comovement in international equity markets a sectoral view abstract we investigate shifts in correlation patterns among international equity returns at the market level as well as the industry level we develop a novel bivariate garch model for equity returns with a smoothly time varying correlation and then derive a lagrange multiplier statistic to test the constant correlation hypothesis directly applying the test to weekly data from germany japan the uk and the us in the period 1980 2000 we find that correlations among the german uk and us stock markets have doubled whereas japanese correlations have remained the same both dates of change and speeds of adjustment vary widely across countries and sectors

regime switching in the relationship between equity returns and short term interest rates in the uk abstract this paper examines the relationship between uk equity returns and short term interest rates using a two regime markov switching egarch model the results suggest one high return low variance regime within which the conditional variance of equity returns responds persistently but symmetrically to equity return innovations in the other low mean high variance regime equity volatility responds asymmetrically and without persistence to shocks to equity returns there is evidence of a regime dependent relationship between shorter maturity interest rate differentials and equity return volatility furthermore there is evidence that events in the money markets influence the probability of transition across regimes

the international crash of october 1987 causality tests the paper analyzes lead lag relationships for six major stock market indexes new york s p 500 tokyo nikkei london ft 30 hong kong hang seng singapore straits times and australia all ordinaries for time periods before during and after the october 1987 market crash unidirectional and bidirectional causality tests are conducted by means of the granger methodology practically no lead lag relationships are found for the pre crash and post crash periods however important feedback relationships and unidirectional causality are detected for the month of the crash there is also an increase in contemporaneous causality during and after the month of the crash in general our findings suggest that the october 1987 market crash probably was an international crisis of the equity markets and that it might have begun simultaneously in all the national stock markets

dynamic steam coal market integration evidence from rolling cointegration analysis abstract the aim of the paper is twofold first to assess the dynamics of the integration process of the international steam coal prices and second to investigate the changes in the roles of particular coal prices in this market in the light of changes in the structure of supply and demand the analysis is based on steam coal prices set by the largest world exporters and importers on both the atlantic and the pacific markets we use weekly data spanning from october 5 2001 to march 28 2014 the aim is achieved in two stages during the first one we use the rolling trace test to identify the integration of the steam coal market and during the second one we apply the rolling weak exogeneity test to determine the roles of the participants of the international steam coal market namely price setters and price takers our main findings can be summarized in two observations firstly the main world steam coal prices are integrated and during the period when freight costs are higher the coal market integration is weaker and when the costs are lower the integration is stronger secondly the role of particular coal prices is not stable in time generally price setters appear in the market which covers greater shares in the physical coal trade although indonesia and russia have a great share in the global export their prices remain price takers during the whole period as a consequence although russia remains the largest coal exporter of the steam coal to the european market it cannot dictate its prices in this market

should america save for its old age fiscal policy population aging and national saving he federal government has recently seen an abrupt turnaround in its budget balance from years of deficits to the now predicted years of surpluses this switch has been widely hailed since many analysts believe that the united states saves too little and that the switch to government budget surpluses can help to address that problem indeed concern about low u s saving and the long term budget outlook has increased of late as the retirement of the baby boom generation draws closer and the financial pressures associated with population aging loom larger in this paper we cite a collection of arguments for why u s fiscal policy should be used to increase national saving then we focus on whether the aging of the u s population adds force to these arguments for boosting national saving and conclude perhaps surprisingly that it may not the potential role of fiscal policy in preparing the country for the coming demographic change is at the center of recent budget proposals although the sudden emergence of budget surpluses is to a large extent based on economic and other factors beyond the government s direct control one can argue that the political will to maintain these surpluses stems in part from a desire to prepare for the retirement of the baby boomers moreover the question of whether the projected surpluses should be devoted to new spending tax cuts or debt reduction is entangled with arguments over what portion of the surpluses should go to saving social security and medicare yet the appropriate saving response to population aging is not clear cut while aging boosts the demands on future resources it also changes the rate of return the u s economy can expect from saving the net effect of aging on desired saving is

economic integration and the comovement of stock returns abstract we analyze how economic integration affects the cross country comovements in stock returns in developed and emerging markets bilateral trade intensity increases the correlation of returns while real exchange rate volatility the asymmetry of output growth and export dissimilarity decrease it

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

money bonds and foreign exchange in the theory of finance capital markets provide securities which allow the ownership of productive assets to be allocated among investors according to their willingness to bear risk in exchange for return and independently of their tastes for the productive services provided by the assets this paper uses the theory of finance to study the role of money as a productive asset and the transformation of money into a portfolio asset true to its purpose the capital market provides securities nominal bonds that allow an allocation of the current services of the money supply according to its current productivity and without regard for its future purchasing power risk and an allocation of the future purchasing power risk of the money supply according to the willingness of investors to bear this risk in exchange for return and without regard for investor needs for the future transactions services of money in open

from great depression to great credit crisis similarities differences and lessons the great depression of the 1930s and the great credit crisis of the 2000s had similar causes but elicited strikingly different policy responses while it remains too early to assess the effectiveness of current policy it is possible to analyse monetary and fiscal responses in the 1930s as a natural experiment or counterfactual capable of shedding light on the impact of current policies we employ vector autoregressions instrumental variables and qualitative evidence for 27 countries in the period 1925 39 the results suggest that monetary and fiscal stimulus was effective that where it did not make a difference it was not tried they shed light on the debate over fiscal multipliers in episodes of financial crisis they are consistent with multipliers at the higher end of those estimated in the recent literature and with the argument that the impact of fiscal stimulus will be greater when banking systems are dysfunctional and monetary policy is constrained by the zero bound miguel almunia agustin benetrix barry eichengreen kevin h o rourke and gisela rua

correlations in price changes and volatility across international stock markets the short run interdependence of prices and price volatility across three major international stock markets is studied daily opening and closing prices of major stock indexes for the tokyo london and new york stock markets are examined the analysis utilizes the autoregressive conditionally heteroskedastic arch family of statistical models to explore these pricing relationships evidence of price volatility spillovers from new york to tokyo london to tokyo and new york to london is observed but no price volatility spillover effects in other directions are found for the pre october 1987 period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

oil and the macroeconomy since world war ii all but one of the u s recessions since world war ii have been preceded typically with a lag of around three fourths of a year by a dramatic increase in the price of crude petroleum this does not mean that oil shocks caused these recessions evidence is presented however that even over the period 1948 72 this correlation is statistically significant and nonspurious supporting the proposition that oil shocks were a contributing factor in at least some of the u s recessions prior to 1972 by extension energy price increases may account for much of post opec macroeconomic performance

asset market linkages evidence from financial commodity and real estate assets abstract we use a general markov switching model to examine the relationships between returns over three different asset classes financial assets us stocks and treasury bonds commodities oil and gold and real estate assets us case shiller index we confirm the existence of two distinct regimes a tranquil regime with periods of economic expansion and a crisis regime with periods of economic decline the tranquil regime is characterized by lower volatility and significantly positive stock returns during these periods there is also evidence of a flight from quality from gold to stocks by contrast the crisis regime is characterized by higher volatility and sharply negative stock returns along with evidence of contagion between stocks oil and real estate furthermore during these periods there is strong evidence of a flight to quality from stocks to treasury bonds

long run relationships between international stock prices further evidence from fractional cointegration tests the recent empirical literature supports the view that most of the international stock prices are not pairwise cointegrated however by using fractional cointegration techniques this paper shows that france germany hong kong and japan stock prices indices are pairwise fractionally cointegrated with us stock prices equilibrium errors are mean reverting with half life lying between 2 and 12 days it is worthwhile noting that emerging markets like brazil and argentina are not pairwise cointegrated with the us stock market these new results have important implications for asset pricing and international portfolio strategy

internal net worth and the investment process an application to u s agriculture recent models of firm investment decisions stressing informational imperfections in capital markets provide a foundation for interpreting evidence that movements in internal finance can predict investment spending even after one controls for measures of firms investment opportunities while such evidence is suggestive it is often open to other interpretations we examine these models using data on equipment investment in the u s agricultural sector this sector is particularly interesting because it has experienced large fluctuations in net worth and the profitability of investment and reasonable measures of net worth can be constructed our findings provide support for a class of internal funds models of investment under asymmetric information

increasing convergence among european stock markets a recursive common stochastic trends analysis abstract the degree of convergence among three major european stock markets is analyzed within the framework of a recursive common stochastic trends analysis the results point towards a decreasing number of common stochastic trends influencing the stock markets i e the degree of convergence among european stock markets has been increased during the recent two decades

optimum consumption and portfolio rules with money as an asset this article generalizes merton s optimum consumption and portfolio rules in continuous time by introducing money as a capital asset and allowing for uncertain inflation assuming that prices are log normally distributed a three funds theorem is derived and the introduction of money is shown not to change the form of the standard inflation adjusted capm but to change the market price of risk the individual s consumption portfolio problem is completely solved under uncertain inflation if his utility function is iso elastic in its arguments comparative statics are used to assess the influence of changes in exogenous parameters on the individual s optimal rules

cointegration how short is the long run abstract when testing for cointegration and faced with short sample periods it is common for researchers to turn to more frequently sampled observations that is to move from annual to quarterly or monthly data in order to increase the number of observations we argue that such a gain in the degrees of freedom is more apparent than real essentially cointegration is a long run concept and hence requires long spans of data to give tests for cointegration much power rather than merely large numbers of observations using monte carlo simulations we demonstrate this for four popular tests for cointegration

interest rate linkages within the european monetary system new evidence incorporating long run trends abstract this paper shows that the rejection of the existence of bivariate long run relationships between the interest rates within the european monetary system ems by previous studies may stem from the under specification of deterministic variables in the models and failure to capture the changes in the trend behavior of the data the present study applies the johansen cointegration tests in models with alternative trend specifications to four german other ems interest rate pairs for 1979 1998 with three sub sample periods corresponding to different degrees of ems monetary integration in contrast to the findings of past studies the results of this study lend support to the hypothesis that the interest rates of ems countries move together more closely over time converging from a wide dispersion toward the central level

are stock market crises contagious the role of crisis definitions abstract financial contagion studies generally examine whether co movement between markets increases during a crisis we use a flexible co movement measure to examine how conclusions of such analyses depend on the sample chosen as the crisis to this end we analyse stock market co movement during the 1997 asian crisis and the 2007 global financial crisis for all possible source countries and for all possible time periods or extreme return quantiles this way we account for the main crisis dating approaches adopted in the literature our results suggest there is no clear relationship between excess co movement and commonly used crisis samples

size distortions of tests of the null hypothesis of stationarity evidence and implications for the ppp debate abstract tests of the null hypothesis of stationarity against the unit root alternative play an increasingly important role in empirical work in macroeconomics and in international finance we show that the use of conventional asymptotic critical values for stationarity tests may cause extreme size distortions if the model under the null hypothesis is highly persistent this fact calls into question the use of these tests in empirical work we illustrate the practical importance of this point for tests of long run purchasing power parity ppp under the recent float we show that the common practice of viewing tests of stationarity as complementary to tests of the unit root null will tend to result in contradictions and in spurious rejections of long run ppp while the size distortions may be overcome by the use of finite sample critical values the resulting tests tend to have low power under economically plausible assumptions about the half life of deviations from ppp thus the fact that stationarity is not rejected cannot be interpreted as convincing evidence in favor of mean reversion only in the rare case that stationarity is rejected do size corrected tests shed light on the question of long run ppp

a markov regime switching approach for hedging energy commodities abstract this paper estimates constant and dynamic hedge ratios in the new york mercantile exchange oil futures markets and examines their hedging performance we also introduce a markov regime switching vector error correction model with garch error structure this specification links the concept of disequilibrium with that of uncertainty as measured by the conditional second moments across high and low volatility regimes overall in and out of sample tests indicate that state dependent hedge ratios are able to provide significant reduction in portfolio risk

common stochastic trends in european stock markets the objective of the paper is to investigate whether price indices of different european stock markets display a common long run trending behaviour using cointegration analysis we provide empirical evidence of common stochastic trends among five important european stock markets over the period 1975 1991

international co movements of real and financial economic variables this study presents a first attempt at investigating whether the international co movements of real economic activity conform to the same international co movements of financial activity this study tests the international co movements of real economic activity on the one hand and financial variables such as stock returns interest rates inflation rates and risk premiums on the other hand we employ a dynamic correlation model on data from oecd countries for the period 1980 2010 our findings demonstrate that international stock markets co react in accordance with the underlying international economic forces we also document three other results first the correlation among countries with respect to real economic activity is statistically positive but the level of this correlation is lower than that of financial variables second there is a significant increase over time in the international correlation level with respect to the financial variables finally the creation of the euro monetary union

the baby boom and world war ii a macroeconomic analysis we argue that one major cause of the u s postwar baby boom was the rise in female labor supply during world war ii we develop a quantitative dynamic general equilibrium model with endogenous fertility and female labor force participation decisions we use the model to assess the impact of the war on female labor supply and fertility in the decades following the war for the war generation of women the high demand for female labor brought about by mobilization leads to an increase in labor supply that persists after the war as a result younger women who reach adulthood in the 1950s face increased labor market competition which impels them to exit the labor market and start having children earlier the effect is amplified by the rise in taxes necessary to pay down wartime government debt in our calibrated model the war generates a substantial baby boom followed by a baby bust

assessing european stock markets co integration abstract this paper examines long run comovements in the uk french and german stock markets using cointegration techniques after fixing the power of the cointegration test no evidence is found of an increasing number of cointegrating vectors an alternative approach to measure increasing integration based on the speed of adjustment coefficients is proposed

transmission of shocks across global real estate and equity markets an examination of the 2007 2008 housing crisis this study analyses the impact of the 2007 2008 u s financial crisis on the structure of interdependence among several major global real estate and equity markets moreover it performs a step by

russian equity market linkages before and after the 1998 crisis evidence from stochastic and regime switching cointegration tests abstract this paper examines the relationships between russian and other equity markets over the period of 1995 2004 to account for potential instability in the market relationships we apply a number of cointegration approaches gregory hansen 1996 residual based tests for cointegration in models with regime shifts journal of econometrics 70 99 126 test which allows for a structural break in the relationships a stochastic cointegration framework by mccabe 2003 testing for stochastic cointegration and evidence for present value models working paper the non parametric test by breitung 2002 nonparametric tests for unit roots and cointegration journal of econometrics 108 2 343 363 and a regime switching cointegration model in the spirit of ho 1999 financial liberalization and international capital mobility of taiwan a regime switching approach asian economic journal 13 4 407 417 the tests point to a significant agreement that the russian equity market remained isolated from the influence by international markets in the long run and that while a structural break might have occurred in august 1998 this did not alter the nature of long run relationships

transmission of the u s subprime crisis to emerging markets evidence on the decoupling recoupling hypothesis abstract we find that emerging markets appeared to be somewhat insulated from developments in u s financial markets from early 2007 to summer 2008 from that point on however emerging markets responded very strongly to the deteriorating situation in the u s financial system and real economy our regression event study focusing on 15 types of news indicates that a range of financial and real economic news emanating from the us had statistically and economically large impacts on 14 emerging markets and several news events uniformly moved markets policy measures taken in emerging markets to insulate themselves from global financial developments proved inadequate in the face of the credit crunch and decline in international trade that followed the lehman bankruptcy in september 2008

the baby boom and the stock market boom this paper addresses two issues the first is whether demographic change was plausibly responsible for the run up in stock prices over the last decade and whether an attempt by the baby boom cohort to cash out of its investments in the period 2010 2030 might lead to an asset meltdown the second issue is whether the rise in dependency that will accompany the retirement of the baby boom cohort calls for an increase in national saving we analyze these issues using a forward looking macro demographic model and show that they are related via the existence of installation costs for capital if such costs are sufficiently large then demographics do have the power to affect stock prices but saving for america s old age is less optimal however conventional estimates of capital installation costs are not large enough to explain large stock price movements in response to actual demographic change

general equilibrium real and nominal interest rates we derive the general equilibrium short term real and nominal interest rates in a monetary economy affected by technological and monetary shocks and where the price level dynamics is endogenous assuming fairly general processes for technology and money supply we show that an inherent feature of our equilibrium is that any real variable dynamics in particular that of the short term real interest rate is driven by both monetary and real factors this money non neutrality is generic as it does not stem from any friction such as price stickiness or from a particular utility function non neutrality obtains because the ex ante cost of real money holdings is random due to inflation uncertainty we then analyze in depth a specialized version of this economy in which the state variables follow square root processes and the representative investor has a log separable utility function the short term nominal rate dynamics we obtain encompasses most of the dynamics present in the literature from vasicek and cir to recent quadratic and more generally non linear interest rate models moreover our results pave the way to several new nominal term structures

the integration of direct real estate and stock markets in asia currently there exists relatively little research investigating the long term association between stock and direct real estate markets using appropriate transaction based property indices this study focuses on the relationship between stock and direct real estate markets in nine asian countries from the period 1980 to 2012 through both linear and nonlinear cointegration techniques we find empirical evidence of linear cointegration of stock and property markets in taiwan fractional cointegration in singapore and hong kong and no evidence of cointegration in china japan thailand malaysia indonesia and south korea it is concluded that segmentation of property markets from stock markets does not appear to be linked to the differences in the maturity of national financial markets and that the differing degrees of integration across asia may instead be reflective of a range of factors impacting upon the underlying economic structures in each country

european monetary union a cointegration analysis this paper employs systems based cointegration techniques developed by johansen 1988 1995 to determine which european union countries would form a successful economic and monetary union emu based on long run behavior of the nominal convergence criteria laid down in the maastricht treaty the original 12 european union countries are analyzed together nominal exchange rates real exchange rates longterm interest rates and government budget deficits are each analyzed for co movements among the 12 countries and various subgroups of them the results suggest that not all of the 12 original countries of the european union could possibly form a successful emu over time unless several countries made significant adjustments

new and old models of business investment a comparison of forecasting performance previous empirical evaluations of investment models have focused on the relative in sample fit of various nonstructural models the authors evaluation extends this work along two dimensions first they augment the usual set of models with two euler equations derived explicitly from dynamic optimization under rational expectations one euler equation is typical of those found in the investment literature while the other embeds time to build lags that yield a richer dynamic structure second the authors focus on out of sample forecast performance as the primary criterion of model evaluation their results indicate that the traditional models dominate both euler equations in forecasting investment copyright 1995 by ohio state university press

an intertemporal model of saving and investment this paper characterizes a market economy with infinitely long lived consumers and value maximizing firms which face costs of adjustment for capital the temporary equilibrium of this economy is similar to the short run equilibrium of standard macroeconomic models consumption is a function of wealth investment is related to the value of firms equilibrium between aggregate demand and aggregate supply is achieved by the endogenous adjustment of the sequence of current and future interest rates the dynamic behavior of output consumption and investment in this economy is the same as in an optimal growth model with adjustment costs the paper shows this equivalence and then uses it together with the equivalence of taxes to technological shocks to study the dynamic effects of fiscal policy

risk premia and the sources of inflation the process of inflation is associated not only with a rising general price level but also with uncertainty about its rate of change it is the latter aspect of inflation that may give rise to risk premia on nominal assets as compared with a real safe asset a possible framework for analyzing the structure of risk premia under inflationary conditions is the well known capital asset pricing model capm developed by sharpe and lintner indeed a number of papers have recently dealt with these risk premia by means of the capm framework or some close variety of it we may mention the works of roll 9 sarnat 10 fischer 4 chen and boness 1 and friend landskroner and losq 5 1 the capm and its extentions to conditions of inflation use a microeconomic approach in a partial equilibrium analysis of the risk premia a basic feature of the foregoing literature is the implicit treatment of inflation as exogenous alternatively there is no theory to relate the real return on money to be denoted 7r to the other variables in the capm formulation this leads to two important shortcomings first the covariance of 7r with the rates of return appears as completely arbitrary second since x was considered as exogenous the authors did not consider the need to include in their models the government s nominal transfer pay

asset market linkages in crisis periods we characterize asset return linkages during periods of stress by an extremal dependence measure contrary to correlation analysis this nonparametric measure is not predisposed toward the normal distribution and can allow for nonlinear relationships our estimates for the g 5 countries suggest that simultaneous crashes between stock markets are much more likely than between bond markets however for the assessment of financial system stability the widely disregarded cross asset perspective is particularly important for example our data show that stock bond contagion is approximately as frequent as flight to quality from stocks into bonds extreme cross border linkages are surprisingly similar to national linkages illustrating a potential downside to international financial integration