forecasting the exchange rate a monetary or random walk phenomenon abstract this paper evaluates the forecasting accuracy of monetary and random walk models of the exchange rate instrumental variable estimates of the simple monetary model are not supported by the data while the full information maximum liklihood estimates of its rational expectations counterpart are the rational expectations monetary model is operationalized using the results of hansen and sargent 1980 and flavin 1981 and box jenkins time series techniques monthly data on the us and uk economics over the recent flexible exchange rate period serve as the case study

short run forecasting of the euro dollar exchange rate with economic fundamentals abstract we propose a fundamentals based econometric model for the weekly changes in the euro dollar rate with the distinctive feature of mixing economic variables quoted at different frequencies the model obtains good in sample fit and more importantly encouraging out of sample forecasting results at horizons ranging from one week to one month specifically we obtain statistically significant improvements upon the hard to beat random walk model using traditional statistical measures of forecasting error at all horizons moreover our model obtains a great improvement when we use the direction of change metric which has more economic relevance than other loss measures with this measure our model performs much better at all forecasting horizons than a naive model that predicts the exchange rate as an equal chance to go up or down with statistically significant improvements

earnings performance and the incremental information content of cash flows from operations this paper investigates whether the incremental information content of cash flows from operations increases when earnings are transitory we suggest that when the valuation implications of earnings are limited by the presence of transitory items cash flows from operations disclosures may play a larger role as an additional value signal we measure transitory items using earnings change scaled by beginning of period price ali 1994 and the earnings to price ratio ou and penman 1989 and ali and zarowin 1992 our analysis suggests that the incremental information content of accounting earnings decreases and the incremental information content of cash flows from operations increases with a decrease in the permanence of earnings

trader see trader do how do small fx traders react to large counterparties trades abstract we show that information about the counterparty of a trade affects the future trading decisions of individual traders the effect is such that traders tend to reverse their order flow in line with the better informed counterparties informed traders primarily incorporate their own private as well as publicly available information into prices whereas uninformed traders mainly magnify the effect of the informed this pattern of interaction among traders extends to different order types traders treat their own and others market orders as more informative than limit orders

global microstructures the virtual societies of financial markets using participant observation data interviews and trading transcripts drawn from interbank currency trading in global investment banks this article examines regular patterns of integration that characterize the global social system embedded in economic transactions to interpret these patterns which are global in scope but microsocial in character this article uses the term global microstructures features of the interaction order loosely defined have become constitutive of and implanted in processes that have global breadth this study draws on schutz in the development of the concept of temporal coordination as the basis for the level of intersubjectivity discerned in global markets this article contributes to economic sociology through the analysis of cambist i e trading markets which are distinguished from producer markets and by positing a form of market coordination that supplements relational or network forms of coordination

firm size and executive compensation using several data sets the relationship between executive income and firm size is shown to be relatively stable over time and in different countries the elasticity of executive earnings to firm size is about the same today as it was in the 1930s with evidence of a decline in the earnings of top executives controlling for firm size in addition to the effects of size and other firm and industry characteristics there are returns to age and experience there is also substantial variability in the level of compensation among firms of comparable size indicating that there may be impediments to mobility

management ownership and market valuation an empirical analysis we investigate the relationship between management ownership and market valuation of the firm as measured by tobin s q in a 1980 cross section of 371 fortune 500 firms we find evidence of a significant nonmonotonic relationship tobin s q first increases then declines and finally rises slightly as ownership by the board of directors rises for older firms there is evidence that q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder

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

investment intensity of currencies and the random walk hypothesis cross currency evidence abstract this paper studies the cross currency and temporal variations in the random walk behavior in exchange rates we characterize currencies with relatively large investment flows as investment intensive and conjecture that the more investment intensive a currency is the closer its exchange rate adheres to random walk using 29 floating bilateral usd exchange rates we find that the higher the investment intensity the less likely it is to reject random walk and the smaller the deviation from random walk is however the effect of investment intensity is non monotonic application of threshold models shows that after investment intensity reaches the estimated thresholds the level of investment intensity has no further effect on the deviation from random walk these findings help reconcile the previous conflicting results on the random walk in exchange rates by focusing on the effect of cross currency and temporal variations in investment intensity

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

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

currency fluctuations in the post bretton woods era the international monetary landscape that has emerged since the felling of bretton woods is characterized by a hybrid exchange rate system that lies somewhere between the textbook polar cases of a gold standard and a pure float this system has relatively flexible exchange rates between major countries active central bank intervention in the market for the major currencies and predominantly fixed exchange rates relative to the dollar or to some basket of currencies for less developed countries and newly industrializing nations the majority of research on currency markets since the early 1970s has focused on the characteristics of flexible exchange rates under this hybrid regime my thesis is that this research has been unsuccessful the proportion of monthly or quarterly exchange rate changes that current models can explain is essentially zero even after the fact forecasts that use actual values instead of forecasted values of the explanatory variables cannot explain major currency movements over the post bretton woods era this result is quite surprising since exchange rate changes would be entirely unpredictable only in very special cases of the theoretical models discussed as the discussion below will argue it is not a general implication of market efficiency that exchange rates follow a random walk process 1

the asymmetric relationship between executive earnings management and compensation a panel threshold regression approach abstractprior research shows that chief executive officers ceos are rewarded for their earnings management we re examine this issue using a panel threshold regression approach which allows the effect of earnings management on the ceo compensation to change across the level of earnings management and ceo compensation our results show that the effect of ceos discretionary accounting choices on their compensation is not homogeneous across various degrees of earnings management and compensation in particular for firms with moderate inordinate levels of earnings management and ceo compensation earnings management is rewarded penalized

does the exchange rate follow a random walk a monte carlo study of four tests for a random walk abstract several authors have urged that real and nominal exchange rates follow a random walk conditions under which the exchange rate follows a random walk are reviewed in this paper many of these do not appear to hold therefore the empirical evidence presents a puzzle some evidence suggets the exchange rate follows a random walk while other evidence suggests the opposite should be true this paper attempts to reconcile the evidence it is argued that the tests for a random walk have low power monte carlo evidence on four tests for a random walk is presented that suppors this claim

expectations driven distortions in the foreign exchange market this paper explores the phenomenon of lasting deviations of the exchange rate from its fundamental value in the foreign exchange market motivated by empirical observations a chartists fundamentalists model is developed in which boundedly rational agents repeatedly choose between technical and fundamental trading rules to determine their speculative investment positions crucial for the dynamics is how the traders perceive the fundamental exchange rate this perception process is based on psychological evidence simulations give rise to bubbles but simultaneously display quite realistic exchange rate dynamics unit roots in the exchange rates fat tails for returns and volatility clustering

annual bonus schemes and the manipulation of earnings abstract using confidential data of executive specific short term bonus plans we investigate the extent to which executives manipulate earnings to maximize the present value of bonus plan payments as such this paper extends the work of healy 1985 like healy we find evidence consistent with the hypothesis that managers manipulate earnings downwards when their bonuses are at their maximum unlike healy we find no evidence that managers manipulate earnings downwards when earnings are below the minimum necessary to receive any bonus we demonstrate that healy s results at the lower bound are likely to be induced by his methodology

demand for cigarettes revisited an application of the threshold regression model recent estimates of the income elasticity of cigarette demand have pointed to a disturbing result a nearly zero or sometimes negative income elasticity in order to explore the nonlinearity embedded in the cigarette demand structure we employ a four regime panel model dynamic fixed effect to estimate the cigarette demand function in the united states the results indicate that income elasticity is i positively significant for the income level less than 8 568 us ii positive but statistically insignificant for the income greater than 18 196 us and iii negatively significant for the income range between 8 568 and 18 196 us in addition we find that the price elasticity assumes the greatest absolute value for the income level in excess of 18 196 us but becomes most inelastic for the income level between 11 129 and 18 196 us

asymmetric effects of the business cycle on bank credit risk abstract prior empirical research on the relation between credit risk and the business cycle has failed to properly investigate the presence of asymmetric effects to fill this gap we examine this relation both at the aggregate and the bank level exploiting a unique dataset on italian banks borrowers default rates we employ threshold regression models that allow to endogenously establish different regimes identified by the thresholds over below which credit risk is more less cyclical we find that not only are the effects of the business cycle on credit risk more pronounced during downturns but cyclicality is also higher for those banks with riskier portfolios

the use of technical analysis in the foreign exchange market abstract technica or chartist analysis of financial markets involves providing forecasts or trading advice on the basis of largely visual inspection of past prices without regard to any underlying economic or fundamental analysis this paper reports the results of a questionnaire survey conducted on behalf of the bank of england among chief foreign exchange dealers based in london in november 1988 amongst other findings it is revealed that at least 90 per cent of respondents place some weight on this form of non fundamental analysis when forming views at one or more time horizons there is also a skew towards reliance on technical as opposed to fundamentalist analysis at shorter horizons which becomes steadily reversed as the length of horizon considered is increased a very high proportion of chief dealers view technical and fundamental analysis as complementary forms of analysis and a substantial proportion suggest that technical advice may be self fulfilling jel f31

earnings management to avoid earnings decreases and losses this paper provides evidence that firms manage reported earnings to avoid earnings decreases and losses specifically in cross sectional distributions of earnings changes and earnings we lind unusually low frequencies of small decreases in earnings and small losscs and unusually high frequencies of small increases in earnings and small positive income we find evidence that two components of earnings cash flow from operations and changes in working capital are used to achieve increases in earnings we present two theories based on stakeholder use of information processing heuristics and prospect theory about the motivation for avoidance of earnings decreases and losses

quantitative easing is not as unconventional as it seems policy interest rates do not have to be short the means by which monetary authorities influence prices and quantities can differ but the obstacles to altering one rather than the other are not insuperable inflation is sluggish and expectations of future interest rates long and short nominal and real are diverse and uncertain these factors determine the limited power that monetary authorities enjoy when they conduct quantitative easing but this policy is not as unconventional as some have claimed and indeed can be viewed as broadly similar to conventional monetary measures the impact of quantitative easing however could be very different depending on the underlying structure of the economy and the fiscal authorities responses finally we note some important caveats that must be borne in mind when trying to evaluate the impact of quantitative easing particularly given the fact that the world s main financial markets are closely linked copyright 2012 oxford university press

the effect of accounting procedure changes on ceos cash salary and bonus compensation abstract this paper examines the effect of accounting procedure changes on cash salary and bonus compensation to ceos we estimate whether there is an adjustment to the statistical relation between compensation and corporate earnings following changes that lower earnings fifo to lifo inventory valuation and that raise earnings accelerated to straight line depreciation the results indicate that 1 subsequent to these changes salary and bonus payments are based on reported earnings rather than earnings under the original accounting method and 2 the potential compensation effect of the changes is small compared to the effect of economy or industry wide changes in compensation

competitiveness and industrial policy from rationalities of failure towards the ability to evolve this article elaborates a dynamic rationale of industrial policy focusing on how to strengthen the socio economic system s ability to evolve i e how to achieve high real income together with qualitative change it highlights that the ubiquitous rationalities of failure be it of markets governments or systems are rooted in a peculiar habit of accepting hypothetical perfect states as normative benchmarks in contrast a dynamic logic of intervention should start from the question what the system aims to accomplish combining the structuralist ontology of micro meso and macro with the functional principles of evolutionary change the paper proposes a general typology of economic policies based on their respective contributions to the system s ability to evolve

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

institutions entrepreneurship and the rationale of government an outline of the schumpeterian theory of the state the schumpeterian theory of the state parallels the theory of entrepreneurship in its concern with the institutional dynamism of capitalist development the evolution of the modern state mirrors the emergence of a distinct sphere of self interested economic activity in the private sector while the state is concerned with the provision of common goods its economic impact needs to be assessed with regard to the social interests that mark its relationship with the private sector this holds for the evolution of fiscal systems as well as for other domains of government activity involving the temporary carrying out of the entrepreneurial function

foreign exchange market efficiency tests implications of recent empirical findings abstract the recent empirical literature on the efficiency of the foreign exchange market has been characterized by strikingly contradictory conclusions drawn from similar empirical evidence these contradictions result because 1 different maintained hypotheses are held and 2 different criteria e g micro versus macroeconomic are used to judge the evidence in this survey we organize the empirical literature under several headings the presence of risk premiums empirical regularities in regression tests profitable trading rules and advanced econometric techniques in integrating this material we consider the implications of the current evidence for investors forecasters policy makers and theorists

order flows news and exchange rate volatility abstract this paper examines the roles of order flow reflecting private information and news reflecting public information in explaining exchange rate volatility analyzing four months of a bank s high frequency dollar euro trading three different kinds of order flow are used in addition to seasonal patterns in explaining volatility we find that only larger sized order flows from financial customers and banks indicating informed trading contribute to explaining volatility whereas flows from commercial customers do not the result is robust when we control for news and other measures of market activity this strengthens the view that exchange rate volatility reflects information processing

additional evidence on bonus plans and income management abstract we extend healy 1985 by examining the relation between discretionary accruals and bonus plan bounds for a sample of 102 firms for the 1980 1990 period contrary to healy we find that when earnings before discretionary accruals fall below the lower bound managers select income increasing discretionary accruals and vice versa we believe that our results are more consistent with the income smoothing hypothesis than with healy s bonus hypothesis however mechanical selection bias in portfolio formation cannot be entirely ruled out as an alternative explanation for our results

accruals management investor sophistication and equity valuation evidence from 10 q filings the release of the full set of financial statements in form 10 q provides investors with the data necessary to estimate the discretionary portion of earnings thereby allowing them to better assess the integrity of reported quarterly earnings we thus expect a negative association between unexpected discretionary accruals estimated using 10 q disclosures and stock returns around 10 q filing dates consistent with our expectations we document a negative association between unexpected discretionary accruals and cumulative abnormal returns over a short window around the 10 q filing date furthermore this association varies systematically with investor sophistication finally results from portfolio tests indicate that this association is economically as well as statistically significant one interpretation of our findings is that accruals management has substantial valuation consequences which are quickly impounded into stock prices

empirical evidence on the properties of exchange rate forecasts and the risk premium abstract the purpose in this note is to examine the properties of the risk premium obtained from a new source of market expectations derived from survey data

threshold effects of inflation on economic growth in developing countries abstract this paper introduces a generalized panel threshold model by allowing for regime intercepts the empirical application to the relation between inflation and growth confirms that the omitted variable bias of standard panel threshold models can be statistically and economically significant

an empirical examination of long run purchasing power parity using cointegration techniques this paper presents an empirical analysis of long run purchasing power parity ppp for five major exchange rates using recently developed econometric techniques on the cointegration of economic time series our empirical results are extremely unfavourable to the ppp hypothesis as a long run equilibrium condition even with an allowance made for measurement error and or tranportation costs in particular we are unable to reject the hypothesis of non cointegration of the exchange rate and relative prices for any of the countries concerned far from finding a stable long run proportionality between exchange rates and relative prices our results therefore suggest that they tend to drift apart without bound

covered interest parity a high frequency high quality data study profitable deviations from covered interest parity cip represent riskless arbitrage opportunities and so indicate market ineffic iency previous empirical work on cip uses noncontemporaneously sampl ed data and reports mixed results this paper uses high frequency te n minute high quality data gathered personally by the author in th e london foreign exchange market to test the cip condition the resu lts overwhelmingly support the market efficiency hypothesis copyright 1987 by the review of economic studies limited

the term structure of forward exchange premiums and the forecastability of spot exchange rates correcting the errors we develop a framework to extract information regarding subsequent spot rate movements from the term structure of forward exchange premiums while admitting possible deviations from rationality and