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There are two approaches to maximum likelihood (ML) estimation of the parameter of fractionally- integrated noise: approximate frequency-domain ML [Fox and Taqqu (1986)] and exact time- domain ML [Sowell (1992b)]. If the mean of the process is known , then a clear finite-sample mean-squared error ranking of the estimators emerges: the exact time-domain estimator is superior. We show in this paper, however, that the finite-sample efficiency of approximate frequency-domain ML relative to exact time-domain ML rises dramatically when the mean is unknown and so must be estimated. The intuition for our result is straightforward: the frequency-domain ML estimator is invariant to the true but unknown mean of the process, while the time-domain ML estimator is not. Feasible time-domain estimation must therefore be based upon de-meaned data, but the long memory associated with fractional integration makes precise estimation of the mean difficult. We conclude that the frequency-domain estimator is an attractive and efficient alternative for situations in which large sample sizes render time-domain estimation impractical.

This study shows that annual output data of the G7 countries in the twentieth century are better characterized as transitory deviations from a (shifting) growth trend than as integrated processes. Furthermore, I find no two countries share common business cycles.

This paper investigates the relationship between the Pacific-Basin country stock returns and real economic activity. It also examines the importance of the Japanese and U.S. economies to the Pacific-Basin financial markets by investigating the effects of the former's industrial production growth rates on the latter's stock market movements. We find that the representative global instrumental variables can explain up to 18% of the monthly portfolio real return variability in the Pacific-Basin stock markets and 46% of the quarterly variability. Our evidence shows that U.S. industrial production growth rates tend to exhibit a stronger and more stable relationship with the Pacific-Basin real stock returns.

We study the differences in currency misalignment estimates obtained from alternative datasets derived from two International Comparison Program (ICP) surveys. A decomposition exercise reveals that the year 2005 misalignment estimates are substantially affected by the ICP price revision. Further, we find that differences in misalignment estimates are systematically affected by a country’s participation status in the ICP survey and its data quality – a finding that casts doubt on the economic and policy relevance of these misalignment estimates. The patterns of changes in estimated degrees of misalignment across individual countries, as exemplified by the BRIC economies, are highly variable.

Using exchange rate data on five currencies vis-à-vis the US dollar, this paper examines the insample and out-of-sample performance of exchange rate equations derived from alternative empirical and optimal interest rate rules. These rules could have either homogeneous or heterogeneous response coefficients. Our exercise shows that these exchange rate equations do not offer good in-sample explanatory power consistently across currencies and over time. The relative forecasting performance of these exchange rate equations tend to vary across currencies and over time and bears limited relationship with the relative in-sample performance. When the forecast performance is compared with a random walk model, these exchange rate equations offer no better performance under the usual MSFE criterion but are better when the ability of predicting the direction of change is considered.

This study evaluates the role market competition plays in determining inflation based on sector-level data from OECD countries. In theory, trade openness can affect inflation through changes in market competitiveness and productivity. Nonetheless, previous empirical studies often fail to account for productivity effects, and their results may overstate the role of market competition. This study shows that inflation decreases with greater market competitiveness even after controlling for productivity effects. Indeed, when market competition and productivity effects are both accounted for, trade openness becomes insignificant in explaining inflation. The results support that changes in market competitiveness and productivity are the main channels through which trade openness affects inflation.

We study the differences in currency misalignment estimates obtained from alternative datasets derived from two International Comparison Program (ICP) surveys. A decomposition exercise reveals that the year 2005 misalignment estimates are substantially affected by the ICP price revision. Further, we find that differences in misalignment estimates are systematically affected by a country’s participation status in the ICP survey and its data quality – a finding that casts doubt on the economic and policy relevance of these misalignment estimates. The patterns of changes in estimated degrees of misalignment across individual countries, as exemplified by the BRIC economies, are highly variable.

We examine the empirical determinants of China’s outward direct investment (ODI) in Africa using an officially approved ODI dataset and a relatively new OECD-IMF format ODI dataset. China’s ODI is found responding to the canonical economic determinants that include the market seeking motive, the risk factor, and the resources seeking motive. It is also affected by the intensity of trade ties and the presence of China’s contracted projects. A host country’s natural resources have an impact on China’s decision on how much to invest in the country rather than on whether to invest in the country or not. China’s drive for Africa’s natural resources is mainly a recent phenomenon and, probably, became prominent after the “Going Global” policy adopted in 2002.

We explore the role of interest rate policy in the exchange rate determination process. Specifically, we derive exchange rate equations from interest rate rules that are theoretically optimal under a few alternative settings. The exchange rate equation depends on its underlying interest rate rule and its performance could vary across evaluation criteria and sample periods. The exchange rate equation implied by the interest rate rule that allows for interest rate and inflation inertia under commitment offers some encouraging results – exchange rate changes "calibrated" from the equation have a positive and significant correlation with actual data, and offer good direction of change prediction. Our exercise also demonstrates the role of the foreign exchange risk premium in determining exchange rates and the difficulty of explaining exchange rate variability using only policy based fundamentals.

We study the empirical determinants of the Chinese renminbi (RMB) covered interest differential. The canonical macroeconomic variables including capital flight and the factors that affect country risk, and a few China-specific regulatory and institutional factors are considered. It is found that the effects of these canonical macroeconomic variables on the RMB covered interest differential are largely consistent with those reported in the literature. Further, the covered interest differential was affected by China's general capital control policy and its exchange rate reform program, but not its political risk index. The effects of these explanatory variables on the covered interest differential appear to work mainly via the forward premium rather than the interest rate differential component. The results are largely the same across the onshore and offshore RMB forward rates that cover different sample periods.

The performance of the Geweke-Porter-Hudak (GPH) test, the modified rescaled range (MRR) test and two Lagrange multiplier (LM) type tests for fractional integration in small samples is examined using Monte Carlo methods. Both the GPH and MRR tests are found to be robust to moderate autoregressive moving-average components, autoregressive conditional heteroskedasticity effects and shifts in the variance. However, these two tests are sensitive to large autoregressive moving-average components and shifts in the mean. It is also found that the LM tests are sensitive to deviations from the null hypothesis. As an illustration, the GPH test is applied to two economic data series.

This study examines the long memory behavior in gold returns during the postBretton Woods period using a new rescaled range technique. Unlike the conventional rescaled range analysis, the new rescaled range analysis is robust to short-term dependence and conditional heteroscedasticity found in the gold data. Statistical results suggest that the long memory behavior in gold returns is rather unstable. When only few observations corresponding to major political events in the Middle East, together with the Hunts event, in late 1979 are omitted, little evidence of long memory can be found.

This paper examines the relevance of long-run purchasing power parity (PPP), which allows for measurement errors, during the recent floating exchange rate period. Previous empirical studies generally fail to find support for long-run PPP over this period. In this paper. In this paper the cointegration property of exchange rates and prices is examined using maximum likelihood procedure, and we find significant evidence favorable to long-run PPP. Further tests for symmetry and proportionality indicate that these two conditions are not generally with the data. The results support the hypothesis of long-run PPP with measurement errors in prices.

Using the Geweke–Porter-Hudak test, we find evidence of long memory in exchange-rate data. This implies that the empirical evidence of unit roots in exchange rates may not be robust to long-memory alternatives. Fractionally integrated autoregressive moving average (ARFIMA) models are estimated by both the time-domain exact maximum likelihood (ML) method and the frequency-domain approximate ML method. Impulse-response functions and forecasts based on these estimated ARFIMA models are evaluated to gain insight into the long-memory characteristics of exchange rates. Some tentative explanations of the long memory found in the exchange rates are discussed.

The value of China's currency, the renminbi (RMB), and the conduct of China's exchange rate policy have generated intense debate in academic and international policy circles. Despite the accumulation of empirical evidence regarding the degree of RMB misalignment over the past few years, the debate continues unabated. In this study, we highlight the challenges to properly assessing the nature and degree of currency misalignment, in terms of the choice of the model, the method of calculation, and data uncertainty. In particular, we demonstrate the susceptibility of misalignment estimates to model selection and data revisions. Further, we explicitly discuss the implications of sampling uncertainty for determining the extent of RMB misalignment.

We study the empirical determinants of China’s capital flight. In addition to the covered interest differential, our empirical exercise includes a rather exhaustive list of macroeconomic variables and a few institutional factors. Overall, our regression exercise shows that China’s capital flight is quite well explained by its own history and covered interest differentials. The other possible determinants offer relatively small additional explanatory power. It is also found that China’s capital flight responds differently to the components of covered interest differentials and to the positive and negative components of these variables. The response pattern, however, depends on the choice of data frequency. The general impression is that the monthly results are more intuitive than the quarterly ones.

In this paper we explore the ‘Mrs. Machlup's Wardrobe’ hypothesis to understand the growing trend of Latin American economies amassing large stocks of international reserves. Using annual data from 1980 to 2007, we examine the relevance of the argument that economies continue to add to their existing reserves stock in order to keep up with the Joneses. We find strong evidence of presence of the Joneses effect. The effect is robust to the inclusion of traditional determinants of reserve accumulation as well as region specific factors including commodity exports that set the Latin American economies apart from other emerging economies.

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. This 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.

The value of China’s currency, the renminbi (RMB), and the conduct of China’s exchange rate policy have generated intense debate in academic and international policy circles. Despite the accumulation of empirical evidence regarding the degree of RMB misalignment over the past few years, the debate continues unabated. In this study, we highlight the challenges to properly assessing the nature and degree of currency misalignment, in terms of the choice of the model, the method of calculation, and data uncertainty. In particular, we demonstrate the susceptibility of misalignment estimates to model selection and data revisions. Further, we explicitly discuss the implications of sampling uncertainty for determining the extent of RMB misalignment.

We study the empirical determinants of China’s capital flight. In addition to the covered interest differential, our empirical exercise includes a rather exhaustive list of macroeconomic variables and a few institutional factors. Overall, our regression exercise shows that China’s capital flight is quite well explained by its own history and covered interest differentials. The other possible determinants offer relatively small additional explanatory power. It is also found that China’s capital flight responds differently to the components of covered interest differentials and to the positive and negative components of these variables. The response pattern, however, depends on the choice of data frequency. The general impression is that the monthly results are more intuitive than the quarterly ones.

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. A NUMBER OF EMPIRICAL studies have documented that stock volatility tends to fall subsequent to an increase in stock prices and rise following a decline in stock prices, an observation commonly attributed to the "leverage effect." As explained by Black (1976), leverage can induce future stock volatility to vary inversely with the stock price: a fall in a firm's stock value relative to the market value of its debt causes a rise in its debt-equity ratio and increases its stock volatility. For example, Black (1976) and Christie (1982) use individual securities and French, Schwert, and Stambaugh (1987), Gallant, Rossi, and Tauchen (1990), Schwert (1990), and Nelson (1991) use market indices to provide evidence consistent with the leverage effect. However, these papers demonstrate a leverage effect either intertemporally or cross-sectionally for some assets. Relatively little work has examined the intertemporal behavior of individual assets by taking into account conditional heteroskedasticity and changing expected returns. In this paper we examine and characterize the cross-sectional and temporal relations between stock price dynamics and firm size. In particular, we investigate the possibility of an inverse relation between future stock volatility and stock price and whether this effect varies across time and/or across firms with different market capitalization. Our study uses the exponential GARCH (EGARCH) formulation of Nelson (1991) as a model for the timeseries behavior of individual security returns. Nonparametric methods are

This paper reports some international evidence on output persistence based on postwar data. Using fractional differencing analysis, we find evidence of fractional integration in output for the U.S. and U.K. but not for the other G-7 countries, implying that these two countries show much less persistence in output fluctuations than the others.

We introduce a time series model that captures both long memory and conditional heteroskedasticity and assess their ability to describe the US inflation data. Specifically, the model allows for long memory in the conditional mean formulation and uses a normal mixture GARCH process to characterize conditional heteroskedasticity. We find that the proposed model yields a good description of the salient features, including skewness and heteroskedasticity, of the US inflation data. Further, the performance of the proposed model compares quite favorably with, for example, ARMA and ARFIMA models with GARCH errors characterized by normal, symmetric and skewed Student-t distributions.

The debate on renminbi (RMB) revaluation has not subsided, despite the policy change announced by the Chinese authorities in July 2005. In this chapter, we show that the evidence of RMB undervaluation may not be as strong as it appears. Specifically, depending on the method used, the evidence ranges from slight overvaluation to undervaluation. Even in the case of undervaluation, the results are not significant in the statistical sense. We also note that China is playing an important economic role in Asia and has established a complex production and trade network with its neighboring economies, which complicates the calculation of the equilibrium exchange rate. Thus, a change in Chinese exchange rate policy in response to demands from foreign countries and short-run considerations may have undesirable effects on the economies of China and the Asian region.

We examine speculative attacks in a controlled laboratory environment featuring continuous time, size asymmetries, and varying amounts of public information. Attacks succeeded in 233 of 344 possible cases. When speculators have symmetric size and access to information: (a) weaker fundamentals increase the likelihood of successful speculative attacks and hasten their onset, and (b) contrary to some theory, success is enhanced by public access to information about either the net speculative position or the fundamentals. The presence of a larger speculator further enhances success, and experience with large speculators increases small speculators' response to the public information. However, giving the large speculator increased size or better information does not significantly strengthen his impact.

This study investigates the sources of bilateral real exchange rate (RER) volatility in industrial countries. Going beyond traditional macroeconomic determinants, we identify the role of both trade- and finance-related factors in explaining RER volatility at different time horizons. The results suggest that RER volatility tends to increase with financial openness and with transport costs but decrease with trade openness and with financial depth. Moreover, the time horizon matters. Financial factors (financial openness and financial depth) are found to influence RER volatility at primarily short horizons, while trade-related factors (trade openness and transport costs) contribute significantly also to RER volatility at much longer horizons. The relative importance of traditional macroeconomic fundamentals and these tradeand finance-related factors can vary considerably across horizons.

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 a) both market seeking and resources seeking motives drive China’s ODI, b) the Chinese exports to developing countries induce China’s ODI, c) China’s international reserves promote its ODI, and d) the 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.

Renminbisation of China’s international assets 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. This 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. Classification JEL : F30, F31, F33, O24., Depuis la crise financière mondiale de 2008, la Chine a lancé plusieurs initiatives pour développer activement le rôle international du renminbi et pour libeller davantage de ses créances internationales en renminbi plutôt qu’en dollars. Cet article examine les facteurs qui influent sur les perspectives d’internationalisation du renminbi au vu de la composition en devises des avoirs et des engagements de la Chine. Ces facteurs incluent, entre autres, la valeur tendancielle et la gestion du renminbi. Classification JEL : F30, F31, F33, O24., Cheung Yin-Wong, Ma Guonan, McCauley Robert N. Renminbisation des actifs internationaux de la Chine. In: Revue d'économie financière, n°95, 2009. Les pays émergents, Mondialisation et crise financière. pp. 135-155.

We observe that daily highs and lows of stock prices do not diverge over time and, hence, adopt the cointegration concept and the related vector error correction model (VECM) to model the daily high, the daily low, and the associated daily range data. The in-sample results attest to the importance of incorporating high–low interactions in modeling the range variable. In evaluating the out-of-sample forecast performance using both mean-squared forecast error and direction of change criteria, it is found that the VECM-based low and high forecasts offer some advantages over alternative forecasts. The VECM-based range forecasts, on the other hand, do not always dominate—the forecast rankings depend on the choice of evaluation criterion and the variables being forecast. Copyright © 2008 John Wiley & Sons, Ltd.

We observe that daily highs and lows of stock prices do not diverge over time and, hence, adopt the cointegration concept and the related vector error correction model (VECM) to model the daily high, the daily low, and the associated daily range data. The in-sample results attest the importance of incorporating high-low interactions in modeling the range variable. In evaluating the out-of-sample forecast performance using both mean-squared forecast error and direction of change criteria, it is found that the VECM-based low and high forecasts offer some advantages over some alternative forecasts. The VECM-based range forecasts, on the other hand, do not always dominate - the forecast rankings depend on the choice of evaluation criterion and the variables being forecasted.

Introduction Yin-Wong Cheung and Kar-yiu Wong Part 1: China Flying Geese or Sitting Ducks? China's Impact on the Trading Fortunes of other Asian Countries Alan Ahearne, John Fernald, Prakash Loungani, and John Schindler. A Decade of Flow of Funds in China (1995-2006) Lin Guijun and Ronald M. Schramm. China's Approach to Capital Flows since 1978: A Brief Overview Juann Hung. The Estimation of Domestic Value-Added and Employment Induced by Exports: An Application to Chinese Exports to the United States Chen Xikang, Leonard K. Cheng, K. C. Fung, and Lawrence J. Lau. Part 2 : Economic Interactions External Shocks, Transmission Mechanisms and Deflation in Asia Hans Genberg. External Balances in Five Asian Countries Jaewoo Lee. What Drives Business Cycle Synchronization in the Pacific Rim Countries? Jakob de Haan, Richard Jong-A-Pin and Mark Mink Part 3: Foreign Exchange Rates Have Exchange Rate Regimes in Asia Become More Flexible Post Crisis? Re-Visiting the Evidence Tony Cavoli and Ramkishen S. Rajan. The Evolution of the East Asia Currency Baskets - Still Undisclosed and Changing Gunther Schnabl. Effective Exchange Rates in Asia with Entrepot and Growing Intra-Regional Trade San Sau Fung, Marc Klau, Guonan Ma and Robert McCauley Part 4: Financial Markets Foreign Intermediation in Japan During the Lost Decade Jose A. Lopez and Mark M. Spiegel. The Core-AMU denominated Asian Bonds for Local Investors in East Asia Eiji Ogawa and Junko Shimizu. A New Framework for Analyzing Adequate and Excessive Reserve Levels under High Capital Mobility Jie Li, Ozan Sula and Thomas D. Willett. Financial Liberalization and Corporate Debt Maturity in Thailand, 1993-97 Federico Guerrero and Elliott Parker. Foreign Lending Under Limited Enforcement Nedim M. Alemdar, Sibel Sirakaya and Stephen J. Turnovsky

We examine the empirical determinants of the demand for international reserves and compare the experiences of some Asian and Latin American economies. Our empirical results indicate that different vintages of the model of international reserves give different inferences about the appropriate level of international reserves. The developed and developing economies have equations of the demand for international reserves that are quite different from each other. Further, the Asian economies and the Latin American economies have different empirical determinants of the demand for international reserves. Our results highlight the complexity of evaluating whether an economy is holding an excessive or deficient level of international reserves - the inference can be heavily dependent on the choice of a benchmark model. A direct comparison affirms the perception that the Asian economies tend to hold more international reserves than the Latin American economies.

We evaluate whether the Renminbi (RMB) is misaligned, relying upon conventional statistical methods of inference. A framework built around the relationship between relative price and relative output levels is used. We find that, once sampling uncertainty and serial correlation are accounted for, there is little statistical evidence that the RMB is undervalued, even though the point estimates usually indicate economically significant misalignment. The result is robust to various choices of country samples and sample periods, as well as to the inclusion of control variables. We then update the results using the latest vintage of the data to demonstrate how fragile the results are. We find that whatever misalignment we detected in our previous work disappears in this data set.

Using available annual data of 174 economies since 1957, we examine the similarities and differences of seven international reserve ratios. While individual international reserve ratios display substantial variations across economies, they are associated with an economy’s characteristics including geographic location, income level, stage of development, degree of indebtedness, and exchange rate regime. The association pattern varies across time and type of international reserve ratios. Interestingly, there is only limited evidence that Asian and non-Asian economies have significantly different international reserve hoarding behavior. Our results suggest that the inference about whether an economy is hoarding too many or too few international reserves depends on the choice of international reserve ratio. Further, different international reserve ratios exhibit different persistence profiles, but the evidence of dependence on structural characteristics is rather weak.

We examine the empirical determinants of the demand for international reserves and compare the experiences of some Asian and Latin American economies. Our empirical results indicate that different vintages of the model of international reserves give different inferences about the appropriate level of international reserves. The developed and developing economies have equations of the demand for international reserves that are quite different from each other. Further, the Asian economies and the Latin American economies have different empirical determinants of the demand for international reserves. Our results highlight the complexity of evaluating whether an economy is holding an excessive or deficient level of international reserves of the inference can be heavily dependent on the choice of a benchmark model. A direct comparison affirms the perception that the Asian economies tend to hold more international reserves than the Latin American economies.

Using 25 years of monthly data on individual Japanese retail prices, we study the behavior of product-specific Law of One Price (LOP) deviations. Individual tradable products, compared with nontradables, are more likely to have different distributions of LOP deviations across cities. Their distributions are also more likely to change over time. Individual LOP deviation series are found to display considerable persistence and there is limited evidence that tradability enhances price convergence. In addition, deviations from the LOP are found to display nonlinear trends, and these trends are not linearly related to a product’s tradability. For individual products, LOP deviations are affected by their own inflation rates and, to a lesser extent, by aggregate inflation, output variations, and monetary variability. Interestingly, the trend behavior remains significant in the presence of these economic variables.

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 ten East Asian economies. Panel-based regression results are suggestive of the presence of the Joneses effect; especially in the post-1997 crisis period. Individual economy estimation results, however, show that the Joneses effect varies across economies.

application/pdf, We evaluate whether the Renminbi (RMB) is misaligned, relying upon conventional statistical methods of inference. A framework built around the relationship between relative price and relative output levels is used. We find that, once sampling uncertainty and serial correlation are accounted for, there is little statistical evidence that the RMB is undervalued, even though the point estimates usually indicate economically significant misalignment. The result is robust to various choices of country samples and sample periods, as well as to the inclusion of control variables.