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This paper analyzes the role of goods market frictions in accounting for the large and volatile deviations from the Law of One Price (LOP) in a framework of flexible prices. We draw a distinction between the goods market frictions that are required to consume tradable goods (e.g., distribution costs) and those that are necessary for international transactions (e.g., trade costs). We find that trade costs generate LOP deviations by introducing a no-arbitrage band, while distribution costs cause the price to deviate from the LOP by affecting the probability that trade will occur, given the band. We then conduct a Monte Carlo simulation to show that real exchange rate volatility is positively associated with trade costs, but negatively related to distribution costs. This effect depends on the interplay of trade costs and distribution costs, as they work in opposite directions when creating arbitrage opportunities.

We develop several models to examine possible predictors of the return of gold, which embrace six global factors (business cycle, nominal, interest rate, commodity, exchange rate and stock price) extracted from a recursive principal component analysis (PCA) and two uncertainty and stress indices (the Kansas City Fed's financial stress index and the U.S. economic policy uncertainty index). Specifically, by comparing alternative predictive models, we show that the dynamic model averaging (DMA) and dynamic model selection (DMS) models outperform linear models (such as the random walk) as well as the Bayesian model averaging (BMA) model. The DMS is the best predictive model overall across all forecast horizons. Generally, all the predictors show strong predictive power at one time or another though at varying magnitudes, while the exchange rate factor and the Kansas City Fed's financial stress index appear to be strong at almost all horizons and sub-periods. However, the forecasting prowess of the exchange rate is supreme.

Starting from a new continuous-time non-linear dynamic model of the exchange rate, we formally show that the introduction of a Tobin tax reduces speculators’ profit and influences the dynamics of the system, making it more stable and less prone to chaotic motion.

Exploring the determinants and dynamics of the current account balance is one of the priorities of academic literature and policy circles. Although the effects of structural variables are deeply analyzed, a lesser attention has been paid to the impact of financial variables. Drawing on standard empirical current account models and with a large sample of industrial and developing countries, we report a significant deterioration in the current account balance in case of an increase in the credit growth. Moreover, we find that this link is substantially stronger for the developing ones motivating a closer examination. Therefore, we further advance our analysis and show that credit growth causes a stronger impact on the current account balance for lower levels of financial depth. In other words, at the early stages of financial development, acceleration in the credit growth might cause a larger deterioration in the current account balance; thus, it might be suggested that monetary policy and macro-prudential measures aimed at preventing financial excess might be more effective to reduce the external imbalances at the early stages of financial deepening.

The global crisis of 2008 caused both liquidity shortage and increasing insolvency in the banking system. The study focuses on credit default contagion in the Central and Eastern European (CEE) region, which originated in bank runs generated by non-performing loans granted to non-financial clients. In terms of methodology, the paper relies on the one hand on review of the literature, and on the other hand on a data survey with comparative and regression analysis. To uncover credit default contagion, the research focuses on the combined impact of foreign exchange rates and foreign private indebtedness.

This paper studies the impact of fiscal policy and external shocks on the sustainability of Serbia?s external position. The key determinants of Serbia's current account balance are identified using model averaging techniques and are compared with estimates obtained for other small open economies (Poland, Georgia, Morocco, Ukraine, and Estonia). The paper uses estimated influences of macrovariables on the current account balance to generate a rich set of possible outcomes for the external position of the country. The results suggest the importance of fiscal policy for the reduction of external imbalances in all countries in our sample. In particular, credible and sustained fiscal adjustment can reduce current account deficit and stabilize Serbia?s external position close to its current level over the medium term. The analysis also warns that lack of success in fiscal consolidation coupled with external shocks may easily push the external position onto an unsustainable path.

We construct factors from a cross section of exchange rates and use the idiosyncratic deviations from the factors to forecast. In a stylized data generating process, we show that such forecasts can be effective even if there is essentially no serial correlation in the univariate exchange rate processes. We apply the technique to a panel of bilateral U.S. dollar rates against 17 OECD countries. We forecast using factors, and using factors combined with any of fundamentals suggested by Taylor rule, monetary and purchasing power parity (PPP) models. For long horizon (8 and 12 quarter) forecasts, we tend to improve on the forecast of a "no change" benchmark in the late (1999-2007) but not early (1987-1998) parts of our sample.

This paper investigates the market-risk-hedging effectiveness of the Taiwan Futures Exchange (TAIFEX) stock index futures using daily settlement prices for the period from July 21, 1998 to December 31, 2010. The minimum variance hedge ratios (MVHRs) are estimated from the ordinary least squares regression model (OLS), the vector error correction model (VECM), the generalized autoregressive conditional heteroskedasticity model (GARCH), the threshold GARCH model (TGARCH), and the bivariate GARCH model (BGARCH), respectively. We employ a rolling sample method to generate the time-varying MVHRs for the out-of-sample period, associated with different hedge horizons, and compare across their hedging effectiveness and risk-return trade-off. In a one-day hedge horizon, the TGARCH model generates the greatest variance reduction, while the OLS model provides the highest rate of risk-adjusted return; in a longer hedge horizon, the OLS generates the largest variance reduction, while the BGARCH model provides the best risk-return trade-off. We find that the selection of appropriate models to measure the MVHRs depends on the degree of risk aversion and hedge horizon.

A simulation exercise is conducted to find out if the profitability of forecasting-based currency trading is more related to the ability of the underlying model to predict the direction of change than the magnitude of the forecasting error. Theoretical considerations show that a correct prediction of the direction of change is neither a necessary nor a sufficient condition for a profitable trade. The results of the simulation exercise indicate that profitability is more strongly correlated with direction accuracy than with the root mean square error. - In questo studio viene condotta una simulazione al fine di verificare se la convenienza del currency trading basato su modelli previsionali è maggiormente riferibile alla capacità del modello di prevedere la direzione del tasso di cambio o piuttosto alla portata dell’errore di previsione. Considerazioni teoriche mostrano che una previsione corretta della direzione non è condizione né necessaria né sufficiente affinché l’operazione sia conveniente. I risultati della simulazione evidenziano che tale convenienza è maggiormente correlata con l’accuratezza della direzione che con l’errore quadratico medio.

The euro crisis has rekindled questions about the advantages and disadvantages of membership in the European Monetary Union. In the Northern periphery of the EU, the different monetary regime choices of Finland and Sweden have created a particularly interesting testing ground for the benefits of the EMU. The average growth rates were rather similar before the Great Recession that started in the autumn of 2009, while Sweden has grown faster since that. In terms of price stability Sweden has fared somewhat better than Finland in the EMU period. We assess the effects of the regime choice by simulating the behaviour of the Swedish economy with National Institute’s Global Econometric Model (NiGEM) on the assumption that Sweden had joined the EMU in 1999. The simulation exercise suggests that the independent monetary regime reduced the impact of the global shock on Sweden. The different monetary regimes cannot, however, explain the growth gap between Sweden and Finland anymore in 2012. Other factors, such as the decline of the Nokia cluster, are needed for that. As a whole, our results suggest that the different choices with regard to the EMU have not affected the macroeconomic outcomes very much.

Momentum in foreign stock market returns is exploitable as signal of currency excess returns. Past stock market winner currencies offer higher returns than past stock market loser currencies. This finding is unrelated to interest rate differentials. Funding liquidity risk explains the time series variation in foreign stock market momentum sorted currency portfolio returns. Their cross-sectional dispersion is hardly rationalized by systematic risk factors in contrast to forward discount and currency momentum sorted currency portfolios. This latter finding reflects that fundamentals driving stock market momentum based currency portfolio returns are not related to recently proposed currency risk factors in the cross-section.

We investigate the performance and risk of currency hedge funds using a large and unique consolidated currency hedge fund dataset. We find that a substantial number of hedge funds generate returns that exceed foreign exchange risk premia obtained through carry trades. The best alpha-generating funds exhibit a performance that persists over a one-year horizon. This performance persistence is mostly due to compensation for currency risk-taking as there is no strong evidence of remuneration for active management. The results are robust to biases affecting hedge fund returns, alternative carry trade benchmarks and different methodologies used to correct for sample variability.

This article proposes a modeling framework for the study of changes in cross-market comovement conditional on volatility regimes. Methodologically, we extend the Dynamic Conditional Correlation multivariate GARCH model to allow the dynamics of correlations to depend on asset variances through a threshold structure. The empirical application of our model to a sample of international stock markets in 1994--2011 indicates that the periods of market turbulence are associated with an increase in cross-market comovement. The modeling framework proposed in the article represents a useful tool for the study of market contagion. Copyright The Author, 2013. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

We analyze contributions of different markets to price discovery on traded inflation expectations and how it changed during the financial crisis. The quicker information is processed on one market and the less one market is disrupted by the financial crisis the more valuable is its information for central banks and market participants. We use a new high frequency data set on inflation-indexed and nominal government bonds as well as inflation swaps to calculate information shares of break-even inflation rates in the euro area and the US. For maturities up to 5 years new information comes from both the swap and the bond markets. For longer maturities the swap market provides less and less information in the euro area. In the US where the market volume of inflation-linked bonds is large the bond market dominates the price discovery process for all maturities. The severe financial crisis that spread out in Autumn 2008 drove a wedge between bond and swap break-even inflation rates in both currencies. Price discovery ceased to take place on the swap market. Disruptions coming from the short-end of the market even separated price formation on both segments for maturities of up to 6 years in the US. Against the backdrop of the most severe financial crisis in decades contributions to price formation concentrated a lot more on the presumably safest financial instrument: government bonds.

This study aims to capture volatility patterns using GARCH (1,1) models. It evaluates these models to obtain one-step-ahead forecastabilities by employing four major forecasting evaluation criteria, and compares two different currencies— the Pakistan rupee and the US dollar—as domestic and foreign currency-valued exchange rates, respectively. The results show that using an international vehicle currency is favorable in Pakistan’s context. However, the Kuwaiti dinar, Canadian dollar, US dollar, Singapore dollar, Hong Kong dollar, and Malaysian ringgit are found to be preferable when performing direct international transactions. Using the root mean square errors and mean absolute errors techniques, the study also assess the robustness of measuring one-step-ahead forecasts.

One of the findings of the recent literature is that the 2008 financial crisis caused reduction in international diversification benefits. To fully understand the possible potential from diversification, we build an empirical model which combines generalised autoregressive score copula functions with high frequency data, and allows us to capture and forecast the conditional time-varying joint distribution of stock returns. Using this novel methodology and fresh data covering five years after the crisis, we compute the conditional diversification benefits to answer the question, whether it is still interesting for an international investor to diversify. As diversification tools, we consider the Czech PX and the German DAX broad stock indices, and we find that the diversification benefits strongly vary over the 2008--2013 crisis years., Comment: arXiv admin note: substantial text overlap with arXiv:1307.5981

Recent crisis evolutions have changed both the hypothesis in terms of monetary integration inside the Euro Zone for future members, but also the type of approach needed in order to achieve two major objectives' sets. These aims can be described as sustainability and medium and long term macroeconomic volatility control. This paper envisages pointing out Romania's necessary approach concerning the Euro adoption process based on a set of variables determining a so called convergence array. Components are determined leaving from the depth of the real convergence and catching-up process, from the structural analysis of the Romanian economy and its GDP evolution during recent years and getting to the out-put variation, foreign debt directing towards more or less productive investments. In order to get a clearer perspective of Romania's growth perspective, we test the OeNB's Forecasting Model for Selected CESEE Countries for Romania.

This paper deals with an important aspect of Tunisian economic and political decisions related to the opportunity for currency convertibility. Tunisia has established its current currency convertibility and has taken steps to achieve full convertibility of the dinar by gradually removing capital flow obstacles. Theoretical and empirical literature suggests that capital account liberalization generally leads to capital inflow in developing countries, generating an appreciation in the real exchange rate (RER) and thus a loss in competitiveness. However, preserving competitiveness is a key challenge for monetary authorities, who have to conciliate these two apparently conflicting purposes. To guide their decisions with respect to the prescribed procedure for capital liberalization, we need to evaluate the impact of each capital component flow on the RER. The question is addressed by analyzing impulse response functions (IRF) resulting from a VAR model, covering 1970 to 2010 and gathering the RER, its fundamental determinants, monetary variables and an estimated capital control (CC) variable. Results show that a relaxation of CC overappreciates the RER to its long-term level, and liberalizing portfolio investment is the most compromising for competitiveness.

This work proposes an approach for estimating value at risk (VaR) of the Mexican stock exchange index (IPC) by using a combination of the autoregressive moving average models (ARMA); three different models of the arch family, one symmetric (GARCH) and two asymmetric (GJR-GARCH and EGARCH); and the extreme value theory (EVT). The ARMA models were initially used to obtain uncorrelated residuals, which were later used for the analysis of extreme values. The GARCH, EGARCH and GJR-GARCH models, by including past volatility, are particularly useful both in instability and calm periods. Moreover, the asymmetric models GJR-GARCH and EGARCH handle differently the impact of positive and negative shocks in the market. The importance of the IPC in the Mexican economy raises the need to study its variations, particularly its downward movement; so, we propose to use VaR to calculate the maximum loss that IPC may have, at a certain level of reliability, in a given period of time, using more efficient models to dynamically quantify volatility. The RiskMetrics approach was parallelly used as a way to compare the methodology proposed. The results indicate that the ARMA-GARCH-EVT methodology showed a better performance than RiskMetrics, because of the simultaneous adjustment of ARMA-GARCH models for returns and variances respectively. Although estimates of the EGARCH models had fewer violations of VaR, the estimates of the three models used for volatility were more accurate than the others, evaluated at the same error and reliability levels through the Kupiec Likelihood Ratio test.

The hereto article indicates how multifractals related ideas can contribute to the modelling of the long-memory nature of the financial market volatility. The multifractal models appear in the context of the new paradigm of the financial markets, being related to Benoit Mandelbrot’s fractal view of the financial markets, while the analysed multifractal model was developed by Laurent Calvet and Benoit Mandelbrot and it’s based on the concepts of fat tails and long time dependence or long memory, representing an alternative to ARCH models, focusing on the multi-scaling property of the process, resulting a promising alternative to ARCH models due to scale-consistency. The Multifractal Model of Asset Returns compounds a Brownian motion with a multifractal time-deformation process that produces volatility clustering, and its purpose is not to predict the future with certainty, but to create a more realistic picture of market risks, given the lately delicate situation of the hedge funds, a more accurate estimate of risk being needed. The Multifractal Model of Asset Returns presented in this paper incorporates regularities observed in financial time series, including fat tails and long memory, multifractality being defined by a set of restrictions on the process moments as the time scale of observations changes, integrated in the model through trading time, a random distortion of clock time that accounts for changes in volatility.

This paper develops a Bayesian structural VAR model for Canada in order to estimate the effects of monetary policy shocks, using the overnight rate target as the policy instrument. I allow the policy variable and other home and foreign variables to interact with each other contemporaneously. The key finding is that monetary policy affects the real economy through both the market interest rate and the exchange rate. I also find that the Bank of Canada responds to any home and foreign variables that embodies information about future inflation and that external shocks are an important source of output fluctuations.

Equilibrium real effective exchange rate estimate for the Slovak economy presented in this paper helps to evaluate the total impact of the development of nominal exchange rates against the currencies of Slovakia’s relevant trading partners, domestic and foreign inflation on the price competitiveness of domestic companies over time. The appreciating trajectory of the equilibrium exchange rate is related to the gradual nominal convergence of the Slovak economy to the developed countries that is founded on the macroeconomic fundamentals development reflecting ongoing real convergence. On the basis of the equilibrium real exchange rate forecast resulting from the predicted values of the fundamentals, further real appreciation can be expected corresponding with the continuing convergence of the economy also in the future without jeopardizing the economic balance. The real exchange rate misalignments contribute to the identification of expansive or restrictive monetary policy influence on the economy.

The reform of the financial-monetary system in the context of creation of a new global order presents the current trend of the establishment of a new world government, with a global central bank and a single currency. This will succeed to a decline of democracy and a growth of the totalitarianism. The international financial institutes must have much power to help the emerging economies, in the time of redemption of debts. Banks and investment banks of which`s health is problematic for the global financial system, must operate under an united framework of regulation. Meanwhile, a world government would involve much more than cooperation between nations, would be an entity with similar characteristics of a state, sustained by a legislative body.

The global economic crisis have important implications for international capital movements, which further sharpens the question of the sustainability of permanent current account deficits in Southeast Europe. The goal of this paper is to analyze the medium and long-term sustainability of Serbia?s current account deficit. The first part of the paper presents a factor analysis of the sustainability of Serbia?s current account deficit. In the second part of the paper the theoretical model created by Milesi-Ferretti and Razin is used to access Serbia?s medium term current account sustainability. On the basis of Reisen?s theoretical work (Reisen methodology) and by adding net reinvested earnings from foreign direct investment to the model, a new (modified) model for assessing the long-term sustainability of a country?s current account deficit is presented. The created model was used for assessing the long-term sustainability of Serbia?s current account deficit.

This study looks at the dynamic relationship between the Pakistani equity market and equity markets of Group of Eight countries (G8) which includes Canada, France, Germany, Italy, Japan, Russia, UK and USA by using weekly time series data starting from June 2004 to May 2009. Multivariate Co-integration approach by Johnson and Julius (1990) shows there exists no long-term relationship between the G8 and Pakistani equity market. Vector error correction (VECM) model suggests that 100% of the lag periods disequilibrium has been corrected in the current period. Pairwise Granger Causality test shows that there exist a unidirectional causality between the equity market of Pakistan and the markets of France, Germany, Italy, Japan and United Kingdom. Impulse response analysis and variance decomposition analysis reveal that most of the shocks in Pakistani equity market are due to its own innovation and behave like exogenous. However, the markets of France, Japan, Germany and United Kingdom are exerting a little pressure on Pakistani equity markets. Therefore, by investing in Karachi Stock Exchange (KSE) the fund manager of G8 countries especially Canada, Italy, Russia and USA is capable of getting the advantage of portfolio diversification.

While many explanations have been put forward for the failure of exchange rate models to outperform the random walk in out-of-sample forecasting, a simple explanation is the use of measures of forecasting accuracy that depend entirely on the magnitude of the forecasting error. By using simulated data representing the forecasts of eight models, it is demonstrated that the random walk can be outperformed if forecasting power is judged by measures of direction accuracy, by adjusting the root mean square error to take into account direction accuracy, and by using the risk-adjusted return obtained from a trading strategy based on the forecasts. - Sono state proposte diverse spiegazioni della incapacità dei modelli di previsione dei tassi di cambio di battere la random walk. Qui si avanza l’ipotesi di considerare come unica metodologia valida di comparazione la dimensione dell’errore di previsione. Utilizzando le previsioni di otto modelli si dimostra che la random walk può essere superata se la capacità di previsione è valutata attraverso misure di accuratezza direzionale, tramite lo scarto quadratico medio dell’errore e il risk-adjusted return ottenuto da una strategia di trading basata sulle previsioni.

I identify a forward-looking monetary policy function in a structural VAR model by using forecasts of macroeconomic variables, in addition to the realized variables used in a standard VAR. Both impulse responses and variance decompositions of the monetary policy variable of this forecast-augmented VAR model suggest that forecasted variables play a greater role than realized variables in a central bank’s policy decisions. I also find that a contractionary policy shock instantaneously increases the market interest rate as well as the forecast of the market interest rate. The policy shock also appreciates both the British pound and the forecast of the pound on impact. On the other hand, the policy shock lowers expected inflation immediately, but affects realized inflation with a lag. When I estimate the standard VAR model encompassed in the forecast-augmented model, I find that a contractionary policy shock raises the inflation rate and leads to a gradual appreciation of the domestic currency. However, the inclusion of inflation expectations reverses this puzzling response of the inflation rate, and the inclusion of both the market interest rate forecast and the exchange rate forecast removes the delayed overshooting response of the exchange rate. These findings suggest that a standard VAR may incorrectly identify the monetary policy function.

A wave of recent research has studied the predictability of foreign currency returns. A wide variety of forecasting structures have been proposed, including signals such as carry, value, momentum, and the forward curve. Some of these have been explored individually, and others have been used in combination. In this paper we use new econometric tools for binary classification problems to evaluate the merits of a general model encompassing all these signals. We find very strong evidence of forecastability using the full set of signals, both in sample and out-of-sample. This holds true for both an unweighted directional forecast and one weighted by returns. Our preferred model generates economically meaningful returns on a portfolio of nine major currencies versus the U.S. dollar, with favorable Sharpe and skewness characteristics. We also find no relationship between our returns and a conventional set of so-called risk factors.

This study presents an empirical analysis investigating the relationship between the futures trading activities of speculators and hedgers and the potential movements of major spot exchange rates. A set of trader position measures are employed as regression predictors, including the level and change of net positions, an investor sentiment index, extremely bullish/bearish sentiments, and the peak/trough indicators. We find that the peaks and troughs of net positions are generally useful predictors to the evolution of spot exchange rates, but other trader position measures are less correlated with future market movements. In addition, speculative position measures usually forecast price-continuations in spot rates while hedging position measures forecast price-reversals in these markets. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark

This article examines the dynamic growth of international reserves for the entire group of Latin American countries in an international comparative perspective and with respect to variables such as imports, current account balances, capital flows and GDP. We also present a review of the theories to analyze the causes, and a balance of benefits and maintenance costs. We have used the Wijnholds methodology to determine the necessary levels of international reserves for the period 2005-2008, considering the commitments of public and private external debt in the short term, and potential leakage of deposits from the local financial system. It is estimated that, for the last year, levels of excess reserves are equivalent to between US$ 170-200 billions. Also, the annual maintenance cost is equivalent to 0.8 per cent of GDP for all the countries surveyed. Finally, it outlines a set of proposals to take advantage of these circumstances.

Stock markets in Central and Eastern European (CEE) countries significantly collapsed during the financial crisis of 2008. We studied whether the collapse of stock markets in CEE countries was due to international linkages of deteriorating fundamentals or international spillovers of speculative bubbles. To this end, we estimated a state-space model to decompose the stock market indexes of three large CEE countries (Czech Republic, Hungary, and Poland) into fundamentals and speculative bubbles. We then used the techniques of cointegration analysis to study the long-run linkages of fundamentals and speculative bubbles. Our results suggest that international long-run linkages varied over time. The long-run linkages with the U.S. stock market strengthened in terms of both fundamentals and speculative bubbles during the market jitters caused by the financial crisis of 2008.

En este trabajo se presentan simulaciones a partir de un Modelo de Equilibrio General Dinámico Estocástico calibrado para la economía boliviana con el propósito de evaluar la efectividad de la respuesta de política monetaria a shocks exógenos en las exportaciones,productividad y tasas de interés. Los resultados sugieren que ante estos shocks, una orientación monetaria que se preocupa únicamente de los desvíos de la inflación es menos exitosa para estabilizar la economía real e incluso los precios, que aquella que además considera las desviaciones del producto. Los hallazgos constatan el carácter contra cíclico de la política monetaria en Bolivia que tiene como objeto principal controlar la inflación y estabilizar el producto como uno no tan explicito.

When granting credit, banks depend on reliable information about the creditworthiness and risk structure of potential borrowers. This information is typically gathered by national credit bureaus. Nationally established banks depend on information from credit bureaus more than ever, particularly when entering a foreign market. This DIW study (which is partially based upon research by the same authors for the European Credit Research Institute and data collected by the institute) investigates whether the existence of credit bureaus influences European bank competition and concludes that they facilitate market entry for foreign banks. In turn, the absence of credit bureaus can create significant disadvantages in competition. In this case, a market entry is then primarily possible via the purchase of an incumbent bank, because the entering institution has essentially no other opportunity to access debtor data. This study also shows that provision of data within the EU is not harmonized overall.

Initial public offerings (IPO) of financial instruments on international financial markets represent one of the most important financing channels not only for developed countries, but for emerging ones too. The most sensitive element of international IPOs that could determine the success or failure of them is the initial price mentioned in the prospectus. This initial price used to sell securities to individual or institutional investors is always compared with real market price and is essential for investment decision. For this reason, in almost cases of international IPOs, the underpricing effect is present. This paper discusses the problem of underpricing effect and highlights the most sensitive problems with securities’ valuation methods that are commonly used by financial managers to decide and to act in this case.

El principal resultado de este artículo consiste en la resolución del problema inverso del modelo de Black-Cox (1976), usando el método propuesto por Sukhomlin (2007). Se parte del enfoque retrógrado (backward) para obtener una expresión exacta de la volatilidad implícita en función de parámetros cuantificables con datos de mercado y de variables conocidas. Se descubre la existencia de dos valores de la volatilidad para un activo subyacente en elmodelo referido, lo que indica que las asunciones tradicionales no lo definen de manera unívoca. Se encuentra la causa de que el modelo de Black-Cox contenga dos valores de la volatilidad. Además, se lleva a cabo una simulación, afin de verificar, numéricamente, que la expresión obtenida para la volatilidad es la inversión de la fórmula que representa la probabilidad de que la firma no alcance un nivel de insolvencia antes del tiempo de madurez de la deuda. Finalmente, se resuelve el problema de calibración de mercadodesde el punto de vista directo (forward), encontrándose una expresión que resulta de mayor utilidad para los agentes de mercado. || The main result of this paper consists in the resolution of the inverse problem for the Black-Cox (1976) model, using the method proposed by Sukhomlin (2007). Based on the backward approach, we obtain an exact expression of the implied volatility expressed as a function of quantifiable market parameters and known variables. We discover the existence of two values of the volatility for an underlying asset, in the referred model, which means that the model's traditional assumptions do not define it univocally. We findthe cause that the Black-Cox model contains two values of the volatility. Besides, we carry out a simulation in order to verify, numerically, that our volatility expression is in fact the inversion of the formula that represents the probability that the firm has not reached the reorganization boundary before the debt expires. Finally, we solve the market calibration problem from the forward approach, finding an expression that is more useful for market agents.

This article aims to underline the importance of market liquidity for the stability of the financial system, emphasizing the pivotal role played by liquidity risk in the development of the current financial crisis.

This note focuses on the impact of the global financial crisis on subnational debt financing. We approach the following questions: Why is subnational debt financing important? What are the impacts of the crisis on the fiscal balance and financing cost of subnational governments (SNGs)? What explains the variations across countries in the ability of SNGs to proactively address the threat of fiscal deterioration? And, equally important, what are the long-term structural challenges facing SNGs in sustainable financing of infrastructure and social services?

When expanding abroad, a multinational bank faces a trade-off between accessing a foreign country via cross border lending or financial foreign direct investment, i.e. greenfield or acquisition entry. We analyze the entry mode choice of multinational banks and explicitly derive the entry mode pattern in the banking industry. Moreover, we show that in less developed banking markets, a trend towards cross border lending and acquisition entry exists. Greenfield entry prevails in more developed markets. Furthermore, we identify a tendency towards acquisition entry in smaller host countries and towards greenfield entry in larger host countries.

The United States is currently engulfed in the most severe financial crisis since the Great Depression. The crisis was triggered by the crash in the real estate “bubble” and amplified by the extreme concentration of risk in a highly leveraged financial sector. Conventional wisdom is that both the bubble and the risk concentration were the result of mistakes in regulatory policy: an expansionary monetary policy during the boom period of the bubble, and failure to reign in the practices of unscrupulous lenders. In this paper we argue that, while correct in some dimensions, this story misses two key structural factors behind the securitization process that supported the real estate boom and the corresponding lever age. First, over the last decade, the US has experienced large and sustained capital inflows from foreigners seeking US assets to store value (Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas 2008 ). Second, especially after the NASDAQ/tech bubble and bust, excess world savings have looked predominantly for safe debt investments. This should not be surprising because a large amount of the capital flow into the US has been from foreign central banks and governments that are not expert investors and are merely looking for a store of value (Krishnamurthy and Annette Vissing-Jorgenson 2008). In this paper we develop a stylized model that captures the essence of this environment. The model accounts for three facts observed during the boom and bust phases of the current crisis. First, during a period of good shocks— which we interpret as the period up to the end

This paper provides a comprehensive evaluation of the short-horizon predictive ability of economic fundamentals and forward premiums on monthly exchange-rate returns in a framework that allows for volatility timing. We implement Bayesian methods for estimation and ranking of a set of empirical exchange rate models, and construct combined forecasts based on Bayesian model averaging. More importantly, we assess the economic value of the in-sample and out-of-sample forecasting power of the empirical models, and find two key results: (1) a risk-averse investor will pay a high performance fee to switch from a dynamic portfolio strategy based on the random walk model to one that conditions on the forward premium with stochastic volatility innovations and (2) strategies based on combined forecasts yield large economic gains over the random walk benchmark. These two results are robust to reasonably high transaction costs. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

The ratios of public debt as a share of gdp of Brazil, Colombia and Mexico were 12 percentage points higher on average during the period 1996-2005 than in the period 1990-1995. Costa Rica’s debt ratio remained stable but at a high level; near 50 per cent. Is there reason to be concerned about the solvency of the public sector in these economies? We provide an answer to this question based on the quantitative predictions of a variant of the framework proposed by Mendoza and Oviedo (2007). This methodology yields forward-looking estimates of debt ratios that are consistent with fiscal solvency, for a government that faces revenue uncertainty and can issue only non-state-contingent debt. In this environment, aversion to a collapse in outlays leads the government to respect a “natural debt limit” equal to the annuity value of the primary balance in a “fiscal crisis”. A fiscal crisis occurs after a long sequence of adverse revenue shocks, and public outlays adjust to their tolerable minimum. The debt limit also represents a credible commitment to remain able to repay even in a fiscal crisis. The debt limit is not, in general, the same as the sustainable debt, which is driven by the probabilistic dynamics of the primary balance. The results of a baseline scenario question the sustainability of current debt ratios in Brazil and Colombia, while those in Costa Rica and Mexico are inside the limits consistent with fiscal solvency. In contrast, current debt ratios are found to be unsustainable in all four countries for plausible changes to lower average growth rates or higher real interest rates. Moreover, sustainable debt ratios fall sharply when default risk is taken into account.

FDIs are very often the most glorified way of high and rapid economic development into transitional countries. Bosnia and Herzegovina has to catch up the significant higher level of real economic convergence before its entrance into European Union membership. So, in that way Bosnia and Herzegovina will be able to meet with a foreign competition on a huge common market of EU. The neoclassical concept of economic growth (famous as ''Washington Consensus'') which has been applying into Bosnia and Herzegovina emphasizes the FDIs entrance as the main actuator of B&H economic development. That concept supposes that FDIs entrance and comparative advantages could bring the optimal economic growth and development for all countries in the conditions of foreign trade and capital movement’s liberalization, monetary stability (without inflation and with stable exchange rate) and fiscal stability (balance of budget). The subject of this paper is the analysis of theoretical vindication of such macroeconomic policy and real role of FDIs in economic development concerning existing economic and political situation in Bosnia and Herzegovina and historical experiences of today developed economies.

In recent years there has been a growing interest in academics, international policy institutions and central banks1 in developing small-to-medium, even large-scale, open economy macroeconomic models called Dynamic Stochastic General Equilibrium (DSGE) models based on new-Keynesian framework.2 The term DSGE was originally used by Kydland and Prescott (1982) in their seminal contribution on Real Business Cycle (RBC) model. The RBC model is based on neoclassical framework with micro-founded optimisation behaviour of economic agents with flexible prices. One of the critical assumptions of this model is that fluctuations of real quantities are caused by real shock only; that is, only stochastic technology or government spending shocks play their role. Later research in DSGE models however included Keynesian short-run macroeconomic features (called nominal rigidities), such as Calvo (1983) type staggered pricing behaviour and Taylor (1980) type wage contracts. Hence this new DSGE modeling framework labeled as new-neoclassical synthesis or new-Keynesian modeling paradigm. 3 This new approach combines micro-foundations of both households and firms optimisation problems and with a large collection of both nominal and real (price/wage) rigidities that provide plausible short-run dynamic macroeconomic fluctuations with a fully articulated description of the monetary policy transmission mechanism; see, for instance, Christiano, et al. (2005) and Smets and Wouters (2003). The key advantage of modern DSGE models, over traditional reduce form macroeconomic models, is that the structural interpretation of their parameters allows to overcome the famous Lucas critique (1976).4 Traditional models contained equations linking variables of interest of explanatory factors such as economic policy variables. One of the uses of these models was therefore to examine how a change in economic policy affected these variables of interest, other things being equal. In using DSGE models for practical purposes and to recommend how central banks and policy institutions should react to the short-run fluctuations, it is necessary to first examine the possible sources,5 as well as to evaluate the degree of nominal and real rigidities present in the economy. In advanced economies, like US and EURO area, it is easy to determine the degree of nominal and real rigidities as these economies are fully documented. In developing economies like Pakistan, where most of economic activities are un-documented (also labeled as informal economy, black economy, or underground economy), it is very difficult to determine the exact degree of nominal and real rigidities present in the economy. However, one can approximate results using own judgments and through well defined survey based methods

On 21 July 2005 China adopted an undisclosed basket exchange rate regime. We formally assess and envisage the gradual evolution of the renminbi over time. We utilize nonlinear dependencies in the renminbi exchange rate and describe the smooth transition of the renminbi/U.S. dollar (RMB/USD) exchange rate using the family of time-varying autoregressive (TV-AR) models. Specifically, the nonlinear models allow for a smooth transition from one optimal level to another. Our estimation results imply that the RMB/USD exchange rate will likely be about 7.10 RMB/USD in summer/autumn 2009.

This paper presents new stylized facts on the distribution of the home bias at the fund level. We find (i) a large heterogeneity in the degree of home bias across mutual funds; (ii) a positive correlation between the size of funds and home bias; and (iii) a positive correlation between the size of funds, the number of foreign countries and the number of sectors in which they invest. These facts constitute a challenge for existing theories.

The objective of our paper is to analyze the possibility to provide a forecast for the sign of the financial asset returns using the empirical prices of stocks listed at the Bucharest Stock Exchange. Previous research provided by Christoffersen and Diebold (2004) among others show that even if both the sign and the absolute value of returns are deterministic, their composure (the returns themselves) do not show autocorrelations. We focus on the deterministic nature of the signs by implementing a pure empirical analysis.

This paper revisits the relationship between energy prices and the Canadian dollar, using an equation first developed by Amano and van Norden (1995). They found evidence of a negative relationship between these two variables, such that higher real energy prices led to a depreciation of the Canadian dollar. Based on structural break tests, we find a break point in the sign of this relationship, which changes from negative to positive in the early 1990s. The timing of the break is consistent with major changes in Canada's energy policies and in energy-related cross-border trade and investment.

Tunisia has experienced a performance when pursuing a constant real exchange rate rule. The limitations of this rule are beginning to emerge in the context of a more open economy, which desire to relax capital controls. This paper estimates the equilibrium real exchange rate of the dinar vis 0076is the euro and the $US from 1983 to 2000, using quarterly data, based on the following fundamental variables: terms of trade, net capital inflows and the differential of productivity. Results show that Tunisian dinar was overvalued before the 1986 devaluation, becomes close to its equilibrium value over the 90s. In the beginning of this century (2000), authorities permit a larger fluctuation of the real effective exchange rate.

The half-life is defined as the number of periods required for the impulse response to a unit shock to a time series to dissipate by half. It is widely used as a measure of persistence, especially in international economics to quantify the degree of mean-reversion of the deviation from an international parity condition. Several studies have proposed bias-corrected point and interval estimation methods. However, they have found that the confidence intervals are rather uninformative with their upper bound being either extremely large or infinite. This is largely due to the distribution of the half-life estimator being heavily skewed and multi-modal. In this paper, we propose a bias-corrected bootstrap procedure for the estimation of half-life, adopting the highest density region (HDR) approach to point and interval estimation. Our Monte Carlo simulation results reveal that the bias-corrected bootstrap HDR method provides an accurate point estimator, as well as tight confidence intervals with superior coverage properties to those of its alternatives. As an application, the proposed method is employed for half-life estimation of the real exchange rates of seventeen industrialized countries. The results indicate much faster rates of mean-reversion than those reported in previous studies.

We examine empirical consistency of the fundamentals in (1) the Middle and South American and (2) the Asian currency crises with the first-generation model, using panel data. We also evaluate our model by forecasting, and examine the differences between the two currency crises in terms of fundamentals. Some differences in explanatory power between fundamentals suggest that we should consider other factors in addition to our fundamentals. Dividing data into the two countries groups manifests that the causes were slightly different. The in-sample and out-of-sample tests indicate that our model could better predict the Middle and South American currency crisis.