disorderly adjustments to the misalignments in the korean won this paper estimates the equilibrium exchange rates for korea s real effective rates using clark and macdonald s 1999 behavioural equilibrium exchange rate beer approach the estimation result suggests that the real exchange rate was substantially overvalued during the period prior to the currency crisis of 1997 98 the subsequent adjustment however was disorderly in the sense that the real exchange rate overshot its long run equilibrium value there was also a large deviation from the beer indicating that the sharp depreciation was not an equilibrium phenomenon

profitability of time series momentum abstract we propose a continuous time heterogeneous agent model consisting of fundamental momentum and contrarian traders to explain the significant time series momentum we show that the performance of momentum strategy is determined by both time horizon and the market dominance of momentum traders specifically when momentum traders are more active in the market momentum strategies with short long time horizons stabilize destabilize the market and meanwhile the market under reacts over reacts in short run long run this provides profit opportunity for time series momentum strategies with short horizons and reversal with long horizons when momentum traders are less active in the market they always lose the results provide an insight into the profitability of time series momentum documented in recent empirical studies

the use of flow analysis in foreign exchange exploratory evidence abstract this paper provides questionnaire evidence on the role of flow analysis for professional traders and fund managers this evidence suggests that besides fundamental information and technical analysis the analysis of flows provides an independent third type of information for professionals the view that flows can be used to learn about fundamentals is not consistent with the data instead evidence indicates that flows more likely provide insight into semi fundamental private information

incomplete contracting renegotiation and expectation based loss aversion abstract we consider a simple trading relationship between an expectation based loss averse buyer and a profit maximizing seller when writing a long term contract the parties have to rely on renegotiation in order to ensure materially efficient trade ex post we show that if the buyer expects renegotiation to occur the seller can opportunistically exploit the buyer s attachment to the expected outcome of renegotiation in other words incomplete contracts create a new type of hold up problem if credible the buyer prefers to expect not to renegotiate which gives rise to ex post inefficiencies in a next step we allow the buyer to undertake a non contractible investment we find that loss aversion can mitigate the traditional hold up problem

the reference point approach to the theory of the firm an introduction there is a small but growing literature on the reference point approach to incomplete contracts as formulated by hart and moore the reference point approach has begun to be applied to the theory of the firm in 3 recent papers this introduction reviews the main theoretical aspects of each of these papers it then discusses the relationship between the reference point approach to the firm the transaction cost approach and the property rights approach here it is argued that the reference point approach is a step back towards ex post inefficiencies away from reliance on ex ante inefficiencies

estimation of financial agent based models with simulated maximum likelihood abstract this paper proposes a general computational framework for empirical estimation of financial agent based models for which criterion functions have unknown analytical form for this purpose we adapt a recently developed nonparametric simulated maximum likelihood estimation based on kernel methods in combination with the model developed by brock and hommes 1998 which is one of the most widely analysed heterogeneous agent models in the literature we extensively test the properties and behaviour of the estimation framework as well as its ability to recover parameters consistently and efficiently using simulations key empirical findings indicate the statistical insignificance of the switching coefficient but markedly significant belief parameters that define heterogeneous trading regimes with a predominance of trend following over contrarian strategies in addition we document a slight proportional dominance of fundamentalists over trend following chartists in major world markets

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

assessing the credibility of a target zone evidence from the ems this paper provides some new evidence on the credibility of the exchange rate mechanism erm of the european monetary system ems the study differs from previous research in the literature in three main respects first the main contribution is the use of several credibility indicators some of which have never been applied before to all of the currencies under study this allows one to strengthen the results obtained in this paper second a longer period than that of previous studies is analysed covering the complete ems history third a comparison has been made of the prediction qualities of the different indicators in order to explore their ability to capture the main erm events realignments changes in the fluctuations bands and speculative pressures fourth the indicators are applied to the experience of the new modified erm linking the currencies of non euro area member states to the euro showing the relevance of this approach in the near future with the enlargement of the european union

the determinants of international migration unbundling the role of economic political and social institutions international migrants may relocate because of economic political and social factors in their origin or destination countries using global bilateral migration flows from 103 countries over the period 1990 2000 we explore whether emigrants self select based on economic political and social institutions our study adds social dimension as a potential determinant of migration and separates the pull and push effects of political economic and social institutions our results indicate that economic political and social institutions are significant pull factors of migration economic freedom has the most substantial pull effect followed by the political institutions social institutions have the weakest pull effect on migration moreover economic and social institutions are significant push factors of migration while political institutions do not show any push effect furthermore educated migrants are more sensitive to the destination economic political and social institutions than less educated migrants and less educated migrants are more sensitive to the social institutions at the origin

a closer look at the determinants of international migration decomposing cultural distance abstractusing a modified gravity model and three measures of cultural distance we employ the zero inflated negative binomial estimation technique to examine the impact of cultural distance on international migration flows we confirm the finding of prior studies that there exists a negative relationship between composite measures of cultural distance and immigrant flows extending the literature we decompose our composite cultural distance measures into their component dimensions to examine potential variability in the influences of individual dimensions on international migration we find the cultural dimensions that reflect individualism uncertainty avoidance and perceived gender roles are typically more influential in determining immigrant flows than are other cultural dimensions

native migrant labour substitution by industry and wage effects evidence from the uk unlike previous studies we estimate the native migrant substitution elasticity nme differentiated by sector to do so we employ a straightforward estimation strategy that consists of adding slo

migration with endogenous moving costs we study a dynamic model of labor migration in which moving costs decrease with the number of migrants already settled in the destination this assumption is supported by sociological studies of migrant networks with endogenous moving costs migration occurs gradually over time once it starts it develops momentum and migratory flows may increase even as wage differentials narrow in addition migration tends to follow geographical channels and low moving cost individuals migrate first these patterns are consistent with historical evidence from the great black migration of 1915 1960 in the united states much of which cannot be reconciled with existing migration models excerpt

reference points social norms and fairness in contract renegotiations how does an ex ante contract affect behavior in an ex post renegotiation game we address this question in a canonical buyer seller relationship with renegotiation our paper provides causal experimental evidence that an initial contract has a highly significant and economically important impact on renegotiation behavior that goes beyond the effect of contracts on bargaining threat points we compare situations in which an initial contract is renegotiated to strategically equivalent bargaining situations in which no ex ante contract was written the ex ante contract causes sellers to ask for markups that are 45 lower than in strategically equivalent bargaining situations without an initial contract moreover buyers are more likely to reject given markups in renegotiations than in negotiations these effects do not depend on whether the contract was written under competitive or monopolistic conditions our results provide strong evidence supporting the hypothesis that contracts serve as reference points that shape and coordinate the expectations of the contracting parties

a meeting of the minds informal agreements and social norms using coordination games we elicit social norms directly for two different games where either an agreement to take the first best action has been reached or where no such agreement exists we combine the norms data with separately measured choice data to predict changes in behavior we demonstrate that including social norms as a utility component significantly improves predictive performance then we compare social norms to guilt aversion and lying aversion we estimate that honoring an agreement in the double dictator game is worth giving up approximately 10 of total earnings and more than 120 in the bertrand game we show that informal agreements affect behavior through their direct effect on social norms as well as through an indirect effect on beliefs this paper was accepted by uri gneezy behavioral economics

asset pricing and foreign exchange risk econometric evidence for the g 7 abstract this paper uses an error correction model ecm to examine the dynamic behavioural relationship between the excess returns of foreign exchange and the variables that measure the stock market risk factor the test results for the major currencies of the g 7 over the period january 1982 to january 1994 support the hypothesis that the excess foreign exchange returns are related to relative risks of the two national equity markets and hence supports the notion of a risk premium in foreign exchange markets in addition we find evidence of non monotonic adjustment in some of the equations with respect to the us dollar which suggests some short run exchange rate overshooting

chasing trends at the micro level the effect of technical trading on order book dynamics abstract technical traders attempt to exploit trends in market prices and the order flow despite this little is known about how these traders behave in a micro structure context we consider a model of an order book based financial market the market contains two groups informed traders and technical traders a numerical technique is used to identify a markov perfect equilibrium of the trading game and so determine the optimal strategies we find that technical trading rules are profitable and allow traders to increase their returns the effect of technical traders on the market however is ambiguous they decrease volatility and pricing errors but also increase trading costs despite primarily acting as liquidity suppliers

behavioral heterogeneity in u s inflation dynamics in this article we develop and estimate a behavioral model of inflation dynamics with heterogeneous firms in our stylized framework there are two groups of price setters fundamentalists and rando

exchange rates and fundamentals new evidence from real time data abstract this paper analyses the link between economic fundamentals and exchange rates by investigating the importance of real time data we find that economic news in the united states germany and the euro area have been a driving force behind daily us dollar euro dem exchange rate developments in the period 1993 2003 the larger importance of us macroeconomic news is at least partly explained by their earlier release time compared to corresponding german and euro area news the exchange rate is also shown to respond more strongly to news in periods of large market uncertainty and when negative or large shocks occur overall the model based on real time data explains about 75 of the monthly directional changes of the us dollar euro exchange rate although it does not explain well the magnitude of the exchange rate changes

financial returns and efficiency as seen by an artificial technical analyst abstract we introduce trading rules which are selected by an artificially intelligent agent who learns from experience an artificial technical analyst these rules restrict the data mining concerns associated with the use of simple technical trading rules as model evaluation devices and are good at recognising subtle regularities in return processes the relationship between the efficiency of financial markets and the efficacy of technical analysis is investigated and it is shown that the artificial technical analyst can be used to provide a quantitative measure of market efficiency we estimate this measure on the djia daily index from 1962 to 1986 and draw implications for the optimal behaviour of certain classes of investors it is also shown that the structure of technical trading rules commonly used is consistent with utility maximisation for risk neutral agents and in a myopic sense even for risk averse agents

charts noise and fundamentals in the london foreign exchange market this paper presents some empirical evidence on the prevalence perceived importance and nature of chartist or technical analysis in the london foreign exchange market if noise traders see e g de long et al i987 are defined as those speculators who do not base their trading strategies on a consideration of market fundamentals then it clearly encompasses those traders who employ chart analysis i e those who base their strategies on the analysis and extrapolation of past price movements alone

contributions of oliver hart and bengt holmstrom to contract theory oliver hart and bengt holmstrom were awarded the 2016 sveriges riksbank prize in economic sciences in memory of alfred nobel for their fundamental contributions to contract theory this article offers a short summary and discussion of their path breaking work

the effect of national culture on the choice of entry mode characteristics of national cultures have frequently been claimed to influence the selection of entry modes this article investigates this claim by developing a theoretical argument for why culture should influence the choice of entry two hypotheses are derived which relate culture to entry mode choice one focusing on the cultural distance between countries the other on attitudes towards uncertainty avoidance using a multinomial logit model and controlling for other effects the hypotheses are tested by analysing data on 228 entries into the united states market by acquisition wholly owned greenfield and joint venture empirical support for the effect of national culture on entry choice is found

a gravity model of immigration this paper develops a gravity model of immigration tests of the model using panel data for 16 oecd countries for 1991 2000 confirm the model s high explanatory power and examples illustrate its usefulness for testing other hypothesized determinants of immigration

contracts reference points and competition behavioral effects of the fundamental transformation in this paper we study the role of incomplete ex ante contracts for ex post trade previous experimental evidence indicates that a contract provides a reference point for entitlements when the terms are negotiated in a competitive market we show that this finding no longer holds when the terms are determined in a non competitive way our results imply that the presence of a fundamental transformation i e the transition from a competitive market to a bilateral relationship is important for a contract to become a reference point to the best of our knowledge this behavioral aspect of the fundamental transformation has not been shown before jel c91 d03 d23

exchange rate management in the same week that the pound sterling and the italian lira were forced by speculative pressures to suspend their participation in the exchange rate mechanism erm of the european monetary system ems a study was published which concluded that exchange market intervention was a far more potent instrument for managing exchange rates than the conventional wisdom had held catte galli and rebecchini i 992 a i shall argue in this paper that far from providing instant refutation of the new optimism regarding the potency of intervention what we currently understand about exchange rate theory is consistent with both the tumult in the exchange markets in september i992 and the new optimism the paper seeks to draw the implications of current knowledge for what exchange rate management can and cannot hope to accomplish the first section of the paper reviews where exchange rate theory stands a second section discusses what we know about the possibility of managing exchange rates and how that ties in with the theory the final section explores how exchange rate management needs to vary depending on whether it is intended to use the exchange rate as a nominal anchor or to limit misalignments in a more keynesian approach to policy design

macroeconomic and stock market interactions with endogenous aggregate sentiment dynamics abstract this paper studies the implications of heterogeneous capital gain expectations on output and asset prices we consider a disequilibrium macroeconomic model where agents expectations on future capital gains affect aggregate demand agents beliefs take two forms fundamentalist and chartist and the relative weight of the two types of agents is endogenously determined we show that there are two sources of instability arising from the interaction of the financial with the real part of the economy and from the heterogeneous opinion dynamics two main conclusions are derived on the one hand perhaps surprisingly the non linearity embedded in the opinion dynamics far from the steady state can play a stabilizing role by preventing the economy from moving towards an explosive path on the other hand however real financial interactions and sentiment dynamics do amplify exogenous shocks and tend to generate persistent fluctuations and the associated welfare losses we consider alternative policies to mitigate these effects

are immigrants favorably self selected one of the standard propositions in the migration literature is that migrants tend to be favorably self selected for labor market success that is economic migrants are described as tending on average to be more able ambitious aggressive entrepreneurial or otherwise more favorably selected than similar individuals who choose to remain in their place of origin in recent years there have been challenges to the general proposition of the favorable selectivity of migrants in addressing this issue this paper considers alternative specifications of the migration model that are relevant for the issue of migrant selectivity excerpt

the comparative advantages of firms markets and contracts a unified theory the most efficient labour market mechanism depends on the advantages of specialization workers costs of switching between entrepreneurs and the frequency with which needs change multilateral mechanisms are more efficient when specialization is more advantageous when it is cheap for workers to switch between entrepreneurs and when individual entrepreneurs cannot occupy a worker on a full time basis given a bilateral mechanism employment a firm is more efficient than contracts when in process adjustments arise more frequently there exist three regions in which firms markets and sequences of bilateral contracts are weakly more efficient than all other mechanisms in a big class

let s talk how communication affects contract design we study experimentally how the ability to communicate affects the frequency andeffectiveness of flexible and inflexible contracts in a bilateral trade context where sellers canadjust trade quality after observing a post contractual cost shock and a discretionary buyertransfer in the absence of communication we find that rigid contracts are more frequent andlead to higher earnings for both buyer and seller by contrast in the presence of communication flexible contracts are much more frequent and considerably more productive both for buyers andsellers also both buyer and seller earn considerably more from flexible with communicationthan rigid without communication our results show quite strongly that communication a normalfeature in contracting can remove the potential cost of flexibility disagreements caused byconflicting perceptions we offer an explanation based on social norms

further evidence on exchange rate expectations abstract this paper considers a previously unexploited survey data set of exchange rate expectations which allows us to focus on differences between ems and dollar exchange rates we corroborate the earlier finding in the literature that exchange rate forecasts are not rational and that agents do not use all available information efficiently although extrapolative and adaptive expectations formation mechanisms describe non ems exchange rate expectations to a certain extent ems exchange rates forecasts seem to follow long run fundamentals more closely and would suggest that agents believe that ems exchange rate expectations undershoot their long run equilibrium values jel f31

experimental evidence on inflation expectation formation using laboratory experiments within a new keynesian sticky price framework we study the process of inflation expectation formation we focus on adaptive learning and rational expectations contrary to the previous literature that mostly studied simple heuristics using a test for rational expectations that allows heterogeneity of expectations we find that we cannot reject rationality for about 40 of subjects more than 20 of subjects are also best described by adaptive learning models where they behave like econometricians and update their model estimates every period however rather than using a single forecasting model switching between models describes their behavior better switching is more likely to occur when experimental economy is in a recession

explaining dispersion in foreign exchange expectations a heterogeneous agent approach this paper combines survey forecasts with a heterogeneous agent model to examine the dispersion of expectations of participants in the foreign exchange market we find distinct variations in the level of dispersion and document that dispersion arises because of the combined effect of market participants holding private information and attaching different weights to fundamental technical and carry trade analyses we estimate a heterogeneous agent model on the survey forecasts and show that the weight attached to the three forecast rules is adjusted over time in response to the relative importance of the rules in the actual foreign exchange market the weights are related to market circumstances the switching model is finally shown to outperform the random walk model in an out of sample forecast exercise

should developing countries undervalue their currencies abstract the washington consensus emphasizes the economic costs of real exchange rate distortions however a sizable recent empirical literature finds that undervalued real exchange rates help countries to achieve faster economic growth this paper shows that recent findings are driven by inappropriate homogeneity assumptions on cross country long run real exchange rate behavior and or growth regression misspecification when these problems are redressed the empirical results for a sample of 63 developing countries suggest that deviations of the real exchange rate in either direction from the value that is consistent with external and internal equilibriums reduce economic growth deviations from balassa samuelson adjusted purchasing power parity on the other hand do not seem to matter for growth performance the real exchange rate should thus be consistent with external and internal balances irrespective of implied purchasing power parity benchmarks

an investigation of customer order flow in the foreign exchange market this paper examines the effect that heterogeneous customer orders flows have on exchange rates by using a new propreitary dataset of weekly net order flow segmented by customer type across nine of the most liquid currency pairs we make three contributions first we investigate the extent to which order flow can help to explain exchange rate movements over and above the influence of macroeconomic variables second we look at the usefulness of order flow in forecasting exchange rate movements at longer horizons than those generally considered in the microstructure literature finally we address the question of whether the out of sample exchange rate forecasts generated by order flows can be employed profitably in the foreign exchange markets

self selection and internal migration in the united states abstract within the conceptual framework of the roy model this paper provides an empirical analysis of internal migration flows using data from the national longitudinal survey of youth the theoretical approach highlights regional differences in the returns to skills regions that pay higher returns to skills attract more skilled workers than regions that pay lower returns our empirical results suggest that interstate differences in the returns to skills are a major determinant of both the size and skill composition of internal migration flows persons whose skills are most mismatched with the reward structure offered by their current state of residence are the persons most likely to leave that state and these persons tend to relocate in states which offer higher rewards for their particular skills

using financial prices to test exchange rate models a note the purpose of this note is to illustrate how tests of exchange rate models can be conducted using financial prices rather than macroeconomic data all empirical tests of exchange rate models have met with limited success so far a major problem encountered is the poor quality of the macroeconomic data used most of the data suffer from large measurement error or cannot even be measured directly for example these models often require measures of changes in expected real activity or in monetary policy such variables can only be poorly estimated from time series models on industrial production or money supply the innovation in this paper is to use financial prices such as stock prices instead of the traditional macroeconomic data there exists convincing empirical evidence that stock returns forecast changes in economic activity as measured by industrial production real growth in gnp employment rate or corporate profits fama 5 and geske and roll 8 in the domestic context stock prices have been used to test the relation between economic activity and inflation e g fama 5 geske and roll 8 and solnik 12 in the same spirit stock returns are used in this paper as proxies for changes in economic activity to test the relation between exchange rates and economic activity interest rates are determined by monetary policies and changes in interest rates are used in this article as indicators of monetary shocks the approach used is introduced in section i while the empirical results are presented in section ii the data cover the eight major western countries over the recent period of flexible exchange rates july 1973 to december 1983

the roles of nominal exchange rate and relative price adjustments in ppp reversion this paper investigates the roles of the nominal exchange rate and relative prices in restoring purchasing power parity ppp by estimating their dynamics with a bivariate threshold vector error correction model our empirical results suggest a threshold cointegrating relationship between the nominal exchange rate and relative prices however these two variables play different roles in restoring ppp the nominal exchange rate adjusts to restore ppp only outside the threshold band within the band ppp is restored mainly through adjustments in relative prices

technical analysis and the spanish stock exchange testing the rsi macd momentum and stochastic rules using spanish market companies the aim of this research is to examine the result of the application of the indicators relative strength index rsi moving average convergence divergence macd momentum and stochastic in different companies of the spanish continuous market by using these indicators it is intended to give purchase and sale recommendations to small investors the generation of great capital gains depends on the type of the stock exchange company and the indicator which is being used in addition this research solves the problems in case of ambiguity in the indicators for the traders

the effects of japanese interventions on fx forecast heterogeneity we investigate the determinants of forecast heterogeneity in the jpy usd market using panel data from consensus economics we find that past exchange rate volatility increases forecast dispersion while foreign exchange intervention of the japanese ministry of finance dampens expectation heterogeneity

stable classes of technical trading rules technical analysis includes a huge variety of trading rules this fact has always been a serious hindrance to the large number of market efficiency studies implemented either to demonstrate the profitability of market beating systems or to deny their operational feasibility for evident reasons it is practically impossible and theoretically weak to systematically analyse the entire body of all trading rules we therefore propose a novel method to form natural classes of trading rules which are found to be robust to changing market scenarios in particular groups are formed adopting a similarity measure based on the investing signals of the trading rules our clustering methodology adopts a markov chain bootstrapping technique to generate differentiated scenarios preserving volume and price joint distributional features an application is developed on a sample of 674 trading rules results show that six groups here identified as trading styles are sufficient to explain the large portion of the investing

loss aversion and inefficient renegotiation we propose a theory of inefficient renegotiation that is based on loss aversion when two parties write a long term contract that has to be renegotiated after the realization of the state of the world they take the initial contract as a reference point to which they compare gains and losses of the renegotiated transaction we show that loss aversion makes the renegotiated outcome sticky and materially inefficient the theory has important implications for the optimal design of long term contracts first it explains why parties often abstain from writing a beneficial long term contract or why some contracts specify transactions that are never ex post efficient secondly it shows under what conditions parties should rely on the allocation of ownership rights to protect relationship specific investments rather than writing a specific performance contract thirdly it shows that employment contracts can be strictly optimal even if parties are free to renegotiate