and bear down market situations the results indicate that between july 1993 and december 1997 gaming stocks on average yield a significantly lower return and a significantly greater systematic risk against the us stock market after changes in stock market conditions are controlled the systematic risk is still considerably above the market average but the excess return turns out insignificant

integrated models of capital adequacy why banks are undercapitalised with the majority of large uk and many us banks collapsing or being forced to raise capital over the 2007 9 period blaming bankers may be satisfying but is patently insucient basel ii and federal oversight frameworks also deserve criticism we propose that the current methodological void at the heart of basel ii pillar 2 is filled with the recommendation that banks develop fully integrated models for economic capital that relate asset values to fundamental drivers of risk in the economy to capture systematic eects and inter asset dependencies in a way that crude correlation assumptions do not we implement a fully integrated risk analysis based on the balance sheet of a representative eurobank using an economic scenario generation model calibrated to conditions at the end of 2007 our results suggest that the more modular correlation based approaches to economic capital that currently dominate practice will have led to an undercapitalisation of banks a

the copula garch model of conditional dependencies an international stock market application abstract modeling the dependency between stock market returns is a difficult task when returns follow a complicated dynamics when returns are non normal it is often simply impossible to specify the multivariate distribution relating two or more return series in this context we propose a new methodology based on copula functions which consists in estimating first the univariate distributions and then the joining distribution in such a context the dependency parameter can easily be rendered conditional and time varying we apply this methodology to the daily returns of four major stock markets our results suggest that conditional dependency depends on past realizations for european market pairs only for these markets dependency is found to be more widely affected when returns move in the same direction than when they move in opposite directions modeling the dynamics of the dependency parameter also suggests that dependency is higher and more persistent between european stock markets

testing macroprudential stress tests the risk of regulatory risk weights we compare the capital shortfall measured by regulatory stress tests to that o fa benchmark methodology the v lab stress test that employs only publicly available market data we find that when capital shortfalls are measured relative to risk weighted assets the ranking of financial institutions is not well correlated to the ranking of the v lab stress test whereas rank correlations increase when required capitalization is a function of total assets we show that the risk measures used in risk weighted assets are cross sectionally uncorrelated with market measures of risk as they do not account for the risk that risk will change furthermore the banks that appeared to be best capitalized relative to risk weighted assets were no better than the rest when the european economy deteriorated into the sovereign debt crisis in 2011

dynamic correlation analysis of financial contagion evidence from asian markets we apply a dynamic conditional correlation model to nine asian daily stock return data series from 1990 to 2003 the empirical evidence confirms a contagion effect by analyzing the correlation coefficient series we identify two phases of the asian crisis the first shows an increase in correlation contagion the second shows a continued high correlation herding statistical analysis of the correlation coefficients also finds a shift in variance during the crisis period casting doubt on the benefit of international portfolio diversification evidence shows that international sovereign credit rating agencies play a significant role in shaping the structure of dynamic correlations in the asian markets

a reassessment of real business cycle theory during the downturn of 2008 2009 output and hours fell significantly while labor productivity rose these facts have led many to conclude that there is a significant deviation between observations and current macrotheories that assume business cycles are driven at least in part by fluctuations in total factor productivities of firms we show that once investment in intangible capital is included in the analysis there is no inconsistency measured labor productivity rises if the fall in output is underestimated this occurs when there are large unmeasured intangible investments microevidence suggests that these investments are large and cyclically important

an evaluation of bank measures for market risk before during and after the financial crisis abstract we study the performance and behavior of value at risk measures used by a number of large u s banks before during and after the financial crisis alternative benchmark var measures including garch based measures are estimated directly from the banks trading revenues to explain the bank var performance results while overly conservative in both the pre crisis and post crisis periods bank var exceedances were excessive and clustered in the crisis period this contrasted with mostly unbiased benchmark hs and garch vars in the pre crisis and post crisis periods and vastly superior garch based var performance in the crisis period with lower exceedance rates and no exceedance clustering our results document the bank vars very slow adjustment to changing market conditions and their systematic bias in all studied periods our results indicate that bank vars could be improved by the use of models with time varying volatility and built on banks knowledge of their current positions

extreme risk modeling an evt pair copulas approach for financial stress tests abstract this paper presents a semi parametric copula garch risk model for financial return series with a stress testing perspective the marginal distributions of the returns are specified using the extreme value theory evt putting a specific emphasis on extreme returns the joint distribution is then built up using the pair copulas theorem based on the marginal distributions and the pair dependence structures the model performance is assessed for three sets of assets namely equity indices exchange rates and commodity prices the empirical results support a better static and dynamic properties of the presented model compared to most common specifications used in practice the proposed model and the alternative specifications are then carried out to perform stress testing exercises on hypothetical portfolios where financial returns are considered as risk factors the results show that the use of a wide range of risk models produce significantly different results in terms of the corresponding stress scenario and in the corresponding impact on the portfolios hence considering flexible and consistent specifications as in the proposed model allows ensuring a better credibility of the stress scenario and enhances the usefulness of the stress testing results

fisher phillips friedman and the measured impact of inflation on interest a reply the purpose of this paper is to demonstrate that empirical findings which persistently appear to contradict the fisher hypothesis that the nominal rate of interest should rise by the full amount of an increase in anticipated inflation are due basically to a failure to control for changes in the real rate of interest that are associated with changes in anticipated inflation we are guided in our search for proper specification of a fisher equation by a simple general equilibrium model which is employed to derive the impact of a change in anticipated inflation upon nominal interest given the requirement that commodity money and labor markets remain in equilibrium in effect we depart from the empirical tradition which has grown up around testing of the fisher hypothesis that takes the real interest rate to be independent of anticipated inflation and argues that for anticipated inflation properly measured the data ought to support the fisher hypothesis 1

discovering the link between inflation rates and inflation uncertainty a new time series model is used to reassess the strength of the link between inflation uncertainty and the level of inflation in the united states the model provides several statistical measures that can be used to examine different aspects of uncertainty the main finding is that uncertainty about the long rather than short term prospects for inflation moved strongly with the rate of inflation since the early 1970s copyright 1991 by ohio state university press

the effect of money shocks on interest rates in the presence of conditional heteroskedasticity most current empirical work finds no evidence that money shocks lower interest rates we show that these nonresults are mainly due to a failure to model the conditional heteroskedasticity of interest rates autoregressive conditional heteroskedasticity arch models find a significant liquidity effect where ordinary least squares ols models do not the existence of a liquidity effect is found using different models and sample periods when arch models are used in estimation but never when ols is employed

currency crises capital account liberalization and selection bias are countries with unregulated capital flows more vulnerable to currency crises efforts to answer this question properly must control for self selection bias since countries with liberalized capital accounts may also have more sound economic policies and institutions that make them less likely to experience crises we employ a matching and propensity score methodology to address this issue in a panel analysis of developing countries our results suggest that after controlling for sample selection bias countries with liberalized capital accounts experience a lower likelihood of currency crises that is when two countries have the same likelihood of allowing free movement of capital based on historical evidence and a very similar set of economic and political characteristics and one country imposes controls and the other does not the country without controls has a lower likelihood of experiencing a currency crisis this result is at odds with the conventional wisdom and suggests that the benefits of capital market liberalization for external stability are substantial

are empirical measures of macroeconomic uncertainty alike there is a plethora of time series measures of uncertainty for inflation and real output growth in empirical studies but little is known whether they are comparable to the uncertainty measure reported by individual forecasters in the survey of professional forecasters are these two measures of uncertainty inherently distinct this paper shows that compared with many uncertainty proxies produced by time series models the use of real time data with fixed sample recursive estimation of an asymmetric bivariate generalized autoregressive conditional heteroskedasticity model yields inflation uncertainty estimates which resemble the survey measure there is however overwhelming evidence that many of the time series measures of growth uncertainty exceed the level of uncertainty obtained from survey measure our results highlight the relative merits of using different methods in modelling macroeconomic uncertainty which are useful for empirical researchers

value at risk for long and short trading positions in this paper we model value at risk var for daily stock index returns using a collection of parametric models of the arch family based on the skewed student distribution we show that models that rely on a symmetric density distribution for the error term underperform with respect to skewed density models when the left and right tails of the distribution of returns must be modelled thus var for traders having both long and short positions is not adequately modelled using usual normal or student distributions we suggest using an aparch model based on the skewed student distribution to fully take into account the fat left and right tails of the returns distribution this allows for an adequate modelling of large returns defined on long and short trading positions the performances of all models are assessed on daily data for the cac40 dax nasdaq nikkei and smi stock indexes we also compute the expected short fall and the average multiple of tail event to risk measure for the new model

forecasting exchange rate volatility abstract exchange rate volatility forecasts are obtained using a fractionally integrated garch model gains in forecast accuracy associated with a fractionally integrated model compared to a garch or igarch model are shown to be substantial in many cases

arch models properties estimation and testing abstract the aim of this survey paper is to provide an account of some of the important developments in the autoregressive conditional heteroskedasticity arch model since its inception in a seminal paper by engle 1982 this model takes account of many observed properties of asset prices and therefore various interpretations can be attributed to it we start with the basic arch models and discuss their different interpretations arch models have been generalized in different directions to accommodate more and more features of the real world we provide a comprehensive treatment of many of the extensions of the original arch model next we discuss estimation and testing for arch models and note that these models lead to some interesting and unique problems there have been numerous applications and we mention some of these as we present different models the paper includes a glossary of the acronyms for the models we describe

the relationship between inflation and inflation uncertainty in the uk 1885 1998 abstract using a long series of uk inflation data i have provided strong evidence in favour of the hypothesis that inflationary periods are associated with high inflation uncertainty this result supports the friedman ball hypothesis and has important implications for the inflation output relationship provided that more inflation uncertainty leads to lower output

uncertainty and labor contract durations this paper provides an empirical investigation into the relationship between ex ante u s labor contract durations and uncertainty over the period 1970 to 1995 we construct measures of inflation uncertainty as well as aggregate nominal and real uncertainty the results not only corroborate previous findings of an inverse relationship between contract durations and inflation uncertainty but also document that this relationship extends to both measures of aggregate uncertainty we also explore the robustness of this relationship to various measures of inflation uncertainty that have appeared in the literature

the relationship between forecast dispersion and forecast uncertainty evidence from a survey data arch model this paper examines empirically the relationship between measures of forecast dispersion and forecast uncertainty from data on inflation expectations from the livingston survey series and the survey research center src survey series because the survey series do not provide probabilistic forecasts of inflation we derive measures of inflation uncertainty by modelling the conditional variance of the inflation forecast errors from the survey series as an autoregressive conditional heteroscedastic arch process the analysis is complicated by the fact that the overlap of forecast horizons for the survey series does not preclude the model s disturbance terms from displaying autocorrelation and also places a restriction on the specification for the arch measures of inflation uncertainty we estimate the model using hansen s 1982 generalized method of moments gmm procedure to account for the presence of serial correlation and conditional heteroscedasticity in the disturbance terms the results generally support the hypothesis that the measures of forecast dispersion across survey respondents are positively and statistically significantly associated with the measures of inflation uncertainty however the appropriateness of using forecast dispersion measures as proxies for inflation uncertainty is sensitive to the choice of the survey series

hysteresis and instability in the natural rate of unemployment in this paper it is pointed out that the long run phillips curve genus contains upward and downward sloping species as well as the vertical species two models are used in one the rate of inflation helps determine the natural rate of unemployment as proposed by friedman in the other the process of moving from one inflation rate to another helps shape the natural rate according to the hysteresis effect proposed by phelps in both cases the resulting models are unstable implying that a vertical long run phillips curve will not be regained if disturbed

firm dynamics and pricing under customer capital accumulation abstract in a search model of firm dynamics customer accumulation is shown to affect the lifecycle of firms and the dynamics of markups in response to aggregate demand shocks in the model sellers of different sizes and productivities post dynamic pricing contracts to strike a balance between attracting new customers and exploiting pre existing ones calibrated using establishment level and micro pricing data from the u s retail sector the model provides a quantitatively good fit to the lifecycle and cross sectional properties of retail establishments further the model predicts that markups are procyclical to aggregate demand shocks with a larger contribution by small sellers

rational and self fulfilling balance of payments crises speculative attacks on a pegged exchange rate must sometimes occur ifasset price paths are to be free of abnormal profit opportunities suchattacks are fully rational as they reflect the market s response to aregime breakdown that is inevitable the authors shows that under someexpectations about policy balance of payments crises can also be purely self fulfilling events in such cases even a permanently viableregime may collapse and the economy will possess multiple equilibriacorresponding to different subjective assessments of the probability ofa crisis the behavior of the domestic interest rate will naturally reflect the possibility of a speculative attack copyright 1986 by american economic association

the choice of the distribution of asset returns how extreme value theory can help abstract one of the issues of risk management is the choice of the distribution of asset returns academics and practitioners have assumed for a long time for more than three decades that the distribution of asset returns is a gaussian distribution such an assumption has been used in many fields of finance building optimal portfolio pricing and hedging derivatives and managing risks however real financial data tend to exhibit extreme price changes such as stock market crashes that seem incompatible with the assumption of normality this article shows how extreme value theory can be useful to know more precisely the characteristics of the distribution of asset returns and finally help to chose a better model by focusing on the tails of the distribution an empirical analysis using equity data of the us market is provided to illustrate this point

policy implications in an adaptive financial economy abstract this paper investigates the policy implications of a discrete time flex price financial economy with micro agents optimizing decisions under uncertainty government policies are most effective with constrained households money demand monetary and government spending policies are more potent in changing real debt than output but vice versa for income tax policy an income tax cut does not necessarily lead to an inflation reduction unlike what the supply siders conceived an inviable crisis can occur when assets returns are correlated this leads to the disruption of the self adjusting mechanism to equilibrium in addition a fisherian like equation is produced showing positive correlation between inflation and nominal interest rates

can intangible capital explain cyclical movements in the labor wedge intangible capital is an important factor of production in modern economies that is generally neglected in business cycle analyses we demonstrate that intangible capital can have a substantial impact on business cycle dynamics especially if the intangible is complementary with production capacity we focus on customer capital the capital embodied in the relationships a firm has with its customers introducing customer capital into a standard real business cycle model generates a volatile and countercyclical labor wedge due to a mismeasured marginal product of labor we also provide new evidence on cyclical variation in selling effort to discipline the exercise

market risk management in a post basel ii regulatory environment we propose a novel method of mean capital requirement portfolio optimization the optimization is performed using a parallel framework for optimization based on the nondominated sorting genetic algorithm ii capital requirements for market risk include an additional stress component introduced by the recent basel 2 5 regulation our optimization with the basel 2 5 formula in the objective function produces superior results to those of the old basel ii formula in stress scenarios in which the correlations of asset returns change considerably these improvements are achieved at the expense of reduced cardinality of pareto optimal portfolios this reduced cardinality and thus portfolio diversification in periods of relatively low market volatility may have unintended consequences for banks risk exposure

how resilient is the german banking system to macroeconomic shocks abstract macroeconomic stress testing studies often rely on rather short sample periods due to the limited availability of banking data they may fail to appropriately account for the cyclicality in the interaction between the banking system and macroeconomic developments in this paper we use a newly constructed data set on german banks income and loss statements over the past 39 years to model the interaction between the banking sector and the macroeconomy our var analysis indicates that the level of stress in the banking sector is strongly affected by monetary policy shocks the results rationalize the active behavior of central banks observed during periods of financial market crises

declining us output volatility and its effect on labour flow volatility an mgarch analysis this article analyses flow rates of us workers between employment and unemployment using new quarterly data for the period 1967 to 2002 multivariate garch models are used to investigate links between flow rate volatilities the results suggest that links changed substantially in the mid 1980s coinciding with the documented decline in output volatility these changes in adjustment dynamics are consistent with a move to greater use of hours rather than worker adjustment

causality between inflation and real growth abstract the paper investigates inflation growth causality over 1947 2005 with varma ml asymmetric vgarch the results imply that one uncertainty affects positively its level and much less negatively the other level whereas one level influences positively both uncertainties friedman s hypothesis was not strongly rejected

asymmetry and uncertainty in capital formation an application to oil investment theories of irreversible investment suggest a negative relation between investment and uncertainty and nonlinear adjustment costs open for asymmetries in the adjustment of fixed capital we propose an econometric modelling approach to estimate and test the key predictions of modern investment theory including asymmetric dynamics and various uncertainty indicators our application on a data set from the oil industry offers empirical support for both asymmetric dynamics and uncertainty in oil and gas investment

replication in empirical economics the journal of money credit and banking project this paper examines the role of replication in empirical economic research it presents the findings of a two year study that collected programs and data from authors and attempted to replicate their published results the research provides new and important information about the extent and causes of failures to replicate published results in economics the findings suggest that inadvertent errors in published empirical articles are a commonplace rather than a rare occurence copyright 1986 by american economic association

collapsing exchange rate regimes some linear examples abstract we construct a pair of linear examples to study the collapse time of a fixed exchange rate regime the first example is a perfect foresight continuous time model which allows calculation of the exact collapse time and the tracking of reserves the second example is a discrete time stochastic model which yields an endogenous probability distribution over the collapse time and produces a forward discount of the exchange rate

the international linkage of real interest rates the european us connection abstract in this paper we present evidence on several questions regarding the movement in short term real interest rates in eight countries have ex ante real estates in the united states and europe been high during recent years has there been a link between us real rates and those in other countries can this link be quantified the basic finding in this paper is that real rates have climbed dramatically from the 1970s to the 1980s in both the european countries and the united states there is also strong evidence that there is a positive association between movements in us real rates and those in europe however european real rates typically do not move one for one with us real rates still leaving open the possibility that european monetary policy can influence domestic economic activity

high and variable inflation further evidence on the friedman hypothesis abstract this study employing a garch model finds a positive and significant relationship between the level and variability of inflation this provides evidence in support of friedman s friedman 1977 view that high inflation leads to more variable inflation

the effects of real and nominal uncertainty on inflation and output growth some garch m evidence in this paper we use garch m methods to test four hypotheses about the effects of real and nominal uncertainty on average inflation and output growth in the united states from 1948 to 1996 we find no evidence that higher inflation uncertainty or higher output growth uncertainty raises the average inflation rate we also find no support for the idea that more risky output growth is associated with a higher average real growth rate our key result is that in a variety of models and sample periods inflation uncertainty significantly lowers real output growth copyright 2000 john wiley sons ltd

estimates of the variance of u s inflation based upon the arch model it is generally agreed that the unpredictability of future inflation is a major component of the welfare loss associated with inflation perfectly predicted inflation might induce some costs through institutional rigidities governmental interference and transaction costs but in the long run these should be rather minimal as these institutions adopt various forms of indexing when inflation is unpredictable risk averse economic agents will incur a loss even if prices and quantities are perfectly flexible in all markets inflation is a measure of the relative price of goods today and goods tomorrow thus uncertainty in tomorrow s price impairs the efficiency of today s allocation decisions friedman in his nobel lecture 8 argues convincingly that higher variability of inflation would lead to decreased output ceteris paribus he then conjectures that higher rates of inflation are generally associated with higher variability of inflation and presumably greater uncertainty about future rates if this is true then higher rates of inflation would also be associated with low levels of output which implies a positively sloped phillips curve this paper uses a new statistical technique arch to estimate the conditional mean and variance of inflation from u s time series data the main finding is that the variance of inflation in the seventies was only slightly greater than in the sixties

transitory productivity shocks and long run output this paper analyzes the effects of transitory productivity shocks on long run output the study demonstrates that despite it transitory nature an adverse productivity shock may result in lower long run output a fall in productivity reduces output and savings and consequently the interest rate increases and investment in human capital falls although productivity returns to its initial level a sufficiently large reduction in investment pushes the economy to a new stationary equilibrium with lower output a redistribution of income from consumers to savers may restore the initial long run output copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

generalized instrumental variables estimation of autoregressive conditional heteroskedastic models abstract this paper considers an alternative to maximum likelihood ml estimation of the autoregressive conditional heteroskedastic arch model introduced in engle 1982 specifically the analysis demonstrates that hansen s 1982 generalized method of moments gmm procedure can be applied for estimation of arch models as an illustration we compare the results from ml estimation and gmm estimation of engle and kraft s 1983 arch model of u s inflation

would a tobin tax have saved the ems this paper scrutinizes the claim by eichengreen tobin and wyplosz 1995 that a small tax on foreign exchange transactions would help to stabilize the european monetary system we present a target zone model a la svensson 1994 in which an optimizing government is faced with a trade off between its foreign exchange and its domestic objectives the introduction of a tobin tax is shown to improve the credibility of the peg by relaxing the foreign exchange rate constraint and making it less costly for the government to stay in the fixed exchange rate system we calibrate the model using data on the french franc in 1991 93 and show that the stabilizing effect of a 0 1 tobin tax would have been quite sizeable copyright 1996 by the editors of the scandinavian journal of economics

on inflation and inflation uncertainty in the g7 countries abstract the relationship between inflation and inflation uncertainty is investigated in the g7 countries from 1948 to 1993 garch models are used to generate a measure of inflation uncertainty and then granger methods are employed to test the causality between average inflation and inflation uncertainty in all g7 countries inflation significantly raises inflation uncertainty as predicted by friedman and ball weaker evidence is found that inflation uncertainty granger causes inflation in three countries us uk and germany increased inflation uncertainty lowers inflation while in two countries japan and france increased inflation uncertainty raises inflation

aggregate uncertainty investment and asymmetric adjustment in the uk manufacturing sector theory suggests that the level of uncertainty facing firms should affect both the rate of adjustment to and the steady state level of investment although there is ambiguity about the sign of the effect a non linear model of investment behaviour incorporating time varying adjustment speeds with threshold effects is estimated for the uk manufacturing sector the most general non linear specification is found to be most congruent with the data uncertainty has a large and significant effect on both levels and rates of adjustment

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances

inflation and uncertainty tests for temporal ordering for the postwar united states increases in the rate of inflation tend to precede increases in the level of inflation uncertainty the finding suggests that higher inflation uncertainty is part of the welfare cost of inflation possible explanations are 1 a high rate of inflation increases uncertainty about future monetary policy and 2 there is uncertainty about the persistence of inflation copyright 1995 by ohio state university press