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

the forward market in emerging currencies less biased than in major currencies abstract many studies have replicated the finding that the forward rate is a biased predictor of the future change in the spot exchange rate usually the forward discount actually points in the wrong direction but at least until recently those studies applied only to advanced economies and major currencies we apply the same tests to a sample of 14 emerging market currencies we find a smaller bias than for advanced country currencies the coefficient is on average positive i e the forward discount at least points in the right direction it is never significantly less than zero to us this suggests that a time varying exchange risk premium may not be the explanation for traditional findings of bias the reasoning is that emerging markets are probably riskier yet we find that the bias in their forward rates is smaller emerging market currencies probably have more easily identified trends of depreciation than currencies of advanced countries

is the price level tied to the m2 monetary aggregate in the long run a long run link between money and prices is evident for the united states since the korean war if the m2 measure of money is used and the velocity of m2 v2 is modeled as a mean reverting series this link between m2 and prices is the basis for a dynamic model of inflation that compares favorably in forecasting exercises with phillips curve and more typical monetarist approaches the behavior of v2 is examined from 1870 to the present providing a basis for reconsidering previous findings that v2 follows a random walk copyright 1991 by american economic association

financial technology shocks and the case of the missing m2 m2 growth was unusually weak in the early 1990s when its velocity soared although m2 growth subsequently recovered its velocity plateaued at a high level giving rise to a case of missing money these swings in m2 growth have accompanied opposite swings in bond mutual fund inflows m2 growth is better tracked and the missing m2 problem is resolved when money models are modified to account for shifts in bond mutual fund costs this approach avoids the capital gains and portfolio substitution problems posed by adding bond or equity funds to m2 while capturing the substitution effects relevant to money demand

efficiency with non convexities extending the scandinavian consensus approaches there are two distinct scandinavian consensus approaches to public good supply both based on agents willingness to pay a wicksell foley public competitive equilibrium arises from a negative consensus in which no change of public environment together with associated taxes and subsidies which finance it will be unanimously approved alternatively in a lindahl or valuation equilibrium charges for the public environment induce a positive consensus to allow general non convexities to be regarded as aspects of the public environment we extend recent generalizations of these equilibrium notions and prove counterparts to both the usual fundamental efficiency theorems of welfare economics

the equivalence of core and cost share equilibria in an economy with a public good abstract the central result of this paper is a refinement of an equivalence theorem in mas collell quart j econ 94 1980 625 641 for the core of a finite economy with a public good it is shown that an allocation belongs to the core if and only if it is a cost share equilibrium i e is supported by a monotonic cost share system we also characterize the set of core allocations which can be supported by a linear cost share system it turns out that the set of linear cost share equilibria which are in one to one correspondence with the lindahl foley equilibria is determined by uniform upper and lower bounds on the relative marginal rate of substitution for the public good

oligopoly and cost sharing in economies with public goods we study economies that involve both small and large traders as well as the choice of a public project within this framework we establish two sufficient conditions under which the set of competitive allocations coincides with the core our first core equivalence result holds under the assumption that there is a countably infinite set of large traders similar to each other the second result independent of the number of large traders requires the existence of a coalition of small traders with the same characteristics of the large traders finally we show how the generalized aubin approach to cooperation may dispense with both conditions

the relationship between the renminbi future spot return and the forward discount rate abstract we use rolling cointegration tests to investigate the relationship between the renminbi daily future spot return and the forward discount rate for the period after the currency regime reform in china in july 2005 we find that there are different regimes after this reform and that the financial crisis affects the relationship between the future spot return and the forward discount rate in china the unbiasedness hypothesis that the forward rate is an unbiased predictor of the future spot rate requires cointegration and a unity coefficient for the forward discount we conclude that the unbiased forward rate hypothesis only holds in spring 2009 when the chinese authorities returned to pegging the renminbi to the us dollar to overcome the turmoil of the global financial crisis

income wealth and household demand for deposits theories of the demand for money typically predict that the quantity of money demanded will increase when a the rate of return paid on money if any increases b the rates of return paid on alternative assets decrease or c the scale of operations as measured by income wealth spending or permanent income of the relevant economic actor firm household or nation increases regarding c the choice of the most useful measure of scale involves the guidance of two competing but overlapping concepts of money s role transactions models going back at least to irving fisher 1911 are based on the idea of money as an inventory that bridges the gap created by nonsynchronous receipts and expenditures for economic actors of a given scale the optimal inventory should be determined by the opportunity cost of money holding the pattern of receipts and expenditures and the technology of money management given these factors that inventory should increase as the scale as measured by the rate of receipts or expenditures rises portfolio models going back at least to john m keynes 1930 and popularized by milton friedman 1956 are based on the analogy between asset holding and budgetary decisions by consumers the portfolio manager faces a menu of alternative assets with various risk and return characteristics and a given net worth the optimal holding of money or any asset depends upon this wealth constraint the characteristics of the menu items and his or her preferences an increase in wealth should in general lead to an increase in money holding the magnitude of which depends upon the relative superiority of money as a portfolio component such theories suggest that a measure of wealth is the single most useful scale variable although the rate of transactions may enter indirectly as a determinant of the otherwise unmeasured marginal return to money estimated demand schedules should presumably be based on the most useful scale variable and some policy issues depend on the choice 1 this choice has been addressed a number of times by studies exploiting time series data table 1 summarizes the results of six regressions from three studies which have approached the question in a nearly uniform way in equation i alan meltzer 1963 uses wealth as the scale variable for aggregate data with great success the addition of an income measure in ii yields no appreciable increase in explanatory power an equation with income only not shown is very similar to i the fit is very slightly poorer in iii charles lieberman 1977 uses debits to demand deposits as a measure of transactions the addition of a wealth measure in iv yields little additional explanatory power in v robert rasche 1987 uses gnp velocity in a first difference regression adding wealth in vi yields no significant improvement meltzer interprets his results as evidence of the superiority of a portfolio approach lieberman interprets his results as evidence of the superiority of the transactions approach produced by a more useful measure of transactions rasche favors the use of transactions velocity

cournot nash and lindahl equilibria in pure public good economies using a general equilibrium framework this paper analyzes the equilibrium provision of a pure public bad commodity for example pollution considering a finite economy with one desired private good and one pure public bad we explicitly introduce the concept of lindahl equilibrium and the lindahl prices into a pure public bad economy then the lindahl provision is analyzed and compared with the cournot nash provision the main results for economies with heterogeneous agents state that the asymptotic lindahl allocation of the pure public bad is the null allocation in contrast the asymptotic cournot nash provision of the public bad might approach infinity other results were obtained in concert with the broad analysis of the large finite economies with pure public bad commodities

the forward premium anomaly and the trend behavior of the exchange rates abstract it is found that the forward premium and the change in the spot exchange rate have rather different time series properties and trend behavior this study shows that the reported finding of the forward premium anomaly may partially stem from the underspecification of deterministic variables in the model the results of the study appear to be consistent with the peso problem proposition of interpreting the forward premium anomaly

the foreign exchange market a random walk with a dragging anchor this paper explores some anomalies in the foreign exchange market it is hard to find evidence of either short term overshooting or of longer term reversion to an equilibrium the forward exchange rate contains virtually no information on future spot rates discussions with practitioners indicate that longer term speculation based on fundamentals is strictly limited and survey data and other evidence suggest that expectations and speculation are based on a variety of models the interplay between speculation based on fundamentals and on a random walk or chartist approach influences the outcome this endorses the prior model of j a frankel and k a froot copyright 1988 by the london school of economics and political science

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

economies with public projects efficiency and decentralization the article deals with the two fundamental theorems of welfare economics for production economies with a finite set of agents infinitely many private goods and a set of public projects the problem of efficiency and decentralization is addressed under the following very general assumptions a the commodity price duality is endowed with a consistent locally convex topology b the set of public projects is without any mathematical structure moreover any agent is characterized by a nonordered preference relation depending on consumption goods and public projects approximate and exact welfare theorems are discussed throughout the article

the provision of collective goods through a social division of labour abstract we develop a general equilibrium framework in which a wide range of collective economic configurations are provided through specialised professionals as part of an endogenously emerging social division of labour we extend the theory of value to this setting bringing together a model of an economy with collective goods with the model of a private goods market economy with an endogenously emerging social division of labour natural applications are the presence of non tradables in production the effects of education on productive abilities and the market system itself as an implementation of the price mechanism for an appropriately generalised notion of valuation equilibrium we prove the two fundamental theorems of welfare economics under very general conditions notably allowing for incomplete non monotonic and non transitive preferences we also incorporate adam smith s principle of increasing returns to specialisation and establish that there emerge well structured social divisions of labour in equilibrium

covariance matrix estimators and tests of market efficiency abstract this paper carries out multi currency multi horizon and combined tests of simple market efficiency using alternative covariance matrix estimators whose finite sample performances have been examined elsewhere in the literature the data utilized are properly aligned weekly exchange rates from june 1973 to december 1994 on bid spot 1 month 3 month and 6 month ask forward rates for several currencies the results demonstrate that tests of market efficiency are sensitive to the information set specified the prediction horizon considered and the covariance matrix estimator employed in most but not all cases rejections of market efficiency are overturned using a prewhitened heteroskedasticity and autocorrelation consistent covariance matrix estimator with optimal asymptotic properties and better finite sample performance

the pure theory of public goods efficiency decentralization and the core the authors extend the findings of mas colell on valuation equilibria and the relationship of cost share equilibria with the core they allow for any finite number of private goods and a set of public projects without any structure the authors show the two welfare theorems for valuation equilibrium the inclusion of the set of cost share equilibria in the core and the nonequivalence of these two sets for an economy with a finite number of agents copyright 1996 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

accounting for forward rates in markets for foreign currency absteract forward and spot exchange rates between major currencies imply large standard deviations of both predictable returns from currency speculation and of the equilibrium price measure the intertemporal marginal rate of substitution representative agent theory with time additive preferences cannot account for either of these properties we show that the theory does considerably better along these dimensions when the representative agent s preferences exhibit habit persistence but that the theory fails to reproduce some of the other properties of the data in particular the strong autocorrelation of forward premiums since the advent of flexible exchange rates in the early 1970s a large body of statistical work has established that forward rates for major currencies are not optimal predictors of future spot rates relevant evidence is reported in studies by baillie lippens and mcmahon 1983 bekaert 1991 bilson 1981 boothe and longworth 1984 cumby 1988 cumby and obstfeld 1984 fama 1984 gregory and mccurdy 1984 hansen and hodrick 1983 hodrick and srivastava 1984 and korajczyk and viallet 1990 a more complete list of references is provided by hodrick 1987 these papers indicate that returns from speculation in forward and spot currency markets are predictable and that the predictable components vary considerably over time a number of alternative explanations have been offered for the predictable variation in foreign currency market excess returns kaminsky 1988 korajczyk 1985 and krasker 1980 suggest that infrequent extreme events may make returns appear predictable in small samples the so called peso problem lewis 1989 argues that rational learning following infrequent changes in the process governing equilibrium prices can explain part of the ex post predictability of currency returns froot and frankel 1989 and froot and thaler 1990 examine the hypothesis that market forecasts of future spot

anomalies foreign exchange most all behavior can be explained by assuming that agents have stable well defined preferences and make rational choices consistent with those preferences in markets that eventually clear an empirical result qualifies as an anomaly if it is difficult to rationalize or if implausible assumptions are necessary to explain it within the paradigm this column will present a series of such anomalies readers are invited to suggest topics for future columns by sending a note with some reference to or better yet copies of the relevant research comments on anomalies printed here are also welcome the address

scale economies the value of time and the demand for money longitudinal evidence from firms compustat data on 12 000 firms for the years 1961 92 indicate that large firms hold less cash as a percentage of sale than small ones whether comparisons are made within or across industries the clasticity of cash balance with respect to sales is about 0 8 firms headquartered in counties with high wages hold more money for a given level of sales a finding consistent with the idea that time can substitute for mony in the provision of transactions services the estimates are consistent with both scale economies in the holding of money and secular declines in velocity

the micromechanics of the federal funds market implications for day of the week effects in funds rate variability the federal funds rate arguably is the most important interest rate in the u s capital market because it plays a central role in monetary policy and the term structure this paper examines the micromechanics of the funds market we show that in a continuous market with asynchronous trading regulatory constraints and accounting conventions that focus agents attention on discrete time instants have important implications for the dynamics of trading activity and realized market prices we also exhibit a model of the market that explains observed regularities in the intertemporal behavior of the funds rate

decentralization in replicated club economies with multiple private goods abstract we show that exhaustion of blocking opportunities is a sufficient condition such that every allocation in the core of a replicated club economy can be decentralized as a competitive equilibrium and that a related condition efficient scale is necessary and under an assumption on endowments sufficient such that competitive equilibrium exists and the core is nonempty these results do not require the euclidean structure and monotonicity assumed in lindahl equilibrium do not require convexity of preferences or costs and do not require the strong assumption that private goods are essential journal of economic literature classification numbers d46 d50 d61 h40

exchange rate volatility and deviations from unbiasedness in a cash in advance model abstract this paper examines time series properties of exchange rate changes the forward premium and the forward bias in the context of a variant of svensson s cash in advance model the model is solved and simulated using realistic forcing processes whose law of motion is estimated from u s japan data and then approximated by a markov chain although method of moments estimation shows that the over identifying restrictions implied by the model are not rejected it fails dramatically in producing a sufficiently variable risk premium on forward market speculation this result is robust to various pertubations to the model s parameters forcing processes and preference structure the model also fails to match exchange rate and forward premium volatility simultaneously

the road less travelled institutional aspects of data and their influence on empirical estimates with an application to tests of forward rate unbiasedness the difference between data used in empirical studies and that envisioned in the theory can influence empirical estimates sometimes by enough that the direction of future research is altered this paper illustrates how in the context of tests of forward rate unbiasedness a lack of articulation about the mechanics underlying foreign exchange market speculation and about the institutional aspects governing spot and forward rate contracts leads to sampling of the data in a way that is not consistent with the theory the authors find that the sampling problems account for some but not all of the bias in the coefficient on the forward premium copyright 1996 by royal economic society

a reconsideration of the uncovered interest parity relationship abstract this paper argues that the uncovered interest parity uip relationship is distinct from and more important than the unbiasedness of forward exchange rates as predictors of future spot rates the standard finding that the slope estimate b is roughly 3 in regressions of s t on t 1 s t 1 implies rejection of unbiasedness but not necessarily uip the hypothesis that monetary authorities manage interest rates so as to smooth their movements while also resisting changes in exchange rates is attractive conceptually and is capable of explaining not only the b 3 finding but also several other notable features of the data