Foreign exchange market intervention and expectations: an empirical study of the yen/dollar exchange rate

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "Foreign exchange market intervention and expectations: an empirical study of the yen/dollar exchange rate"

Transcription

1 Foreign exchange marke inervenion and expecaions: an empirical sudy of he yen/dollar exchange rae by Gabriele Galai a, William Melick b and Marian Micu a a Moneary and Economic Deparmen, Bank for Inernaional Selemens, CH-4002 Basel, Swizerland b Deparmen of Economics, Kenyon College, 312Ascension Hall, Gambier, Ohio 43022, Unied Saes Absrac We use official inervenion daa provided by he Federal Reserve and, recenly, he Japanese Minisry of Finance, as well as a new daa se based on Reuers news aricles on inervenion ha is perceived by FX raders. We esimae probabiliy densiy funcions (PDFs) from opion daa o describe marke expecaions. We find ha, beween 1993 and 1996, Japanese auhoriies ended o respond mainly o deviaions of he exchange rae from some implici arge levels and o a rise in marke uncerainy. Beween 1997 and 2000, he Bank of Japan mainly reaced in response o higher uncerainy. On he oher hand, he Federal Reserve inervened only in cooperaion wih he Bank of Japan. We find ha inervenion had no saisically significan sysemaic effec on he mean of yen/dollar expecaions. Consisenly, we deec no evidence ha inervenion sysemaically alered marke paricipans bias beween a sronger and a weaker dollar wih respec o he forward rae. Conrary o mos findings of he lieraure, we fail o find evidence ha inervenion was associaed on average wih higher exchange rae variabiliy. Finally, we find ha inervenion was no followed by an increase in he ails of he disribuion of exchange rae expecaions. The consensus view is ha serilized inervenion can be effecive if i is announced publicly, coordinaed across cenral banks, and mos imporanly, consisen wih underlying fiscal and moneary policies. As we are able o conrol for public announcemen and cenral bank coordinaion, our findings sugges ha inervenion during our sample period was no consisen wih underlying fiscal and moneary policy and herefore had lile influence on marke oucomes and expecaions. JEL Classificaion: C22 E41 F31 Keywords: Corresponding auhor. Tel.: ; fax: address: (G. Galai) 1

2

3 1. Inroducion This paper presens empirical evidence on he relaionship beween cenral bank inervenion and marke expecaions of he daily yen/dollar exchange rae. Over he pas years, a number of sudies have analysed he effec of inervenion on he exchange rae level as well as on he insananeous and expeced volailiy of he exchange rae of he yen/dollar, he mark/dollar and oher exchange raes. The resuls are generally mixed and depend on boh he sample period being invesigaed and he inervenion sraegies being used. This paper provides furher evidence on his issue in four ways. Firs, i focuses no only on he expeced level and variance of he exchange rae, bu on he enire disribuion of expeced exchange raes, which is derived from opion prices. The momens of his disribuion allow a more complee characerisaion of marke senimen. Second, his paper uses wo new daa ses on inervenion episodes. One daa se covers acual inervenion episodes and was recenly provided by he Japanese Minisry of Finance hrough is websie. The oher daa se conains inervenions perceived by marke paricipans and is based on Reuers repors. This daa se is more comprehensive han he daa ses based on newspaper aricles ha have been used in he lieraure. Third, his paper uses a comprehensive daa se of news abou macroeconomic variables ha helps o disinguish he effec of inervenion from ha of he arrival of oher relevan informaion. Finally, he paper also looks a wo direcions of causaliy in he relaionship beween inervenion and marke expecaions. We firs examine he reacion funcion of moneary auhoriies and esimae how changes in he momens of he expeced disribuion of fuure exchange raes affec he likelihood of cenral bank inervenion. We hen invesigae he effec of inervenion on he momens, aking accoun of he fac ha inervenion and marke expecaions are deermined simulaneously. In his paper, he empirical probabiliy densiy funcions (PDFs) of fuure yen/dollar raes are esimaed using risk reversals and a-he-money implied volailiies of one-monh OTC opions. 1 We use measures of he momens of hese disribuions he mean, variance, skewness and kurosis and 1 In his paper, he exchange rae is defined as yen per dollar. 1

4 quasi-momens such as inerquanile ranges o describe he sae of marke condiions on a paricular day. If we consider he yen/dollar exchange rae, he mean of he PDF is he raders average expecaion of he yen/dollar rae one monh ahead, i.e. he one-monh forward rae. The second momen of he PDF, he variance of he expeced exchange rae, can be used o describe how uncerain marke paricipans are on a specific day abou he yen/dollar exchange rae ha will prevail over he near fuure. Skewness can be inerpreed as a measure of marke paricipans balance of risks beween a much sronger and a much weaker dollar wih respec o he yen around he expeced fuure exchange rae. The fourh momen, kurosis, measures how fa he ails of a PDF are and indicaes he marke s view of he likelihood of very large exchange rae movemens in eiher direcion in he near fuure. The higher he probabiliy ha he marke assigns o such an exreme change (in eiher direcion) on a paricular day, he higher he kurosis of he PDF on ha day. 2 Our analysis is conduced over he period from 20 Sepember 1993 o 30 April For he purpose of his paper, cenral bank inervenions are defined as ransacions inended o influence he exchange rae. This definiion herefore excludes ransacions such as hose aimed a alering he currency composiion of he cenral bank s foreign exchange porfolio. Our resuls sugges ha during he period of dollar weakness beween 1993 and 1996, he Bank of Japan seems o have responded o deviaions of he spo exchange rae from wha raders perceived as implici arge ranges. I also appears o have inervened on average as a response o a rise in marke uncerainy, consisen wih saemens made by cenral banks in he pas ha emphasised heir aemp o calm disorderly markes. We found evidence ha beween 1997 and 2000, he Bank of Japan seems o have inervened mainly following a rise in uncerainy. During he whole sample period, he Federal Reserve inervened always in conjuncion wih he Bank of Japan. Consisen wih some of he findings in he lieraure, our regression analysis suggess ha, on average, inervenion in he yen/dollar marke had no saisically significan effec on he mean of he 2 3 High kurosis need no come exclusively from "fa ails", since i may also come from having a high proporion of observaions close o he mean (a "hick midriff"). Hence, a change in kurosis may no necessarily imply a change in he ails of he disribuion. Equivalenly, an increase in he kurosis of one of he PDFs need no imply a rise in he expeced likelihood of major moves. The sar of he sample period is dicaed by he availabiliy of opion daa necessary o esimae he PDFs. 2

5 PDF during he period under review. We also find ha, beween Sepember 1993 and April 2000, cenral bank inervenion direced a he yen/dollar exchange rae was no associaed wih a significanly higher variance of expeced fuure spo raes. This resul indicaes ha, on average, cenral bank inervenion was no followed by an increase in uncerainy in he marke abou fuure exchange rae movemens. Consisen wih our resuls for he mean, we find ha, on average, inervenion did no have a significan effec on he skewness. Hence, following inervenion in suppor of he dollar, marke paricipans did no change he weigh ha hey pu on a much sronger raher han a much weaker dollar wih respec o he forward rae. Finally, we find ha inervenion did no influence he kurosis in a significan way. In erms of inervenion sraegies, resuls for he period 1993 o 1996, when all inervenions involved dollar purchases, indicae ha a 90% or 95% confidence levels, he impac of coordinaed or officially announced inervenions was no saisically differen from ha of unilaeral inervenions. 4 Our resuls can be easily reconciled wih he consensus view on he effecs of inervenion in he foreign exchange marke. According o his view (see he lieraure review in he following secion) serilized inervenion can be effecive if i is announced publicly, coordinaed across cenral banks, and mos imporanly, consisen wih underlying fiscal and moneary policies. When cenral banks enered foreign exchange markes in a coordinaed, public fashion in he 1980s - paricularly around he Plaza or Louvre Agreemens - hese inervenions did succeed in affecing raders expecaions of fuure exchange rae movemens (see Galai and Melick (2002)). For he period under sudy in his paper, however, all of hese condiions were no me; wih he resul ha inervenion is found o have lile influence on marke oucomes and expecaions. The remainder of he paper is organised as follows. Secion 2 reviews he main conribuions o he lieraure on he effec of cenral bank inervenion and on cenral banks reacion funcions. In Secion 3, we describe our inervenion daa and daa on macroeconomic news. Secion 4 describes he opion daa and he mehod ha was used o esimae he empirical PDFs. We also discuss he inerpreaion of PDFs. In Secion 5, we firs esimae reacion funcions for he Federal Reserve and he Bank of 3

6 Japan ha relae inervenion o pas marke condiions. We hen analyse he impac of inervenion on marke expecaions. Secion 6 concludes. 2. Review of he lieraure The lieraure on he effec of inervenion in foreign exchange markes is exensive. This secion reviews some of he main conribuions for comprehensive surveys, refer o Edison (1993), Almekinders (1995), Schwarz (2000) and Sarno and Taylor (2001). 5 In he 1980s and early 1990s, aenion focused on he effec of serilised inervenion on he level of he exchange rae and on he channels hrough which i works. The resuls on he effeciveness of inervenion are mixed and depend on which exchange rae is analysed, wha sample period is sudied and he inervenion sraegy ha was used. In an influenial paper, Dominguez and Frankel (1993a) use daily and weekly official and press repor daa on inervenion direced a he yen/dollar and mark/dollar exchange raes beween 1984 and The auhors find ha inervenion had a significan impac on he exchange rae, especially when i was publicly announced and coordinaed. Laer sudies have no provided a unanimous confirmaion of Dominguez and Frankel s finding ha inervenion has an impac on exchange rae levels. Using a case sudy approach for he yen/dollar and mark/dollar exchange raes during he period , Cae e al. (1994) confirm ha inervenion influences exchange raes paricularly for coordinaed inervenions. 6 Faum (2000) and Faum and Huchinson (2002, 2003) argue in favour of an even sudy approach o examine he effec of inervenion on exchange rae changes, as mehods relying on ime series daa do no capure he sporadic occurrence of inervenion. Faum (2000) uses a non-parameric esimaion echnique o show ha during he monhs following he Plaza agreemen, inervenion by he Federal Reserve and he Bundesbank was effecive, especially when i was coordinaed. Using similar echniques, Faum and Huchison (2002, 2003) find evidence supporing he effeciveness of inervenion in he 4 5 In his paper we define as coordinaed inervenion hose episodes in which wo or more cenral banks enered he marke on he same day. For a survey of informaional aspecs of inervenion, see Bailie, Humpage and Oserberg (2000). 4

7 mark/dollar and yen/dollar markes. Io (2003) presens evidence based on Japanese Minisry of Finance daa ha inervenion in he yen/dollar marke in he second half of he 1990s was effecive. Dominguez (2003a) concludes ha recen G3 inervenion was ofen successful wih regard o boh shor and longer-erm exchange rae movemens. However, oher papers do no suppor he conclusion ha inervenion is effecive. Humpage (1988), for example, concludes ha inervenion was unable o influence he dollar s level. Baillie and Oserberg (1997) find ha over he period Augus 1985 o March 1990, Federal Reserve inervenion did no influence he mark/dollar or yen/dollar exchange raes. In erms of ransmission channels, here is now general consensus in he lieraure ha inervenion does no affec exchange raes hrough he porfolio channel, i.e. by changing he relaive ousanding supply of domesic and foreign asses and hereby of he expeced relaive reurns on hese asses. 7 There is some, bu no conclusive, evidence ha inervenion mainly works hrough he signalling channel, i.e. by he cenral bank conveying a signal o marke paricipans abou informaion on fuure fundamenals. 8 Recen work on he microsrucure of foreign exchange markes has highlighed he role of imperfec informaion as a channel hrough which inervenion migh influence exchange raes (Evans and Lyons (2001); D Souza (2002); Dominguez (2003b)). Over he pas few years, a number of sudies have focused on he effecs of inervenion on exchange rae volailiy. 9 Mos of hese papers have looked a condiional exchange rae volailiy, usually esimaed wih GARCH models. Empirical evidence suggess ha cenral bank inervenion ends o increase he condiional exchange rae volailiy. Connolly and Taylor (1994), for example, use a GARCH model o describe condiional yen/dollar volailiy and use marke daa on inervenion by he Bank of Japan. They presen evidence ha, beween 1977 and 1979, Bank of Japan inervenion was For a criical view of Cae e al s resul, see Truman (1994) and Weber (1994). Rogoff (1984) is among he firs o es he imporance of he porfolio balance channel. He finds no significan effecs of serilised inervenion hrough his channel. Frankel and Engel (1984), Lewis (1988) and a number of oher sudies, which are reviewed in deail in Edison (1993), reach a similar conclusion. By conras, Dominguez and Frankel (1993b) find some supporive evidence for he porfolio channel. An overview of he lieraure on he signalling channel is provided by Baillie, Humpage and Oserberg (2000). Sudies ha find a significan effec of inervenion hrough his channel include Dominguez (1990), Klein and Rosengren (1991), Dominguez (1993), Kaminsky and Lewis (1996) and Lewis (1995). On he oher hand, evidence provided by Dominguez (1997) suggess ha inervenion does no serve exclusively as a consisen signal of fuure moneary policy changes. Dominguez (1998) provides a good overview of his lieraure. 5

8 associaed wih an increase in condiional yen/dollar volailiy. Similarly, Baillie and Humpage (1992) find a posiive relaionship beween Federal Reserve, Bank of Japan and Bundesbank inervenion and he condiional volailiy of he mark/dollar and yen/dollar exchange raes for he period February 1987 o February Dominguez (1993), however, argues ha he impac on exchange rae volailiy depends on how cenral banks conduc inervenion. Looking a daily and weekly daa for , she finds ha inervenion ha is officially announced reduces volailiy while inervenion ha is no deeced by he marke increases volailiy. Finally, Hung (1997) finds ha inervenion can affec exchange rae volailiy hrough he noise-rading channel, i.e. by inducing noise raders o reac o changing marke condiions. A recen paper by Dominguez (2003c) examines he impac of G3 inervenion in he Deusche mark/dollar and yen/dollar markes using inra-daily and daily daa. She finds evidence of a significan impac of inervenion on exchange rae volailiy boh a he inraday and he daily frequency, alhough lile lasing effec. More recenly, daa on volailiy implied by opion prices have been used o sudy he effec of inervenion on marke paricipans assessmens of fuure exchange rae volailiy. 10 The advanage of implied volailiy over measures of volailiy compued from acual exchange rae realisaions, for example using GARCH models, is ha implied volailiy incorporaes a marke assessmen of fuure volailiy ha is no direcly observable. The idea here is ha inervenion on a paricular day may send a signal o marke paricipans abou he fuure exchange rae policy and hence influence he marke s forecass of fuure exchange rae volailiy. The evidence on he impac of inervenion on implied volailiy is mixed. Bonser-Neal and Tanner (1996) are he firs o have sudied he effec of inervenion on implied volailiy. They use daa on implied volailiies from exchange raded opions from 1985 o 1991 ogeher wih official daa on inervenion by he Federal Reserve and he Bundesbank. They also recover daa on perceived inervenion by he Bank of Japan from newspaper aricles. They find ha inervenion had a differen impac on volailiy over differen ime periods. Beween February 1987 and December 1989 (he Louvre period ), inervenion acually increased implied volailiy, while here is less evidence ha 10 The usefulness of implied volailiy from currency opions as a forecas of fuure exchange rae movemens has been documened in Figlewski (1997) and Galai and Tsasaronis (1996). 6

9 inervenion reduced exchange rae volailiy beween 1990 and Over he period 1985 o 1991 as a whole, here is no evidence ha cenral bank inervenion reduced exchange rae volailiy. Bonser-Neal and Tanner (1996) also examine wheher changes in implied volailiy Granger cause inervenion by he Federal Reserve and find lile evidence of Granger causaliy running from implied volailiy o inervenion. Murray e al. (1997) invesigae he effec of differen inervenion sraegies by he Bank of Canada on implied volailiy of he Canadian/US dollar exchange rae. In conras o Dominguez (1993) resuls, hey find ha inervenion ha was expeced or ha was unexpecedly ligh had no effec on implied volailiy, while inervenion ha was unexpeced and heavy significanly reduced implied volailiy. Dominguez (1998) looks a he effec of inervenion on boh GARCH volailiy and implied volailiy. She finds ha he effec depends on boh he sample period and he inervenion sraegy. One of her ineresing resuls is ha inervenion can lead o an increase in volailiy even if marke paricipans do no perceive i. Similarly o Bonser-Neal and Tanner (1996), she also finds ha volailiy does no Granger-cause inervenion. In summary, here is no unanimiy among empirical sudies on he size and srengh of he effec of inervenion on he level and higher momens of exchange raes. Findings vary by ime period, daa source, and esimaion mehod. In paricular, sudies ha include he Plaza and Louvre ime periods are more likely o find ha inervenion has a significan effec on he mean or he variance of he exchange rae. Those sudies ha include conrol for he simulaneous deerminaion of he inervenion decision and he exchange rae are less likely o find a significan effec for inervenion. Reviews of all of hese sudies, and commenaries by policy makers involved in inervenion, do sugges a consensus view. As Sarno and Taylor (2001) pu i official inervenion can be effecive if he inervenion is publicly announced and concered and provided ha i is consisen wih he underlying sance of moneary and fiscal policy. Former Federal Reserve and Unied Saes Treasury official Truman (2003) argues ha The evidence on he shor-run effeciveness of exchange marke inervenion is sufficien in my view o suppor he judicious use of inervenion by he Unied Saes as a supplemenary policy insrumen as long as i generally is used in a manner consisen wih oher economic policies, bu ha same evidence falls subsanially shor of demonsraing ha inervenion is a separae policy insrumen ha can be used o manage exchange raes wih any lasing effec. Edison (1993) and Almekinders (1995) survey empirical work on he deerminans of inervenion. The approach ha is generally followed in he lieraure consiss of specifying and esimaing a reacion 7

10 funcion for cenral banks. The objecives being considered include leaning agains he wind, minimising deviaions of exchange raes from some implici arge levels and reducing uncerainy. Eijffinger and Gruijers (1991) find ha, beween 1985 and 1987, he Federal Reserve and he Bundesbank inervened mainly o reduce erraic exchange rae movemens and lean agains he wind. Dominguez and Frankel (1993a) find ha beween Sepember 1985 and December 1990 he Federal Reserve and he Bundesbank mainly inervened when he dollar deviaed from is implici arges. They specify hese arges based on Funabashi s (1988) analysis of cenral bank inervenion and, alernaively, by assuming ha he arges equal he exchange rae level implied by purchasing power pariy. A similar conclusion is reached by Goodhar and Hesse (1993) based on an analysis of inra-day daa beween 9 April and 30 June A recen paper by Frenkel e al (2002) looks a he period and finds ha he Bank of Japan regularly inervened in response o deviaions of he yen/dollar rae from a shor-erm and a long-erm arge. By conras, heir resuls sugges ha he Federal Reserve inervened only occasionally o accompany he Bank of Japan s inervenion. Almekinders and Eijffinger (1996) presen evidence ha, from 1987 o 1989, he Federal Reserve inervened wih he inenion of lowering exchange rae uncerainy. Baillie and Oserberg (1997) find ha, beween 1985 and 1990, spo exchange rae volailiy Granger causes inervenion in he yen/dollar marke, while he forward premium s condiional volailiy does no. They conclude ha inervenion is moivaed by increases in spo raher han forward marke volailiy. 3. The daa We sudy he daily movemens of he yen agains he dollar beween Sepember 1993 and April 2000 (Graph 1). The beginning of he sample is dicaed by he availabiliy of opions daa needed o esimae empirical PDFs. We chose April 2000 as he end of he sample since here was no inervenion in he yen/dollar marke in he following 12 monhs. The exchange rae we used is aken a noon in London, quoed in yen per dollar. 3.1 Cenral bank inervenion In his paper, we use wo daa ses on inervenion in he yen/dollar marke. The firs se comprises official inervenion daa ha were provided by he Federal Reserve and he Japanese Minisry of 8

11 Finance. While he Federal Reserve has made official inervenion daa available in he pas, he Japanese Minisry of Finance sared o pos official inervenion daa on is websie in July The second daa source for idenifying episodes of cenral bank inervenion in he yen/dollar marke consiss of Reuers press repors. 12 These press repors reveal inervenions ha are perceived by marke paricipans and hence may oversae or undersae acual cenral bank inervenions. For example, Reuers aricles may well repor cases where marke paricipans hough a cenral bank was inervening when in fac his was no he case. Wih he new daa se on official inervenion i is now possible o gauge he accuracy of press repors on raders percepions of inervenion by he Japanese auhoriies. Previous sudies (Dominguez and Frankel (1993a), Bonser-Neal and Tanner (1996), Ramaswamy and Samiei (2000)) have used official daa for Federal Reserve inervenions and used newspaper aricles o build a daa se on inervenion conduced by he Bank of Japan. A recen paper by Frenkel e al (forhcoming) compares he Minisry of Finance daa wih repors of inervenions in he Financial Times and he Wall Sree Journal. They find ha beween January 1995 and December 1999, press repors are a relaively inaccurae indicaor of acual inervenion by he Bank of Japan. In conras o Frenkel e al s conclusion, Table 1 reveals ha Reuers repors quie accuraely mached acual inervenion in he yen/dollar marke. The probabiliy ha inervenion in he yen/dollar marke was repored and perceived by raders given ha i acually occurred was Likewise, he probabiliy ha inervenion was acually underaken given ha i was repored in Reuers aricles was A cross-check wih Bonser-Neal and Tanner s (1996) daa se for he period from January o July 1991 suggess ha he Reuers daa se used in his paper conains many more inervenion episodes han heir daa se. 13 Table 1 also repors informaion from he wo alernaive sources on inervenion sraegies ha were followed in he yen/dollar marke beween 20 Sepember 1993 and April During his period, Chang and Taylor (1998) have used Reuers repors o idenify he occurrence and iming of inervenion in he dollar/yen marke during he period 1 Ocober 1992 o 30 Sepember Bonser-Neal and Tanner (1996) show ha heir reporing of inervenion episodes is more complee han Dominguez and Frankel s (1993). 9

12 almos 90% of all inervenions were conduced unilaerally by he Bank of Japan, in a discree fashion, and on successive days. The Federal Reserve inervened only ogeher wih he Bank of Japan. This is in line wih he common observaion ha he U.S. moneary auhoriies became much less acive in foreign exchange markes in he 1990s (see eg Bonser-Neal and Tanner (1996)). Abou wo-hirds of he inervenions involved amouns of $1 billion or less. Ineresingly, while raders quie accuraely perceived he occurrence of cenral bank inervenion in he yen/dollar marke, hey ended o underesimae he magniude of inervenions. Beween mid-february 1996 and November 1997, no cenral bank inervenion ook place in he yen/dollar marke. Since November 1997, moreover, he wo cenral banks have ended o ener he yen/dollar marke less frequenly han in during he period I is herefore useful o spli he sample ino wo sub-periods, Sepember 1993 o February 1996 and November 1997 o April All economeric ess are carried ou separaely on hese wo sub-samples. 3.2 Macroeconomic news In he empirical analysis of he effec of inervenion on exchange rae expecaions, we also include a number of variables ha capure he effec of news abou macroeconomic or policy developmens ha may arrive on he same day on which inervenion is carried ou. We measure he unexpeced componen of macroeconomic news by he difference beween official daa announcemens and he resuls of opinion surveys conduced during he days preceding he announcemens by Money Marke Services and Bloomberg. We inroduce news variables for boh he Unied Saes and for Japan. For he Unied Saes, we include news abou he CPI, he PPI, indusrial producion, he unemploymen rae and he rade balance. For Japan, we include news abou Tankan surveys, reail sales and indusrial producion. In order o capure he effec of news abou changes in policy raes, for boh he Unied Saes and Japan we creaed a dummy variable ha equals one on a day on which he cenral bank announced ha i changed is policy rae and zero oherwise. 4. Esimaing and inerpreing probabiliy densiy funcions In recen years, daa from foreign exchange opion markes have been used o exrac informaion abou he enire risk-neural PDF of he underlying exchange rae (eg BIS (1996 and 1999); Malz 10

13 (1996); McCauley and Melick (1996a and 1996b)). The four momens of his disribuion he mean, variance, skewness and kurosis can be used o characerise marke expecaions of fuure exchange raes. The mean of a PDF can be inerpreed as raders average expecaion of he yen/dollar rae a a fuure dae. For a risk-neural PDF he mean is equal o he forward rae. We will use his mean in he empirical secion bu i is imporan o undersand ha here is lile difference, eiher in principle or resul, beween using his measure or he spo exchange rae. Obviously he spo and forward rae are joinly deermined and linked via covered ineres pariy. Given ha he correlaion beween he mean of he PDF (he forward rae) and he spo rae is 0.99 for levels and 0.83 for firs differences over he sample period, our resuls using he mean of he PDF can be undersood o apply o he spo exchange rae as well. The variance of a PDF can be inerpreed as providing a measure of how uncerain he marke is on a given day abou he exchange rae ha will prevail over he near fuure. The hird momen of a PDF, skewness, can be inerpreed as he weigh ha marke paricipans pu on a much higher and a much lower yen/dollar exchange rae in he near fuure wih respec o he forward rae. We define a PDF o be skewed o he lef (or negaively skewed) when, compared wih he forward rae, marke paricipans assign more weigh o a much weaker dollar raher han o a much sronger dollar agains he yen. Similarly, we define a PDF as skewed o he righ (or posiively skewed) when he marke aaches more weigh o a much sronger dollar han a much weaker dollar in he near fuure. Kurosis, he fourh momen of a PDF, measures how fa is ails are, and can be inerpreed as indicaing how likely marke paricipans hink very large exchange rae changes in eiher direcion will be in he near fuure. I is imporan o keep in mind ha he inerpreaion of he esimaed risk-neural PDFs is no as sraighforward as migh be hoped, given ha he PDFs capure marke views as o he likelihood of paricular exchange rae oucomes as well as marke preferences owards risk. Unforunaely, in he absence of srong assumpions, i is impossible o disinguish beween he wo. A simple example illusraes he problem. Suppose we observe an increase in he price of fire insurance. This increase migh reflec he marke view ha fires are now more likely; hence here is a greaer need for insurance. Alernaively, he price increase migh reflec a change in marke senimen regarding poenial exposures in he even of a fire. The probabiliy of a fire may no have increased; however, 11

14 he marke view of any loss associaed wih a fire may have increased. The observaion ha he price of insurance has increased does no allow us o deermine wheher fires are more likely, wheher exposure is perceived as larger, or some combinaion of boh. In he same way, a change in opion prices does no allow us o separae ou changes in views on fuure exchange raes from changes in poenial exposures. Boh Jackwerh (2000) and Bliss and Panigirzoglou (2002), when sudying equiy markes, decompose he risk-neural PDF ino he produc of he subjecive or acuarial densiy funcion and a risk aversion funcion. While his approach migh in principle be applied o expecaions of fuure exchange raes, we decided no o follow heir lead for several reasons. Firs, we are aemping o answer he quesion of wheher or no cenral bank inervenion has an effec on marke paricipans, and hence we have only a secondary ineres in wheher he effec is fel wih regard o expecaions, preferences owards risk or boh. Secondly, boh sudies make srong assumpions wih regard o he saionariy of he risk aversion funcion, assumpions ha are no enable for a sudy ha conemplaes changes in expecaions and preferences oward risk a a daily horizon. Finally, in he equiy marke here is a naural measure of wealh o use in recovering preferences owards risk, mainly he value of he equiy index iself. However, in he foreign exchange marke here is no naural definiion of wealh. Therefore, we make use of only he risk-neural PDFs raher han aemping he furher sep of decomposing he risk-neural PDF ino is componens. For each day from 20 Sepember 1993 o 30 April 2000, he four momens of he risk-neural PDF of he yen/dollar exchange rae were esimaed using he indicaive quoes of a marke maker in London on a-he-money implied volailiy, he risk reversal and he srangle. 14 The mauriy of he opions is consan and equal o one monh. The midpoin of he ime srangle price can be expressed as STR 75δ 25δ ( σ + σ ) ATM = 0.5 (1) 14 The risk reversal is he price difference beween wo equally ou-of-he money opions. I provides a direc measure of he skewness of he probabiliy disribuion. A srangle is a financial insrumen ha consiss of a purchase or sale of an ou-ofhe-money pu opion and call opion on he same underlying insrumen, wih he same expiraion dae. A srangle leads o profis if here is a drasic move in he price of he underlying asse. 12

15 and he risk reversal price as RR = σ σ, (2) 25δ 75δ where STR, RR and ATM denoe, respecively, he srangle price, risk reversal price and he a-he- 25δ money volailiy. σ and σ 75 represen he implied volailiies of he 25 dela call and 25 dela pu. δ 15 We use he above equaions o recover implied volailiies corresponding o he given dela values. Our approach hen follows wo seps. Firs, we use sandard Garman-Kohlhagen equaions o ranslae he hree quoes ino six opion prices (one pu and one call for every srike price) in erms of unis of yen per dollar. 16 Second, hese opion prices are used for he empirical esimaion of he PDFs. There are differen possible echniques for recovering implied risk neural densiy funcions from opion prices. 17 In our sudy we use he Hermie polynomial approach, a echnique developed by Madan and Milne (1994). We follow his approach since i gives a fairly robus esimaion of he PDF momens and has a beer convergence performance compared wih oher echniques. 18 A more deailed descripion of our empirical mehodology is presened in he annex. Figure 2 shows he imes series of esimaes of he firs wo momens of he PDF, he mean and he variance, of he yen/dollar exchange rae. As an alernaive measure of he variabiliy of exchange rae expecaions, we also compued he difference beween he 90% and he 10% quanile of he PDF, which we normalised by he median. Figure 2a shows he ime series of his variable. Since he variance of he PDF and he inerquanile range comove very closely, in he res of he paper we repor The dela of an opion is he firs derivaive of he opion price wih respec o he underlying asse. See annex or Malz (1996) and McCauley and Melick (1996a) for furher deails. These echniques can be classified in four broad caegories (Bahra (1997), Chang and Melick (1999)): I) echniques ha recover he implied densiy funcions by assuming a paricular sochasic process for he underlying asse (eg Baes (1991), Malz (1996)); II) a funcional form for he PDF is assumed wih he parameers for he funcion esimaed by minimizing he difference beween acual and prediced opion prices (eg Rubinsein (1994), Melick and Thomas (1997), Bahra (1997)); III) he probabiliy densiy funcion is implied from some parameric specificaion of he call pricing funcion or he implied volailiy smile (see eg Shimko (1993), Madan and Milne (1994), Malz (1997)); IV) non-parameric esimaion of he densiy funcion (see eg Aï-Sahalia and Lo (1998)). Applicaions of his echnique can also be found in Abken, Madan and Ramamurie (1996), Jondeau and Rockinger (2000), Couan, Jondeau and Rockinger (2001), and Mc Manus (1999). A poenial problem wih his echnique is ha esimaed probabiliies can be negaive (Jondeau and Rockinger (2001)). In our daa se, however, his problem urned ou no o be relevan. Melick (1999) demonsraes ha differen echniques for exracing risk-neural PDFs give very similar resuls for probabiliies beween he 10 h and 90 h quaniles, hence our findings are robus o he echnique used o exrac he PDF. 13

16 only resuls for he variance of he PDF. 19 Esimaes of he skewness are repored in Figure 3 ogeher wih esimaes of he mean. Figure 4 repors esimaes of he fourh momen of he PDF (he kurosis) over he period Sepember 1993 o November To explore he relaionship beween inervenion and exchange raes i is necessary o specify he iming of inervenions wih respec o he ime a which he opion daa are recorded. Given he difference of nine hours beween he Asian ime zone and GMT, if he Bank of Japan inervened in Asian markes, he inervenion will precede he recording of opion prices in London on ha day. In his case, he iming of he inervenion variables and ha of he parameers of he PDFs are se equal in he daa se. When inervenion occurred on day in New York, i is inroduced a ime +1 in he daa se because i will be known in London afer he opion daa are repored. In he few cases in which inervenion was carried ou in Europe we assume ha inervenion in European markes always preceded he recording of opion prices and herefore use he same iming convenion ha we use for inervenions conduced in Asia Inervenion and marke expecaions 5.1 Inervenion and PDFs Figure 5 illusraes wih an example how risk-neural PDFs can be used o analyse he effec of foreign exchange inervenion. The episode of concered inervenion by Japanese, German and US auhoriies on 15 Augus 1995 has been described as pushing on an open door (BIS (1996)) given he sharp appreciaion of he dollar on 15 and 16 Augus. Cenral banks purchased dollars when he US currency was appreciaing agains he background of heavy Japanese buying of US bonds and opion dealers hedging The correlaion coefficien beween he PDF variance and he inerquanile range is All he economeric resuls are robus o using he inerquanile range insead of he variance. Robusness checks show ha using a differen iming assumpion for inervenion in Europe, according o which inervenion carried ou in Europe generally followed he recording of opion prices, does no aler he empirical resuls in his paper. 14

17 Figure 5 shows ha he PDFs around Augus 1995 exhibied righ skewness, indicaing ha marke paricipans aached a higher probabiliy o a much sronger raher han a much weaker dollar one monh ahead wih respec o he forward rae. 21 Following cenral bank inervenion, he skewness increased on 16 Augus, suggesing ha he concered acion by cenral banks increased he marke bias owards a much sronger dollar. A he same ime, he variance of he PDFs rose on 16 Augus I hen declined during he following days. This can be inerpreed as indicaing ha inervenion was followed by a emporary increase in marke uncerainy. Moreover, he kurosis of he PDFs increased on he day ha cenral banks inervened, suggesing ha he concered effor o boos he already appreciaing dollar induced marke paricipans o aach more weigh o he possibiliy of furher very large changes of he yen/dollar exchange rae in eiher direcion in he following monh. Figures 6 o 11 provide some informaion on he average movemens of he mean, variance and skewness of he risk-neural PDFs around inervenion episodes over he period from Sepember 1993 o November For he five days before and five days afer inervenion, which happens a = 0, Figure 6 shows he mean of he risk-neural PDF, ie he forward rae, averaged over all dollar purchases. We repor he averages for a horizon of 10 days because mos of he empirical lieraure has suggesed ha he effec of inervenion is shor lived. The value of he mean is normalised a zero on he day preceding he inervenion, ie a = -1. The grey area gives an indicaion of he variabiliy of he changes in he momen of he PDF across all inervenions. For each day, i is calculaed as he average value of he mean plus/minus one sandard deviaion, where he sandard deviaion is compued over all inervenion episodes. Figure 7 shows he same informaion for dollar sales. The char looks very similar when we use he spo rae insead of he mean of he PDF. Figures 8 and 11 show averages of he variance, and he kurosis, respecively for all inervenion episodes, while Figures 9 and 10 show he movemen of skewness around dollar purchases and sales respecively. Purchases and sales are no separaely presened for he variance and kurosis, since he hypohesis of ineres in hese cases - wheher 21 The PDFs in Figure 5 are expressed in yen per dollar. 15

18 inervenion increases uncerainy is symmeric in boh direcions. Again, shaded areas indicae sandard deviaions around he averages of he momens. Figures 6-8 in paricular sugges he possibiliy ha inervenion may have had subsanial effecs on he momens of he expeced exchange rae, alhough he sandard deviaion shadings encompass zero in all cases. However, one should be careful in using hem o draw inferences abou he impac of inervenion for hree reasons. Firs, he figures do no conrol for simulaneiy. I could be ha inervenion responds o movemens in he momens raher han vice-versa. Second, on he day ha cenral banks inervene, oher imporan macroeconomic or policy news may arrive ha could promp marke paricipans o reac. For example, he announcemen of an unexpecedly high indusrial producion figure for Japan could induce raders o revise heir expecaions of fuure Japanese ineres raes upwards, hereby boosing he yen. Inervenion could also be carried ou on he same day on which a paricipaing cenral bank changes is moneary policy rae. The behaviour of he momens would hen reflec he effec of boh he arrival of macroeconomic or policy news and cenral bank inervenion. The simple averages repored in Figures 6 11 do no accoun for he influence of hese differen facors. The hird shorcoming of hese graphs is ha inervenion could be carried ou on several successive days. Table 1 shows ha his was indeed he case for mos of he inervenions during our sample period. As a consequence, he average values of he PDF momens on day reflec no only he effec of inervenion ha occurred on ha day, bu also he effec of cenral bank acions carried ou on previous days. In order o assess he effec of inervenion and conrol for hese hree issues, we use daily daa o esimae regression equaions ha explain each momen in erms of curren and lagged inervenion and a se of oher explanaory variables. To disinguish he effec of inervenion from he effec of news abou relevan macroeconomic variables ha may arrive on he same day, we include a se of variables ha measure he unanicipaed componen of announcemens of major macroeconomic variables. Our se of news variables includes variables for boh he Unied Saes, as in mos previous sudies on inervenion in he yen/dollar marke, and Japan. In our model of he relaionship beween inervenion and exchange rae expecaions, he momens of he PDFs are deermined by expecaions of exchange rae fundamenals. The expeced level of he 16

19 exchange rae is deermined by, among oher hings, expeced fuure price levels and fuure likely moneary policy. The expeced volailiy of exchange raes is deermined by expeced fuure goods price volailiy and uncerainy abou fuure moneary and inervenion policy and oher facors. Similar argumens apply o he skewness and he kurosis. Hence, he PDF momens change when hose expecaions change. Inervenion is a deerminan of hese expecaions as suggesed by he signalling channel. In formal erms, consider a simple inerpreaion of he exchange rae s as deermined by fundamenals Z, Z, Z,... Assuming lineariy and aking expecaions, his would imply ha he ime expecaion of he value of s = s( Z, Z, Z,...) he exchange rae a ime +i would be given by: (3) E s E Z E Z E Z i = α + β1 + i + β 2 + i + β3 + i +... (4) Similarly, and assuming for simpliciy zero covariances, he variance of he exchange rae would be given by: ( ) var s + i = β1 var( Z + i ) + β 2 var( Z + i ) + β3 var( Z + i )... (5) The expeced exchange raes and variances, as well as he expeced fundamenals, depend on informaion available a ime, which includes informaion abou inervenion a ime. As such, if cenral banks inervene a ime, his can poenially lead o a change in he expeced momen: E + 1 s + i Es + i = β1( E + 1Z + i E Z + i ) + β2( E + 1Z + i E Z + i ) + β3( E + 1Z + i E Z + i ) +... (6) The level of inervenion direcly affecs he change in expecaions of fundamenals and, hereby, he changes in expecaions. 5.2 The simulaneiy problem Regressions ha esimae he effec of cenral bank inervenion on marke condiions face a poenial simulaneiy problem. In a regression of he variance of he expeced exchange rae on an inervenion 17

20 dummy, for example, a posiive coefficien can mean eiher ha inervenion increases expeced volailiy, or ha cenral banks inervene o smooh rising exchange rae volailiy, bu are no successful. A simple example can be used o illusrae his problem. Consider he case where a cenral bank inervenes o smooh volailiy. To simplify he exposiion, we ignore here he role of oher momens of he PDF. In is simples form, we can hen wrie he following sysem of equaions: M = a + a2i + a3 1 X + ε (7) I = b + b 2M + b3 1 Y + η (8) where M measures he variance of he PDF, I capures inervenion, and X and Y represen oher facors ha influence volailiy and inervenion. ε and η are error erms. Equaion (7) is probably of greaes ineres, since i describes he effec of inervenion on he variance of he exchange rae. Equaion (8) is a reacion funcion ha describes how inervenion responds o movemens in he variance. Esimaing he effec of inervenion on he variance implies esimaing he coefficien a 2 in Equaion (7), while he effec of he variance on inervenion is capured by he coefficien b 2 in Equaion (8). This would require solving he simulaneous sysem for M and I in erms of X, Y, and ε and sandard OLS procedures are applied o esimae hese wo equaions separaely, hey will yield biased and inconsisen esimaes of a 2 and b 2 because cov( I, ε ) 0 and cov(, ) 0 M η. η. If Ideally hen, equaions like (7) and (8) would be esimaed simulaneously. In pracice however, his is no a viable alernaive because he resuls would be very sensiive o specificaion errors in eiher of he equaions in he sysem. A mehod ha has been used in he lieraure o address his simulaneiy 18

21 problem consiss in lagging he inervenion variable by one period in equaion (7) and hen esimaing ha equaion direcly wih OLS. 22 However, his mehod will misrepresen he rue effec of inervenion on marke expecaions because par of his effec may already be capured in lagged values of he dependen variable (he momen), which are inroduced among he explanaory variables. A beer alernaive is a limied informaion esimaor such as Insrumenal Variables (IV), alhough even his approach can be problemaic. As is well known, and discussed for example in Sock and Yogo (2002) and Sock and Wason (2003), weak insrumens can produce biased IV esimaors and hypohesis ess wih large disorions. An IV esimaion of equaion (7) requires an insrumen for inervenion, while an IV esimaion of equaion (8) requires an insrumen for he momen of he exchange rae. Unforunaely, he noorious difficuly in explaining daily exchange rae movemens means ha i is highly unlikely ha a good insrumen can be found for he momen of he exchange rae. Forunaely, as shown below, i is possible o obain a good insrumen for inervenion. Therefore, a specificaion like equaion (7) can be esimaed wih IV while a specificaion like equaion (8) probably should no. For equaions like (8) he safes approach is o include only lagged values of he exchange rae momens on he righ hand side o avoid he simulaneiy problem. Humpage (1999) follows a similar approach when esimaing reacion funcions, including only early morning quoes for he exchange rae on he righ hand side. Alhough no perfec, his compromise of esimaing one equaion wih IV and he oher wih only lagged values and OLS is he bes sraegy. The main quesion of ineres, he effec of inervenion on he exchange rae, is answered wih he IV esimaion, while he OLS esimaion of he reacion funcion will provide a rough descripion of he behaviour of he cenral banks. The bigges drawback o his approach is he possibiliy of omied variables bias in he OLS esimaion of he reacion funcion, since only lagged values of he exchange rae momens are included and he conemporaneous values of he exchange rae momens via an insrumen are omied. However, his bias is likely o be rivial, since he exchange rae momens show lile if any persisence and hus 22 Sudies ha followed his mehod include Dominguez (1993a), Bonser-Neal and Tanner (1996) and Murray e al. (1997). For a criique of his approach o he simulaneiy bias, see Humpage (1999). 19

22 here is no much correlaion beween he included lagged momens and he omied insrumen for he conemporaneous momens. In paricular, we esimae he following equaions ha correspond o he simple sysem of equaions (7) and (8): M j 5 5 = j a + bim i + cii i + 5 i = 1 i = 0 i = 0 d X i i + ε (9) and I 8 5 j j = a + bi Mˆ i + η (10) j = 1 i = 1 j where is he j-h momen a ime, ˆ j is he arge value (explained below) for he jh momen M M i lagged by i periods. I is he amoun of inervenion on day, X is a vecor of macroeconomic variables and ε and η are error erms. Insead of esimaing equaion (9) using OLS, we use insrumenal variables, essenially replacing inervenion wih is prediced value from he reacion funcion. Equaion (10), since i only includes lagged momens, can be esimaed wih OLS. 5.3 Esimaing a reacion funcion for he Federal Reserve and he Bank of Japan The mehod we follow o esimae reacion funcions (equaion (10)) builds on he work of Baillie and Oserberg (1997). In heir sudy of he behaviour of he Federal Reserve and he Bank of Japan, hey find ha he probabiliy of he wo cenral banks inervening is deermined by he deviaion of he exchange rae from some arge nominal exchange rae level and by he volailiy of he exchange rae. In he pos-breon Woods era, he Federal Reserve and he Bank of Japan have never officially announced a arge for he yen/dollar exchange rae. However, Funabashi (1988) argues ha hey adoped some implici arge levels for he nominal exchange raes. This is also consisen wih he findings of Io (2003). Baillie and Oserberg (1997) ake he arge levels for he nominal exchange raes from Funabashi (1988). We assume ha he Federal Reserve and he Bank of Japan inervened when he spo rae, he variance or he skewness deviaed from implici arge ranges. We also assume he likelihood of 20

23 inervenion depended on he disance from hese arges. We choose implici arges for he spo exchange rae based on press repors, which ypically emphasised he role of he spo rae as rigger for cenral bank inervenion (Table 2). 23 Equaion (10) is esimaed separaely for he Bank of Japan and he Federal Reserve. Given ha he Federal Reserve were much less acive in foreign exchange markes during he sample period and inervened only on days when he Bank of Japan was in he marke, we followed Frenkel e al (2002) and included Bank of Japan inervenion in he specificaion for he Federal Reserve s reacion funcion. We inroduced Bank of Japan inervenion a ime and - 1, since cenral banks almos always inervene in heir local markes, a fac noed by Dominguez (2003a,2003c) and confirmed by an examinaion of he Reuers repors in our daase. Therefore, U.S. auhoriies would usually know ha he Bank of Japan had inervened, since he Tokyo rading session is well ahead of he U.S. rading session. As a firs approximaion, we se he arges for he higher momens equal o heir hisoric average. In oher words, we assume ha cenral banks ended o inervene whenever he variance or skewness of marke expecaions was abnormally high or low wih respec o is hisorical average. 24 The explanaory variables ˆ j M i include he disance a ime -i of he yen/dollar spo rae from he boom of he arge range when he exchange rae is below ha limi and a variable for he case in which he exchange rae breaks hrough he op of he arge range. We also include he disance of he variance from is hisorical average when he dollar is, respecively, appreciaing or depreciaing. Furhermore, a variable is inroduced o measure he disance of skewness from is hisorical average when he yen is depreciaing and he marke is skewed owards a much weaker yen. Similarly, we use a measure of he disance from he average of skewness when he yen is srenghening and he marke is biased owards a much sronger yen. Finally, we inroduced a variable measuring he disance of kurosis from is hisorical average when he dollar was, respecively, appreciaing and depreciaing An alernaive approach used in he lieraure consiss of seing he implici arge equal o he PPP value of he dollar/yen exchange rae, as in Dominguez and Frankel (1993a). Oher sudies have se he arge rae equal o pas levels of he exchange rae, hereby assuming ha cenral banks sysemaically lean agains he wind (Almekinder and Eijffinger (1991)). The arge bounds are aken here as he hisorical mean ± 1.5 sandard deviaion. 21

Measuring macroeconomic volatility Applications to export revenue data, 1970-2005

Measuring macroeconomic volatility Applications to export revenue data, 1970-2005 FONDATION POUR LES ETUDES ET RERS LE DEVELOPPEMENT INTERNATIONAL Measuring macroeconomic volailiy Applicaions o expor revenue daa, 1970-005 by Joël Cariolle Policy brief no. 47 March 01 The FERDI is a

More information

Chapter 8: Regression with Lagged Explanatory Variables

Chapter 8: Regression with Lagged Explanatory Variables Chaper 8: Regression wih Lagged Explanaory Variables Time series daa: Y for =1,..,T End goal: Regression model relaing a dependen variable o explanaory variables. Wih ime series new issues arise: 1. One

More information

DOES TRADING VOLUME INFLUENCE GARCH EFFECTS? SOME EVIDENCE FROM THE GREEK MARKET WITH SPECIAL REFERENCE TO BANKING SECTOR

DOES TRADING VOLUME INFLUENCE GARCH EFFECTS? SOME EVIDENCE FROM THE GREEK MARKET WITH SPECIAL REFERENCE TO BANKING SECTOR Invesmen Managemen and Financial Innovaions, Volume 4, Issue 3, 7 33 DOES TRADING VOLUME INFLUENCE GARCH EFFECTS? SOME EVIDENCE FROM THE GREEK MARKET WITH SPECIAL REFERENCE TO BANKING SECTOR Ahanasios

More information

Vector Autoregressions (VARs): Operational Perspectives

Vector Autoregressions (VARs): Operational Perspectives Vecor Auoregressions (VARs): Operaional Perspecives Primary Source: Sock, James H., and Mark W. Wason, Vecor Auoregressions, Journal of Economic Perspecives, Vol. 15 No. 4 (Fall 2001), 101-115. Macroeconomericians

More information

Duration and Convexity ( ) 20 = Bond B has a maturity of 5 years and also has a required rate of return of 10%. Its price is $613.

Duration and Convexity ( ) 20 = Bond B has a maturity of 5 years and also has a required rate of return of 10%. Its price is $613. Graduae School of Business Adminisraion Universiy of Virginia UVA-F-38 Duraion and Convexiy he price of a bond is a funcion of he promised paymens and he marke required rae of reurn. Since he promised

More information

Morningstar Investor Return

Morningstar Investor Return Morningsar Invesor Reurn Morningsar Mehodology Paper Augus 31, 2010 2010 Morningsar, Inc. All righs reserved. The informaion in his documen is he propery of Morningsar, Inc. Reproducion or ranscripion

More information

Does Option Trading Have a Pervasive Impact on Underlying Stock Prices? *

Does Option Trading Have a Pervasive Impact on Underlying Stock Prices? * Does Opion Trading Have a Pervasive Impac on Underlying Sock Prices? * Neil D. Pearson Universiy of Illinois a Urbana-Champaign Allen M. Poeshman Universiy of Illinois a Urbana-Champaign Joshua Whie Universiy

More information

Risk Modelling of Collateralised Lending

Risk Modelling of Collateralised Lending Risk Modelling of Collaeralised Lending Dae: 4-11-2008 Number: 8/18 Inroducion This noe explains how i is possible o handle collaeralised lending wihin Risk Conroller. The approach draws on he faciliies

More information

Term Structure of Prices of Asian Options

Term Structure of Prices of Asian Options Term Srucure of Prices of Asian Opions Jirô Akahori, Tsuomu Mikami, Kenji Yasuomi and Teruo Yokoa Dep. of Mahemaical Sciences, Risumeikan Universiy 1-1-1 Nojihigashi, Kusasu, Shiga 525-8577, Japan E-mail:

More information

Principal components of stock market dynamics. Methodology and applications in brief (to be updated ) Andrei Bouzaev, bouzaev@ya.

Principal components of stock market dynamics. Methodology and applications in brief (to be updated ) Andrei Bouzaev, bouzaev@ya. Principal componens of sock marke dynamics Mehodology and applicaions in brief o be updaed Andrei Bouzaev, bouzaev@ya.ru Why principal componens are needed Objecives undersand he evidence of more han one

More information

The Greek financial crisis: growing imbalances and sovereign spreads. Heather D. Gibson, Stephan G. Hall and George S. Tavlas

The Greek financial crisis: growing imbalances and sovereign spreads. Heather D. Gibson, Stephan G. Hall and George S. Tavlas The Greek financial crisis: growing imbalances and sovereign spreads Heaher D. Gibson, Sephan G. Hall and George S. Tavlas The enry The enry of Greece ino he Eurozone in 2001 produced a dividend in he

More information

4. International Parity Conditions

4. International Parity Conditions 4. Inernaional ariy ondiions 4.1 urchasing ower ariy he urchasing ower ariy ( heory is one of he early heories of exchange rae deerminaion. his heory is based on he concep ha he demand for a counry's currency

More information

Market Liquidity and the Impacts of the Computerized Trading System: Evidence from the Stock Exchange of Thailand

Market Liquidity and the Impacts of the Computerized Trading System: Evidence from the Stock Exchange of Thailand 36 Invesmen Managemen and Financial Innovaions, 4/4 Marke Liquidiy and he Impacs of he Compuerized Trading Sysem: Evidence from he Sock Exchange of Thailand Sorasar Sukcharoensin 1, Pariyada Srisopisawa,

More information

INVESTIGATION OF THE INFLUENCE OF UNEMPLOYMENT ON ECONOMIC INDICATORS

INVESTIGATION OF THE INFLUENCE OF UNEMPLOYMENT ON ECONOMIC INDICATORS INVESTIGATION OF THE INFLUENCE OF UNEMPLOYMENT ON ECONOMIC INDICATORS Ilona Tregub, Olga Filina, Irina Kondakova Financial Universiy under he Governmen of he Russian Federaion 1. Phillips curve In economics,

More information

SPECIAL REPORT May 4, Shifting Drivers of Inflation Canada versus the U.S.

SPECIAL REPORT May 4, Shifting Drivers of Inflation Canada versus the U.S. Paul Ferley Assisan Chief Economis 416-974-7231 paul.ferley@rbc.com Nahan Janzen Economis 416-974-0579 nahan.janzen@rbc.com SPECIAL REPORT May 4, 2010 Shifing Drivers of Inflaion Canada versus he U.S.

More information

Appendix D Flexibility Factor/Margin of Choice Desktop Research

Appendix D Flexibility Factor/Margin of Choice Desktop Research Appendix D Flexibiliy Facor/Margin of Choice Deskop Research Cheshire Eas Council Cheshire Eas Employmen Land Review Conens D1 Flexibiliy Facor/Margin of Choice Deskop Research 2 Final Ocober 2012 \\GLOBAL.ARUP.COM\EUROPE\MANCHESTER\JOBS\200000\223489-00\4

More information

Supplementary Appendix for Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?

Supplementary Appendix for Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking? Supplemenary Appendix for Depression Babies: Do Macroeconomic Experiences Affec Risk-Taking? Ulrike Malmendier UC Berkeley and NBER Sefan Nagel Sanford Universiy and NBER Sepember 2009 A. Deails on SCF

More information

Recovering Market Expectations of FOMC Rate Changes with Options on Federal Funds Futures

Recovering Market Expectations of FOMC Rate Changes with Options on Federal Funds Futures w o r k i n g p a p e r 5 7 Recovering Marke Expecaions of FOMC Rae Changes wih Opions on Federal Funds Fuures by John B. Carlson, Ben R. Craig, and William R. Melick FEDERAL RESERVE BANK OF CLEVELAND

More information

YTM is positively related to default risk. YTM is positively related to liquidity risk. YTM is negatively related to special tax treatment.

YTM is positively related to default risk. YTM is positively related to liquidity risk. YTM is negatively related to special tax treatment. . Two quesions for oday. A. Why do bonds wih he same ime o mauriy have differen YTM s? B. Why do bonds wih differen imes o mauriy have differen YTM s? 2. To answer he firs quesion les look a he risk srucure

More information

MACROECONOMIC FORECASTS AT THE MOF A LOOK INTO THE REAR VIEW MIRROR

MACROECONOMIC FORECASTS AT THE MOF A LOOK INTO THE REAR VIEW MIRROR MACROECONOMIC FORECASTS AT THE MOF A LOOK INTO THE REAR VIEW MIRROR The firs experimenal publicaion, which summarised pas and expeced fuure developmen of basic economic indicaors, was published by he Minisry

More information

INTEREST RATE FUTURES AND THEIR OPTIONS: SOME PRICING APPROACHES

INTEREST RATE FUTURES AND THEIR OPTIONS: SOME PRICING APPROACHES INTEREST RATE FUTURES AND THEIR OPTIONS: SOME PRICING APPROACHES OPENGAMMA QUANTITATIVE RESEARCH Absrac. Exchange-raded ineres rae fuures and heir opions are described. The fuure opions include hose paying

More information

Bid-ask Spread and Order Size in the Foreign Exchange Market: An Empirical Investigation

Bid-ask Spread and Order Size in the Foreign Exchange Market: An Empirical Investigation Bid-ask Spread and Order Size in he Foreign Exchange Marke: An Empirical Invesigaion Liang Ding* Deparmen of Economics, Macaleser College, 1600 Grand Avenue, S. Paul, MN55105, U.S.A. Shor Tile: Bid-ask

More information

THE PERFORMANCE OF OPTION PRICING MODELS ON HEDGING EXOTIC OPTIONS

THE PERFORMANCE OF OPTION PRICING MODELS ON HEDGING EXOTIC OPTIONS HE PERFORMANE OF OPION PRIING MODEL ON HEDGING EXOI OPION Firs Draf: May 5 003 his Version Oc. 30 003 ommens are welcome Absrac his paper examines he empirical performance of various opion pricing models

More information

Why does the correlation between stock and bond returns vary over time?

Why does the correlation between stock and bond returns vary over time? Why does he correlaion beween sock and bond reurns vary over ime? Magnus Andersson a,*, Elizavea Krylova b,**, Sami Vähämaa c,*** a European Cenral Bank, Capial Markes and Financial Srucure Division b

More information

Journal Of Business & Economics Research September 2005 Volume 3, Number 9

Journal Of Business & Economics Research September 2005 Volume 3, Number 9 Opion Pricing And Mone Carlo Simulaions George M. Jabbour, (Email: jabbour@gwu.edu), George Washingon Universiy Yi-Kang Liu, (yikang@gwu.edu), George Washingon Universiy ABSTRACT The advanage of Mone Carlo

More information

Usefulness of the Forward Curve in Forecasting Oil Prices

Usefulness of the Forward Curve in Forecasting Oil Prices Usefulness of he Forward Curve in Forecasing Oil Prices Akira Yanagisawa Leader Energy Demand, Supply and Forecas Analysis Group The Energy Daa and Modelling Cener Summary When people analyse oil prices,

More information

The Information Content of Implied Skewness and Kurtosis Changes Prior to Earnings Announcements for Stock and Option Returns

The Information Content of Implied Skewness and Kurtosis Changes Prior to Earnings Announcements for Stock and Option Returns The Informaion Conen of Implied kewness and urosis Changes Prior o Earnings Announcemens for ock and Opion Reurns Dean Diavaopoulos Deparmen of Finance Villanova Universiy James. Doran Bank of America

More information

11/6/2013. Chapter 14: Dynamic AD-AS. Introduction. Introduction. Keeping track of time. The model s elements

11/6/2013. Chapter 14: Dynamic AD-AS. Introduction. Introduction. Keeping track of time. The model s elements Inroducion Chaper 14: Dynamic D-S dynamic model of aggregae and aggregae supply gives us more insigh ino how he economy works in he shor run. I is a simplified version of a DSGE model, used in cuing-edge

More information

Roman Horvath Czech National Bank and IES, Charles University. Abstract

Roman Horvath Czech National Bank and IES, Charles University. Abstract Modelling Cenral Bank Inervenion Aciviy under Inflaion Targeing Roman Horvah Czech Naional Bank and IES, Charles Universiy Absrac Using daily daa from he Czech Republic in //8-3//00, we find ha foreign

More information

A Further Examination of Insurance Pricing and Underwriting Cycles

A Further Examination of Insurance Pricing and Underwriting Cycles A Furher Examinaion of Insurance ricing and Underwriing Cycles AFIR Conference, Sepember 2005, Zurich, Swizerland Chris K. Madsen, GE Insurance Soluions, Copenhagen, Denmark Svend Haasrup, GE Insurance

More information

Monetary Policy & Real Estate Investment Trusts *

Monetary Policy & Real Estate Investment Trusts * Moneary Policy & Real Esae Invesmen Truss * Don Bredin, Universiy College Dublin, Gerard O Reilly, Cenral Bank and Financial Services Auhoriy of Ireland & Simon Sevenson, Cass Business School, Ciy Universiy

More information

Hedging with Forwards and Futures

Hedging with Forwards and Futures Hedging wih orwards and uures Hedging in mos cases is sraighforward. You plan o buy 10,000 barrels of oil in six monhs and you wish o eliminae he price risk. If you ake he buy-side of a forward/fuures

More information

Does Option Trading Have a Pervasive Impact on Underlying Stock Prices? *

Does Option Trading Have a Pervasive Impact on Underlying Stock Prices? * Does Opion Trading Have a Pervasive Impac on Underlying Soc Prices? * Neil D. Pearson Universiy of Illinois a Urbana-Champaign Allen M. Poeshman Universiy of Illinois a Urbana-Champaign Joshua Whie Universiy

More information

Cointegration: The Engle and Granger approach

Cointegration: The Engle and Granger approach Coinegraion: The Engle and Granger approach Inroducion Generally one would find mos of he economic variables o be non-saionary I(1) variables. Hence, any equilibrium heories ha involve hese variables require

More information

Investor sentiment of lottery stock evidence from the Taiwan stock market

Investor sentiment of lottery stock evidence from the Taiwan stock market Invesmen Managemen and Financial Innovaions Volume 9 Issue 1 Yu-Min Wang (Taiwan) Chun-An Li (Taiwan) Chia-Fei Lin (Taiwan) Invesor senimen of loery sock evidence from he Taiwan sock marke Absrac This

More information

Estimating Time-Varying Equity Risk Premium The Japanese Stock Market 1980-2012

Estimating Time-Varying Equity Risk Premium The Japanese Stock Market 1980-2012 Norhfield Asia Research Seminar Hong Kong, November 19, 2013 Esimaing Time-Varying Equiy Risk Premium The Japanese Sock Marke 1980-2012 Ibboson Associaes Japan Presiden Kasunari Yamaguchi, PhD/CFA/CMA

More information

The Relationship between Stock Return Volatility and. Trading Volume: The case of The Philippines*

The Relationship between Stock Return Volatility and. Trading Volume: The case of The Philippines* The Relaionship beween Sock Reurn Volailiy and Trading Volume: The case of The Philippines* Manabu Asai Faculy of Economics Soka Universiy Angelo Unie Economics Deparmen De La Salle Universiy Manila May

More information

SPEC model selection algorithm for ARCH models: an options pricing evaluation framework

SPEC model selection algorithm for ARCH models: an options pricing evaluation framework Applied Financial Economics Leers, 2008, 4, 419 423 SEC model selecion algorihm for ARCH models: an opions pricing evaluaion framework Savros Degiannakis a, * and Evdokia Xekalaki a,b a Deparmen of Saisics,

More information

Does informed trading occur in the options market? Some revealing clues

Does informed trading occur in the options market? Some revealing clues Does informed rading occur in he opions marke? Some revealing clues Blasco N.(1), Corredor P.(2) and Sanamaría R. (2) (1) Universiy of Zaragoza (2) Public Universiy of Navarre Absrac This paper analyses

More information

CVA calculation for CDS on super senior ABS CDO

CVA calculation for CDS on super senior ABS CDO MPRA Munich Personal RePEc Archive CVA calculaion for CDS on super senior AS CDO Hui Li Augus 28 Online a hp://mpra.ub.uni-muenchen.de/17945/ MPRA Paper No. 17945, posed 19. Ocober 29 13:33 UC CVA calculaion

More information

The Identification of the Response of Interest Rates to Monetary Policy Actions Using Market-Based Measures of Monetary Policy Shocks

The Identification of the Response of Interest Rates to Monetary Policy Actions Using Market-Based Measures of Monetary Policy Shocks The Idenificaion of he Response of Ineres Raes o Moneary Policy Acions Using Marke-Based Measures of Moneary Policy Shocks Daniel L. Thornon Federal Reserve Bank of S. Louis Phone (314) 444-8582 FAX (314)

More information

II.1. Debt reduction and fiscal multipliers. dbt da dpbal da dg. bal

II.1. Debt reduction and fiscal multipliers. dbt da dpbal da dg. bal Quarerly Repor on he Euro Area 3/202 II.. Deb reducion and fiscal mulipliers The deerioraion of public finances in he firs years of he crisis has led mos Member Saes o adop sizeable consolidaion packages.

More information

Options and Volatility

Options and Volatility Opions and Volailiy Peer A. Abken and Saika Nandi Abken and Nandi are senior economiss in he financial secion of he Alana Fed s research deparmen. V olailiy is a measure of he dispersion of an asse price

More information

A Note on Using the Svensson procedure to estimate the risk free rate in corporate valuation

A Note on Using the Svensson procedure to estimate the risk free rate in corporate valuation A Noe on Using he Svensson procedure o esimae he risk free rae in corporae valuaion By Sven Arnold, Alexander Lahmann and Bernhard Schwezler Ocober 2011 1. The risk free ineres rae in corporae valuaion

More information

PROFIT TEST MODELLING IN LIFE ASSURANCE USING SPREADSHEETS PART ONE

PROFIT TEST MODELLING IN LIFE ASSURANCE USING SPREADSHEETS PART ONE Profi Tes Modelling in Life Assurance Using Spreadshees PROFIT TEST MODELLING IN LIFE ASSURANCE USING SPREADSHEETS PART ONE Erik Alm Peer Millingon 2004 Profi Tes Modelling in Life Assurance Using Spreadshees

More information

BALANCE OF PAYMENTS. First quarter 2008. Balance of payments

BALANCE OF PAYMENTS. First quarter 2008. Balance of payments BALANCE OF PAYMENTS DATE: 2008-05-30 PUBLISHER: Balance of Paymens and Financial Markes (BFM) Lena Finn + 46 8 506 944 09, lena.finn@scb.se Camilla Bergeling +46 8 506 942 06, camilla.bergeling@scb.se

More information

expressed here and the approaches suggested are of the author and not necessarily of NSEIL.

expressed here and the approaches suggested are of the author and not necessarily of NSEIL. I. Inroducion Do Fuures and Opions rading increase sock marke volailiy Dr. Premalaa Shenbagaraman * In he las decade, many emerging and ransiion economies have sared inroducing derivaive conracs. As was

More information

Small and Large Trades Around Earnings Announcements: Does Trading Behavior Explain Post-Earnings-Announcement Drift?

Small and Large Trades Around Earnings Announcements: Does Trading Behavior Explain Post-Earnings-Announcement Drift? Small and Large Trades Around Earnings Announcemens: Does Trading Behavior Explain Pos-Earnings-Announcemen Drif? Devin Shanhikumar * Firs Draf: Ocober, 2002 This Version: Augus 19, 2004 Absrac This paper

More information

USE OF EDUCATION TECHNOLOGY IN ENGLISH CLASSES

USE OF EDUCATION TECHNOLOGY IN ENGLISH CLASSES USE OF EDUCATION TECHNOLOGY IN ENGLISH CLASSES Mehme Nuri GÖMLEKSİZ Absrac Using educaion echnology in classes helps eachers realize a beer and more effecive learning. In his sudy 150 English eachers were

More information

Why Did the Demand for Cash Decrease Recently in Korea?

Why Did the Demand for Cash Decrease Recently in Korea? Why Did he Demand for Cash Decrease Recenly in Korea? Byoung Hark Yoo Bank of Korea 26. 5 Absrac We explores why cash demand have decreased recenly in Korea. The raio of cash o consumpion fell o 4.7% in

More information

Working Paper Series. Do China and oil exporters influence major currency configurations? No 973 / December 2008. by Marcel Fratzscher and Arnaud Mehl

Working Paper Series. Do China and oil exporters influence major currency configurations? No 973 / December 2008. by Marcel Fratzscher and Arnaud Mehl Working Paper Series No 973 / December 2008 Do China and oil exporers influence major currency configuraions? by Marcel Frazscher and Arnaud Mehl WORKING PAPER SERIES NO 973 / DECEMBER 2008 DO CHINA AND

More information

Can Individual Investors Use Technical Trading Rules to Beat the Asian Markets?

Can Individual Investors Use Technical Trading Rules to Beat the Asian Markets? Can Individual Invesors Use Technical Trading Rules o Bea he Asian Markes? INTRODUCTION In radiional ess of he weak-form of he Efficien Markes Hypohesis, price reurn differences are found o be insufficien

More information

GOOD NEWS, BAD NEWS AND GARCH EFFECTS IN STOCK RETURN DATA

GOOD NEWS, BAD NEWS AND GARCH EFFECTS IN STOCK RETURN DATA Journal of Applied Economics, Vol. IV, No. (Nov 001), 313-37 GOOD NEWS, BAD NEWS AND GARCH EFFECTS 313 GOOD NEWS, BAD NEWS AND GARCH EFFECTS IN STOCK RETURN DATA CRAIG A. DEPKEN II * The Universiy of Texas

More information

Technical Description of S&P 500 Buy-Write Monthly Index Composition

Technical Description of S&P 500 Buy-Write Monthly Index Composition Technical Descripion of S&P 500 Buy-Wrie Monhly Index Composiion The S&P 500 Buy-Wrie Monhly (BWM) index is a oal reurn index based on wriing he nearby a-he-money S&P 500 call opion agains he S&P 500 index

More information

Skewness and Kurtosis Adjusted Black-Scholes Model: A Note on Hedging Performance

Skewness and Kurtosis Adjusted Black-Scholes Model: A Note on Hedging Performance Finance Leers, 003, (5), 6- Skewness and Kurosis Adjused Black-Scholes Model: A Noe on Hedging Performance Sami Vähämaa * Universiy of Vaasa, Finland Absrac his aricle invesigaes he dela hedging performance

More information

Economics 140A Hypothesis Testing in Regression Models

Economics 140A Hypothesis Testing in Regression Models Economics 140A Hypohesis Tesing in Regression Models While i is algebraically simple o work wih a populaion model wih a single varying regressor, mos populaion models have muliple varying regressors 1

More information

Contrarian insider trading and earnings management around seasoned equity offerings; SEOs

Contrarian insider trading and earnings management around seasoned equity offerings; SEOs Journal of Finance and Accounancy Conrarian insider rading and earnings managemen around seasoned equiy offerings; SEOs ABSTRACT Lorea Baryeh Towson Universiy This sudy aemps o resolve he differences in

More information

Impact of Debt on Primary Deficit and GSDP Gap in Odisha: Empirical Evidences

Impact of Debt on Primary Deficit and GSDP Gap in Odisha: Empirical Evidences S.R. No. 002 10/2015/CEFT Impac of Deb on Primary Defici and GSDP Gap in Odisha: Empirical Evidences 1. Inroducion The excessive pressure of public expendiure over is revenue receip is financed hrough

More information

Revisions to Nonfarm Payroll Employment: 1964 to 2011

Revisions to Nonfarm Payroll Employment: 1964 to 2011 Revisions o Nonfarm Payroll Employmen: 1964 o 2011 Tom Sark December 2011 Summary Over recen monhs, he Bureau of Labor Saisics (BLS) has revised upward is iniial esimaes of he monhly change in nonfarm

More information

Nikkei Stock Average Volatility Index Real-time Version Index Guidebook

Nikkei Stock Average Volatility Index Real-time Version Index Guidebook Nikkei Sock Average Volailiy Index Real-ime Version Index Guidebook Nikkei Inc. Wih he modificaion of he mehodology of he Nikkei Sock Average Volailiy Index as Nikkei Inc. (Nikkei) sars calculaing and

More information

A Brief Introduction to the Consumption Based Asset Pricing Model (CCAPM)

A Brief Introduction to the Consumption Based Asset Pricing Model (CCAPM) A Brief Inroducion o he Consumpion Based Asse Pricing Model (CCAPM We have seen ha CAPM idenifies he risk of any securiy as he covariance beween he securiy's rae of reurn and he rae of reurn on he marke

More information

Measuring the Downside Risk of the Exchange-Traded Funds: Do the Volatility Estimators Matter?

Measuring the Downside Risk of the Exchange-Traded Funds: Do the Volatility Estimators Matter? Proceedings of he Firs European Academic Research Conference on Global Business, Economics, Finance and Social Sciences (EAR5Ialy Conference) ISBN: 978--6345-028-6 Milan-Ialy, June 30-July -2, 205, Paper

More information

Option Trading Costs Are Lower Than You Think

Option Trading Costs Are Lower Than You Think Opion Trading Coss Are Lower Than You Think Dmiriy Muravyev Boson College Neil D. Pearson Universiy of Illinois a Urbana-Champaign March 15, 2015 Absrac Convenionally measured bid-ask spreads of liquid

More information

Synchronization Risk and the NASDAQ Technology Bubble. Douglas W. Blackburn Kelley School of Business Indiana University

Synchronization Risk and the NASDAQ Technology Bubble. Douglas W. Blackburn Kelley School of Business Indiana University Synchronizaion Risk and he NASDAQ Technology Bubble Douglas W. Blackburn Kelley School of Business Indiana Universiy Ruslan Y. Goyenko McGill Universiy Andrey D. Ukhov Kelley School of Business Indiana

More information

Foreign Exchange Market Microstructure

Foreign Exchange Market Microstructure Foreign Exchange Marke Microsrucure Marin.. Evans 1 Georgeown Universiy and NBER Absrac This paper provides an overview of he recen lieraure on Foreign Exchange Marke Microsrucure. Is aim is no o survey

More information

WORKING PAPER SERIES STOCKS, BONDS, MONEY MARKETS AND EXCHANGE RATES MEASURING INTERNATIONAL FINANCIAL TRANSMISSION NO.

WORKING PAPER SERIES STOCKS, BONDS, MONEY MARKETS AND EXCHANGE RATES MEASURING INTERNATIONAL FINANCIAL TRANSMISSION NO. WORKING PAPER SERIES NO. 452 / MARCH 25 STOCKS, BONDS, MONEY MARKETS AND EXCHANGE RATES MSURING INTERNATIONAL FINANCIAL TRANSMISSION by Michael Ehrmann, Marcel Frazscher and Robero Rigobon WORKING PAPER

More information

ARCH 2013.1 Proceedings

ARCH 2013.1 Proceedings Aricle from: ARCH 213.1 Proceedings Augus 1-4, 212 Ghislain Leveille, Emmanuel Hamel A renewal model for medical malpracice Ghislain Léveillé École d acuaria Universié Laval, Québec, Canada 47h ARC Conference

More information

CRISES AND THE FLEXIBLE PRICE MONETARY MODEL. Sarantis Kalyvitis

CRISES AND THE FLEXIBLE PRICE MONETARY MODEL. Sarantis Kalyvitis CRISES AND THE FLEXIBLE PRICE MONETARY MODEL Saranis Kalyviis Currency Crises In fixed exchange rae regimes, counries rarely abandon he regime volunarily. In mos cases, raders (or speculaors) exchange

More information

Information Leadership in Advanced Asia-Pacific Stock Markets: Returns. and Volatility Spillover and the role of public information from the U.S.

Information Leadership in Advanced Asia-Pacific Stock Markets: Returns. and Volatility Spillover and the role of public information from the U.S. Informaion Leadership in Advanced Asia-Pacific Sock Markes: Reurns and Volailiy Spillover and he role of public informaion from he U.S. and Japan Suk-Joong Kim School of Banking and Finance The Universiy

More information

Estimating the immediate impact of monetary policy shocks on the exchange rate and other asset prices in Hungary

Estimating the immediate impact of monetary policy shocks on the exchange rate and other asset prices in Hungary Esimaing he immediae impac of moneary policy shocks on he exchange rae and oher asse prices in Hungary András Rezessy Magyar Nemzei Bank 2005 Absrac The paper applies he mehod of idenificaion hrough heeroskedasiciy

More information

Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C.

Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary Affairs Federal Reserve Board, Washington, D.C. Finance and Economics Discussion Series Divisions of Research & Saisics and Moneary Affairs Federal Reserve Board, Washingon, D.C. Volailiy, Money Marke Raes, and he Transmission of Moneary Policy Seh

More information

THE IMPACT OF CUBES ON THE MARKET QUALITY OF NASDAQ 100 INDEX FUTURES

THE IMPACT OF CUBES ON THE MARKET QUALITY OF NASDAQ 100 INDEX FUTURES Invesmen Managemen and Financial Innovaions, Volume 3, Issue 3, 2006 117 THE IMPACT OF CUBES ON THE MARKET QUALITY OF NASDAQ 100 INDEX FUTURES Seyfein Unal, M. Mesu Kayali, Cuney Koyuncu Absrac Using Hasbrouck

More information

PROFIT TEST MODELLING IN LIFE ASSURANCE USING SPREADSHEETS PART TWO

PROFIT TEST MODELLING IN LIFE ASSURANCE USING SPREADSHEETS PART TWO Profi Tes Modelling in Life Assurance Using Spreadshees, par wo PROFIT TEST MODELLING IN LIFE ASSURANCE USING SPREADSHEETS PART TWO Erik Alm Peer Millingon Profi Tes Modelling in Life Assurance Using Spreadshees,

More information

Order Flows, Delta Hedging and Exchange Rate Dynamics

Order Flows, Delta Hedging and Exchange Rate Dynamics rder Flows Dela Hedging and Exchange Rae Dynamics Bronka Rzepkowski # Cenre d Eudes rospecives e d Informaions Inernaionales (CEII) ABSTRACT This paper proposes a microsrucure model of he FX opions and

More information

Individual Health Insurance April 30, 2008 Pages 167-170

Individual Health Insurance April 30, 2008 Pages 167-170 Individual Healh Insurance April 30, 2008 Pages 167-170 We have received feedback ha his secion of he e is confusing because some of he defined noaion is inconsisen wih comparable life insurance reserve

More information

Graphing the Von Bertalanffy Growth Equation

Graphing the Von Bertalanffy Growth Equation file: d:\b173-2013\von_beralanffy.wpd dae: Sepember 23, 2013 Inroducion Graphing he Von Beralanffy Growh Equaion Previously, we calculaed regressions of TL on SL for fish size daa and ploed he daa and

More information

Research Question Is the average body temperature of healthy adults 98.6 F? Introduction to Hypothesis Testing. Statistical Hypothesis

Research Question Is the average body temperature of healthy adults 98.6 F? Introduction to Hypothesis Testing. Statistical Hypothesis Inroducion o Hypohesis Tesing Research Quesion Is he average body emperaure of healhy aduls 98.6 F? HT - 1 HT - 2 Scienific Mehod 1. Sae research hypoheses or quesions. µ = 98.6? 2. Gaher daa or evidence

More information

How Useful are the Various Volatility Estimators for Improving GARCH-based Volatility Forecasts? Evidence from the Nasdaq-100 Stock Index

How Useful are the Various Volatility Estimators for Improving GARCH-based Volatility Forecasts? Evidence from the Nasdaq-100 Stock Index Inernaional Journal of Economics and Financial Issues Vol. 4, No. 3, 04, pp.65-656 ISSN: 46-438 www.econjournals.com How Useful are he Various Volailiy Esimaors for Improving GARCH-based Volailiy Forecass?

More information

Relationships between Stock Prices and Accounting Information: A Review of the Residual Income and Ohlson Models. Scott Pirie* and Malcolm Smith**

Relationships between Stock Prices and Accounting Information: A Review of the Residual Income and Ohlson Models. Scott Pirie* and Malcolm Smith** Relaionships beween Sock Prices and Accouning Informaion: A Review of he Residual Income and Ohlson Models Sco Pirie* and Malcolm Smih** * Inernaional Graduae School of Managemen, Universiy of Souh Ausralia

More information

Price elasticity of demand for crude oil: estimates for 23 countries

Price elasticity of demand for crude oil: estimates for 23 countries Price elasiciy of demand for crude oil: esimaes for 23 counries John C.B. Cooper Absrac This paper uses a muliple regression model derived from an adapaion of Nerlove s parial adjusmen model o esimae boh

More information

An empirical analysis about forecasting Tmall air-conditioning sales using time series model Yan Xia

An empirical analysis about forecasting Tmall air-conditioning sales using time series model Yan Xia An empirical analysis abou forecasing Tmall air-condiioning sales using ime series model Yan Xia Deparmen of Mahemaics, Ocean Universiy of China, China Absrac Time series model is a hospo in he research

More information

The Effects of Economic News on Commodity Prices: Is Gold Just Another Commodity?

The Effects of Economic News on Commodity Prices: Is Gold Just Another Commodity? WP/09/140 The Effecs of Economic News on Commodiy Prices: Is Gold Jus Anoher Commodiy? Shaun K. Roache and Marco Rossi 1 2008 Inernaional Moneary Fund WP/09/140 IMF Working Paper Research Deparmen The

More information

Market Efficiency or Not? The Behaviour of China s Stock Prices in Response to the Announcement of Bonus Issues

Market Efficiency or Not? The Behaviour of China s Stock Prices in Response to the Announcement of Bonus Issues Discussion Paper No. 0120 Marke Efficiency or No? The Behaviour of China s Sock Prices in Response o he Announcemen of Bonus Issues Michelle L. Barnes and Shiguang Ma May 2001 Adelaide Universiy SA 5005,

More information

Reporting to Management

Reporting to Management CHAPTER 31 Reporing o Managemen Inroducion The success or oherwise of any business underaking depends primarily on earning revenue ha would generae sufficien resources for sound growh. To achieve his objecive,

More information

The Effect of Monetary Policy on Private Money Market Rates in Jamaica: An Empirical Microstructure Study. Derek Leith

The Effect of Monetary Policy on Private Money Market Rates in Jamaica: An Empirical Microstructure Study. Derek Leith The Effec of Moneary Policy on Privae Money Marke Raes in Jamaica: An Empirical Microsrucure Sudy Derek Leih Research Services Deparmen Research and Economic Programming Division Bank of Jamaica Absrac

More information

SURVEYING THE RELATIONSHIP BETWEEN STOCK MARKET MAKER AND LIQUIDITY IN TEHRAN STOCK EXCHANGE COMPANIES

SURVEYING THE RELATIONSHIP BETWEEN STOCK MARKET MAKER AND LIQUIDITY IN TEHRAN STOCK EXCHANGE COMPANIES Inernaional Journal of Accouning Research Vol., No. 7, 4 SURVEYING THE RELATIONSHIP BETWEEN STOCK MARKET MAKER AND LIQUIDITY IN TEHRAN STOCK EXCHANGE COMPANIES Mohammad Ebrahimi Erdi, Dr. Azim Aslani,

More information

PRICE VOLATILITY ON THE USD/JPY MARKET AS A MEASURE OF INVESTORS ATTITUDE TOWARDS RISK

PRICE VOLATILITY ON THE USD/JPY MARKET AS A MEASURE OF INVESTORS ATTITUDE TOWARDS RISK QUANTITATIVE METHODS IN ECONOMICS Vol. XI, No. 1, 010, pp. 37-44 PRICE VOLATILITY ON THE USD/JPY MARKET AS A MEASURE OF INVESTORS ATTITUDE TOWARDS RISK Kaarzyna Banasiak Deparmen of Economics of Agriculure

More information

Influence of the Dow returns on the intraday Spanish stock market behavior

Influence of the Dow returns on the intraday Spanish stock market behavior Influence of he Dow reurns on he inraday Spanish sock marke behavior José Luis Miralles Marcelo, José Luis Miralles Quirós, María del Mar Miralles Quirós Deparmen of Financial Economics, Universiy of Exremadura

More information

Anchoring Bias in Consensus Forecasts and its Effect on Market Prices

Anchoring Bias in Consensus Forecasts and its Effect on Market Prices Finance and Economics Discussion Series Divisions of Research & Saisics and Moneary Affairs Federal Reserve Board, Washingon, D.C. Anchoring Bias in Consensus Forecass and is Effec on Marke Prices Sean

More information

The Grantor Retained Annuity Trust (GRAT)

The Grantor Retained Annuity Trust (GRAT) WEALTH ADVISORY Esae Planning Sraegies for closely-held, family businesses The Granor Reained Annuiy Trus (GRAT) An efficien wealh ransfer sraegy, paricularly in a low ineres rae environmen Family business

More information

Cointegration Analysis of Exchange Rate in Foreign Exchange Market

Cointegration Analysis of Exchange Rate in Foreign Exchange Market Coinegraion Analysis of Exchange Rae in Foreign Exchange Marke Wang Jian, Wang Shu-li School of Economics, Wuhan Universiy of Technology, P.R.China, 430074 Absrac: This paper educed ha he series of exchange

More information

Florida State University Libraries

Florida State University Libraries Florida Sae Universiy Libraries Elecronic Theses, Treaises and Disseraions The Graduae School 2008 Two Essays on he Predicive Abiliy of Implied Volailiy Consanine Diavaopoulos Follow his and addiional

More information

SAMUELSON S HYPOTHESIS IN GREEK STOCK INDEX FUTURES MARKET

SAMUELSON S HYPOTHESIS IN GREEK STOCK INDEX FUTURES MARKET 154 Invesmen Managemen and Financial Innovaions, Volume 3, Issue 2, 2006 SAMUELSON S HYPOTHESIS IN GREEK STOCK INDEX FUTURES MARKET Chrisos Floros, Dimirios V. Vougas Absrac Samuelson (1965) argues ha

More information

Estimating the Term Structure with Macro Dynamics in a Small Open Economy

Estimating the Term Structure with Macro Dynamics in a Small Open Economy Esimaing he Term Srucure wih Macro Dynamics in a Small Open Economy Fousseni Chabi-Yo Bank of Canada Jun Yang Bank of Canada April 18, 2006 Preliminary work. Please do no quoe wihou permission. The paper

More information

Chapter 8 Student Lecture Notes 8-1

Chapter 8 Student Lecture Notes 8-1 Chaper Suden Lecure Noes - Chaper Goals QM: Business Saisics Chaper Analyzing and Forecasing -Series Daa Afer compleing his chaper, you should be able o: Idenify he componens presen in a ime series Develop

More information

The impact of the trading systems development on bid-ask spreads

The impact of the trading systems development on bid-ask spreads Chun-An Li (Taiwan), Hung-Cheng Lai (Taiwan)* The impac of he rading sysems developmen on bid-ask spreads Absrac Following he closure, on 30 June 2005, of he open oucry sysem on he Singapore Exchange (SGX),

More information

Real long-term interest rates and monetary policy: a cross-country perspective

Real long-term interest rates and monetary policy: a cross-country perspective Real long-erm ineres raes and moneary policy: a cross-counry perspecive Chrisian Upper and Andreas Worms, 1 Deusche Bundesbank 1. Inroducion The real rae of ineres is a cenral concep in economics. I represens

More information

The naive method discussed in Lecture 1 uses the most recent observations to forecast future values. That is, Y ˆ t + 1

The naive method discussed in Lecture 1 uses the most recent observations to forecast future values. That is, Y ˆ t + 1 Business Condiions & Forecasing Exponenial Smoohing LECTURE 2 MOVING AVERAGES AND EXPONENTIAL SMOOTHING OVERVIEW This lecure inroduces ime-series smoohing forecasing mehods. Various models are discussed,

More information

Chapter 7: Estimating the Variance of an Estimate s Probability Distribution

Chapter 7: Estimating the Variance of an Estimate s Probability Distribution Chaper 7: Esimaing he Variance of an Esimae s Probabiliy Disribuion Chaper 7 Ouline Review o Clin s Assignmen o General Properies of he Ordinary Leas Squares (OLS) Esimaion Procedure o Imporance of he

More information

Credit Index Options: the no-armageddon pricing measure and the role of correlation after the subprime crisis

Credit Index Options: the no-armageddon pricing measure and the role of correlation after the subprime crisis Second Conference on The Mahemaics of Credi Risk, Princeon May 23-24, 2008 Credi Index Opions: he no-armageddon pricing measure and he role of correlaion afer he subprime crisis Damiano Brigo - Join work

More information