Search

We show that after controlling for the effects of bid-ask spreads and trading volume the conditional future volatility of equity returns is negatively related to the level of stock price. This "leverage effect" is stronger for small, as compared to large, firms. We also document that while the essential characteristics of the relations between stock price dynamics and firm size are stable, the strengths of the relationships appear to change over time. [ABSTRACT FROM AUTHOR]

Since the 2008 global financial crisis, China has rolled out a number of initiatives to actively promote the international role of the renminbi and to denominate more of its international claims away from the US dollar and into the renminbi. The present paper discusses the factors shaping the prospects of internationalising the renminbi from the perspective of the currency composition of China's international assets and liabilities. These factors include, among others, underlying valuation and management of the renminbi. [ABSTRACT FROM AUTHOR]

Motivated by the observed international reserve hoarding behavior in the post-1997 crisis period, we explore the Mrs Machlup's Wardrobe hypothesis and the related keeping up with the Joneses argument. It is conceived that, in addition to psychological reasons, holding a relatively high level of international reserves reduces the vulnerability to speculative attacks and promotes growth. A stylized model is constructed to illustrate this type of hoarding behavior. The relevance of the keeping up with the Joneses effect is examined using a few plausible empirical specifications and data from 10 East Asian economies. Panel-based regression results are suggestive of the presence of the Joneses effect, especially in the post-1997 crisis period. [ABSTRACT FROM AUTHOR]

We investigate the empirical determinants of China's outward direct investment (ODI). It is found that China's investments in developed and developing countries are driven by different sets of factors. Subject to the differences between developed and developing countries, there is evidence that: (i) both market-seeking and resource-seeking motives drive China's ODI; (ii) Chinese exports to developing countries induce China's ODI; (iii) China's international reserves promote its ODI; and (iv) Chinese capital tends to agglomerate among developed economies but diversify among developing economies. Similar results are obtained using alternative ODI data. We do not find substantial evidence that China invests in African and oil-producing countries mainly for their natural resources. [ABSTRACT FROM AUTHOR]

One argument for floating the Chinese renminbi (RMB) is to insulate China's monetary policy from the US effect. However, we note that both theoretical considerations and empirical results do not offer a definite answer on the link between exchange rate arrangement and policy dependence. We examine the empirical relevance of the argument by analysing the interactions between the Chinese and the US interest rates. Our empirical results, which appear robust to various assumptions of data persistence, suggest that the US effect on the Chinese interest rate is quite weak. Apparently, even with its de facto peg to the US dollar, China has alternative measures to retain its policy independence and de-link its interest rates from the US rate. In other words, the argument for a flexible RMB to insulate China's monetary policy from the US effect is not substantiated by the observed interest rate interactions. Copyright © 2007 John Wiley & Sons, Ltd. [ABSTRACT FROM AUTHOR]

We construct an empirical model for daily highs and daily lows of US stock indexes based on the intuition that highs and lows do not drift apart over time. Our empirical results show that daily highs and lows of three main US stock price indexes are cointegrated. Data on openings, closings, and trading volume are found to offer incremental explanatory power for variations in highs and lows within the VECM framework. With all these variables, the augmented VECM models explain 40–50% of variations in daily highs and lows. The generalized impulse response analysis shows that the responses of daily highs and daily lows to the shocks depend on whether data on openings, closings, and trading volume are included in the analysis. Copyright © 2007 John Wiley & Sons, Ltd. [ABSTRACT FROM AUTHOR]

The financial linkages between the People's Republic of China (hereafter ‘China’) and the other Greater China economies of Hong Kong and Taiwan are assessed, and compared against those of China with Singapore, Japan and the United States. For both sets of links, there is evidence that ex post uncovered interest parity tends to hold over longer periods, and the magnitude of the parity deviations is shrinking over time. The deviations depend upon the extent of capital controls, and in certain cases, exchange rate volatility. However, while the money markets of China are increasingly linked to money markets in the rest of the world, our empirical results suggest that the banking sector—the main source of capital for Chinese firms—remains insulated. Copyright © 2005 John Wiley & Sons, Ltd. [ABSTRACT FROM AUTHOR]

The study assesses the level of integration among the three Greater China economies (China, Hong Kong and Taiwan) and examines the suitability of a Greater China currency union. The three economies already have extensive trade and investment linkages. Our analyses show that they share common long-run and short-run cyclical variations. We also estimate the output costs of relinquishing policy autonomy to form a currency union. The estimated output losses, which depend on, e.g., the method used to generate shock estimates, seem to be moderate and are likely to be less than the efficient gains derived from a currency union. [ABSTRACT FROM AUTHOR]

This paper summarizes the results of a survey of UK-based foreign exchange dealers conducted in 1998. It addresses topics in three main areas: the microeconomic operation of the foreign exchange market; the beliefs of dealers regarding the importance, or otherwise, of observable macroeconomic fundamental factors in affecting exchange rates; microstructure factors in FX. We find that heterogeneity of traders' beliefs is evident from the results but that it is not possible to explain such disagreements in terms of institutional detail, rank or trading technique (e.g. technical analysts versus fundamentalists). As expected, non-observable fundamental factors are thought to dominate short horizon changes in exchange rates, but observable fundamentals are deemed important over much shorter horizons than the mainstream empirical literature would suggest. Finally, market ‘norms’ and behavioural phenomena are very strong in the FX market and appear to be key determinants of the bid–ask spread. Copyright © 2004 John Wiley & Sons, Ltd. [ABSTRACT FROM AUTHOR]

This study suggests that some empirical findings against money-output causality can be the consequence of ignoring autoregressive conditional heteroskedastic (ARCH) errors. Monte Carlo results confirm that ARCH effects drastically reduce the power of the standard causality test. The maximum likelihood approach allowing for ARCH effects, on the other hand, provides a good power performance. Using different specifications and sample period, Friedman and Kuttner (1993) and Thomas (1994) report limited evidence of money causing output. We detect significant ARCH effects in the models considered by these studies. Once ARCH effects are explicitly accounted for, we find that the monetary effect is significant though its magnitude is quite small. [ABSTRACT FROM AUTHOR]

We examine the relationship between market structure and the persistence of US dollar-based sectoral real exchange rates for 14 OECD countries. Our empirical results based on disaggregated data suggest that differences in market structure significantly determine the rates at which deviations from sectoral purchasing power parity decay. Specifically, industries with a larger price-cost margin are found to exhibit slower parity reversion of their sectoral real exchange rates. Further, as the degree of intra-industry trade activity increases, sectoral real exchange rate persistence becomes more pronounced. These findings suggest that an imperfectly competitive market structure contributes to the well-documented persistence in real exchange rates. [ABSTRACT FROM AUTHOR]

This study assesses the claim that the Austrian economy depends mainly on the German business cycle. Controlling for possible influences from the US economy, it is confirmed that the Austrian and German industrial production indexes have a common long-term stochastic trend and German industrial production Granger-causes the Austrian industrial production in the short run. However, German and US shocks only account for a small proportion of Austrian industrial production variability. Further, it is found that the three countries share a non-synchronized common business cycle. [ABSTRACT FROM AUTHOR]

This article demonstrates the effect of lag order on finite-sample critical values of the Dickey-Fuller (DF-GLS) test. The Dickey-Fuller test examines the null hypothesis of a unit root against stationary alternatives. Empirical applications of the test necessarily deal with finite samples. Lag-adjusted critical values can be computed from response surface equations. The DF-GLS test is applied to two sets of economic time series in order to show how lag-adjusted critical values can be used in practice.

This article examines the finite-sample sizes of S. Johansen's likelihood ratio (LR) tests for cointegration and their robustness to lag length specification and non-normal errors. In this study, the finite-sample bias of Johansen's (1991) LR test for cointegration has been examined using the Monte Carlo method. Response surface analysis is employed to obtain approximations to the finite-sample critical values and show the individual roles of the sample size, the dimension of the variable system, and the lag order in determining the finite-sample bias of Johansen's tests. It is found that Johansen's tests are biased toward finding cointegration more often than what asymptotic theory suggests. Moreover, the finite-sample bias magnifies as the dimension of the estimated system or the lag length increases. Proper corrections of the critical values in finite samples are therefore particularly essential when the estimated system contains many variables and/or long lags.

A fractional integration framework and a relationship between the variability of innovations in real stock prices and real dividends implied by the present value model are used to examine the issue of stock market volatility raised by Shiller (1981) and LeRoy and Porter (1981). It is found that both stock price and dividend data are neither trend stationary nor difference stationary; they are fractionally integrated. The data also show that low interest rates and investors' myopic behaviour only have a limited role in explaining excessive market volatility. On the other hand, the evidence for excess market volatility seems substantial even after controlling for sampling uncertainty. [ABSTRACT FROM AUTHOR]

Arguably, international finance is one of the most exciting areas in economics. The development of international finance is influenced and shaped, at least in part, by the continuing process of globalization and integration. In the last 25 years the profession has witnessed the proliferation of both theoretical models and empirical analyses in international finance. The analysis of both new and existing issues has benefited from increasingly elaborate modelling techniques and sophisticated empirical tools. [ABSTRACT FROM AUTHOR]