the structure and degree of dependence a quantile regression approach abstract the copula function defines the degree of dependence and the structure of dependence this paper proposes an alternative framework to decompose the dependence using quantile regression we demonstrate that the methodology provides a detailed picture of dependence including asymmetric and non linear relationships in addition changes in the degree or structure of dependence can be modeled and tested for each quantile of the distribution the empirical part applies the framework to three different sets of financial time series and demonstrates substantial differences in dependence patterns among asset classes and through time the analysis of 54 global equity markets shows that detailed information about the structure of dependence is crucial to adequately assess the benefits of diversification in normal times and crisis times

econometric issues in the analysis of contagion this paper presents a canonical econometric model of contagion and investigates the conditions under which contagion can be distinguished from inter dependence in a two country market set up it is shown that for a range of fundamentals the solution is not unique and for sufficiently large values of the contagion coefficients it has interesting bifurcation properties with bimodal density functions the extension of the model to herding behaviour is also briefly discussed to identify contagion effects in the presence of inter dependencies the equations for the individual markets or countries must contain country market specific forcing variables this sheds doubt on the general validity of the correlation based tests of contagions recently proposed in the literature which do not involve any country market specific fundamentals finally we show that ignoring inter dependence can introduce an upward bias in the estimate of the contagion coefficient and using monte carlo experiments we further show that this bias could be substantial

a markov switching analysis of contagion in the ems abstract this paper applies the multivariate version of the forbes and rigobon 2002 contagion test as proposed by dungey et al 2005a to detect contagion effects in the exchange rate mechanism erm of the european monetary system ems crisis and non crisis observations are determined endogenously via a markov switching vector autoregression msvar we show that the msvar is suitable for this purpose as it does particularly well in identifying the 11 realignments of the erm we examine whether denmark s rejection of the maastricht treaty and italy s competitiveness problems affected other ems participants and find evidence for contagion

correlations in price changes and volatility across international stock markets the short run interdependence of prices and price volatility across three major international stock markets is studied daily opening and closing prices of major stock indexes for the tokyo london and new york stock markets are examined the analysis utilizes the autoregressive conditionally heteroskedastic arch family of statistical models to explore these pricing relationships evidence of price volatility spillovers from new york to tokyo london to tokyo and new york to london is observed but no price volatility spillover effects in other directions are found for the pre october 1987 period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

have the gipsi settled down breaks and multivariate stochastic volatility models for and not against the european financial integration we investigate the integration of the european peripheral financial markets with germany france and the uk using a combination of tests for structural breaks and return correlations derived from several multivariate stochastic volatility models our findings suggest that financial integration intensified in anticipation of the euro further strengthened by the emu inception and amplified in response to the 2007 2008 financial crisis hence no evidence is found of decoupling of the equity markets in more troubled european countries from the core interestingly the uk despite staying outside the emu is not worse integrated with the gipsi than germany or france 2013 elsevier b v

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

transmission of government default risk in the eurozone abstract this paper analyzes the reasons behind the rising ten year government bond spreads in the eurozone during the recent euro debt crisis we develop a structural vector autoregressive model that allows us to test whether the upsurges in the spreads reflect breaks in the instantaneous shock propagation mechanisms between the spreads contagion changing dynamical effects or changing country specific risk factors especially a new approach to test the stability of the instantaneous shock propagation mechanisms is introduced our results show that although contagion appears as the single most important reason for the increasing spreads there are notable differences between the countries for example and ireland spain and italy see statistically significant increases in their country specific risk factors

renewables diffusion and contagion effect in italian regional electricity markets assessment and policy implications abstract in the electricity market sudden price jumps occur more frequently than in other markets due to the peculiarity of electricity furthermore the structural spot characteristics of the electricity market determine high price variability all these characteristics have been accentuated by the dramatic increase of renewable energy supply in italy starting in 2010 these features suggest the possibility of contagion effects across italian regional electricity markets considering contagion such as a sudden and significant increase in cross market links arising from a shock to a specific market in this paper we investigate whether such a renewable energy increase has affected the contagion behavior in the italian electricity spot market taking into account both the difference between interdependence and contagion and the direction of the shock we find empirical evidence with significant tests that no changes have occurred in interdependence mechanism nor in contagion effects due to renewable energy sources development in italy

measuring common cyclical features during financial turmoil evidence of interdependence not contagion abstract this paper develops a test of contagion in financial markets by considering a measure of co movement based on the notion of common cycles to detect short run co movements between a set of time series we apply our methodology to the international effects of the 1994 mexican peso crisis and the 1997 asian crisis our results can be interpreted as evidence of a high level of market co movement during all states of the world and therefore question the hypothesis of shift contagion in the transmission of financial shocks during the 1997 asian crisis and to a lesser extent the 1994 mexican crisis

arbitrage in stock index futures the textbook description of arbitrage suggests that it is a straightforward matter of taking offsetting positions in different securities and realizing the arbitrage profit such descriptions however typically ignore the transaction costs that give rise to the arbitrage opportunity in the first place taking proper account of these transactions costs may considerably complicate the problem particularly when as is usually the case the arbitrage potential is restricted this article is concerned withoptimal arbitrage strategies with transaction costs when the arbitrage potential is restricted by position limits the particular case we shall analyze is the standard and poor s sp the corresponding figure for the s p 500 portfolio for the same period was

competitive equilibrium cycles recently there has been a surge of interest in endogenous business cycles that arise in competitive laissez faire economies in the context of standard overlapping generations economies conditions for the existence of equilibrium cycles have been given by grandmont 1983 and by benhabib and day 1982 models of the economy with extrinsic uncertainty or sunspots that have been developed by shell 1977 and by cass and shell 1983 see also balasko 1983 can also lead to equilibrium cycles

optimal hedge ratios at the winnipeg commodity exchange multivariate garch models are employed to estimate time varying hedge ratios for three commodities traded on the winnipeg commodity exchange garch hedge ratios are shown to be superior to those based on the traditional regression approach to calculating the optimal hedge les ratios optimaux de comptant par rapport aux contrats a terme a la bourse de denrees de winnipeg l auteur emploie des modeles multivaries de type garch pour calibrer les ratios optimaux de comptant par rapport aux contrats a terme pour trois denrees transigees a la bourse des denrees de winnipeg ces ratios s averent superieurs a ceux qu on obtient par les methodes de regression traditionnelles

futures hedging with markov switching vector error correction fiegarch and fiaparch abstract markov switching vector error correction asymmetric long memory volatility models with fat tailed innovations are proposed bivariate two state versions of the models are applied to a futures hedge of the s p500 regime switches occur between high and low cost of carry states via changes in the error correction term or basis regime identification is therefore dominated by switches in the mean not volatility relative to a number of alternatives the proposed models provide superior out of sample forecasts of the covariance matrix particularly for horizons greater than 10 days ahead when hedging markov switching with long memory improves the tail risk of hedged returns beyond 10 day horizons however there is mixed support for models with volatility asymmetries these findings have important implications for the development of multivariate models and other applications including portfolio management spread option pricing and arbitrage

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

eurozone sovereign contagion evidence from the cds market 2005 2010 abstract this paper analyses the dynamics of the credit default swap cds market of piigs france germany and the uk for the period of 2005 2010 the study is performed on the basis of the datastream and dtcc data on cds spreads and the bis data on cross border exposures the analysis of the data shows that sovereign risk mainly concentrates in the eu countries the ewma correlation analysis and the granger causality test demonstrate that there was contagion effect since correlations and cross county interdependencies increased already after august 2007 furthermore the irf analysis shows that among piigs the cds markets of spain and ireland have the biggest impact on the european cds market whereas the cds market of the uk does not cause a big distress in the eurozone the adjusted correlation analysis confirms that greece and other piigs even spain and italy have lower capacity to trigger contagion than core eu countries besides portugal is the most vulnerable country in the sample whereas the uk is the most immune to shocks

heterogeneous information arrivals and return volatility dynamics uncovering the long run in high frequency returns recent empirical evidence suggests that the interdaily volatility clustering for most speculative returns are best characterized by a slowly mean reverting fractionally integrated process meanwhile much shorter lived volatility dynamics are typically observed with high frequency intradaily returns the present article demonstrates that by interpreting the volatility as a mixture of numerous heterogeneous short run information arrivals the observed volatility process may exhibit long run dependence as such the long memory characteristics constitute an intrinsic feature of the return generating process rather than the manifestation of occasional structural shifts these ideas are confirmed by our analysis of a one year time series of fiveminute deutschemark u s dollar exchange rates among the most puzzling issues is the behavior of volatility while the general properties of volatility remain elusive perhaps the most intriguing feature revealed by empirical work on volatility is its long persistence such behavior has sparked a search almost akin to that for the holy grail for the perfect garch model but the underlying question of why such volatility persistence endures remains unanswered we conjecture that the ability to analyze higher frequency data may be particularly useful in pursuing this issue goodhart and o hara 1997 the pronounced volatility clustering is arguably one of the most striking features of financial price series recorded at daily or weekly intervals and a large body of literature seeking to characterize this aspect of speculative returns has emerged over the past decade 1 at the same time convincing theoretical explanations for the underlying sources of long run persistence in volatility remain elusive the recent advent of comprehensive high frequency andersen is from the j l kellogg graduate school of management of northwestern university bollerslev is from the university of virginia and is a research associate at the national bureau of economic research we gratefully acknowledge the financial support provided by a research grant from the institute for quantitative research in finance the q group special thanks are due to olsen and associates for making the intradaily exchange rate quotes and reuter s news tape available we have received valuable comments from wake epps clive w j granger stephen f gray j huston mcculloch as well as seminar participants at the december 1996 triangle econometrics workshop the 1997 afa meetings in new orleans academia sinica the wharton school usc and georgetown and york universities we remain fully responsible for the content 1 see bollerslev chou and kroner 1992 for a survey of this literature using arch type

global equilibrium dynamics with stationary recursive preferences abstract we study the global dynamics of capital accumulation for a general two sector model which is not necessarily convex and where preferences of an infinitely lived agent are stationary but not additively separable we obtain monotonicity and convergence results for capital under normality assumptions on preferences and factor intensity assumptions on technology we then derive results on oscillatory dynamics under alternative factor intensity conditions or under the assumption of inferiority of future utilities finally in an exchange model with two agents we show that utilities will be monotonic or oscillatory depending on the normality or inferiority of the preferences

bivariate garch estimation of the optimal commodity futures hedge six different commodities are examined using daily data over two futures contract periods cash and futures prices for all six commodities are found to be well described as martingales with near integrated garch innovations bivariate garch models of cash and futures prices are estimated for the same six commodities the optimal hedge ratio ohr is then calculated as a ratio of the conditional covariance between cash and futures to the conditional variance of futures the estimated ohrs reveal that the standard assumption of a time invariant ohr is inappropriate for each commodity the estimated ohr path appears non stationary which has important implications for hedging strategies

currency crises sunspots and markov switching regimes abstract this paper investigates the theoretical properties of a class of escape clause models of currency crises as well as their applicability to empirical work we show that under some conditions these models give rise to an arbitrarily large number of equilibria as well as cyclic or chaotic dynamics for the devaluation expectations we then propose an econometric technique based on the markov switching regimes framework by which these models can be brought to the data we illustrate this empirical approach by studying the experience of the french franc between 1987 and 1993 and find that the model performs significantly better when it allows the devaluation expectations to be influenced by sunspots

a new approach to measuring financial contagion this article proposes a new approach to evaluate contagion in financial markets our measure of contagion captures the coincidence of extreme return shocks across countries within a region and across regions we characterize the extent of contagion its economic significance and its determinants using a multinomial logistic regression model applying our approach to daily returns of emerging markets during the 1990s we find that contagion is predictable and depends on regional interest rates exchange rate changes and conditional stock return volatility evidence that contagion is stronger for extreme negative returns than for extreme positive returns is mixed

reassessing the link between the japanese yen and emerging asian currencies abstract we reassess the degree of exchange rate co movement between the japanese yen and five emerging asian currencies relative to the us dollar in the 2000s it is often claimed that these currencies have been closely tied with the japanese yen possibly due to active interactions of japan and emerging asian economies we question the validity of such claims reporting substantially lower even negative dynamic conditional correlations between these currencies and the yen dollar exchange rate in the second half of the 2000s our novel multivariate garch framework identifies the liquidity deterioration measured by the ted spread and the elevated risk aversion measured by the sovereign cds premium in international capital markets as the two major driving forces of such decoupling phenomena

unravelling financial market linkages during crises an empirical model of multiple asset classes across countries is formulated in a latent factor framework a special feature of the model is that financial market linkages during periods of financial crises including spillover and contagion effects are formally specified the model also captures a range of common factors including global shocks country and market shocks and idiosyncratic shocks the framework is applied to modelling linkages between currency and equity markets during the east asian financial crisis of 1997 98 the results provide strong evidence that cross market links are important spillovers have a relatively larger effect on volatility than contagion but both are statistically significant

on crises contagion and confusion abstract since the tequila crisis of 1994 1995 the asian flu of 1997 and the russian virus of 1998 economists have been busy producing research on the subject of contagion yet few studies have examined empirically through which channels the disturbances are transmitted if there are indeed fundamental reasons for the spillovers we observe we attempt to fill this gap by analyzing how both trade links and the largely ignored financial sector links influence the pattern of fundamentals based contagion we examine the role of international bank lending the potential for cross market hedging and bilateral and third party trade in the propagation of crises

a simple dynamic general equilibrium model abstract we analyse a single sector economy with h 1 infinitely lived agents that operate in a continuous time framework utility functions are recursive but not additive both efficient and perfect foresight competitive equilibrium allocations are considered the existence and stability of such allocations are investigated locally i e in a neighbourhood of steady state allocations the model is shown to be useful for explaining the distribution of wealth and consumption across agents and for analysing the way in which wealth redistribution can affect the dynamics of aggregate economic variables

the voracity effect abstract we analyze an economy that lacks a strong legal political institutional infrastructure and is populated by multiple powerful groups powerful groups dynamically interact via a fiscal process that effectively allows open access to the aggregate capital stock in equilibrium this leads to slow economic growth and a voracity effect by which a shock such as a terms of trade windfall perversely generates a more than proportionate increase in fiscal redistribution and reduces growth we also show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks jel f43 o10 o23 o40

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

regional vulnerability the case of east asia in a case study of six east asian economies we use dynamic factor analysis to estimate a regional component of the exchange market pressure index empi as a measure of regional financial stress the extent to which this indicator is explained by regional economic and financial factors is interpreted as regional vulnerability to crisis we find that regional external liabilities and exuberance in domestic stock and credit markets as well as the us high yield spread were positively correlated with regional vulnerability individual country empis are also explained by regional factors with country specific factors and trade linkages playing little role

why do more polarized countries run more procyclical fiscal policy abstract we study the cyclical behavior of fiscal policy to explain why some countries exhibit procyclical fiscal policy stances being expansionary in good times and contractionary in bad times we develop a model that links the polarization of preferences over fiscal spending to the procyclicality bias we then present evidence that social polarization as measured by income inequality and educational inequality is consistently and positively associated with fiscal procyclicality even after controlling for other determinants from existing theories we also find a strong negative impact of fiscal procyclicality on economic growth

procyclical government spending a public choice analysis procyclical government spending occurs when government expenditures increase at a faster rate than income in an economic upturn but fall at a faster rate in a recession voracity effects occur when competition for increased spending proves more effective as national income increases public choice theory can be applied to describe the distribution of fiscal power across different tiers of government to shed insight into competition for intergovernmental transfers politicians have electoral incentives to press for intergovernmental transfers but they also have electoral incentives to signal their ability to manage the economy with this mix of incentives the prediction is that intergovernmental transfers will be procyclical and that sub central government spending will be more procyclical than central government spending public choice analysis of pressure for increased public spending predicts a specific pattern of cyclical government spending this pattern can be observed when analyzing government expenditures in 20 oecd countries between 1995 and 2006

impacts of the financial crisis on eurozone sovereign cds spreads abstract we study the variation of sovereign credit default swaps cdss of eurozone countries their persistence and co movements with particular attention given to the impact of the financial crisis specifically using a dual fractional integration model we test the evidence of long memory for cdss of ten eurozone countries our analysis reveals that price discovery processes satisfy the minimum requirements for a weak form of efficiency for sovereign cds markets even during the crisis in contrast we document the spreading out of persistent cds uncertainty among the peripheral economies with its outbreak we provide evidence that cds uncertainty has implications for the pricing of sovereign risk including that of core countries in the crisis period finally we present the potential spillover effects utilizing a dynamic conditional correlation model and show that with the collapse of lehman the probability of a contagion increased across all countries and became more explicit for peripheral economies as the sovereign crisis took on a new dimension

transmission of the u s subprime crisis to emerging markets evidence on the decoupling recoupling hypothesis abstract we find that emerging markets appeared to be somewhat insulated from developments in u s financial markets from early 2007 to summer 2008 from that point on however emerging markets responded very strongly to the deteriorating situation in the u s financial system and real economy our regression event study focusing on 15 types of news indicates that a range of financial and real economic news emanating from the us had statistically and economically large impacts on 14 emerging markets and several news events uniformly moved markets policy measures taken in emerging markets to insulate themselves from global financial developments proved inadequate in the face of the credit crunch and decline in international trade that followed the lehman bankruptcy in september 2008

real and spurious long memory properties of stock market data we test for the presence of long memory in daily stock returns and their squares using a robust semiparametric procedure of lobato and robinson spurious results can be produced by nonstationarity and aggregation we address these problems by analyzing subperiods of returns and using individual stocks the test results show no evidence of long memory in the returns by contrast there is strong evidence in the squared returns

the impact of r d subsidies during the crisis this study investigates the impact of r d subsidies on r d investment during the past financial crisis we conduct a treatment effects analysis and show that r d subsidies increased r d spending among subsidized small and medium sized firms in germany during the crisis years in the first crisis year the additionality effect induced by public support was however smaller than in other years this temporary decrease may be caused by an altered innovation subsidy scheme in crisis years or by a different innovation investment behavior of the subsidy recipients we do not find support for the countercyclical innovation subsidy scheme having caused the smaller additionality effect and conclude that it is likely to be driven by subsidy recipient behavior

dynamic resource management intertemporal substitution and risk aversion we consider resource management with recursive preferences these generalize expected utility while eliminating some well known difficulties monotonicity and convergence properties of optimal decision rules are established using lattice programming methods empirical applications are rangeland and groundwater management decreasing the intertemporal elasticity of substitution implies greater lower resource usage with limited abundant stocks this moderates stock evolution and stabilizes consumption increasing risk aversion implies the same or reduced usage over the state space intertemporal substitution has a substantial effect on the optimal decision rule and a moderate effect on the limiting distribution while risk aversion has a very small effect

finance and synchronization abstract in the workhorse model of international real business cycles financial integration exacerbates the cycle asymmetry created by country specific supply shocks the prediction is identical in response to purely common shocks in the same model augmented with simple country heterogeneity e g where depreciation rates or factor shares are different across countries this happens because common shocks have heterogeneous consequences on the marginal products of capital across countries which triggers international investment in the data filtering out common shocks requires therefore allowing for country specific loadings we show that finance and synchronization correlate negatively in response to such common shocks consistent with previous findings but finance and synchronization correlate non negatively almost always positively in response to purely country specific shocks

will tighter futures price limits decrease hedge effectiveness abstract the events triggered by the global financial crisis gfc have led to calls for the regulation of financial markets given that regulation may involve opportunity costs this paper examines whether tighter futures price limits can reduce the effectiveness of a futures hedge we propose a new model that uncovers the underlying spot futures dynamics when futures prices are subject to limits we use the model to determine the maximum number of limit days that can occur before minimum variance hedging outcomes are adversely affected application of this model to the us soybean and corn markets reveals that existing limits do not reduce hedge effectiveness if the frequency of limit days increases from current levels of 1 to approximately 3 4 conventional hedging approaches will experience economically and statistically significant increases in portfolio variance these results are important for hedgers clearing houses and regulators in light of the recent calls for derivatives regulation

detecting shift contagion in currency and bond markets abstract this paper investigates why financial market crises often increase the interdependence between assets associated with different countries two sources of increased co movement in asset returns are considered i larger common shocks operating through standard cross country linkages and ii changes in the structural transmission of shocks across countries referred to as shift contagion to examine this issue we develop a method for detecting shift contagion with three notable features first parameters corresponding to the structural transmission of shocks across countries are identified in the presence of changing volatility regimes for the shocks second the timing of changes in volatility is endogenously estimated instead of being exogenously assigned third the countries in which crises originate need not be known or even included in the analysis we apply the method to currency returns for developed countries and bond returns for emerging market countries

optimal growth with many consumers abstract a method is described for constructing all pareto optimal allocations for a dynamic economy with many heterogeneous consumers under certainty in which both the technology and consumer preferences are recursive but preferences need not be additively separable over time optimal perfect foresight competitive equilibrium allocations are obtained through the study of a dynamic program for an economy with one consumption good sufficient conditions are given for the existence of a unique interior stationary distribution of consumption and wealth for a two person exchange economy sufficient conditions are given for the global asymptotic stability of the unique interior stationary point

transmission of the financial and sovereign debt crises to the emu stock prices cds spreads and exchange rates abstract this paper tests for the transmission of the 2007 2010 financial and sovereign debt crises to fifteen emu countries we use daily data from 2003 to 2010 on country financial and non financial stock market indexes to analyze the stock market returns for three country groups within emu north south and small the following results hold for both the north and south european countries while the smallest countries seem to be relatively isolated from international events first we find strong evidence of crisis transmission to european non financials from us non financials but not for financials second in order to test how the sovereign debt crisis affects stock market developments we split the crisis in pre and post lehman sub periods results show that financials become significantly more dependent on changes in the difference between the greek and german cds spreads after lehman s collapse compared to the pre lehman sub period however this increase is much smaller for non financials third before the crisis euro appreciations coincide with european stock market decreases whereas this relationship reverses during the crisis finally this reversal seems to be triggered by lehman s collapse

structural breaks in volatility spillovers between international financial markets contagion or mere interdependence abstract this paper conducts an investigation of volatility transmission between stock markets in hong kong europe and the united states covering the time period from 2000 up to 2011 using intra daily data we compute realized volatility time series for the three markets and employ a heterogeneous autoregressive distributed lag model as our baseline econometric specification motivated by the presence of various crisis events contained in our sample we detect time variation and structural breaks in volatility spillovers particularly during the financial crisis of 2007 we find effects consistent with the notion of contagion suggesting strong and sudden increases in the cross market synchronization of chronologically succeeding volatilities investigating the role of mean breaks and conditional heteroskedasticity in the realized volatilities however we find the latter to be the main driver of breaks in volatility spillovers taking the volatility of realized volatilities into account we find no evidence of contagion anymore

tax base variability and procyclical fiscal policy in developing countries abstract based on a sample of 56 countries we show that fiscal policy in the g7 countries appears to be acyclical while fiscal policy in developing countries is procyclical i e fiscal policy is expansionary in good times and contractionary in bad times to explain this puzzle we develop an optimal fiscal policy model in which running budget surpluses is costly because they create pressures to increase public spending given this distortion a government that faces large fluctuations in the tax base as is the case for developing countries will find it optimal to run a procyclical fiscal policy

the role of copulas in the housing crisis abstract due to its simplicity and familiarity the gaussian copula is popular in calculating risk in collaterized debt obligations but it imposes asymptotic independence such that extreme events appear to be unrelated this restriction might be innocuous in normal times but during extreme events such as the housing crisis the gaussian copula might be inappropriate this paper explores various copula specifications and finds that the degree to which housing prices are related based on the gaussian copula is too small compared with real housing price data

balanced growth consistent recursive utility abstract koopmans s recursive utility has proven useful in a number of dynamic modelling contexts nonetheless recursive utility has not made significant inroads into what one would expect to be a natural haven models of balanced growth whether exogenous or endogenous mainly this is due to the dearth of interesting recursive utilities which are consistent with balanced growth in this paper i provide conditions on the aggregator which guarantee the existence of a recursive utility function which is consistent with balanced growth the result in turn shows how a family of such utility functions may be constructed i also provide a generalization of jones and manuelli s theorem on the existence of optimal endogenous growth

shift contagion vulnerability in the mena stock markets as part of a broader financial development reform agenda the middle east and north africa mena countries have successfully expanded and revitalised their stock markets over the last decade whereas previous contributions have investigated efficiency international integration and portfolio diversification opportunities very little is known about these markets vulnerability to external financial crises in this paper we investigate shift contagion to the mena region using a comprehensive battery of econometric tests for a number of different crises episodes the 1997 asian crisis the 1998 russian virus and its brazilian sequel the 2000 turkish collapse the 9 11 turmoil the 2001 argentinean crisis the 2002 enron worldcom scandal and the 2007 09 global financial crisis we found that turkey israel and jordan were the most vulnerable markets over the 1997 2009 period followed by tunisia morocco egypt and lebanon our results also highlight heterogeneous but increasing levels of sensitivity to external financial shocks especially during the recent global financial crisis from a financial point of view this suggests that mena based diversification strategies may be relatively inefficient during periods of global turmoil from an economic point of view our results suggest that stock market development also involves potential destabilisation costs this issue should be acknowledged and addressed by policymakers if these countries are to ensure a smooth transition towards international financial integration

basis convergence and long memory in volatility when dynamic hedging with futures abstractwhen market returns follow a long memory volatility process standard approaches to estimating dynamic minimum variance hedge ratios mvhrs are misspecified simulation results and an application to the s p 500 index document the magnitude of the misspecification that results from failure to account for basis convergence and long memory in volatility these results have important implications for the estimation of mvhrs in the s p 500 example and other markets as well

long term global market correlations the correlation structure of the world equity markets varied considerably over the past 150 years and was high during periods of economic integration we decompose diversification benefits into two parts one component due to variation in the average correlation across markets and a another component due to the variation in the investment opportunity set from this we infer that periods of globalization have both benefits and drawbacks for international investors globalization expands the opportunity set but as a result the benefits from diversification rely increasingly on investment in emerging markets

are stock market crises contagious the role of crisis definitions abstract financial contagion studies generally examine whether co movement between markets increases during a crisis we use a flexible co movement measure to examine how conclusions of such analyses depend on the sample chosen as the crisis to this end we analyse stock market co movement during the 1997 asian crisis and the 2007 global financial crisis for all possible source countries and for all possible time periods or extreme return quantiles this way we account for the main crisis dating approaches adopted in the literature our results suggest there is no clear relationship between excess co movement and commonly used crisis samples

procyclical government spending patterns of pressure and prudence in the oecd this paper tests for differences in the cyclicality of government spending across functional categories evidence from 20 oecd countries suggests that procyclicality is more likely in smaller functional budgets but capital spending is more likely to be procyclical for the larger spending categories

the cyclical behaviour of fiscal policy evidence from the oecd this paper addresses the topic of cyclicality in scal policy in particular we show that the level of cyclicality varies across spending categories and across oecd countries in line with leading theories of scal cyclicality we show that countries with volatile output and dispersed political power are the most likely to run procyclical scal policies wage government consumption is highlighted as the most important channel by which these variables affect scal cyclicality

evaluation of contagion or interdependence in the financial crises of asia and latin america considering the macroeconomic fundamentals this article investigates the existence of contagion between countries on the basis of an analysis of returns for stock indices over the period 1994 to 2003 the econometrics methodology used is that of multivariate generalized autoregressive conditional heteroscedasticity garch family volatility models particularly the dynamic conditional correlation dcc models in the form proposed by engle and sheppard 2001 the returns were duly corrected for a series of country specific fundamentals the relevance of this procedure is highlighted in the literature by the work of pesaran and pick 2003 the results obtained in this article provide evidence favourable for the hypothesis of regional contagion in both latin america and asia as a rule contagion spread from the asian crisis to latin america but not in the opposite direction

a primer on financial contagion abstract this paper presents a theoretical framework to highlight possible channels for the international transmission of financial shocks we first review the different definitions and measures of contagion adopted by the literature we then use a simple multi country asset pricing model to classify the main elements of the current debate on contagion and provide a stylized account of how a crisis in one country can spread to the world economy in particular the model shows how crises can be transmitted across countries without assuming ad hoc portfolio management rules or market imperfections finally tracking our classification we survey the results of the empirical literature on contagion

meteor showers or heat waves heteroskedastic intra daily volatility in the foreign exchange market this paper seeks to explain the causes of volatility clustering in exchange rates careful examination of intra daily exchange rates provides a test of two hypotheses heat waves and meteor showers the heat wave hypothesis is that the volatility has only country specific autocorrelation alternatively the meteor shower is a phenomenon of intra daily volatility spillovers from one market to the next using the garch model to specify the heteroskedasticity across intra daily market segments we find that the empirical evidence is generally against the null hypothesis of the heat wave using a volatility type of vector autoregression we examine the impact of news in one market on the time path of per hour volatility in other markets

the dynamics of efficient intertemporal allocations with many agents recursive preferences and production abstract the local dynamics of efficient allocations are studied for heterogeneous agent economies with production where preferences are recursive but not time separable in the case of a one sector neoclassical technology it is shown that optimal trajectories locally converge to a unique steady state provided that every agent s utility satisfies normality and increasing marginal impatience conditions in the two sector case with the above restrictions on preferences it is shown that oscillations can result only if the consumption goods sector is sufficiently capital intensive

explaining co movements between stock markets the case of us and germany abstract we explain co movements between stock markets by explicitly considering the distinction between interdependence and contagion we propose and implement a full information approach on data for us and germany to provide answers to the following questions i is there long term interdependence between us and german stock markets ii is there short term interdependence and contagion between us and german stock markets i e do short term fluctuations of the us share prices spill over to german share prices and is such co movement unstable over high volatility episodes our answers are respectively no to the first question and yes to the second one

macro finance linkages in this survey i review the academic and policy oriented literature on the linkages between financial markets and the rest of the economy first i summarize the leading economic theories for why the financial sector can influence the macroeconomy second i consider empirical research on spillovers from the financial sector to the rest of the economy as well as across financial markets in different countries third i discuss key monetary policy debates regarding the appropriate response of central banks to financial conditions finally i conclude with an overview of the major gaps in the existing literature

cyclical ratcheting in government spending evidence from the oecd this paper studies the role of business cycles in the phenomenon of increasing government spending gdp ratios in the oecd countries an empirical framework that includes both long run and cyclical considerations in the determination of government spending is applied to panel data covering 1975 1998 the main finding is that the prolonged rise in the spending gdp ratio is partially explained by cyclical upward ratcheting due to asymmetric fiscal behavior the ratio increases during recessions and is only partially reduced in expansions the long run ratcheting effect is estimated as approximately 2 of gdp also analyzed are the cyclical changes in the composition of government spending government consumption transfers and subsidies and capital expenditure as well as a possible link between cyclical ratcheting and government weakness

contagion and banking crisis international evidence for 2007 2009 abstract policy makers aim to avoid banking crises and although they can to some extent control domestic conditions internationally transmitted crises are difficult to tackle this paper identifies international contagion in banking during the 2007 2009 crisis for 54 economies we identify three channels of contagion systematic idiosyncratic and volatility and find evidence for these in 45 countries banking crises are overwhelmingly associated with the presence of both systematic and idiosyncratic contagion the results reveal that crisis shocks transmitted from a foreign jurisdiction via idiosyncratic contagion increase the likelihood of a systemic crisis in the domestic banking system by almost 37 percent whereas increased exposure via systematic contagion does not necessarily destabilize the domestic banking system thus while policy makers and regulatory authorities are rightly concerned with the systematic transmission of banking crises reducing the potential for idiosyncratic contagion can importantly reduce the consequences for the domestic economy

international order flows explaining equity and exchange rate returns macroeconomic models of equity and exchange rate returns perform poorly at high frequencies the proportion of daily returns that these models explain is essentially zero instead of relying on macroeconomic determinants we model equity price and exchange rate behavior based on a concept from microstructure order flow the international order flows are derived from belief changes of different investor groups in a two country setting we obtain a structural relationship between equity returns exchange rate returns and their relationship to home and foreign equity market order flow to test the model we construct daily aggregate order flow data from 800 million equity trades in the u s and france from 1999 to 2003 almost 60 of the daily returns in the s p100 index are explained jointly by exchange rate returns and aggregate order flows in both markets as predicted by the model daily exchange rate returns and order flow into the french market have significant incremental explanatory power for the daily s p returns the model implications are also validated for intraday returns

strength of co movement between sector cds indexes and relationship with major economic and financial variables over time and during investment horizons abstractthe main purpose of this article is to analyse the co movement in both time and frequency between financial sector cds indexes and between these indexes and their main economic and financial control variables for the period 2004 2014 empirically we implement the wavelet squared coherence methodology to analyse the co movement through time frequency and power our results unveil that the co movement between the three financial sectors cdss changes through time and investment horizons stressing the importance of hedging portfolios in real time also we uncover that the changes in co movement to relatively higher frequencies coincide with the inception of the recent global financial crisis this result is collaborated with the co movement between each cds index and other global risk factors including crude oil prices interest rates and equity market volatility finally we compare the wavelet coherence results with those of the dcc fiaparch model and find that the two different approaches pro

global connectedness of msci energy equity indices a system wide network approach abstract the paper utilizes msci energy indices of 21 major energy consumer economies as a full sample to serve as a proxy indicator of the energy sector of these economies and then studies the squared return spillover interlinkages among them for the pre and post global financial crisis of 2008 and during the crude oil crises of 2008 09 and 2014 15 the squared return spillover connectedness has been analyzed on intra and inter regional basis based on the segregation of indices into regions viz europe north and latin america and asia pacific and africa the connectedness interlinkage has been quantified deploying generalized error variance decomposition gevd and the results have been visualized via network diagrams the result shows that the return spillover connectedness is significant and is more prominent in some economies primarily in europe and north america for the full sample however post crisis the squared return spillover connectedness of emerging economies of asia pacific has witnessed a boost surprisingly russia as a major oil exporter sends moderate shocks system wide in the post crisis era implying economic sanctions downplay the influence it could make in the energy sector during the crisis year though spillover risk transmission is high during the 2008 09 crisis it is more spread out during the 2014 15 crisis with the inclusion of the asia pacific emerging market energy indices

rational addiction with learning and regret we present a theory of rational behavior in which individuals maximize a set of stable preferences over goods with unknown addictive power the theory is based on three fundamental postulates that consumption of the addictive good is not equally harmful to all that individuals possess subjective beliefs concerning this harm and that beliefs are optimally undated with information gained through consumption although individual actions are optimal and dynamically consistent addicts regret their past consumption decisions and regret their initial assessment of the potential harm of the good addict prone individuals who believe it could not happen to them are most likely to be drawn into a harmful addiction

the role of portfolio constraints in the international propagation of shocks we study the comovement among stock prices and exchange rates in a three good three country centre periphery dynamic equilibrium model in which the centre s agents face portfolio constraints we characterize equilibrium in closed form for a broad class of portfolio constraints solving for stock prices terms of trade and portfolio holdings we show that portfolio constraints generate wealth transfers between the periphery countries and the centre which increase the comovement of the stock prices across the periphery we associate this excess comovement caused by portfolio constraints with the phenomenon known as contagion the model generates predictions consistent with other important empirical results such as amplification and flight to quality effects copyright 2008 wiley blackwell

a complete characterization of optimal growth paths in an aggregated model with a non concave production function the convexity of technology has played a crucial role in economic analyses of optimal one sector growth problems for example two of the key results on the traditional model of ramsey 1928 that have relied on the convexity of the technology are that optimal intertemporal growth involves moving monotonically towards a unique steady state as in cass 1965 koopmans 1965 and that the value function is a concave differentiable function of the initial capital stock as in benveniste and scheinkman 1979

risks of latin america sovereign debts before and after the financial crisis we investigate the financial determinants of the return and volatility of sovereign cds spread from six major latin american countries before and after the bankruptcy of lehman brothers other than cboe vix index we also find that global factors including us baa aaa default yield ted spread and us treasury rate all contribute to the changes in these sovereign cds spread although global risk aversion vix is a significant determinant of sovereign debt spread in the years after the crisis the emphasis has shifted towards short term refinancing risk ted furthermore the risk of greek sovereign debt crisis also transmitted latin american cds spreads immediately but only in the post lehman sub period these findings provide implications for international bonds and credit derivatives trading strategies

return dependence and the limits of product diversification in financial firms copula garch models indicate dependence between bank returns and those to insurance underwriting securities brokerage and mortgage finance increased during the recent crisis in contrast dependence between banks and the broader market was little changed the crisis related jump in return dependence within the financial services sector was greatest for banks that had previously appeared the most independent larger banks were also especially prone to increased dependence these findings raise doubts about the ability of financial conglomerates to diversify effectively and highlight the need for policy progress in methods for resolving such institutions should they become illiquid or insolvent

budget deficits and social protection cyclical government expenditure in the oecd countercyclical government spending offers social protection to the vulnerable when economies move into recession this paper questions the extent to which governments are able to spend countercyclically and the extent to which social expenditures are likely to be countercyclical an analysis of public spending in oecd countries 1980 2005 suggests countercyclical social protection is constrained by the limits to public borrowing and the degree of political polarization

has the cds market influenced the borrowing cost of european countries during the sovereign crisis this paper assesses the potential influence of the growing cds market on the borrowing cost of sovereign states during the european sovereign crisis we analyze the sovereign debt market to ascertain the pattern of information transmission between the cds and corresponding bond markets our methodological innovation is the use of a non linear specification rather than the linear vecm specification customarily employed using a panel smooth transition model during the 2008 2010 period we find that 1 linearity tests clearly reject the null hypothesis of a linear transmission mechanisms between the bond and the cds markets 2 market distress alters the mutual influence and 3 the higher the distress the more the cds market dominates the information transmission between cds and bond markets

the role of price spillovers in the american housing boom abstract one of the striking features of the last u s housing boom was the heterogeneity in the timing of its onset across local markets in this paper we exploit this heterogeneity to estimate the extent to which the boom was spread via spatial spillovers from one market to another our analysis focuses on spillovers that occur around the time that a local market enters its boom which we identify using sharp structural breaks in house price growth rates on the extensive margin there is evidence that the likelihood of a market booming increases substantially if nearby neighbors boom on the intensive margin we also find statistically significant but economically modest effects of the size of a neighbor s boom on subsequent price growth in nearby markets these affects appear to be unrelated to local market fundamentals suggesting a potential role for non rational factors

estimation of the optimal futures hedge standard approaches to designing a futures hedge often suffer from two major problems first they focus only on minimizing risk so no account is taken of the impact on expected return second in estima ting the hedge ratio no allowance is made for time variation in the distribution of cash and futures price changes this paper describes a technique for estimating the optimal futures hedge that corrects these problems and illustrates its use in hedging treasury bonds with t bond futures copyright 1988 by mit press

externalities and nonlinear discounting indeterminacy abstract this paper studies a one sector model with externalities and nonlinear discounting loosely if the bellman equation for a standard model is written as v k max u v k then the bellman equation for our model is written as v k max u b v k for some concave function b our model assumes that period utility u is linear in consumption and leisure and the production function exhibits increasing social returns and nonincreasing private returns we establish the existence of a steady state under fairly general conditions and give a necessary and sufficient condition for local indeterminacy we show that regardless of the degrees of increasing returns and externalities there exists a discount function b such that indeterminacy arises we also show that in a certain sense as the degree of increasing returns converges to zero the variability of discounting the second derivative of b required to generate indeterminacy also converges to zero numerical examples are provided the main results are also extended to a one sector model with fixed labor supply

rational contagion and the globalization of securities markets this paper argues that globalization may promote contagion by weakening incentives for gathering costly information and by strengthening incentives for imitating arbitrary market portfolios in the presence of short selling constraints the gain of gathering information at a fixed cost may diminish as markets grow moreover if a portfolio manager s marginal cost for yielding below market returns exceeds the marginal gain for above market returns there is a range of optimal portfolios in which all investors imitate arbitrary market portfolios and this range widens as the market grows numerical simulations suggest that these frictions can have significant implications for capital flows in emerging markets

government science and technology budgets in times of crisis abstract following a recent paper by filippetti and archibugi filippetti a archibugi d 2011 innovation in times of crisis national systems of innovation structure and demand research policy 40 2 179 192 this article aims to contribute to the sparse literature on the impacts of the recent economic downturn on the government expenditures and innovative activities of the countries of the enlarged european union eu 27 using eurostat s socio economic objectives i e the nomenclature for the analysis and comparison of scientific programmes and budgets nabs 2007 classification this paper addresses the impact of the recent economic downturn on governments science and technology s t budgets across the 27 eu countries most countries followed a pro cyclical pattern where the government s t budgets in most nabs shrunk along slowing gross domestic product growth in similar pace with total government expenditure the new member states of eastern europe were the most affected

a bayesian markov switching correlation model for contagion analysis on exchange rate markets this article develops a new markov switching vector autoregressive var model with stochastic correlation for contagion analysis on financial markets the correlation and the log volatility dynamics are driven by two independent markov chains thus allowing for different effects such as volatility spill overs and correlation shifts with various degrees of intensity we outline a suitable bayesian inference procedure based on markov chain monte carlo algorithms we then apply the model to some major and asian pacific cross rates against the u s dollar and find strong evidence supporting the existence of contagion effects and correlation drops during crises closely in line with the stylized facts outlined in the contagion literature a comparison of this model with its closest competitors such as a time varying parameter var reveals that our model has a better predictive ability supplementary materials for this article are available online

monetary policy effects new evidence from the italian flow of funds new evidence on the transmission of monetary policy to the economy is provided through an analysis of the effects of a restrictive monetary policy shock on italian flow of funds over the period 1980 to 2002 firms reduce issuance of debt and decrease the acquisition of financial assets providing no support for the existence of strong financial frictions following the shock in the first quarter households increase short tem liabilities and diminish the acquisition of liquid assets and shares the public sector increases net borrowing during the first 2 years financial corporations decrease their borrowing for three quarters while in the same period the foreign sector increases borrowed funds we claim that our results shed new light on the role of the financial decisions of the economic sectors in the transmission mechanism of monetary policy

long and short term dynamic causal transmission amongst international stock markets abstract this paper investigates the dynamic causal linkages amongst nine major international stock price indexes in order to gauge the causal transmission patterns we employ very recent methods of i vector error correction modeling and ii level var modeling with possibly integrated and cointegrated processes advocated by i toda and phillips econometrica 61 1993 1367 and ii toda and yamamoto j econometrics 66 1995 225 respectively the paper illustrates how such methods may be appropriately augmented in a compatible fashion to unearth previously unfounded linkage properties inherent amongst a system of stock price indexes in particular we demonstrate that previous research by using ordinary difference vars ignored an important component of linkages displayed purely over the long run this untapped evidence essentially provides robust and very useful information to international financial analysts and investors at a substantive level results of this study tend to support the contention offered by several studies in the literature of significant interdependencies between the established oecd and the asian markets and also the leadership of the us and uk markets over the short and long run the levels var however illustrate the japanese market s influence as an additional long run leader findings seem to be plausible given that these three markets us uk and japan have consistently contributed over 75 of global stock market capitalization over the major part of the sample under consideration at a methodological level this analysis also provides a primer for the wealth of applied financial econometric research focusing on dynamic causal inference which involve systems containing possibly integrated and cointegrated processes

some contagion some interdependence more pitfalls in tests of financial contagion this paper develops a test of contagion in financial markets based on bivariate correlation analysis which generalizes existing tests and applies it to the international effects of the hong kong stock market crisis of october 1997 contagion is defined as a structural break in the international transmission of financial shocks for plausible values of the variance of country specific shocks in hong kong our test finds evidence of contagion for 5 countries out of a sample of 17 this is in sharp contrast with the findings of recent literature according to which there is no contagion only interdependence we show that this strong result in the literature is due to arbitrary and unrealistic restrictions on the variance of country specific shocks

on impatience economic growth and the environmental kuznets curve a dynamic analysis of resource management the paper presents a dynamic analysis of natural resource management and investigates some key factors that affect optimal management and resource conservation using a recursive specification of time preferences we show how endogenous discounting and impatience can affect the motivation for both capital investments and environmental preservation we examine the relationships between economic growth and environmental quality endogenous discounting provides new insights in the economic dynamics underlying the environmental kuznets curve by treating growth as endogenous we examine how externalities and economic growth interact with each other we investigate how economic development can contribute to an increased demand for environmental preservation as an important new result we also show how poverty can contribute to environmental degradation

optimal consumption dynamics with non concave habit forming utility abstract we study the dynamics of optimal consumption when preferences exhibit habit formation without imposing global concavity conditions on utility we provide a complete characterization of the dynamics despite possible multiplicities in optimal policies and steady states