trading volume and information revelation in stock markets i consider a market microstructure model in which the rates of public and private informa tion arrival are probabilistic the latter depends on the availability of private information that is stochastically changing over time in equilibrium traders estimate the availability of private information using past periods trading volume and use this information to adjust their strategies the time series properties include contemporaneous correlation between price variability and volume and autocorrelation in price variability similar to garch the model explains why trading volume contains useful information for predicting volatil ity and provides predictions on the limit and market order placement strategies of traders

maximum likelihood estimation of cointegration in exchange rate models for seven inflationary oecd countries abstract we apply the johansen technique to estimate cointegration in a monetary exchange rate model modified for real exchange rate fluctuations and applied to seven inflationary oecd countries we generally find one or more cointegrating vectors and the signs of their coefficients are broadly consistent with the modified monetary model the adjustment coefficients are also examined our statistical testing is based on bootstrapping and generates much more conservative rejection criteria than the use of asymptotic critical values even after a substantial degree of freedom correction power estimates are also presented finally we conclude that the monetary model unmodified for real exchange rate fluctuations would be inadequate

the out of sample success of term structure models as exchange rate predictors a step beyond abstract a large literature suggests that standard exchange rate models cannot outperform a random walk forecast and that the forward rate is not an optimal predictor of the spot rate however there is evidence that the term structure of forward premia contains valuable information for forecasting future spot exchange rates and that exchange rate dynamics display nonlinearities this paper proposes a term structure forecasting model of exchange rates based on a regime switching vector equilibrium correction model which is novel in this context our model significantly outperforms both a random walk and to a lesser extent a linear term structure vector equilibrium correction model for four major dollar rates across a range of horizons

modeling and forecasting large realized covariance matrices and portfolio choice summary we consider modeling and forecasting large realized covariance matrices by penalized vector autoregressive models we consider lasso type estimators to reduce the dimensionality and provide strong theoretical guarantees on the forecast capability of our procedure we show that we can forecast realized covariance matrices almost as precisely as if we had known the true driving dynamics of these in advance we next investigate the sources of these driving dynamics as well as the performance of the proposed models for forecasting the realized covariance matrices of the 30 dow jones stocks we find that the dynamics are not stable as the data are aggregated from the daily to lower frequencies furthermore we are able beat our benchmark by a wide margin finally we investigate the economic value of our forecasts in a portfolio selection exercise and find that in certain cases an investor is willing to pay a considerable amount in order get access to our forecasts copyright 2016 john wiley sons ltd

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

the interrelations of finance and economics theoretical perspectives it is traditional in a discussion piece to organize the material in one of two ways the writer can either take a historical perspective and attempt to explain how it is we got where we are today and where we are likely to go from here or the writer can describe the current state of the art dwelling on particular points of interest or promise in the prevailing research having quite recently done both i thought i would take a somewhat different approach i would like to try to briefly describe the main characteristics of a neoclassical theory of finance that captures the essential themes of modern finance and relate these characteristics to the general themes of economics finance uses the modeling framework constructed in economics but within this scaffolding finance has taken a different methodological perspective it is wrong to characterize finance or financial economics to be formal as simply another of the specialty areas of economics not unlike for example labor economics or development economics or public finance while finance is specialized in its focus on the financial markets the differences between economics and finance only begin there the principal distinction is one of methodology rather than of focus if labor markets behaved like financial markets the theories of finance would be used to study them indeed the line where financial theoretic analysis leaves off and more conventional patterns of economic reasoning begin is an active research issue

electricity market integration decarbonisation and security of supply dynamic volatility connectedness in the irish and great britain markets abstract this study investigates the volatility connectedness between the irish and great britain electricity markets and how it is driven by changes in energy policy institutional structures and political ideologies we assess various aspects of this volatility connectedness including static unconditional vs dynamic conditional symmetric vs asymmetric characteristics between 2009 and 2018 we find that the volatility connectedness is time varying and it is significantly affected by important events policy reforms or market re designs such as brexit oil price slump an increasing share of renewables and fluctuations in the exchange rates our asymmetric analysis shows that magnitude of the good volatility connectedness is marginally larger than that of the bad volatility connectedness our result suggests that good volatility levels would be even higher once the irish market adopts the carbon price floor therefore supporting renewable generation by setting an appropriate price of carbon in interconnected wholesale electricity markets will improve market integration

rolling sampled parameters of arch and levy stable models in this paper an asymmetric autoregressive conditional heteroskedasticity arch model and a levy stable distribution are applied to some well known financial indices dax30 ftse20 ftse100 and sp500 using a rolling sample of constant size in order to investigate whether the values of the estimated parameters of the models change over time although there are changes in the estimated parameters reflecting that structural properties and trading behaviour alter over time the arch model adequately forecasts the one day ahead volatility a simulation study is run to investigate whether the time variant attitude holds in the case of a generated arch data process revealing that even in that case the rolling sampled parameters are time varying

continuous time model of uncovered interest parity with regulated jump diffusion interest differential this study investigates to what extent can an exchange rate model built on uncovered interest parity uip match the empirical features of the exchange rate and the interest differential data this article presents a continuous time model of uip in which the interest differential evolves following regulated jump diffusion simulation experiments show that the model is capable of matching several important features of the data inclusion of jumps improves the model to capture persistent dynamics of interest differential and fat tails in exchange rate returns compared to simple diffusion processes

price volatility trading volume and market depth evidence from futures markets the relations between volume volatility and market depth in eight physical and financial futures markets are examined evidence suggests that linking volatility to total volume does not extract all information when volume is partitioned into expected and unexpected components the paper finds that unexpected volume shocks have a larger effect on volatility further the relation is asymmetric the impact of positive unexpected volume shocks on volatility is larger than the impact of negative shocks finally consistent with theories of market depth the study shows large open interest mitigates volatility

common persistence in conditional variances since the introduction of the autoregressive conditional heteroskedastic arch model in engle 1982 numerous applications of this modeling strategy have already appeared a common finding in many of these studies with high frequency financial or monetary data concerns the presence of an approximate unit root in the autoregressive polynomial in the univariate time series representation for the conditional second order moments of the process as in the so called integrated generalized arch igarch class of models proposed in engle and bollerslev 1986 in the igarch models shocks to the conditional variance are persistent in the sense that they remain important for forecasts of all horizons this idea is readily extended to a multivariate framework even though many time series may exhibit persistence in variance it is likely that several different variables share the same common long run component in that situation the variables are naturally defined to be co persistent in variance and the co persistent linear combination is interpretable as a long run relationship conditions for co persistence to occur in the multivariate linear garch model are presented these conditions parallel the conditions for linear co integration in the mean as developed by engle and granger 1987 the presence of co persistence has important implications for asset pricing relationships and in optimal portfolio allocation decisions an empirical example relating to the time series properties of nominal u s dollar exchange rates for the deutschemark and the british pound provides a simple illustration of the ideas

foreign exchange market efficiency and common stochastic trends abstract in a recent paper baillie and bollerslev 1989 using daily data from 1980 to 1985 identified six common stochastic trends in a vector of seven nominal exchange rates implying the existence of one cointegrating vector cointegration implies that granger causality must run in at least one direction that is at least one of the exchange rates is predictable using current available information this result has been interpreted as foreign exchange market inefficiency by many another interpretation is suggested if the stationary linear combination of spot rates proxies for a time varying risk premium in some way then these results could be explained in a rational and risk averse market this possibility is eliminated if the time series properties of the risk premium are incompatible with those of the error correction term specifically it is demonstrated that the forward risk premium is non stationary for the exchange rates that comprise the exchange rate cointegration relationship in this paper the existence of common stochastic trends in a vector of nominal exchange rates is tested over the period 1974 to 1991 the efficiency of foreign exchange markets is then tested by examining the implications of stochastic trends in the forward premium and what this means for the time series properties of a time varying forward risk premium jel f31 g14

exchange rate volatility and u s monetary policy an arch application this paper examines the effect of shifts in u s monetary policy regimes on the stochastic process that generates foreign exchange rates to account for the observed behavior of the data record the author models nominal dollar exchange rates as univariate autoregressive conditional heteroskedastic processes he then tests the stability of this process across u s monetary policy regimes for four of the currencies in the sample accounting for regime shifts improves the fit of the model regime shifts also appear to diminish the degree of persistence of variance making it less likely that exchange rates are integrated in variance copyright 1989 by ohio state university press

econometric analysis of vast covariance matrices using composite realized kernels and their application to portfolio choice we propose a composite realized kernel to estimate the ex post covariation of asset prices these measures can in turn be used to forecast the covariation of future asset returns composite realized kernels are a data efficient method where the covariance estimate is composed of univariate realized kernels to estimate variances and bivariate realized kernels to estimate correlations we analyze the merits of our composite realized kernels in an ultra high dimensional environment making asset allocation decisions every day solely based on the previous day s data or a short moving average over very recent days the application is a minimum variance portfolio exercise the dataset is tick by tick data comprising 437 u s equities over the sample period 2006 2011 we show that our estimator is able to outperform its competitors while the associated trading costs are competitive

separability and the modelling of international economic integration most models of the allocation of imports over suppliers adopt a two stage separable procedure in which a total imports function is estimated prior to the function allocating imports over suppliers this procedure is tested for five countries imports of manufactures and found wanting in four of them a more general model is proposed and estimated it is used to estimate the effects of u k accession to the eec on her exports to these countries exports to the eec countries rose but those elsewhere fell overall accession is shown to have worsened the u k s trade balance and gross output of manufactures

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

on the informational content of spot and forward exchange rates abstract in foreign exchange markets efficiency tests have typically been applied to the forward rate on the argument that the forward rate should be a good proxy for the unobservable market expectations of future spot rates the present study offers innovations in two directions first we utilize a data set which consists of daily observations on spot and forward exchange rates this allows us to match the forward contract with the exact settlement date and to create a large number of non overlapping data sets second and more importantly we show that in general the current spot rate is a better predictor of the future spot rate than is the current forward rate of appropriate maturity

common stochastic trends in international stock markets abstract this paper presents evidence concerning the number of common stochastic trends in the equity markets of the u s japan england germany and canada monthly and quarterly data from january 1974 through august 1990 on morgan stanley s capital international indices are used to compute johansen 1990 tests for common trends the results indicate the presence of a single common trend driving these countries stock markets estimates of the factor loadings suggest that this trend is most important in the japanese market and least important in the canadian market to interpret this evidence the paper demonstrates that under weak conditions the unit root and cointegration structure of stock prices should mirror the unit root and cointegration structure of their dividend payments the paper tests this prediction by constructing national dividend series from capital international s dividend yield data as well as by using gnp data as with stock prices the evidence points to a single common trend although the stochastic properties and relative importance of this trend differs somewhat from the trend in stock prices

foreign exchange market efficiency and cointegration in this note we examine an implication of the cointegration literature for the efficiency of foreign exchange markets in particular if foreign exchange markets are efficient then two spot exchange rates cannot be cointegrated this proposition is tested for 10 dollar bilateral exchange rates over the period january 1973 december 1985

are regional trading arrangements trade creating an application of extreme bounds analysis in this study we use extreme bounds analysis to test the robustness of the hypothesis that regional trading arrangements rtas are trade creating extreme bounds analysis provides a more rigorous test of specification uncertainty than traditional econometric theory by incorporating prior information and using a systematic approach to testing the fragility of coefficient estimates the results show that the trade creation effect of most rtas is fragile using a least squares estimator where all weight is attached to the sampling distribution eight or more of the twelve rtas considered are found to be trade creating when the relative weight in the estimation is shifted from the sampling to the prior distribution the number of rtas that are trade creating falls to six at the 95 percent likelihood ellipsoid moreover when we specify that not all rtas are trade creating four rtas increase trade at the 95 percent likelihood ellipsoid at the extreme bounds when all weight is attached to the prior distribution none of the rtas are found to be trade creating as a result we conclude that the pervasive trade creation effect found in the literature reflects not the information content of the data but rather the unacknowledged beliefs of the researchers

cointegration and market efficiency abstract recently many economists have asserted that asset prices determined in efficient asset markets cannot be cointegrated we show that there is no general equivalence between the existence of arbitrage opportunities and cointegration or for that matter a lack of cointegration whether asset prices are cointegrated is a function of the relevant model we first show a convenient way to calculate the cointegrating vector based on necessary and sufficient conditions for cointegration we then examine particular cases including exchange rates interest rates and spot and forward exchange rates and asset prices with incoem flows reinvested and not reinvested jel f31

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

a variance spillover analysis without covariances what do we miss we evaluate the relevance of covariances in the transmission mechanism of variance spillovers across the us stock us bond and gold markets from july 2003 to december 2012 for that purpose we perform a comparative spillover analysis between a model that considers covariances and a model that considers only variances our results emphasise the importance of covariances including covariances leads to an overall increase of the spillover level and detects the beginnings of the financial crisis and of the us debt ceiling crisis earlier than the spillover measure that considers only variances even for the low dimensional system that we consider one misses important variance spillover channels when covariances are excluded

consistent testing for stochastic dominance under general sampling schemes we propose a procedure for estimating the critical values of the extended kolmogorov smirnov tests of stochastic dominance of arbitrary order in the general k prospect case we allow for the observations to be serially dependent and for the first time we can accommodate general dependence amongst the prospects which are to be ranked also the prospects may be the residuals from certain conditional models opening the way for conditional ranking we also propose a test of prospect stochastic dominance our method is based on subsampling and we show that the resulting tests are consistent and powerful against some n 1 2 local alternatives we also propose some heuristic methods for selecting subsample size and demonstrate in simulations that they perform reasonably we describe an alternative method for obtaining critical values based on recentring the test statistic and using full sample bootstrap methods we compare the two methods in theory and in practice

causality in quantiles and dynamic stock return volume relations abstract this paper investigates the causal relations between stock return and volume based on quantile regressions we first define granger non causality in all quantiles and propose testing non causality by a sup wald test such a test is consistent against any deviation from non causality in distribution as opposed to the existing tests that check only non causality in certain moment this test is readily extended to test non causality in different quantile ranges in the empirical studies of three major stock market indices we find that the causal effects of volume on return are usually heterogeneous across quantiles and those of return on volume are more stable in particular the quantile causal effects of volume on return exhibit a spectrum of symmetric v shape relations so that the dispersion of return distribution increases with lagged volume this is an alternative evidence that volume has a positive effect on return volatility moreover the inclusion of the squares of lagged returns in the model may weaken the quantile causal effects of volume on return but does not affect the causality per se

the threshold effect in expected volatility a model based on asymmetric information this article develops theoretical insight into the threshold effect in expected volatility which means that large shocks are less persistent in volatility than small shocks the model uses the kyle admati pfleiderer setup with liquidity traders informed traders and a market maker information is modeled as a garch process it is shown that the garch process for information is transformed into a tarch process for threshold garch for the market price changes working with information flows allows one to derive implications for trading volume and market liquidity which provide the basis for a more complete test of the model article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

portfolio management using realized covariances evidence from brazil abstract it is often argued that intraday returns can be used to construct covariance estimates that are more accurate than those based on daily returns however it is still unclear whether high frequency data provide more precise covariance estimates in markets more contaminated from microstructure noise such as higher bid ask spreads and lower liquidity we address this question by investigating the benefits of using high frequency data in the brazilian equities market to construct optimal minimum variance portfolios we implement alternative realized covariance estimators based on intraday returns sampled at alternative frequencies and obtain their dynamic versions using a multivariate garch framework our evidence based on a high dimensional data set suggests that realized covariance estimators performed significantly better from an economic point of view in comparison to standard estimators based on low frequency close to close data as they delivered less risky portfolios

cointegration and forward and spot exchange rate regressions abstract we investigate the relationship between cointegration models of the current spot exchange rate s t and the current forward rate f t and cointegration models of the future spot rate s t 1 and f t and the implications of this relationship for tests of the forward rate unbiasedness hypothesis fruh we show that simple models of cointegration between s t and f t imply complicated models of cointegration between s t 1 and f t consequently standard methods are often inappropriate for modeling the cointegrated behavior of s t 1 f t and we show that the use of such methods can lead to erroneous inferences regarding the fruh

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

the covariation of risk premiums and expected future spot exchange rates abstract eugene fama 1984 analyzed the variability and the covariation of risk premiums and expected rates of depreciation we employ three statistical techniques that do not suffer from a potential bias in fama s analysis but we nevertheless conffirms his findings in contrast to his interpretation the results are not necessarily at variance with the predictions of a theoretical model of the risk premium increases in expected rates of depreciation of the dollar relative to five foreign currencies are positively correlated with increases in the expected profitability of purchasing these currencies in the forward market and risk premiums have larger variancies than expected rates of depreciation

financial development and economic growth the role of stock markets utilizing time series methods and data from five developed economies we examine the relationship between stock market development and economic growth controlling for the effects of the banking system and stock market volatility our results support the view that although both banks and stock markets may be able to promote economic growth the erects of the former are more powerful they also suggest that the contribution of stock markets on economic growth may have been exaggerated by studies that utilize cross country growth regressions

the impact of short selling on the price volume relationship evidence from hong kong this paper considers the relationship between traded volume and volatility allowing for the impact of short sales the evidence supports a nonlinear bidirectional relationship between volume and volatility short selling is found to have a significant impact on this relationship and our results suggest i that the hong kong market displays greater volatility following a period of short selling and ii that asymmetric responses to positive and negative innovations to returns appear to be exacerbated by short selling

market efficiency and cointegration an application to the sterling and deutschemark exchange markets abstract the assumption that the foreign exchange market is efficient that is that agents are risk neutral and use all available information rationally so that the forward exchange rate is an unbiased predictor of the future spot rate is a property often imposed in theoretical international macroeconomic models although a vast empirical literature has evolved to test market efficiency we use recent developments in the theory of cointegration to provide new methods of testing several aspects of foreign exchange market efficiency we ffind evidence inconsistent with market efficiency for both germany and the united kingdom

can speculative trading explain the volume volatility relation we derive a speculative trading model with endogenous informed trading that yields a conditionally heteroscedastic time series for trading volume and the squared price changes we use half hourly price change and volume data for ibm during 1988 to test the model and estimate the structural parameters using the simulated method of moments estimation procedure although the model seems to do a reasonable job fitting the unconditional moments of the volume and the squared price change processes it fares less well in fitting the relation between current trading volume and lags of trading volume and squared volume s and its lag s relation to squared price changes

multivariate high frequency based volatility heavy models this paper introduces a new class of multivariate volatility models that utilizes high frequency data we discuss the models dynamics and highlight their differences from multivariate garch models we also discuss their covariance targeting speci cation and provide closed form formulas for multi step forecasts estimation and inference strategies are outlined empirical results suggest that the heavy model outperforms the multivariate garch model out of sample with the gains being particularly signi cant at short forecast horizons forecast gains are obtained for both forecast variances and correlations

the european exchange rate mechanism and the volatility of the sterling deutschemark exchange rate sterling membership of the erm focused interest on the sterling deutsche mark exchange rate with commentators predicting a reduction in exchange rate volatility this paper analyzes the sterling deutsche mark rate pre and post erm entry and finds that erm membership significantly reduced volatility this reduction in volatility is characterized by the disappearance of arch effects evident prior to erm membership the paper argues that the disappearance of arch is probably associated with a reduction in activity of speculators particularly technical analysts copyright 1993 by royal economic society

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

futures based forecasts how useful are they for oil price volatility forecasting oil price volatility forecasts have recently attracted the attention of many studies in the energy finance field the literature mainly concentrates its attention on the use of daily data using garch type models it is only recently that efforts to use more informative intraday data to forecast oil price realized volatility have been made despite all these previous efforts no study has examined the usefulness of futures based models for oil price realized volatility forecasting although the use of such models is extensive for oil price predictions this study fills this void and shows that futures based forecasts based on intra day data provide informative forecasts for horizons that span between 1 day and 66 days ahead more importantly these results hold true even during turbulent times for the oil market such as the global financial crisis of 2007 09 and the oil collapse period of 2014 15

time varying international stock market interaction and the identification of volatility signals abstract this paper investigates the dependency of international stock market interaction on financial volatility we show in a stylized economic model that volatility dependent cross market spillovers can be interpreted in two different ways as indicating information flow or uncertainty if higher volatility in one market leads to higher lower reactions in another market volatility reflects information uncertainty we apply a simultaneous time varying coefficient model where structural arch type variances serve two purposes governing the time variation of spillovers and ensuring statistical identification we analyze data of us and further stock markets indeed we find strong nonlinear volatility dependent spillovers

tax induced trading around ex dividend days abstract this paper investigates trading volume around ex dividend days for taxable distributions cash dividends it is found that trading volume increases significantly around the ex dividend day this increase is more pronounced for high yield actively traded stocks and after brokerage commissions became negotiable the results are consistent with the hypothesis that short term traders have an impact on ex day price behavior at least for taxable distributions for non taxable distributions stock splits and stock dividends we find negative abnormal volume around ex day

the forward exchange rate and the prediction of the future spot rate empirical evidence abstract this paper examines the characteristics and evaluates the record of the forward exchange rate as a predictor of the future spot rate of three european currencies during the recent period of floating rates the forward rate for 1 3 and 6 months is compared to a simple predictor of no change extrapolations i e a martingale model by the use of theil s inequality ratios theil s measures are then applied to assess the relative importance of the various sources of the forward s prediction errors and the efficiency of the forecast is tested the results show that the forward rate while generally producing unbiased forecasts fails to track the fluctuations in future spot rates and poorly reflects their variations further it does not perform better than the current spot rate in predicting the future spot rate for all the examined forecast leads thus its usefulness for the purpose of business decisions is questioned

market conditions trader types and price volume relation in energy futures markets we investigate the asymmetric relations between trading volume and price changes and trading volume and price volatility of energy futures contracts across maturities and under different market conditions using a relatively long sample of daily observations we examine whether the impact of trading volume on returns and volatility of futures contracts can be time varying and dependent on the market condition we differentiate the market condition based on the slope of the forward curve into backwardation and contango the results indicate that trading volume and returns are positively related when the market is in backwardation and negatively related when the market is in contango in addition the positive relation between changes in trading volume and volatility of futures contracts seem to be stronger when the market is in backwardation than when it is in contango finally the results indicate that to a certain extent trade participation and trading activities of agents in energy futures markets can be explained by the slope of the forward curve which reflects the market condition and sentiment

the relation between price changes and trading volume a survey this paper reviews previous and current research on the relation between price changes and trading volume in financial markets and makes four contributions first two empiri cal relations are established volume is positively related to the magnitude of the price change and in equity markets to the price change per se second previous theoretical research on the price volume relation is summarized and critiqued and major insights are emphasized third a simple model ofthe price volume relation is proposed that is consis tent with several seemingly unrelated or contradictory observations and fourth several directions for future research are identified

innovation and trade performance in the united kingdom a popular explanation for the u k s poor trade performance in the postwar period is that insufficient attention was paid to the quality of goods offered to consumers the authors explore the role of both price and quality factors in determining the net trade balances of a number of u k manufacturing and service industries particular attention is paid to the role of innovation used empirically as a proxy for product improvement the findings show considerable support for the view that an advanced industrial country like britain needs to continually upgrade its products to avoid erosion of its domestic and international market shares

measuring business cycle time the business cycle analysis of arthur f burns and wesley c mitchell and the national bureau of economic research presumed that aggregate economic variables evolve on a time scale defined by business cycle turning points rather than by months or quarters do macroeconomic variables appear to evolve on an economic rather than a calendar time scale evidence presented here suggests that they do however the estimated economic time scales are only weakly related to business cycle time scales providing evidence against the view underlying traditional business cycle analysis copyright 1987 by university of chicago press

the information content of end of the day index futures returns international evidence from the osaka nikkei 225 futures contract abstract employing a generalized autoregressive conditional heteroskedastic garch time series model this study investigates the relationship between end of the day eod osaka nikkei index futures returns and overnight spot returns for the period september 1988 through june 1991 a statistically significant positive relationship is found between the unexpected component of eod futures returns and overnight spot returns in addition the unexpected component of eod futures returns is positively related to trading period spot returns over the next two trading days these results suggest that eod futures returns reflect the information of informed traders which is partially revealed through trading the recent elimination of eod osaka nikkei futures trading has removed an important source of information dissemination

modeling and predicting the cboe market volatility index abstract this paper performs a thorough statistical examination of the time series properties of the daily market volatility index vix from the chicago board options exchange cboe the motivation lies not only on the widespread consensus that the vix is a barometer of the overall market sentiment as to what concerns investors risk appetite but also on the fact that there are many trading strategies that rely on the vix index for hedging and speculative purposes preliminary analysis suggests that the vix index displays long range dependence this is well in line with the strong empirical evidence in the literature supporting long memory in both options implied and realized variances we thus resort to both parametric and semiparametric heterogeneous autoregressive har processes for modeling and forecasting purposes our main findings are as follows first we confirm the evidence in the literature that there is a negative relationship between the vix index and the s p 500 index return as well as a positive contemporaneous link with the volume of the s p 500 index second the term spread has a slightly negative long run impact in the vix index when possible multicollinearity and endogeneity are controlled for finally we cannot reject the linearity of the above relationships neither in sample nor out of sample as for the latter we actually show that it is pretty hard to beat the pure har process because of the very persistent nature of the vix index

floating exchange rates expectations and new information abstract this paper analyzes the relationship between forward exchange rates future spot rates and new information a stochastic model of exchange rate determination is used to formally show how unanticipated changes in the exchange rate determinants or news affect the spot rate the empirical analysis indicates that new information plays an important role in explaining the market forecasting error or difference between the spot rate and the forward rate determined in the previous period

cointegration fractional cointegration and exchange rate dynamics multivariate tests due to johansen 1988 1991 as implemented by baillie and bollerslev 1989a and diebold gardeazabal and yilmaz 1994 reveal mixed evidence on whether a group of exchange rates are cointegrated further analysis of the deviations from the cointegrating relationship suggests that it possesses long memory and may possibly be well described as a fractionally integrated process hence the influence of shocks to the equilibrium exchange rates may only vanish at very long horizons in the article by baillie and bollerslev 1989a it is argued that seven different nominal spot and forward exchange rates all contain unit roots in their univariate time series representations at the same time however the spot exchange rates appear to be tied together in the long run through a cointegration type relationship the latter finding of baillie and bollerslev has attracted particular interest and several studies such as those by hakkio and rush 1991 and sephton and larsen 1991 have already addressed this issue using the same data as the baillie and bollerslev article sephton and larsen 1991 describe the evidence for the presence of cointegration as being fragile and note that mixed conclusions are reached by truncating the baillie and bollerslev sample at different points in time diebold gardeazabal and yilmaz 1994 henceforth diebold et al provide interesting evidence that application of the johansen 1988 1991 tests with and without an intercept will result in different inferences on the baillie and bollerslev data set furthermore diebold et al carry out an ex ante forecasting experiment and find that the addition of an error correction term to the martingale model as implied by the standard cointegration paradigm fails to reduce the prediction mean square error when compared to a simple martingale model this therefore leads diebold et al to conclude that there exists substantial uncertainty regarding the existence of cointegration relationships among nominal dollar exchange rates this article provides some additional evidence on the existence of such a long run relationship among the same seven nominal spot exchange rates after further analysis it appears that a form of cointegration does exist between the exchange rates so that they do not drift apart in the long run we argue that this form of cointegration is

modelling and forecasting multivariate realized volatility summary this paper proposes a methodology for dynamic modelling and forecasting of realized covariance matrices based on fractionally integrated processes the approach allows for flexible dependence patterns and automatically guarantees positive definiteness of the forecast we provide an empirical application of the model which shows that it outperforms other approaches in the extant literature both in terms of statistical precision as well as in terms of providing a superior mean variance trade off in a classical investment decision setting copyright 2010 john wiley sons ltd

testing the hypothesis of market efficiency in the taiwan us forward exchange market since 1990 this article examines the applicability of the hypothesis of market efficiency in taiwan s foreign exchange market using daily data instead of linear regression based models we consider the possibility that the true data generating process may come from two different distributions and we employ the markov switching approach to analyse this from the results of the two state markov switching model we define state 1 as the efficient state and state 2 as the inefficient one only the 30 day forward rate is able to differentiate between the two states based on the unconditional probabilities from the markov switching model we also find that the 30 day forward rate has a 70 probability in the efficient state which indicates that 70 of all speculators fully extract information when predicting future spot rates while 30 of all investors do not

on the forecasting accuracy of multivariate garch models this paper addresses the question of the selection of multivariate garch models in terms of variance matrix forecasting accuracy with a particular focus on relatively large scale problems we consider 10 assets from nyse and nasdaq and compare 125 model based one step ahead conditional variance forecasts over a period of 10 years using the model confidence set mcs and the superior predicitive ability spa tests model per formances are evaluated using four statistical loss functions which account for different types and degrees of asymmetry with respect to over under predictions when consid ering the full sample mcs results are strongly driven by short periods of high market instability during which multivariate garch models appear to be inaccurate over rel atively unstable periods i e dot com bubble the set of superior models is composed of more sophisticated specifications such as orthogonal and dynamic conditional correlation dcc both with leverage effect in the conditional variances however unlike the dcc models our results show that the orthogonal specifications tend to underestimate the conditional variance over calm periods a simple assumption like constant conditional correlation and symmetry in the conditional variances cannot be rejected finally during the 2007 2008 financial crisis accounting for non stationarity in the conditional variance process generates superior forecasts the spa test suggests that independently from the period the best models do not provide significantly better forecasts than the dcc model of engle 2002 with leverage in the conditional variances of the returns

common stochastic trends between forward and spot exchange rates abstract the common trend analyses between the forward rate f t and the corresponding future spot rate of the same currency s t 1 have raised several issues notably the sensitivity of the cointegrating relation to a constant term and lag lengths and the non stationarity of the risk premium this paper addresses these issues more rigorously using the daily exchange rate of the pound sterling vis a vis five major currencies viz the canadian dollar french franc german mark japanese yen and us dollar the appropriate deterministic term in the cointegrating space is identified through empirical tests a robust cointegrating relation is found between f t and s t 1 however the hypothesis of unbiasedness of forward rate could not be sustained an alternative measure of risk premium is suggested and its stationarity is confirmed

volume autocorrelation information and investor trading this study investigates whether the widely documented daily correlated trading volume of stocks is driven by individual investor trading institutional trading or both we find that at least 95 of nyse and amex stocks exhibit statistically significant positive serial correlation volume autocorrelation decreases with the level of institutional ownership of a stock we also show that the rate of arrivals of new information to the market contributes to the clustering of trades when there is high information flow to the market institutional trading generates a more pronounced effect on volume autocorrelation than individual investor trading our results are broadly consistent with the predictions of trading volume patterns suggested by most theoretical models of stock trading and by empirical research on investor trading

persistence in variance structural change and the garch model this article examines the persistence of the variance as measured by the generalized autoregressive conditional heteroskedasticity garch model in stock return data in particular we investigate the extent to which persistence in variance may be overstated because of the existence of and failure to take account of deterministic structural shifts in the model both an analysis of daily stock return data and a monte carlo simulation experiment confirm the hypothesis that garch measures of persistence in variance are sensitive to this type of model misspecification

empirical exchange rate models and currency risk some evidence from density forecasts a large literature in exchange rate economics has investigated the forecasting performance of empirical exchange rate models using conventional point forecast accuracy criteria however in the context of managing exchange rate risk interest centers on more than just point forecasts this paper provides a formal evaluation of recent exchange rate models based on the term structure of forward exchange rates which previous research has shown to be satisfactory in point forecasting in terms of density forecasting performance the economic value of the exchange rate density forecasts is investigated in the context of an application to a simple risk management exercise

the price variability volume relationship on speculative markets this paper concerns the relationship between the variability of the daily price change and the daily volume of trading on the speculative markets our work extends the theory of speculative markets in two ways first we derive from economic theory the joint probability distribution of the price change and the trading volume over any interval of time within the trading day and second we determine how this joint distribution changes as more traders enter or exit from the market the model s parameters are estimated by fiml using daily data from the 90 day t bills futures market the results of the estimation can reconcile a conflict between the price variability volume relationship for this market and the relationship obtained by previous investigators for other speculative markets this paper concerns the relationship between the variability of the daily price change and the volume of trading on speculative markets previous empirical studies 2 3 6 12 14 16 of both futures and equity markets always find a positive association between price variability as measured by the squared price change ap2 and the trading volume 2 there are two explanations for the relationship clark s 2 explanation which is secondary to his effort to explain why the probability distribution of the daily price change is leptokurtic emphasizes randomness in the number of within day transactions in clark s model the daily price change is the sum of a random number of within day price changes the variance of the daily price change is thus a random variable with a mean proportional to the mean number of daily transactions clark argues that the trading volume is related positively to the number of within day transactions and so the trading volume is related positively to the variability of the price change the second explanation is due to epps and epps 6 their model examines the mechanics of within day trading the change in the market price on each within day transaction or market clearing is the average of the changes in all of the traders reservation prices epps and epps assume there is a positive relationship between the extent to which traders disagree when they revise their reservation prices and the absolute value of the change in the market price that is an increase in the extent to which traders disagree is associated with a larger absolute price change the price variability volume relationship arises then because the volume of trading is positively related to the extent to which traders disagree when they revise their reservation prices

heteroskedasticity in stock return data volume versus garch effects this paper provides empirical support for the notion that autoregressive conditional heterqskedasticity arch in daily stock return data reflects time dependence in the process generating information flow to the market daily trading volume used as a proxy for information arrival time is shown to have significant explanatory power regarding the variance of daily returns which is an implication of the assumption that daily returns are subordinated to intraday equilibrium returns furthermore arch effects tend to disappear when volume is included in the variance equation the autoregressive conditiqnal heteroskedasticity arch process of engle 1982 has been shown to provide a good fit for many financial return time series 1 arch imposes an autoregressive structure on conditional variance allqwing volatility shocks to persist over time this persistence captures the propensity of returns of like magnitude to clu ter in time and can explain the well documented nonnormality and nonstability of empirical asset return distributions see especially fama 1965 an appealing explanation for the presence of arch is based upon the hypothesis that daily returns are generated by a maiture of distributions in which the rate of daily information arrival is the stochastic mixing variable as suggested by diebold 1986 gallant hsieh and tauchen 1988 and stock 1987 1988 arch might capture the time series properties e g serial correlation of this mixing variable hqwever this linkage has not been broadly documented with the datia the objective of this study is to examine the validity of this explanation for daily stock returns the empirical strategy exploits the implication of the mixture model that the variance of daily price increments is heteroskedastic specifically positively related to the rate of daily information arrival using daily trading volume as a proxy for the mixing variable we show that for a sample of 20 common stocks arch effects vanish when volume is included as an explanatory variable in the conditional variance equation

on cointegration and exchange rate dynamics baillie and bollerslev 1989 have recently argued that nominal dollar spot exchange rates are cointegrated here we examine an immediate implication of their finding namely that cointegration implies an error correction representation yielding forecasts superior to those from a martingale benchmark in light of a large earlier literature highlighting the predictive superiority of the martingale in an out of sample forecasting exercise we find the martingale model to be superior we then perform a battery of improved cointegration tests and find that the evidence for cointegration is much less strong than previously thought a result consistent with the outcome of the forecasting exercise

common stochastic trends in a system of exchange rates univariate tests reveal strong evidence for the presence of a unit root in the univariate time series representation for seven daily spot and forward exchange rate series furthermore all seven spot and forward rates appear to be cointegrated that is the forward premiums are stationary and one common unit root or stochastic trend is detectable in the multivariate time series models for the seven spot and forward rates respectively this is consistent with the hypothesis that the seven exchange rates possess one longrun relationship and that the disequilibrium error around that relationship partly accounts for subsequent movements in the exchange rates a general consensus has emerged in recent years that many macroeconomic time series such as gnp consumption expenditures disposable income etc can be characterized by a stochastic trend model in particular nelson and plosser 22 described this property as one of being difference stationary so that the first difference of a time series is stationary an alternative trend stationary model where a stationary component is added to a deterministic trend term has generally been found to be less appropriate 1 similarly it has long been recognized that many financial time series such as foreign exchange rates are nonstationary e g in meese and singleton 21 the issue of nonstationary is not merely a statistical curiosity but has several important implications for the modeling of exchange rates for instance many models of exchange rate determination under rational expectations require stationarity assumptions when solving out the expected future values of the fundamentals further there has been some controversy over the appropriate transformations to use when conducting tests of whether the forward rate is an unbiased and efficient predictor of the future spot exchange rate 2 some authors e g frenkel 11 12 have conducted tests in levels while geweke and feige 14