diverse information and market efficiency in a monetary model of the exchange rate tests of informational efficiency of a given market involve testing two hypotheses simultaneously the first is the hypothesis about the structure determining equilibrium prices or returns and the second is the hypothesis about the information used in formulating expectations and the ability of agents to set current prices to conform with their expected values we examine this issue in the context of the foreign exchange market by setting up a simple model of exchange rate determination and using equilibrium properties of the model to examine market efficiency the model of exchange rate determination involves monetary equilibrium and rational expectations by virtue of the latter equilibrium prices by definition fully reflect available information yet we show that conventional tests of market efficiency would fail when confronted by data generated by such a model we then proceed to define more restrictive and more appropriate concepts of informational efficiency we also illustrate and clarify a fundamental misconception with current rational expectations models we believe that the current models employing the rational expectations hypothesis overemphasize the distinction between monetary and real shocks and underemphasize the distinction between permanent and transitory distinctions for expectations formation the conventional efficiency tests it is the latter distinction that is the essential one this abstract was borrowed from another version of this item

testing the unbiasedness hypothesis in the forward foreign exchange market a specification analysis abstract this paper evaluates two popular regression methods of testing the unbiasedness hypothesis in the forward foreign exchange market for the 30 day canada united states forward foreign exchange market the evidence overwhelmingly indicates that it is inappropriate to treat the structure of the systematic and stochastic components of the test relations as constant over time hence conclusions inferred from parameter significance testing based upon full sample estimation can be very misleading accordingly we argue for a specification analysis of the test relations and more explicit modelling of market fundamentals

long memory versus structural breaks in modeling and forecasting realized volatility we explore the possibility of structural breaks in the daily realized volatility of the deutschemark dollar yen dollar and yen deutschemark spot exchange rates with observed long memory behavior we find that structural breaks in the mean can partly explain the persistence of realized volatility we propose a var rv break model that provides superior predictive ability when the timing of future breaks is known with unknown break dates and sizes we find that a var rv i d long memory model provides a robust forecasting method even when the true financial volatility series are generated by structural breaks

open economy implications of two models of business fluctuations a wage contract model and misperceptions model of aggregate fluctuations are shown to have strikingly different implications when applied to a small open economy with a flexible exchange rate positive monetary disturbances reduce the relative price of non traded goods and create a trade surplus in the wage contract model but raise the relative price of non traded goods and create a trade deficit in the misperceptions model they also have different implications for production in each industry consumption nominal prices and the exchange rate open economy applications of macro economic models are shown to be a useful source of additional testable implications

monetary information and monetary neutrality abstract the monetary theory of business fluctuations in market clearing models constructed under the rational expectations assumption as advanced by lucas and others involves the idea that suppliers and demanders will typically misinterpret movements in the general level of prices as representing more or less favorable relative opportunities for real activities the present paper examines the consequences of agents possessing contemporaneous monetary information of a potentially noisy variety for the non neutrality of unanticipated monetary events within such an equilibrium business cycle model this modification of the information structure has the strong testable implication that real activity will be uncorrelated with contemporaneous monetary data

fixed versus flexible exchange rates in an equilibrium business cycle model abstract this essay re examines the question of which exchange rate regime is preferable using a rational expectations model that explicitly incorporates wealth and emphasizing the information signalling role of prices previous authors have stressed the argument that floating rates provide agents with an additional source of information which improves forecasting accuracy leading to more efficient allocations this paper adds the counterweighing argument that they also have the effect in contrast to fixed rates of introducing an additional source of monetary disturbances in the determination of real variables another issue addressed is the nature of exchange rate adjustments to monetary disturbances

money output and the trade balance theory and evidence this paper develops a two country equilibrium model of the world economy under floating exchange rates and draws out its implications for co movements of money output and the trade balance the predictions of this model are then compared with those of a fixed price keynesian version of the mundell fleming model the predictions of the two models for co movements of money output and the trade balance are shown to differ on almost all counts empirical evidence on the effects of anticipated and unanticipated changes in money growth rates on output and the trade balance from the recent canadian experience with floating rates is presented and discussed this evidence generally speaking is consistent with the implications of the equilibrium model

an examination of the effects of government purchases in an open economy this paper examines the effects of permanent and transitory changes in government purchases in the context of a model of a small open economy that produces and consumes both traded and nontraded goods the model incorporates an equilibrium interpretation of the business cycle that emphasizes the responsiveness of agents to intertemporal relative price changes it is demonstrated that transitory increases in government purchases lead to an appreciation of the real exchange rate and an ambiguous change although a likely worsening in the current account while permanent increases have an ambiguous impact on the real exchange rate and no effect on the current account when agents do not know whether a given increase in government purchases is permanent or transitory the effect is a weighted average of these separate effects the weights depend on the relative variances of the transitory and permanent components of government purchases in the past few years a considerable amount of effort has been devoted to examining the effects of macroeconomic policy in an open economy such issues as exchange rate overshooting deviations from purchasing power parity sterilization and monetary control the effectiveness of monetary policy and the choice between alternative exchange rate regimes have been at center stage the models that have been employed to study these issues have run the spectrum from variants of the mundell fleming model such as dornbusch 1976 turnovsky 1981 and kimbrough 1983a to wage contracting and indexing models like bhandari 1982b and flood and marion 1982 to equilibrium models of the business cycle along the lines of bhandari 1982a saidi 1982 and kimbrough 1983b to the closely related intertemporal utility maximization models with money of helpman 1981 and stockman 1980 1983 one common thread that in a sense unifies all of these and other recent contributions is that they are concerned primarily with the effects of alternative monetary and exchange rate policies that the central bank might enact in light of the development and refinement during this period of the monetary approach to the balance of payments and the exchange rate it is not surprising i would like to thank phil brock jeremy greenwood gary zarkin and two anonymous

aggregate information and the role of monetary policy in an open economy a model of a small open economy in which agents trade in local goods markets and an economy wide asset market is developed purchasing power parity is assumed to hold at the aggregate level however because of local deviations from purchasing power parity agents possess differential information using this framework it is shown that when the exchange rate is flexible monetary policy can influence the distribution of real output by altering the information content of the exchange rate however when monetary policy is committed to fixing the exchange rate by a feedback rule the distribution of real output is independent of the particular exchange rate rule chosen the stability of real output under the two regimes is compared and it is demonstrated that regardless of the stability of domestic monetary policy a flexible exchange rate regime is superior in this respect possible qualifications and extensions of these results are also discussed

the information content of the exchange rate and the stability of real output under alternative exchange rate regimes abstract when the exchange rate is flexible and thus responds to market forces it provides agents with useful information while when it is fixed by a feedback rule it does not the implications of this asymmetry for the stability of real output under the two regimes is discussed it is shown that whenever shocks are predominantly of one variety or when domestic monetary shocks accompanied by one real shock a flexible exchange rate does a better job of stabilizing real output than does a fixed exchange rate these results undermine arguments favoring fixed exchange rates because they discipline monetary policy in addition it is demonstrated that managed floating rules and exchange rate feedback rules are irrelevant for the distribution of real output

economic impacts of new unionization on private sector employers 1984 2001 economic impacts of unionization on employers are difficult to estimate in the absence of large representative data on establishments with union status information estimates are also confounded by selection bias because unions could organize at highly profitable enterprises that are more likely to grow and pay higher wages using multiple establishment level data sets that represent establishments that faced organizing drives in the united states during 1984 1999 this paper uses a regression discontinuity design to estimate the impact of unionization on business survival employment output productivity and wages essentially outcomes for employers where unions barely won the election e g by one vote are compared with those where the unions barely lost the analysis finds small impacts on all outcomes that we examine estimates for wages are close to zero the evidence suggests that at least in recent decades the legal mandate that requires the employer to bargain with a certified union has had little economic impact on employers because unions have been somewhat unsuccessful at securing significant wage gains

imperfect information and the comovement of the exchange rate and the interest rate a signal extraction approach this paper analyzes the joint determination of the exchange rate and the interest rate in a signal extraction framework in principle a given disturbance should generate a systematic relationship between the exchange rate and the interest rate as two endogenous variables in the context of any specified economic model when expectations matter however the introduction of imperfect information would weaken the comovement between the two endogenous variables that results from a given disturbance this simple point is demonstrated in a flexible price model of a small economy

portfolio optimization in the presence of dependent financial returns with long memory a copula based approach abstract in this paper we seek to examine the effect of the presence of long memory on the dependence structure between financial returns and on portfolio optimization first we focus on the dependence structure using copulas to select the best copula in addition to the goodness of fit tests we employ a graphical method based on visual comparison of the fitted copula density and the smoothed copula density estimated by wavelets moreover we check the stability of the copula parameter the empirical results show that the long memory affects the dependence structure second we analyze the impact of this dependence structure on the optimal portfolio we propose a new approach based on minimizing the conditional value at risk and assuming that the dependence structure is modeled by the copula parameter the empirical results show that our approach outperforms the traditional minimizing variance approach where the dependence structure is represented by the linear correlation coefficient

losing to win tournament incentives in the national basketball association the focus of tournament models has been rank order compensation schemes whereby participants receive higher payments for higher relative performance either incrementally or winner takes all our research focuses on a unique tournament that offers rewards for both winning and losing specifically the national basketball association s regularly scheduled season of games we examine three nba seasons to determine whether team performance responded to changes in the underlying tournament incentives provided by the nba s introduction and restructuring of the lottery system to determine draft order our results yield strong evidence that nba teams are more likely to lose when incentives to lose are present

contracts the trade account and deviations from purchasing power parity in equilibrium a hallmark of the recent monetary analysis of exchange rate determination has been the assumption of purchasing power parity p p p it can be argued that this is an arbitrage relationship in the context of a one output world in any case considerable advance has been made by analyzing international finance issues under this assumption on the other hand it is not innocuous as has been demonstrated by isard 12 and richardson 17 for example p p p does not in fact hold at least in the short run magee 16 argues that observed deviations from p p p do not imply market inefficiency because the presence of contracts in international trade implies that ex ante profit opportunities can be eliminated through arbitrage and yet p p p fail to hold in his context the deviations are spurious and therefore if taken seriously can lead to erroneous policy measures on for example dumping he assumes an exogeneous stochastic process for the exchange rate and so does not discuss the implications of contracting for equilibrium market prices harris and purvis 11 derive equilibrium market prices on the assumption of exogenous deviations from p p p and do not explicitly model the origin of these deviations in the present paper a contrast is drawn between two polar models the first is a standard stochastic equilibrium in a small open economy in which arbitrage ensures

real exchange rate effects of monetary shocks under fixed and flexible exchange rates abstract we analyze how the real exchange rate effects of monetary and real shocks depend on the exchange rate regime within a two country rational expectations model with confusion about money and real shocks the model demonstrates that the real exchange rate effect of unanticipated monetary shocks is negatively related to the variance of the domestically created money supply growth and that the effects of increasing domestic money variance on the real exchange rate are less under a fixed rate regime than under a flexible rate regime

incomplete information and the equilibrium determination of the forward exchange rate abstract in the present paper we embed the forward exchange rate in an equilibrium macroeconomic model incorporating rational expectations and portfolio balance and in which the spot exchange rate the forward exchange rate the expected future spot rate and the domestic interest rate are determined simultaneously the purpose is to examine the impact of alternative macroeconomic disturbances on the spot and forward exchange rates and on the bias in the forward rate as a predictor of future spot rates the rational expectations hypothesis plays a key role in the analysis alternative assumptions made about the information available to agents in the economy are shown to have rather dramatic consequences on the answers obtained

are sunk costs irrelevant evidence from playing time in the national basketball association i introduction sunk costs are irrelevant is a common mantra of price theory but our students seldom believe this claim and for good reason political and corporate leaders alike appeal to sunk costs to justify future policies the escalation effect which borland lee and macdonald 2011 define as commitment to a previous decision despite the expected marginal benefit of that commitment being less than expected marginal cost has become a key element of behavioral economics dating back to seminal work by thaler 1980 and tversky and kahneman 1981 and of economic experiments e g khan salter and sharp 2000 most evidence regarding the relevance of sunk costs stems from anecdotes or artificial experiments we provide a real world test of the escalation effect by estimating the impact of draft position particularly lottery and first round status on playing time in the national basketball association nba whether a team maximizes wins or profits it should give the most playing time to its most productive players regardless of how they were acquired 1 however sports commentators constantly report that teams are committed to specific players because they had used high draft choices or paid high prices to obtain them a classic application of the escalation effect the abundance of data on productivity and playing time allows us to test whether teams give first round draft picks or lottery picks more playing time than other players after accounting for performance we build on earlier studies of playing time in the nba by staw and hoang 1995 and by camerer and weber 1999 hereafter cw by employing data and techniques that have only recently been widely used our estimation builds on staw and hoang and on cw in three ways first our more recent data avoid possible problems of heterogeneity second we have access to variables that better measure playing time and player productivity its main determinant third and most importantly we focus more on the transition between discrete states lottery versus nonlottery and first versus second round than on the precise order of draft picks this shift of focus leads us to use regression discontinuity rd analysis rd enables us to avoid omitted variable bias and thus to discuss causality when evaluating how crossing such thresholds as the lottery or the first round of the draft affects playing time the next section of this article briefly reviews the literature on sunk costs with particular attention to staw and hoang 1995 and cw the third section shows that our data are consistent with those used by previous studies by applying cw s framework and variables to our data section iv explains the relevance of regression discontinuity and presents the empirical model section v addresses several potential threats to the validity of our rd estimates the sixth section presents and discusses our results the seventh section concludes ii the behavioral economics of sunk costs standard neoclassical theory claims that sunk costs have no bearing on current choices because they affect neither marginal benefit nor marginal cost however thaler 1980 and tversky and kahneman 1981 cite psychology studies dating back to the 1950s showing that subjects consider previous expenditures of money or effort when making decisions their findings thus contradict the core neoclassical assumption that agents behave rationally despite the controversy over sunk costs and their centrality to the neoclassical behavioral debate there is little rigorous empirical analysis of their role in decision making one of the few tests comes from staw and hoang 1995 using data for players drafted in the first two rounds of the 1980 1986 nba drafts 2 they regress playing time per season on draft position performance measures and such control variables as race and nationality conditional on players years of experience

long memory and level shifts in the volatility of stock market return indices there has been interest in the possibility of confusing long memory and structural changes in level and studies showed that when a short memory process is contaminated by level shifts the estimate of the fractional differencing parameter is biased upward and the autocovariances decay slowly we analyze the properties of the autocorrelation function the periodogram and the log periodogram estimate of the memory parameter when the level shift component is a mixture model our results explain many findings reported and uncover new features we confront our theoretical predictions using log squared returns as a proxy for the volatility of some assets returns including daily s p 500 returns over the period 1928 2002 the estimates follow patterns that would obtain if the process was short memory with level shifts instead of fractionally integrated a simple test is also proposed which reinforces this conclusion

forecasting the realized volatility of the oil futures market a regime switching approach considering nonlinear and highly persistent dynamics of realized volatility we introduce markov regime switching models to the heterogeneous autoregressive model of the realized volatility har rv models to forecast the realized volatility of the crude oil futures market in sample results demonstrate that the high volatility regime is short lived out of sample results suggest that har rv models with regime switching increase the forecasting ability significantly than those without regime switching moreover these findings are robust for different actual volatility benchmarks forecasting windows and model settings

flexible exchange rates prices and the role of news lessons from the 1970s recent experience with flexible exchange rate systems has led to renewed interest in the operation of foreign exchange markets as reflected in many recent studies of the principal determinants of exchange rates the 1970s witnessed the dramatic alteration of the international monetary system from a regime of pegged exchange rates which prevailed for about a quarter of a century since the bretton woods conference into a regime of flexible though managed rates as a consequence of the emergence of the new legal and economic system traders national governments and international organisations were confronted with new economic problems choices and instruments during the 1970s ex change rates fluctuated widely and inflation rates accelerated the international monetary system had to accommodate extraordinarily large oil related shocks which affected trade flows in goods and assets huge oil payments had to be recycled uncertainties concerning future developments in international politics reached new heights and the prospects for the world economy got gloomier these developments placed unprecedented pressures on the markets for foreign exchange as well as on other asset markets they were associated with a large slide in the value of the us dollar and resulted in speeding up the creation of new institutions like the european monetary system which provided the formal framework for the management of exchange rates among members

real exchange rate effects of monetary disturbances under different degrees of exchange rate flexibility an empirical analysis abstract we examine the effects of monetary policy on the real exchange rate in a cross country analysis we find that the variability of money shocks and the degree of informativeness of the exchange rate are important determinants of the magnitude of the real exchange rate effects of domestic money shocks our results are consistent with previous cross country evidence on the output effects of money shocks but also highlight the role of the exchange rate regime

the transmission of disturbances under alternative exchange rate regimes with optimal indexing the paper develops a general stochastic macroeconomic model that can be used to study the international transmission of disturbances under four alternative exchange rate systems uniform flexible exchange rates uniform fixed exchange rates and two versions of two tier exchange rates the analysis makes two general points first one cannot assume stability of structure when assessing the consequences of alternative exchange rate regimes for example the slope of the aggregate supply curve and the rationally formed expectations in the asset markets can respond dramatically to the government s choice of exchange rate regime second exchange rate regimes that provide full insulation from foreign disturbances may nevertheless be inferior to other regimes in terms of their ability to maximize social welfare

rational expectations econometric analysis of changes in regime an investigation of the term structure of interest rates abstract this paper is of interest both for its methodological contribution of new tools for analyzing rational expectations models and for its substantive conclusions concerning the term structure of interest rates during the monetary experiment of october 1979 the paper studies systems subject to changes in regime interpreted here as occasional discrete shifts in the parameters governing the time series behavior of exogenous economic variables the specification is shown to be quite tractable both theoretically and empirically the technique is used to analyze yields on three month treasury bills and ten year treasury bonds during 1962 to 1987 a constant parameter linear model for short term rates is shown to be inconsistent both with the univariate time series properties of short rates and with the observed bivariate relation between long and short rates under the expectations hypothesis of the term structure an alternative nonlinear model that admits the possibility of changes in regime affords a much better description of the univariate process for short rates moreover the cross equation restrictions implied by the expectations hypothesis of the term structure are consistent with the nonlinear specification indeed the residuals of the restricted relation have a standard error of only 0 8 basis points this is a third less than that of a completely unrestricted linear regression of long rates on short rates and compares with an unconditional standard deviation of long rates of 142 basis points i conclude that once the recognition by bond traders of changes in regime is taken into account the expectations hypothesis of the term structure of interest rates holds up fairly well for these data

hourly volatility spillovers between international equity markets abstract this paper examines the timing of mean and volatility spillovers between new york and london equity markets using an arch model it is found that the evidence of volatility spillovers between these markets is minimal and have a duration which lasts only an hour or so the most significant effects surround the movement of share prices around the new york opening but these results are not strong several new arch models are estimated including an asymmetric or leverage model and a non linear model which allows big shocks to have a different impact from small shocks

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

long memory and regime switching a simulation study on the markov regime switching arfima model abstract recent research argues that if the cause of confusion between long memory and regime switching were properly controlled for they could be effectively distinguished motivated by this idea our study aims to distinguish between them of financial series we firstly model long memory and regime switching via the autoregressive fractionally integrated moving average arfima and markov regime switching mrs models respectively their finite sample properties and the confusion are investigated via simulations to control for the cause of this confusion we propose the mrs arfima model a monte carlo study shows that this framework can effectively distinguish between the pure arfima and pure mrs processes furthermore mrs arfima outperforms the ordinary arfima model for data simulated from the mrs arfima process finally empirical studies of hourly and five minute garman klass and realized volatility of the ftse index is conducted to demonstrate the advantages and usefulness of the proposed mrs arfima framework compared with the arfima and mrs models in practice

exploiting the heteroskedasticity in measurement error to improve volatility predictions in oil and biofuel feedstock markets abstract we examine whether heteroskedasticity in measurement errors improves the volatility forecasting ability of the heterogenous autoregressive har model in crude oil and biofuel feedstock markets we also examine the incremental explanatory power of jumps and the investor fear gauge ifg over heteroskedasticity in measurement errors in improving the volatility forecasting ability of the har model in each of these markets for the in sample evaluation we find that exploiting the heteroskedasticity of measurement errors in the har model improves the model s goodness of fit measured by adjusted r2 by up to 10 depending on the market ifg has a significant incremental role over heteroskedasticity in measurement errors in improving the fit of the har model in both the crude oil and biofuel feedstock markets while jumps have a significant incremental role in improving the fit of the har model in the crude oil market but not the biofuel feedstock markets for the out of sample forecasts including regime switching improves volatility predictions in the corn and wheat markets across all forecasting horizons while for the soybean market including regime switching improves the performance of multi step volatility forecasts in the out of sample forecasts the best ranked models almost always include heteroskedasticity of measurement error and ifg

macroeconomic policy evaluation and optimal control theory a critical review of some recent developments abstract this survey addresses the recent literature on the application of optimal control theory and game theory to macroeconomic policy evaluation and design this literature focuses on strategic interactions between governments and private agents engaged in dynamic non cooperative games and emphasizes such issues as precommitment credibility and reputation as important and endemic aspects of optimal policy design a dominant theme is the problem of dynamic inconsistency and the inferiority of an equilibrium in single stage full information games without commitment this may be alleviated in repeated games involving reputation effects and threat strategies designed to coerce rivals into pursuing particular strategies and to sustain a sequential equilibrium the type and characteristics of a sequential equilibrium also depend importantly upon the information structure conditioning players beliefs under uncertainty included here are separating and pooling equilibria involving notions of learning signalling and information revelation additional dimensions exist in stochastic systems which introduce other forms of uncertainty optimal control and game theory have also been applied to international macroeconomic policy design with emphasis on the potential costs and benefits of non cooperative and cooperative behaviour between countries and problems of international policy coordination

the role of information acquisition and financial markets in international macroeconomic adjustment abstract international macroeconomic adjustment to money supply aggregate expenditure and relative demand disturbances is analyzed within a framework which emphasizes the role of information agents are unable to directly observe disturbances and may become fully informed about disturbances only by purchasing information we analyze how relative price and exchange rate adjustment depends on the variances of the underlying disturbances while taking into account the incentive to acquire information we also discuss the conditions which are necessary to preclude a free rider problem whereby uninformed agents are able to extract from observation of financial market conditions the exact information of the information buyers

exchange rate policy and monetary information this paper develops a model of a small open economy in which the presence of local deviations from purchasing power parity give rise to differential information it is assumed that the monetary authorities are committed to buy and sell foreign exchange in order to support an exchange rate policy rule it is demonstrated that exchange rate policy can influence the distribution of real output i if agents possess incomplete and differential information and ii if they have contemporaneous money supply or balance of payments information it is also shown that exchange rate policy can be effective because of its ability to influence the information content of available monetary data the argument is turned around and used to support the frequent release of monetary data

macroeconomic aspects of exchange rate pass through abstract this paper addresses the cause of the variability in exchange rate pass through we develop a model in which foreign exporters setting prices under uncertainty infer the value of domestic income and prices based upon their observation of the exchange rate and their knowledge of the stochastic structure of the economy this inference problem links pass through to the underlying stochastic macroeconomic structure of the economy rather than the source direction or size of the endogenous exchange rate movement that period the predictions of the model are consistent with pass through experience in the united states during the past decade

long memory in volatility and trading volume abstract we use fractionally integrated time series models to investigate the joint dynamics of equity trading volume and volatility bollerslev and jubinski 1999 show that volume and volatility have a similar degree of fractional integration and they argue that this evidence supports a long run view of the mixture of distributions hypothesis we examine this issue using more precise volatility estimates obtained using high frequency returns i e realized volatilities our results indicate that volume and volatility both display long memory but we can reject the hypothesis that the two series share a common order of fractional integration for a fifth of the firms in our sample moreover we find a strong correlation between the innovations to volume and volatility which suggests that trading volume can be used to obtain more precise estimates of daily volatility for cases in which high frequency returns are unavailable