Currency Crisis Prediction Using ADR Market Data: An Options-based Approach
Stefan Eichler, Dominik Maltritz
International Journal of Forecasting,
Nr. 4,
2010
Abstract
During capital control episodes, large price deviations between American Depositary Receipts (ADR) and their underlying stocks signal that a currency crisis is about to occur. We interpret this price spread as the price of a call option. Using option pricing theory we derive detailed information about both the probability of a currency crisis and the expected magnitude of devaluation. Analyzing daily ADR market data preceding the Venezuelan crisis (1996), our approach predicts crisis probabilities of almost 100% and forecasts the exchange rate after floating quite accurately. During the Argentine crisis (2002), the estimated exchange rates are similar to the actual ones.
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Has the Euro Increased International Price Elasticities?
Oliver Holtemöller, Götz Zeddies
IWH Discussion Papers,
Nr. 18,
2010
publiziert in: Empirica
Abstract
This paper analyzes the role of common data problems when identifying structural breaks in small samples. Most notably, we survey small sample properties of the most commonly applied endogenous break tests developed by Brown, Durbin, and Evans (1975) and Zeileis (2004), Nyblom (1989) and Hansen (1992), and Andrews, Lee, and Ploberger (1996). Power and size properties are derived using Monte Carlo simulations. Results emphasize that mostly the CUSUM type tests are affected by the presence of heteroscedasticity, whereas the individual parameter Nyblom test and AvgLM test are proved to be highly robust. However, each test is significantly affected by leptokurtosis. Contrarily to other tests, where skewness is far more problematic than kurtosis, it has no additional effect for any of the endogenous break tests we analyze. Concerning overall robustness the Nyblom test performs best, while being almost on par to more recently developed tests in terms of power.
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Real Estate Prices and Bank Stability
Michael Koetter, Tigran Poghosyan
Journal of Banking and Finance,
Nr. 34,
2010
Abstract
Real estate prices can deviate from their fundamental value due to rigid supply, heterogeneity in quality, and various market imperfections, which have two contrasting effects on bank stability. Higher prices increase the value of collateral and net wealth of borrowers and thus reduce the likelihood of credit defaults. In contrast, persistent deviations from fundamentals may foster the adverse selection of increasingly risky creditors by banks seeking to expand their loan portfolios, which increases bank distress probabilities. We test these hypotheses using unique data on real estate markets and banks in Germany. House price deviations contribute to bank instability, but nominal house price developments do not. This finding corroborates the importance of deviations from the fundamental value of real estate, rather than just price levels or changes alone, when assessing bank stability.
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Stages of the 2007/2008 Global Financial Crisis: Is there a Wandering Asset-Price Bubble?
Lucjan T. Orlowski
Einzelveröffentlichungen,
Nr. 3,
2008
Abstract
This study argues that the severity of the current global financial crisis is strongly influenced by changeable allocations of the global savings. This process is named a “wandering asset bubble”. Since its original outbreak induced by the demise of the subprime mortgage market and the mortgage-backed securities in the U.S., this crisis has reverberated across other credit areas, structured financial products and global financial institutions. Four distinctive stages of the crisis are identified: the meltdown of the subprime mortgage market, spillovers into broader credit market, the liquidity crisis epitomized by the fallout of Bear Sterns with some contagion effects on other financial institutions, and the commodity price bubble. Monetary policy responses aimed at stabilizing financial markets are proposed.
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Transmission of Nominal Exchange Rate Changes to Export Prices and Trade Flows and Implications for Exchange Rate Policy
Mathias Hoffmann, Oliver Holtemöller
Scandinavian Journal of Economics,
2010
Abstract
We discuss how the welfare ranking of fixed and flexible exchange rate regimes in a New Open Economy Macroeconomics model depends on the interplay between the degree of exchange rate pass-through and the elasticity of substitution between home and foreign goods. We identify combinations of these two parameters for which flexible and fixed exchange rates are superior with respect to welfare as measured by a representative household's utility level. We estimate the two parameters for six non-EMU European countries (Czech Republic, Hungary, Poland, Slovakia, Sweden, and the UK) using a heterogeneous dynamic panel approach.
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A New Metric for Banking Integration in Europe
Reint E. Gropp, A. K. Kashyap
Europe and the Euro,
2010
Abstract
Most observers have concluded that while money markets and government bond markets are rapidly integrating following the introduction of the common currency in the euro area, there is little evidence that a similar integration process is taking place for retail banking. Data on cross-border retail bank flows, cross-border bank mergers and the law of one price reveal no evidence of integration in retail banking. This paper shows that the previous tests of bank integration are weak in that they are not based on an equilibrium concept and are neither necessary nor sufficient statistics for bank integration. The paper proposes a new test of integration based on convergence in banks' profitability. The new test emphasises the role of an active market for corporate control and of competition in banking integration. European listed banks profitability appears to converge to a common level. There is weak evidence that competition eliminates high profits for these banks, and underperforming banks tend to show improved profitability. Unlisted European banks differ markedly. Their profits show no tendency to revert to a common target rate of profitability. Overall, the banking market in Europe appears far from being integrated. In contrast, in the U.S. both listed and unlisted commercial banks profits converge to the same target, and high profit banks see their profits driven down quickly.
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Evaluating the German (New Keynesian) Phillips Curve
Rolf Scheufele
North American Journal of Economics and Finance,
2010
Abstract
This paper evaluates the New Keynesian Phillips curve (NKPC) and its hybrid variant within a limited information framework for Germany. The main interest resides in the average frequency of price re-optimization by firms. We use the labor income share as the driving variable and consider a source of real rigidity by allowing for a fixed firm-specific capital stock. A GMM estimation strategy is employed as well as an identification robust method based on the Anderson–Rubin statistic. We find that the German Phillips curve is purely forward-looking. Moreover, our point estimates are consistent with the view that firms re-optimize prices every 2–3 quarters. These estimates seem plausible from an economic point of view. But the uncertainties around these estimates are very large and also consistent with perfect nominal price rigidity, where firms never re-optimize prices. This analysis also offers some explanation as to why previous results for the German NKPC based on GMM differ considerably. First, standard GMM results are very sensitive to the way in which orthogonality conditions are formulated. Further, model mis-specifications may be left undetected by conventional J tests. This analysis points out the need for identification robust methods to get reliable estimates for the NKPC.
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Stochastic Income Statement Planning and Emissions Trading
Henry Dannenberg, Wilfried Ehrenfeld
Abstract
Since the introduction of the European CO2 emissions trading system (EU ETS), the
development of CO2 allowance prices is a new risk factor for enterprises taking part in this system. In this paper, we analyze how risk emerging from emissions trading can be considered in the stochastic profit and loss planning of corporations. Therefore we explore which planned figures are affected by emissions trading. Moreover, we show a way to model these positions in a planned profit and loss account accounting for uncertainties and dependencies. Consequently, this model provides a basis for risk assessment and investment decisions in the uncertain environment of CO2 emissions trading.
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Money and Inflation: The Role of Persistent Velocity Movements
Makram El-Shagi, Sebastian Giesen
Abstract
While the long run relation between money and inflation is well established, empirical evidence on the adjustment to the long run equilibrium is very heterogeneous. In the present paper we use a multivariate state space framework, that substantially expands the traditional vector error correction approach, to analyze the short run impact of money on prices. We contribute to the literature in three ways: First, we distinguish changes in velocity of money that are due to institutional developments and thus do not induce inflationary pressure, and changes that reflect transitory movements in money demand. This is achieved with a newly developed multivariate unobserved components decomposition. Second, we analyze whether the high volatility of the transmission from monetary pressure to inflation follows some structure, i.e., if the parameter regime can assumed to be constant. Finally, we use our model to illustrate the consequences of the monetary policy of the Fed that has been employed to mitigate the impact of the financial crisis, simulating different exit strategy scenarios.
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Macroeconomic Shocks and Banks' Foreign Assets
Claudia M. Buch, K. Carstensen, A. Schertler
Journal of Money, Credit and Banking,
Nr. 1,
2010
Abstract
Recent developments in international financial markets have highlighted the role of banks in the transmission of shocks across borders. We employ dynamic panel methods for a sample of OECD countries to analyze whether banks' foreign assets react to macroeconomic shocks at home and abroad. We find that banks reduce their foreign assets in response to a relative increase in domestic interest rates, and they increase their foreign assets when the growth rate of world energy prices rises. The responses are characterized by a temporal overshooting and a dynamic adjustment process that extends over several quarters.
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