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

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

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

why was the euro weak markets and policies abstract against all odds the euro turned out to be a weak currency we argue that this outcome can readily be explained by the policy mix that was chosen at the onset of the period tight fiscal policies following the convergence mechanism that was imposed by the maastricht treaty and loose monetary policy that resulted from the convergence of interest rates to the lower point of the spectrum we investigate this outcome empirically and show that the euro s weakness can be understood as the result of an excess supply in the zone which is channelled abroad in the usual beggar my neighbor way

the monetary approach to exchange rate determination under rational expectations the dollar deutschmark rate abstract this paper reformulates the monetary approach after ascertaining that a money demand function with a partial adjustment mechanism had more empirical support than a money demand function which assumed instantaneous stock adjustment the resulting exchange rate equation is estimated by two rational expectations techniques the parameter estimates are reasonable and are robust to the estimation technique used to different specifications of the driving processes and to changes in the estimation period the structural model outperforms the random walk model and its own unconstrained equivalent a pure time series equation in outof sample forecasts

volume liquidity and liquidity risk abstract many classes of microstructure models as well as intuition suggest that it should be easier to trade when markets are more active in the data however volume and liquidity seem unrelated over time this paper offers an explanation for this fact based on a simple frictionless model in which liquidity reflects the average risk bearing capacity of the economy and volume reflects the changing contribution of individuals to that average volume and liquidity are unrelated in the model but volume is positively related to the variance of liquidity or liquidity risk empirical evidence from the u s government bond and stock markets supports this new prediction

seasonal flutuations and equilibrium models of exchange rate most of the evidence on dynamic equilibrium exchange rate models is based on seasonally adjusted consumption data equilibrium models have not worked well in explaining the actual exchange rate however the use of seasonally adjusted data might be responsible for the spurious rejection of the model this article presents a new equilibrium model for the exchange rates that incorporates seasonal preferences the fit of the model to the data is evaluated for five industrialized countries using seasonally unadjusted data our findings indicate that a model with seasonal preferences can generate monthly time series of the exchange rate without seasonality even when the variables that theoretically determine the exchange rate show clear seasonal behaviours further the model can generate theoretical exchange rates with the same order of integration than actual exchange rates and in some cases with the same stochastic trend

minimum price variations discrete bid ask spreads and quotation sizes exchange minimum price variation regulations create discrete bid ask spreads if the minimum quotable spread exceeds the spread that otherwise would be quoted spreads will be wide and the number of shares offered at the bid and ask may be large a cross sectional discrete spread model is estimated by using intraday stock quotation spread frequencies the results are used to project 1 16 spread usage frequencies given a 1 16 tick projected changes in quotation sizes and in trade volumes are obtained from regression models for stocks priced under 10 the models predict spreads would decrease 38 percent quotation sizes would decrease 16 percent and daily volume would increase 34 percent article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a small monetary system for the euro area based on german data previous euro area money demand studies have used aggregated national time series data from the countries participating in the european monetary union emu however aggregation may be problematic because macroeconomic convergence processes have taken place in the countries of interest therefore in this study quarterly german data until 1998 are combined with data from the euro area from 1999 until 2002 and these series are used for fitting a small vector error correction model for the monetary sector of the emu a stable long run money demand relation is found for the full sample period moreover impulse responses do not change much when the sample period is extended by the emu period provided the break in the extended data series is captured by a simple dummy variable copyright 2006 john wiley sons ltd

exchange rates financial innovation and divisia money the sterling dollar rate 1972 1990 in this paper we examine the usefulness of divisia money relative to simple sum money for exchange rate modelling in a period of rapid financial deregulation this comparison is conducted using as a convenient framework the monetary model of the exchange rate we demonstrate inter alia that for the sterling us dollar exchange rate over the period 1972 q1 to 1990 q2 that the use of divisia money makes a significant difference to both the long and short run modelling of the exchange rate

creative destruction and firm specific performance heterogeneity traditional u s industries with higher firm specific stock return and fundamentals performance heterogeneity use information technology it more intensively and post faster productivity growth in the late 20 th century we argue that this mechanically reflects a wave of schumpeter s 1912 creative destruction disrupting a wide swath of industries with successful it adopters unpredictably undermining established firms this validates endogenous growth theory models of creative destruction e g aghion and howitt 1992 and suggests intensified creative destruction as explaining findings associating greater firm specific performance variation with higher per capita gdps economy growth rates accounting standards financial system development and property right protection

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

bond pricing and the term structure of interest rates a new methodology for contingent claims valuation this paper presents a unifying theory for valuing contingent claims under a stochastic term structure of interest rates the methodology based on the equivalent martingale measure technique takes as given an initial forward rate curve and a family of potential stochastic processee for its subsequent movements a no arbitrage condition restricts this family of processes yielding valuation formulae for interest rate sensitive contingent claims which do not explicitly depend on the market prices of risk examples are provided to illustrate the key results in relation to the term structure of interest rates arbitrage pricing theory has two purposes the first is to price all zero coupon default free bonds of varying maturities from a finite number of economic fundamentals called state variables the second is to price all interest rate sensitive contingent claims taking as given the prices of the zero coupon bonds this paper presents a general theory and a unifying framework for understanding arbitrage pricing theory in this context of which all existing arbitrage pricing models are special cases in particular vasicek 1977 brennan and schwartz 1979 langetieg 1980 ball and torous 1983 ho and lee 1986 schaefer and schwartz 1987 and artzner and delbaen 1988 the primary contribution of this paper however is a new methodology for solving the second problem i e the pricing of interest rate sensitive contingent claims given the prices of all zero coupon bonds the methodology is new because i it imposes its stochastic structure directly on the evolution of the forward rate curve ii it does not require an inversion of the term structure to eliminate the market prices of risk from contingent claim values and iii it has a stochastic spot rate process with multiple stochastic factors influencing the term structure the model can be used to consistently price and hedge all contingent claims american or european on the term structure and it is derived from necessary and more importantly sufficient conditions for the absence of arbitrage the arbitrage pricing models of vasicek 1977 brennan and schwartz 1979 langetieg 1980 and artzner and delbaen 1988 all require an iformerly titled bond pricing and the term structure of interest rates a new methodology

eoq models for a coordinated two level international supply chain considering imperfect items and environmental impact abstract for a two level supply chain models are presented to determine the optimal production shipment policy for items with imperfect quality in three different scenarios a both the vendor and the buyer are in the same country b the vendor and the buyer are in different countries where the stochastic behavior of the exchange rate between the two countries is modeled using a mean reverting process and c environmental impact is incorporated in determining the optimal production shipment policy by taking into account the fixed and variable carbon emission costs the objective is to minimize the total expected cost per unit time for each scenario considering equal shipment size the total expected cost per unit time is derived and the solution procedure is proposed numerical examples are presented and the results are discussed

monetary conditions and international investing we examine the relationship between monetary conditions and global stock returns previous studies established that u s stock returns during expansive u s monetary periods are significantly higher than returns during restrictive periods we found that this pattern prevails in non u s markets furthermore the pattern exists relative to both local and u s monetary conditions by examining several investment strategies we show that investors could have improved portfolio performance in the period studied by using both u s and local monetary conditions to guide their portfolio allocations using monetary conditions to determine portfolio composition would have been consistently beneficial throughout the past 30 years

the role of no arbitrage on forecasting lessons from a parametric term structure model abstract parametric term structure models have been successfully applied to numerous problems in fixed income markets including pricing hedging managing risk as well as to the study of monetary policy implications in turn dynamic term structure models equipped with stronger economic structure have been mainly adopted to price derivatives and explain empirical stylized facts in this paper we combine flavors of those two classes of models to test whether no arbitrage affects forecasting we construct cross sectional allowing arbitrages and arbitrage free versions of a parametric polynomial model to analyze how well they predict out of sample interest rates based on us treasury yield data we find that no arbitrage restrictions significantly improve forecasts arbitrage free versions achieve overall smaller biases and root mean square errors for most maturities and forecasting horizons furthermore a decomposition of forecasts into forward rates and holding return premia indicates that the superior performance of no arbitrage versions is due to a better identification of bond risk premium

testing the monetary model of exchange rate determination new evidence from a century of data abstract we test the long run monetary model of exchange rate determination for a collection of 14 industrialized countries using data spanning the late nineteenth or early twentieth century to the late twentieth century interestingly we find support for a simple form of the long run monetary model in over half of the countries we consider for these countries we estimate vector error correction models to investigate the adjustment process to the long run monetary equilibrium in the spirit of meese and rogoff journal of international economics 14 1983 3 24 we also compare nominal exchange rate forecasts based on monetary fundamentals to those based on a naive random walk model

determinants of the implied shadow exchange rates from a target zone abstract the paper provides a continuous time model of the dynamic behavior of exchange rates and interest rates when exchange rates are managed within a target zone with the possibility of realignments in the case of a realignment the exchange rate jumps to a shadow exchange rate the timing of realignments is modelled by a cox process with an intensity that depends on the location of the exchange rate in the target zone band as well as the distance to the shadow exchange rate we set up an approximate maximum likelihood estimation approach and provide parameter estimates for six erm target zones moreover in the empirical analysis we filter out the shadow exchange rates and investigate which fundamental macroeconomic factors are able to explain the short run and long run behavior of the filtered shadow exchange rates

why are excess returns on china s treasury bonds so predictable the role of the monetary system abstract it is well documented that the time varying bond excess returns can be explained by predetermined variables such as information in the term structure and macro economic variables recent studies suggest that demand and supply of bonds influence bond excess returns we extend the literature and find that monetary system attributes affect return dynamics in the bond market by introducing a theoretical model to forecast excess returns on treasury bonds in the context of china s unique monetary system this paper attributes the predicted components of bond excess returns mainly to the inflexible term structures of official interest rates set by china s central bank

on the predictive power of monetary exchange rate model the case of the malaysian ringgit us dollar rate the predictive power of the monetary model for the malaysian ringgit us dollar rm usd rate is analysed using quarterly data ending in 2006 q3 we find compelling evidence of a long run relationship between exchange rates and the economic fundamental determinant macroeconomic factors systematically affect the long run movement of the rm usd rate additionally the rm usd rate was overvalued by about 10 several quarters before the 1997 crisis after the crisis rates fluctuated close to the equilibrium value the out of sample forecasts demonstrate that the monetary model outperforms the naive random walk model the monetary and purchasing power parity ppp models do well at the four to eight quarters horizon

evolution of the trans atlantic exchange rate before and after the birth of the euro and policy implications the establishment of the euro could present a challenge to the hegemony of the us dollar as the predominant international currency the fact that the unipolar us dollar dominated international monetary system can be unstable in the presence of large shocks presents an opportunity for the euro to promote systemic stability the present study pursues this conjecture by exploring with cointegration and error correction method techniques the interdependence between the dynamics of the dollar euro exchange rate and economic fundamentals in the context of a monetary exchange rate model our results suggest that both short run price stickiness and long run secular growth fundamentals affect the exchange rate path these findings support a relatively broad based policy approach to promote the collective economic interest of the eu zone to the extent that such policies succeed in strengthening and stabilizing the euro zone economy they are likely to buttress and possibly accelerate the internationalization

the failure of the monetary model of exchange rate determination in this paper we test three popular versions of the monetary model flexible price forward looking and real interest differential models for the oecd member countries by applying johansen cointegration technique based on country by country analysis we conclude that monetary models do not provide the expected results we reveal several shortcomings of the models and examine the building blocks of the fundamental version although researchers always blame the deviations from purchasing power parity as the reason for the failure of the monetary model our analysis indicates that invalidity of keynesian money demand function is also responsible for unfavourable results

modeling the ecu against the u s dollar a structural monetary interpretation the proposal that a reformed international monetary system be designed around currency blocs has gained some popularity of late in europe the formation of the euro formalizes the existence of a dm based currency block little academic research has been conducted however on the properties of composite currencies such as the euro in this article we examine the properties of the precursor to the euro namely the ecu against the u s dollar using a monetary framework the article has several novel features our modeling strategy involves starting with underlying equilibrium conditions rather than a final reduced form uses divisia money rather than the more conventional simple sum money interprets in an economic sense the long run relationships and produces an appealing forecasting performance

efficient exchange rate forecasts lagged models better than the random walk abstract the evidence of meese amd rogoff 1983 on the out of sample forecasting performance of structural exchange rate models in comparison to the random walk model portrays a disappointing picture of structural models this paper re considers the issue for the german mark for an updated period to include a larger set of structural models and lagged adjustment besides out of sample evidence in sample evidence is also examined we conclude that while some stuctural models dominate the random walk a lagged adjustment consideration can contribute towards better performance

exchange rates innovations and forecasting in this paper an ex post forecasting experiment is performed on the basis of a version of the news model of exchange rate determination for several exchange rates the news formulation of monetary exchange rate models leads to relatively accurate ex port exchange rate forecasts at a number of forecasting horizons for a majority of the exchange rates studied however the results do not compare favorably with those obtained from the naive random walk forecasting rule thus the findings in this article provide mixed evidence with regard to a suggestion in the literature that the finding by meese and rogoff that structural models do not even outperform the random walk in an ex post forecasting experiment may be due to the fact that these models were not properly tested in a news framework the forecasting performance of structural exchange rate models has recently received considerable attention meese and rogoff 1983a b have studied the forecasting performance of several important structural exchange rate models while in sample studies of these models usually show quite satisfactory fits meese and rogoff s out of sample results based on instrumental variables estimates were not very encouraging the structural models failed to improve upon the simple random walk forecasting rule even though the models forecasts were based

preferred habitat for liquidity in international short term interest rates abstract risk shifting window dressing and a preferred habitat for liquidity have been offered as possible explanations as to why us money market rates are higher before the year end than afterwards the two hypotheses differ in the timing of the rate decline at the year end and the evidence on the timing of the decline supports the preferred habitat hypothesis in us money markets this paper extends this line of research to the behavior of international short term interest rates at year ends and quarter ends using london interbank offer rates libor for 11 different currencies the results suggest that the behavior of libor for five currencies the us dollar euro japanese yen swiss franc and german mark is consistent with year end or quarter end preferred habitats for liquidity other currencies do not demonstrate consistently distinct patterns in turn of the year and turn of the quarter yields none of the results provides any support for risk shifting window dressing

exchange rate behaviour are fundamentals important one of the most controversial issues in the international economics literature concerns the role of economic fundamentals in explaining exchange rate behaviour we interpret this controversy as having three different aspects the first concerns the relationship between exchange rates and fundamentals in the long run the second the usefulness of fundamentals in producing out of sample forecasts which dominate a random walk and the third controversy concerns the relative importance of shocks to real and nominal fundamentals in explaining real exchange rate variability this as we shall see is related to the first controversies one and two therefore may be thought of as relating to the first moment of exchange rate behaviour while the third is associated with the second moment the first controversy may be motivated by referring to fig 1 which portrays the logarithm of the real and nominal exchange rates of the mark dollar

investigating stability and linearity of a german m1 money demand function starting from a linear error correction model ecm the stability and linearity of a german m1 money demand function are investigated applying smooth transition regression techniques using seasonally unadjusted quarterly data from 1961 1 to 1990 2 it is found that the money demand equation considered is both linear and stable after extending the sampling period until 1995 4 a clear structural instability due to the monetary unification on 1 july 1990 is found and subsequently modelled a non linear specification for the extended period is presented and discussed copyright 1999 john wiley sons ltd

using daily range data to calibrate volatility diffusions and extract the forward integrated variance a common model for security price dynamics is the continuous time stochastic volatility model for this model hull and white 1987 show that the price of a derivative claim is the conditional expectation of the black scholes price with the forward integrated variance replacing the black scholes variance implementing the hull and white characteriza tion requires both estimates of the price dynamics and the conditional distribution of the forward integrated variance given observed variables using daily data on close to close price movement and the daily range we find that standard models do not fit the data very well and that a more general three factor model does better as it mimics the long memory feature of financial volatility we develop techniques for estimating the conditional distribution of the forward integrated variance given observed variables i introduction

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

measuring the dollar euro permanent equilibrium exchange rate using the unobserved components model this paper employs an unobserved component model that incorporates a set of economic fundamentals to obtain the euro dollar permanent equilibrium exchange rates peer for the period 1975q1 to 2008q4 the results show that for most of the sample period the euro dollar exchange rate closely followed the values implied by the peer the only significant deviations from the peer occurred in the years immediately before and after the introduction of the single european currency the forecasting exercise shows that incorporating economic fundamentals provides a better long run exchange rate forecasting performance than a random walk process

testing the monetary model of exchange rate determination a closer look at panels abstract in this paper we undertake an extensive evaluation of panel tests of the long run monetary model of exchange rate determination we first show how poorly the monetary model performs on a country by country basis for us dollar exchange rates over the post bretton woods period for a large number of industrialized countries in sharp contrast we find considerable support for the monetary model using panel procedures as in groen 2000 and mark and sul 2001 given the disparity in the country by country and panel approaches we carefully analyze the homogeneity restrictions inherent in the panel procedures the evidence on the appropriateness of the homogeneity restrictions is mixed in the end whether the monetary model conforms to post bretton woods data largely depends on one s prior beliefs

testing for bubbles in exchange markets a case of sparkling rates this paper investigates the possibility that the observed deviations of major bilateral exchange rates from values implied by market fundamentals are a consequence of rational asset market bubbles when a new econometric methodology for detecting asset market bubbles is used the joint hypothesis of no bubbles and stable autoregressive processes for relative money supplies and real incomes is rejected for the dollar deutsche mark and dollar pound ratesusing monthly data over the period 1973 82 additional tests for coefficient stability and for lack of cointegration between exchange rates and market fundamentals suggest that the bubble findings must be interpreted with care

asymmetric return dynamics and technical trading strategies abstract we investigate the profitability of technical trading strategies based on an asymmetric reverting property of stock returns we identify an asymmetry in return dynamics for daily returns on the s p 500 index return dynamics evolve along a positive negative unconditional mean after a prior positive negative return the trading strategies based on this asymmetry generate a positive return for buy signals a negative return for sell signals and a positive return for the spread between buy and sell signals our results imply that the observed asymmetry in return dynamics is the main source of profitability for the implied strategies thereby corroborating arguments for the usefulness of technical trading strategies

accounting for real and nominal exchange rate movements in the post bretton woods period abstract using the technique developed by blanchard and quah we decompose real and nominal exchange rate movements into the components induced by real and nominal factors nominal shocks have had a minor effect on the real and nominal bilateral exchange rates between the us and canada japan and germany there is little evidence of exchange rate overshooting real demand rather than supply shocks have been responsible for volatile exchange rate movements structural models of exchange rate determination need to consider such shocks as an important fundamental determinant

testing the validity of the monetary model for asean with structural break this study examines the validity of the long run structural relations underlying the monetary exchange rate model for malaysia singapore the philippines and thailand take into consideration the possibility of structural change we examined the models using recent developed techniques of testing unit root and cointegration with a structural break our findings of three cointegrating relations among the variables in the system were further identified by testing theoretical restrictions on the cointegrating equations the long run relationships were able to be interpreted according to the theory hence support the long run validity of the monetary exchange rate model

foreign exchange market interventions and the exchange rate in the long run this article examines whether foreign exchange market interventions conducted by the bank of japan are important for the dollar yen exchange rate in the long run we rely on a re examination of the empirical performance of a monetary exchange rate model this is basically not a new topic however we focus on two new questions first does the consideration of periods of massive interventions in the foreign exchange market uncover a potential long run relationship between the exchange rate and its fundamentals second do forex interventions support the adjustment towards a long run equilibrium value our results suggest that taking periods of interventions into account within a monetary model does improve the goodness of fit of an identified long run relationship to a significant degree furthermore forex interventions increase the speed of adjustment towards long run equilibrium in some periods particularly in periods of coordinated forex interventions our results indicate that only coordinated inter

nominal exchange rate prediction evidence from a nonlinear approach abstract in this paper we employ a nonlinear error correction model to explain the dynamics of exchange rates starting from a stylized monetary model of exchange rates we found that the nonlinear error correction model is superior to a range of alternative forecasts including random walks and the conventional time varying parameters model even when forecast horizons are short

tests of different monetary aggregates for the monetary models of the exchange rate in five asean countries this study examines the usefulness of divisia money relative to simple sum money for exchange rate modelling in a period of rapid financial deregulation this comparison is conducted using the monetary model of the exchange rate in the long run modelling the divisia money is significantly superior to simple sum money in the case of malaysia and the philippines while indifferent for indonesia singapore and thailand

forecasting the exchange rate ppp versus a random walk abstract forecasts of error correction models based on ppp are compared to a random walk the results are mixed however for two out of four currencies imposing ppp on the error correction term generates a specification that outperforms a random walk

the monetary model in the presence of i 2 components long run relationships short run dynamics and forecasting of the greek drachma this paper re examines the long run properties of the monetary exchange rate model using data for the drachma dollar and drachma mark exchange rates under the hypothesis that the system contains variables that are i 2 using the recent i 2 test by paruolo on the determination of integration indices in i 2 systems j economet 72 1996 313 356 to examine the presence of i 2 and i 1 components in a multivariate context we find that the system contains two i 2 variables in both cases and this finding is reconfirmed by the estimated roots of the companion matrix do purchasing power parity and uncovered interest rate parity hold in the long run an example of likelihood inference in a multivariate time series model juselius j economet 69 1995 211 240 the i 2 component led to the transformation of the estimated model by imposing long run but not short run proportionality between domestic and foreign money two statistically significant cointegrating vectors were found and by imposing linear restrictions on each vector as suggested by johansen and juselius identification of the long run and the short run structure an applicaion to the islm model j economet 63 1994 7 36 and johansen identifying restrictions of linear equations with applications to simultaneous equations and cointegration j economet 69 1995b 111 132 the order and rank conditions for identification are satisfied but the test for overidentifying restrictions was not significant only for the case of the drachma mark rate the main findings suggest that we reject the forward looking version of the monetary model for the drachma dollar case but not when the drachma mark rate is used a result that is attributed to the monetary and exchange rate policy followed by the greek authorities since greece s joining of the european union furthermore we test for parameter stability using the tests developed by hansen and johansen recursive estimation in cointegrated var models working paper 1993 university of copenhagen and it is shown that the dimension of the cointegration rank is sample independent while the estimated coefficients do not exhibit instabilities in recursive estimations finally it is shown that the monetary model outperforms the random walk model in an out of sample forecasting contest

exchange rate predictability the main goal of this article is to provide an answer to the question does anything forecast exchange rates and if so which variables it is well known that exchange rate fluctuations are very difficult to predict using economic models and that a random walk forecasts exchange rates better than any economic model the meese and rogoff puzzle however the recent literature has identified a series of fundamentals methodologies that claim to have resolved the puzzle this article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up to date thorough empirical analysis overall our analysis of the literature and the data suggests that the answer to the question are exchange rates predictable is it depends on the choice of predictor forecast horizon sample period model and forecast evaluation method predictability is most apparent when one or more of the following hold the predictors are taylor rule or net foreign assets the model is linear and a small number of parameters are estimated the toughest benchmark is the random walk without drift

a stable us money demand function 1874 1975 we apply recent econometric techniques to the demand for money in the united states over a period of some hundred years using data previously analyzed by friedman and schwartz 1982 our results parallel those of hendry and ericsson s 1991 uk study we find evidence of a unique long run money demand function and of a stable short run demand function which passes a range of diagnostic tests and exhibits parameter constancy also parameter non constancy in an inverted equation where prices appear as the dependent variable is inconsistent with the hypothesis of exogenous money determining prices through the money demand function

a comparison of yield curve estimation techniques using uk data abstract i compare different methods of estimating the term structure of interest rates on a daily uk treasury bill and gilt data that spans the period from january 1995 to january 1999 in sample and out of sample statistics reveal the superior pricing ability of certain methods characterised by an exponential functional form in addition to these standard goodness of fit statistics model performance is judged in terms of two trading strategies based on model residuals both strategies reveal that parsimonious representations of the term structure perform better than their spline counterparts characterised by a linear functional form this is valid even when abnormal returns are adjusted for market movements linear splines overfit the data and are likely to give misleading results

error correction modelling and dynamic specifications as a conduit to outperforming the random walk in exchange rate forecasting the proposition that dynamic exchange rate models can outperform the random walk in out of sample forecasting in the sense that they produce lower mean square errors is examined and disputed by using several dynamic versions of three macroeconomic exchange rate models it is demonstrated that dynamic specifications outperform the corresponding static models but improvement in the forecasting power may not be sufficient for the dynamic models to perform better than the random walk the results are explained by suggesting that any dynamic specification or transformation of the static model leads to the introduction of a lagged dependent variable which in effect is a random walk component the analysis leads to the conclusion that it is implausible to aim at beating the random walk by augmenting a static model with a random walk component

long run purchasing power parity is it for real in this paper we re examine the purchasing power parity concept using data from the recent experience with floating exchange rates in particular we utilise the recently developed multivariate cointegration methodology to test for a long run relationship between exchange rates and relative prices and also to test for the proportionality of the exchange rate with respect to relative prices in contrast to much other research we demonstrate that there is a long run relationship between a number of bilateral u s dollar exchange rates and their corresponding relative prices the proportionality of the exchange rate to relative prices does not however receive support from the data this finding may be attributable to the use of measured price series rather than the true series

tax induced clientele effects in the market for british government securities abstract this paper develops a new methods for measuring tax effects in bond markets and presents empirical results for british government securities the basic idea is to construct a least cost portfolio which for investors in a given tax bracket dominates a given bond a portfolio is said to dominate a bond if it provides cash flows which are at least as great in every period and has a lower price in effect our method calculates an upper bound on the value of a bond to investors in a given tax bracket the results demonstrate i the existence of clientele effects and ii the absence of an effective tax rate

models of the yield curve and the curvature of the implied forward rate function abstract we examine several alternative models of the uk gilt yield curve using daily data for the period 12 july 1996 10 february 2010 we select the best models according to two criteria low out of sample errors in pricing bonds and low curvature of the implied forward rate curve function we suggest additions to some of the models that significantly improve their performance some of the new models out perform those typically used by the central banks in particular this paper suggests that the model used by the canadian central bank which both outperforms other models and is particularly easy to estimate is well suited to the uk gilt market

cointegration tests of purchasing power parity the case of swiss exchange rates abstract this paper tests purchasing power parity ppp as a long run equilibrium condition by examining the long run relationshiop between exchange rates and wholesale price indices using cointegration tests this paper avoids some of the problems of previous cointegration tests of ppp by using more precise data pretests and by not imposing a priori restrictions upon the cointegrating vector of the nine combinations of swiss exchange rates and price indices examined cointegration is detected in seven cases thus supporting ppp as a long run equilibrium jel f31 c32

does the euro follow the german mark evidence from the monetary model of the exchange rate abstract this paper investigates whether german or synthetic european pre emu data provides the appropriate empirical basis for evaluating euro dollar exchange rate behavior monetary exchange rate equations are estimated for both data sets over the pre emu period and out of sample forecasts are evaluated to assess their ability to explain the euro dollar exchange rate from 1999 to 2004 while forecast accuracy tests confirm the usefulness of synthetic european data for euro exchange rate analysis forecasts based on the german pre emu experience cannot even beat a random walk our results indicate that the euro does not simply follow the german mark but that it has its origins in the other pre emu currencies as well

international evidence on bond risk premia abstract this paper revisits the study of time varying excess bond returns in international bond markets using newly available yield curve data from 10 different countries with independent monetary policy i test the robustness of cochrane and piazzesi 2005 for most countries in my sample i find more modest predictive power for forward rates than originally found by cochrane and piazzesi 2005 for the us their single factor model captures well the predictability in international data and this factor also tends to have a tent shape in most countries of my sample cp factors are more idiosyncratic across countries than yields or forward rates finally i show that the recent financial crisis has significantly affected the predictability of excess bond returns

co integration tests for long run equilibrium in the monetary exchange rate model abstract the monetary model of exchange rate determination is tested as a long run equilibrium relation tests of co integration among the variables in this model over a wide range of specifications are generally unfavorable to the monetary approach

on empirical exchange rate models what does a rejection of the symmetry restriction on short run interest rates mean abstract the purpose of this paper is to interpret the well documented rejection of reduced form symmetry restrictions on short run interest rates and to show that such a rejection implies a rejection of rational expectations re and or uncovered interest rate parity uip the paper also shows that if this rejection is due to failure of uip it cannot be explained by the presence of a standard risk premium in order to provide for well specified alternatives the paper explores the reduced form implications of imperfect capital mobility and a recent alternative to re called the theories consistent expectations framework

exchange rates and fundamental variables a semi parametric analysis of binary choice this study is motivated by the dearth of models that provide good out of sample fit for exchange rates that is current models of exchange rate behaviour are poor predictors of subsequent currency movements an attempt is made to determine if the relationship between exchange rates and fundamental variables can help explain the more extreme exchange rate movements distributional switches models are developed that relate fundamental economic variables to the resulting estimates based on the mixture of normal probability distributions parametric estimation procedures logit and probit are compared with a semi parametric technique maximum score estimation mscore which is relatively untested in the field of finance the fundamental variables of these models include information on trade balances money supply changes interest rate changes real economic growth relative inflation rates and changes in stock market indexes classification results favour mscore implications of results and improvements

new empirical evidence on the bid ask spread in this article we model the determinants of spread for 734 firms listed on the nyse over the period 1 january 1998 to 31 december 2008 we propose a panel data model of the determinants of spread there are four main messages emerging from our work we find a statistically significant effect of volume on spread inconsistent with the work of johnson 2008 on price we find mixed results consistent with the literature on the effect of price volatility on spread our results are completely the opposite of the cross sectional literature but sides with the relatively recent work of chordia et al 2001 we allow for persistence of spread as a determinant of spread and find significant evidence of spread persistence across all 16 sectors finally we examine size effects and find statistically strong evidence of size effects based on the relationship between price and spread persistence and spread and volatility and spread

tests of the different variants of the monetary model in a developing economy malaysian experience in the pre and post crisis periods this study examines the validity of four different variants of the monetary model of exchange rate determination for malaysia covering both the pre and post crisis periods using the vector error correction models the findings demonstrate that for both periods the variables used are cointegrated tests tend to suggest that of the four variants of monetary model the sticky price model holds in both periods and the flexible price model holds only in the post crisis period the proportionality between the exchange rate and relative money does not hold in any period the plotted actual and fitted exchange rates for both sub samples show that the models are able to track the actual exchange rate trend quiet well

revisiting the expectations hypothesis of the term structure of interest rates the expectations hypothesis of the term structure has been decisively rejected in a large empirical literature that spans several decades in this paper using a newly constructed dataset of synthetic zero coupon bond yields we show that evidence against the expectations hypothesis is substantially weaker in data generated after the widespread publicity of its failure these results are consistent with the idea that asset pricing anomalies tend to disappear once they are widely recognized

do market capitalization and stocks traded converge new global evidence abstract in this paper we examine convergence of stock markets our empirical exercise is based on 11 different panels which together consist of 120 countries the richness of the dataset allows us to disaggregate countries into panels such as high income middle income low income oecd csi and developing country panels in addition we construct regional panels such as those representing the arab states east asia and the pacific south asia latin america and the caribbean and sub saharan africa our main finding is that based on the conditional convergence model convergence of stock market capitalization and stocks traded is found for four panels namely the high and low income panels the oecd panel and the sub saharan african panel the speed of convergence is high in most cases between 20 and 30

monetary models of dollar yen euro nominal exchange rates dead or undead the predictions of the models were based on ex post realised values of the explanatory variables in other words the standard exchange rate models we estimated exhibited extremely poor out of sample fit 2 at the time these nihilistic results seemed quite radical since there was widespread optimism about the potential of monetary models especially sticky price monetary models to explain how flexible exchange rates function after all the main cornerstones of monetary exchange rate models were relatively noncontroversial long run purchasing power parity or some variant of ppp and a presumption that there is a strong long run connection between money growth and inflation today the meese and rogoff 1983a results no longer seem quite so crazy despite longer data sets on modern floating rates and the application of more sophisticated econometric techniques researchers have continued to find it very frustrating to firmly demonstrate any systematic relationship between exchange rates and macroeconomic fundamentals at least for the cross rates between the dollar dm euro and yen it is true that researchers have occasionally found particular sub samples where certain models seem to perform noticeably better than the random walk model but as a rule these results wilt under sustained out of sample testing surveying the evidence in their survey for the handbook of international economics frankel and rose 1995 conclude that numerous attempts to overturn the meese and rogoff 1983a results have failed

results of a study of the stability of cointegrating relations comprised of broad monetary aggregates abstract we find strong evidence of a stable money demand relationship for mzm and m2m through the 1990s though the m2 relation breaks down somewhere around 1990 evidence has been accumulating that the disturbance is well characterized as a permanent upward shift in m2 velocity which began around 1990 and was largely over by 1994 taken together our results support the hypothesis that households permanently reallocated a portion of their wealth from time deposits to mutual funds although this reallocation may have been induced by depository restructuring we argue that the substitution could be explained by appropriately measured opportunity cost

varying risk premia in international bond markets abstract cochrane and piazzesi cochrane j h piazzesi m 2005 bond risk premia american economic review 95 138 160 use forward rates to forecast future bond returns we extend their approach by applying their model to international bond markets our results indicate that the unrestricted cochrane and piazzesi 2005 model has a reasonable forecasting power for future bond returns the restricted model however does not perform as well on an international level furthermore we cannot confirm the systematic tent shape of the estimated parameters found by cochrane and piazzesi 2005 the forecasting models are used to implement various trading strategies these strategies exhibit high information ratios when implemented in individual countries or on an international level and outperform alternative approaches we introduce an alternative specification to forecast future bond returns and achieve superior risk adjusted returns in our trading strategy bayesian model averaging is used to enhance the performance of the proposed trading strategy

banking on currency forecasts how predictable is change in money abstract the paper examines the predictive performance of four structural exchange rate models using both parametric and nonparametric techniques error correction versions of the models are fit so that plausible long run elasticities can be imposed on the fundamental variables of each model a variety of model evaluation statistics are reported our findings confirm that fundamental exchange rate models forecast no better than a random walk model for short term prediction horizons for longer horizons error correction terms can explain exchange rate movements significantly better than a no change forecast for a subset of the models and currencies we consider

exchange rates and fundamentals co movement long run relationships and short run dynamics abstract the present study builds upon the seminal work of engel and west 2005 and in particular on the relationship between exchange rates and fundamentals the paper discusses the well known puzzle that fundamental variables such as money supply and interest rate provide help in predicting changes in floating rates it also tests the theoretical result of engel and west 2005 that in a rational expectations present value model the asset price manifests near random walk behaviour if the fundamentals are i 1 and the factor for discounting future fundamentals is near one the study explores the direction and nature of causal interdependencies among the most widely traded currencies in the world their country specific fundamentals and their us differentials a new var vecm garch multivariate filtering approach is implemented whilst linear and nonlinear non causality is tested and validated on simulated and empirical data the evidence implies that there is no indication of a prevailing causal behaviour and when nonlinear effects are accounted for the pattern of leads and lags changes over time the variations in this linkage can be attributed to parameter instability in structural models which may have little effect on fx forecastability over short horizons yet it is significant for long run cointegrating relationships while it is difficult to reconcile these findings with the rational expectations hypothesis the theory of consistent expectations or bounded rationality matches simulation and empirical findings more efficiently overall fundamentals may be important determinants of fx rates however there may be some other unobservable variables driving the currency rates that current asset pricing models have not yet captured

does exchange rate stability increase trade and welfare we develop a simple general equilibrium framework to study the effect of the exchange rate system on trade and welfare an important feature of the model is deviations from purchasing power parity caused by rigid price setting in buyers currency we find the following first exchange rate stability is not necessarily associated with more trade in a simple benchmark model with separable preferences and only monetary shocks trade is unaffected by the exchange rate system consistent with most evidence second both trade and welfare can be higher under either exchange rate system depending on preferences and on the monetary policy rules followed under each system finally in general there is no one to one relationship between the levels of trade and welfare across exchange rate systems

persistence in foreign exchange rates abstract this study examines the long run behavior of seven daily nominal exchange rates using univariate and multivariate persistence measures our results indicate that for some currencies the long run behavior deviates from that of a pure random walk in certain periods the multivariate estimates reflect the effect of both the ems exchange rate mechanism and increased post louvre accord coordinated intervention a large portion of the effect of a shock in one currency on another currency s long run value can be attributed to contemporaneous effects on the other currencies

the taylor rule and forecast intervals for exchange rates in this paper we examine the meese rogoff puzzle from a different perspective out of sample interval forecasting while most studies in the literature focus on point forecasts we apply semiparametric interval forecasting to a group of exchange rate models forecast intervals for 10 oecd exchange rates are generated and the performance of the empirical exchange rate models are compared with the random walk our contribution is twofold first we find that in general exchange rate models generate tighter forecast intervals than the random walk given that their intervals cover out of sample exchange rate realizations equally well our results suggest a connection between exchange rates and economic fundamentals economic variables contain information useful in forecasting distributions of exchange rates we also find that the benchmark taylor rule model performs better than the monetary ppp and forward premium models and its advantages are more pronounced at longer horizons second the bootstrap inference framework proposed in this paper for forecast interval evaluation can be applied in a broader context such as inflation forecasting

testing the expectations hypothesis when interest rates are near integrated nominal interest rates are unlikely to be generated by unit root processes using data on short and long interest rates from eight developed and six emerging economies we test the expectations hypothesis using cointegration methods under the assumption that interest rates are near integrated if the null hypothesis of no cointegration is rejected we then test whether the estimated cointegrating vector is consistent with that suggested by the expectations hypothesis the results show support for cointegration in 10 of the 14 countries we consider and the cointegrating vector is similar across countries however the parameters differ from those suggested by theory we relate our findings to existing literature on the failure of the expectations hypothesis and to the role of term premia

long term behavior of yield curves the flattening of yield curves at long term maturities is proven to be approximately pro portional to the reciprocal of the time to maturity under general conditions this is a con sequence of the persistence of earlier forward rates in the averaging process which pro duces yields from forward rates this relationship suggests the use of a reciprocal maturity yield curve which significantly facilitates the interpretation ofthe behavior of long term yields by linearizing them for display over a shorter interval this is illustrated using a yield curve for u s treasury bills

macroeconomic determinants of exchange rates a frequency specific analysis this paper applies a new methodology rolling spectral regression to investigate currency movements at various frequencies this technique generates efficient and frequency band estimates of the regression coefficients between three major exchange rates and their determinants from a generic monetary model empirical results reported in this study suggest that the variations of the yen dollar and pound dollar exchange rates can be explained by changes in monetary policy in the long run and fluctuations in economic growth and long term interest rates in the medium run

the call sinking fund and term to maturity features of corporate bonds an empirical investigation do bond issuing firms attempt to choose the call sinking fund and term to maturity features of bonds to improve shareholder wealth this paper develops and tests two hypotheses about the determinants of bond features using a conditional logistic model the model is estimated on a sample of bonds issued between 1982 and 1986 model estimates show that a bond s call sinking fund and term to maturity features are statistically related to the issuing firm s retention ratio ratio of convertible to long term debt two year change in net operating income and whether the firm is listed on the nyse and included in the s p400 these findings support the view that firms financing highquality projects but facing information asymmetries choose shorter term medium term callable bonds with and without the sinking fund feature

the demand for money in the united states evidence from cointegration tests this paper uses recent cointegration test procedures to investigate the underlying economic relationship between real money balances real income and interest rates for the united states unlike recent studies of money demand the authors analysis uses quarterly data spanning the period 1915 88 thus providing a sample encompassing a wide variety of economic experiences the evidence presented indicates that the broader m2 measure of money is the preferable measure with which to consider the long run effects of monetary policy copyright 1991 by ohio state university press

the monetary model of the exchange rate long run relationships short run dynamics and how to beat a random walk abstract the monetary model is re examined for the sterling dollar exchange rate first it is demonstrated using a multivariate cointegration technique that an unrestricted monetary model is a valid framework for analyzing the long run exchange rate second we find once proper account has been taken of the short run data dynamics that an unrestricted monetary model outperforms the random walk and other models in an out of sample forecasting contest jel f31

real exchange rates and structural breaks cointegration tests often fail to detect the existence of long term relationships such as purchasing power parity for two reasons i these tests have low power and ii structural shocks can alter the long run real exchange rate in this paper the long run movements of five exchange rates relative to the us dollar and five european exchange rates relative to the deutsche mark are investigated in particular corrected cointegration tests are applied which take into account the possibility of a structural break at an unknown date empirical evidence is found that structural changes can be responsible for most exchange rate deviations from their equilibrium defined by purchasing power parity or a generic monetary model

flattening of bond yield curves for long maturities the paper presents a theoretical proof that flattening of yield curves for par bonds is inevitable for long maturities this proof implies that behavioral explanations of flattening are unnecessary the proof also implies that the use of yields to maturity of couponbearing bonds to estimate the true term structure as well as forward rates for long maturities has potentially infinite bias suggesting that a greater effort should be made to directly estimate the true term structure in empirical work empirically observed bond yield to maturity curves have consistently been found to become flat for long maturities as evidenced by the empirical work of durand 6 7 8 malkiel 15 and the treasury bulletin 25 a concise summary of this evidence is contained in malkiel 15 he presents three dimensional graphs of corporate bond yield curves from 1900 to 1965 15 pp 8 9 and two dimensional graphs of yield curves for u s government securities for the period 1953 66 15 p 13 both of these show that flattening of yield curves occurs consistently for long maturities more recent u s government bond yield curves in the treasury bulletin exhibit a similar flatness for long maturities malkiel 15 considered flattening of yield curves for long maturities to be an important desiderata that a theory of the term structure must fulfil he said that a term structure theory must account for the pervasive tendency of the yield curve to level out as term to maturity increases and to develop what is called a shoulder irrespective of the general shape in the early maturities slopes with large absolute values occur only in the early maturities 15 p 16 malkiel has suggested that the shape of yield curves depends on the sensitivity of bond price to changes in interest rates according to malkiel s viewpoint if long term bonds of different maturities have essentially the same price sensitivity to interest rate changes yield curves would tend to be flat for long maturities in another viewpoint lutz 14 has said that the flattening of yield curves is the result of constant long term forward rates for long maturities this view would be justified if investors would use the same forecasted rate as the best predictor of all distant rates because of the uncertainties attached to expectations of future rates in different but distant future periods the major innovative result of our paper is a formal proof that flattening of yield curves for par bonds is inevitable for long maturities the power of this proof is that no assumptions are required about forward rates zero coupon

portfolio selection and skewness evidence from international stock markets abstract this paper finds that the returns of the world s 14 major stock markets are not normally distributed and that the correlation matrix of these stock markets was stable during the january 1988 december 1993 time period polynomial goal programming in which investor preferences for skewness can be incorporated is utilized to determine the optimal portfolio consisting of the choices of 14 international stock indexes the empirical findings suggest that the incorporation of skewness into an investor s portfolio decision causes a major change in the construction of the optimal portfolio the evidence also indicate that investors trade expected return of the portfolio for skewness

exchange rates and fundamentals under adaptive learning abstract this paper studies a monetary model that is standard in all respects except that market participants have incomplete knowledge about the economic structure and employ adaptive learning rules to learn about the economic environment market participants also must contend with unannounced regime shifts simulation results suggest that the models under adaptive learning especially constant gain learning combined with a structural change dominate the alternative specifications of expectations in their ability to account for why fundamentals predict exchange rate returns over long horizons but not over short horizons and for generating excessively volatile returns and persistent deviations of the exchange rate from the monetary fundamentals