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on Financial Markets |
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Issue of 2009‒02‒14
seven papers chosen by |
| By: | Giorgio Canarella (Department of Economics, University of Nevada, Las Vegas); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas); Stephen K. Pollard (Department of Economics, University of Nevada, Las Vegas) |
| Abstract: | This paper explores the dynamic linkages that portray different facets of the joint probability distribution of stock market returns in NAFTA (i.e., Canada, Mexico, and the US). Our examination of interactions of the NAFTA stock markets considers three issues. First, we examine the long-run relationship between the three markets, using cointegration techniques. Second, we evaluate the dynamic relationships between the three markets, using impulse-response analysis. Finally, we explore the volatility transmission process between the three markets, using a variety of multivariate GARCH models. Our results also exhibit significant volatility transmission between the second moments of the NAFTA stock markets, albeit not homogenous. The magnitude and trend of the conditional correlations indicate that in the last few years, the Mexican stock market exhibited a tendency toward increased integration with the US market. Finally, we do note that evidence exists that the Peso and Asian financial crises as well as the stock-market crash in the US affect the return and volatility time-series relationships. |
| Keywords: | NAFTA stock markets, cointegration, impulse response, volatility transmission |
| JEL: | G10 C30 C50 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nlv:wpaper:0905&r=fmk |
| By: | Alagidede, Paul; Panagiotidis, Theodore |
| Abstract: | We investigate the behaviour of stock returns in Africa's largest markets namely, Egypt, Kenya, Morocco, Nigeria, South Africa, Tunisia and Zimbabwe. The validity of the random walk hypothesis is examined and rejected by employing a battery of tests. Secondly we employ smooth transition and conditional volatility models to uncover the dynamics of the first two moments and examine weak from efficiency. The empirical stylized facts of volatility clustering, leptokurtosis and leverage effect are present in the African data. |
| Keywords: | Stock Returns; Weak Form Efficiency; Asymmetric Volatility; African Stock Markets |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:stl:stledp:2009-04&r=fmk |
| By: | Kohei Aono; Tokuo Iwaisako |
| Abstract: | The first contribution of this paper, following the works of Lettau and Ludvigson (2001a,b), is construction of the Japanese consumption-wealth ratio data series and to examine whether it explains Japanese stock market data. We find that the consumption- wealth ratio does not predict future stock returns, but it does help to explain the cross-section of Japanese stock returns. The second contribution of the paper is that we propose new consumption-wealth ratios in terms of which we more explicitly deal with household real estate wealth utilizing Japanese aggregate level data. Such ``real estate augmented'' consumption-wealth ratios work in a similar way, but perform bet- ter than, the consumption-wealth ratio calculated with only financial wealth data. While the scaled factor model with the consumption-wealth ratio proposed by Let- tau and Ludvigson performs relatively well with Japanese data, the book-to-market related anomaly pointed out by Jagannathan et al. (1998) remains strong. |
| Keywords: | consumption-wealth ratio; cointegration; cross-section of stock returns |
| JEL: | E21 G12 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:hit:hituec:a504&r=fmk |
| By: | Satyajit Chatterjee (Federal Reserve Bank of Philadelphia); Burcu Eyigungor |
| Abstract: | We present a novel and tractable model of long-term sovereign debt. We make two sets of contributions. First, on the substantive side, using Argentina as a test case we show that unlike one-period debt models, our model of long-term sovereign debt is capable of accounting for the average spread, the average default frequency, and the average debt-tooutput ratio of Argentina over the 1991-2001 period without any deterioration in the model’s ability to account for Argentina’s cyclical facts. Using our calibrated model we determine what Argentina’s debt, default frequency and welfare would have been if Argentina had issued only short-term debt. Second, on the methodological side, we advance the theory of sovereign debt begun in Eaton and Gersovitz (1981) by establishing the existence of an equilibrium pricing function for long-term sovereign debt and by providing a fairly complete set of characterization results regarding equilibrium default and borrowing behavior. In addition, we identify and solve a computational problem associated with pricing long-term unsecured debt that stems from nonconvexities introduced by the possibility of default. |
| Keywords: | Unsecured Debt, Sovereign Debt, Long Duration Bonds, Debt Dilution, Random Maturity Bonds, Default Risk |
| JEL: | F34 F41 G12 G33 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:0901&r=fmk |
| By: | Marcello Pericoli (Bank of Italy); Marco Taboga (Bank of Italy) |
| Abstract: | We introduce a two-country no-arbitrage term-structure model to analyse the joint dynamics of bond yields, macroeconomic variables, and the exchange rate. The model allows to understand how exogenous shocks to the exchange rate affect the yield curves, how bond yields co-move in different countries, and how the exchange rate is influenced by the interactions between macroeconomic variables and time-varying bond risk premia. Estimating the model with US and German data, we obtain an excellent fit of the yield curves and we are able to account for up to 75 per cent of the variability of the exchange rate. We find that time-varying risk premia play a non-negligible role in exchange rate fluctuations due to the fact that a currency tends to appreciate when risk premia on long-term bonds denominated in that currency rise. A number of other novel empirical findings emerge. |
| Keywords: | exchange rate, term structure, UIP |
| JEL: | C5 E4 G1 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_699_09&r=fmk |
| By: | Yu-chin Chen; Kwok Ping Tsang |
| Abstract: | This paper uses information contained in the cross-country yield curves to test the asset-pricing approach to exchange rate determination, which models the nominal exchange rate as the discounted present value of its expected future fundamentals. Research on the term structure of interest rates has long argued that the yield curve contains information about future economic activity such as GDP growth and inflation. Bringing this lesson to the international context, we extract the Nelson-Siegel (1987) factors of relative level, slope, and curvature from cross-country yield differences to proxy expected movements in future exchange rate fundamentals. Using monthly data between 1985-2005 for the United Kingdom, Canada, Japan and the US, we show that the yield curve factors indeed can explain and predict bilateral exchange rate movements and excess currency returns one month to two years ahead. Out-of- sample analysis also shows the yield curve factors to outperform a random walk in forecasting short-term exchange rate returns. |
| Keywords: | Exchange Rate Forecasting, Term Structure of Interest Rates, Uncovered Interest, Parity |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:vpi:wpaper:e07-15&r=fmk |
| By: | Aliyu, Shehu Usman Rano |
| Abstract: | This paper examined the long run and short run interactions between stock prices and exchange rate in Nigeria based on a sample from 1st February, 2001 to 31st December, 2008. Three models were derived from the sample, albeit pre-crisis, crisis and basic models. The paper set out by testing the time series properties of the series using the ADF and PP tests. In addition, the Engle and Granger two-step and Johansen and Juselius cointegration procedures were applied. Empirical results showed that all the series are I(1) and evidence of cointegration was established using the Johansen and Juselius methodology. Furthermore, causality tests revealed strong evidence of long run bidirectional relationship between stock prices and exchange rate in the models. Policy wise, the findings implied that monetary authorities in Nigeria are not constrained to take into account stock market development in achieving their exchange rate policy objective given the symbiotic nature of relationship between the two. The paper recommends measures that would promote greater stability and efficiency of the Nigeria’s foreign exchange market |
| Keywords: | Stock prices; exchange rate; Granger causality; cointegration and vector error correction. |
| JEL: | G15 F21 |
| Date: | 2009–02–04 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:13283&r=fmk |