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Finance and Financial Management Commons™
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Articles 31 - 60 of 61
Full-Text Articles in Finance and Financial Management
The Purchasing Power Parity Debate, Alan M. Taylor, Mark P. Taylor
The Purchasing Power Parity Debate, Alan M. Taylor, Mark P. Taylor
CRIF Seminar series
No abstract provided.
Deflationary Dynamics In Hong Kong: Evidence From Linear Andneural Network Regime Switching Models, Paul D. Mcnelis, Carrie K.C. Chan
Deflationary Dynamics In Hong Kong: Evidence From Linear Andneural Network Regime Switching Models, Paul D. Mcnelis, Carrie K.C. Chan
CRIF Seminar series
This paper examines deflationary dynamics in Hong Kong with a linear and a nonlinear neural-network regime-switching (NNRS) model. The NNRS model is superior to the linear model in terms of in-sample specification tests as well as out-of-sample forecasting accuracy. As befitting a small and highly open economy, the most important variables affecting inflation and deflation turn out to be the growth rates of import prices and wealth (captured by the rates of growth of residential property prices). The NNRS model indicates that the likelihood of moving out of deflation has been steadily increasing.
The Role Of U.S. Trading In Pricing Internationally Cross-Listed Stocks, Joachim Grammig, Michael Melvin, Christian Schlag
The Role Of U.S. Trading In Pricing Internationally Cross-Listed Stocks, Joachim Grammig, Michael Melvin, Christian Schlag
CRIF Seminar series
No abstract provided.
Optimal Transaction Filters Under Transitory Trading Opportunities: Theory And Empirical Illustration, Ronald J. Balvers, Yangru Wu
Optimal Transaction Filters Under Transitory Trading Opportunities: Theory And Empirical Illustration, Ronald J. Balvers, Yangru Wu
CRIF Seminar series
If transitory profitable trading opportunities exist, filter rules are used in practice to mitigate transaction costs. The filter size is difficult to determine a priori. Our paper uses a dynamic programming framework to design a filter that is optimal in the sense of maximizing expected returns after transaction costs. The optimal filter size depends crucially on the degree of persistence of the profitable trading opportunities, on transaction cost, and on the standard deviation of shocks. We apply our theoretical results to foreign exchange trading by parameterizing the moving average strategy often employed in foreign exchange markets. The parameterization implies the …
Stock Market Liberalization And The Information Environment, Kee-Hong Bae, Warren Bailey, Connie X. Mao
Stock Market Liberalization And The Information Environment, Kee-Hong Bae, Warren Bailey, Connie X. Mao
CRIF Seminar series
We study the associations between openness to foreign equity investors and the information environment facing emerging market firms. Changes in openness are reflected in legal, regulatory, and cross-listing events, the fraction of stock available to foreign investors, and the size of U.S. portfolio capital flows. The information environment is reflected in firm-specific return volatility and in indicators of information production, uncertainty, and disagreement related to earnings announcements. We find that information measures typically increase with openness to foreign equity investment, particularly in the form of security cross-listings and aggregate portfolio flows.
The Economics Of International Monies, Gerald P. Dwyer Jr., James R. Lothian
The Economics Of International Monies, Gerald P. Dwyer Jr., James R. Lothian
CRIF Working Paper series
The purpose of this paper is to examine the history of international monies and the theory related to their adoption and use. We summarize the history of international monies, beginning with a discussion of the gold solidus introduced in the fourth century by the Emperor Constantine, continuing with the currencies of the Italian city states and ending with the currencies that have functioned as international monies from the early modern period to the present. We identify four key characteristics of these currencies: high unitary value; relatively low inflation rates for long periods; issuance by major economic and trading powers; and …
Equilibrium Impact Of Value-At-Risk Regulation, Markus Leippold, Fabio Trojani, Paolo Vanini
Equilibrium Impact Of Value-At-Risk Regulation, Markus Leippold, Fabio Trojani, Paolo Vanini
CRIF Seminar series
We study the partial and general equilibrium implications of value-at-risk (VaR) regulation in continuous-time economies with intermediate expenditure, stochastic opportunity set, and heterogeneous attitudes to risk. Our findings show that because of an anticipatory effect of VaR constraints on the optimal hedging demand, the partial equilibrium incentives of VaR regulation can lead banks to increase their risk exposure in high-volatility states. In general equilibrium, VaR constraints can produce unambiguously lower interest rates and higher equity Sharpe ratios. The VaR impact on equity volatility and equity expected returns is ambiguous.
Corporate Stability And Economic Growth, Kathy S. He, Randall Morck, Bernard Yeung
Corporate Stability And Economic Growth, Kathy S. He, Randall Morck, Bernard Yeung
CRIF Seminar series
Greater instability in a country's list of top corporations is associated with faster economic growth. This faster growth is primarily due to faster growth in total factor productivity in industrialized countries, and faster capital accumulation in developing countries. These findings are consistent with the view that economic growth is more closely tied to the rise of new large firms than to the prosperity of established large firms. Although a stable list of leading corporations is highly correlated with government size, it is unrelated to other possible policy goals, such as (successful) income equalization and avoiding economic crises, it is related …
The Behavior Of Money And Other Economic Variables: Two Natural Experiments, James R. Lothian, Cornelia H, Mccarthy
The Behavior Of Money And Other Economic Variables: Two Natural Experiments, James R. Lothian, Cornelia H, Mccarthy
CRIF Working Paper series
Every once in a great while, history provides us with a natural experiment, an episode in which a major change in a key economic variable occurs that has no direct relation to the contemporaneous behavior of the variables that theory suggests it ought to effect.1 A classic example was the currency reform during the U.S. Civil War by the Confederacy in spring 1864. A second was provided by the massive inflow of specie from the New World to Spain in the sixteenth century. In the first of these examples, a rapidly growing money stock suddenly fell and a decline in …
Real Exchange Rates Over The Past Two Centuries: How Important Is The Harrod-Balassa-Samuelson Effect?, James R. Lothian, Mark P. Taylor
Real Exchange Rates Over The Past Two Centuries: How Important Is The Harrod-Balassa-Samuelson Effect?, James R. Lothian, Mark P. Taylor
CRIF Seminar series
Using long-span data on the dollar-sterling and dollar-franc real exchange rates over the past two centuries, we apply the findings of various strands of the recent literature in order to examine the statistical and economic significance of the Harrod-Balassa-Samuelson effect (the effect of productivity differentials on real exchange rates) in a nonlinear context while allowing for shifts in volatility across nominal exchange rate regimes, and the implications for the speed of adjustment. The results indicate significant nonlinearity and volatility shifts corresponding broadly to the classical Gold Standard and Bretton Woods periods, as well as a statistically significant Harrod-Balassa-Samuelson effect, although …
Does Opening A Stock Exchange Increase Economic Growth?, Scott L. Baier, Gerald P. Dwyer, Jr., Robert Tamura
Does Opening A Stock Exchange Increase Economic Growth?, Scott L. Baier, Gerald P. Dwyer, Jr., Robert Tamura
CRIF Seminar series
We examine the connection between the creation of stock exchanges and economic growth with a new set of data on economic growth that spans a longer time period than generally available. We find that economic growth increases relative to the rest of the world after a stock exchange opens. Our evidence indicates that increased growth of productivity is the primary way that a stock exchange increases the growth rate of output, rather than an increase in the growth rate of physical capital. We also find that financial deepening is rapid before the creation of a stock exchange and slower subsequently.
Has International Financial Integration Increased?, Lawrence G. Goldberg, James R. Lothian, John Okunev
Has International Financial Integration Increased?, Lawrence G. Goldberg, James R. Lothian, John Okunev
CRIF Working Paper series
This paper compares the behavior of real interest rate differentials across the major countries under the Bretton Woods regime and the regime of floating exchanges that replaced it. The primary object is to investigate both the extent of market integration and its changes over time. For all fifteen possible country pairs real interest differentials are mean reverting, and in two-thirds of these cases indistinguishable from zero statistically. For all country pairs on average and for most such pairs individually, moreover, the estimated differentials are not appreciably different in absolute value than the differentials that we estimate for various money-market rates …
Static Hedging Of Standard Options, Peter Carr, Liuren Wu
Static Hedging Of Standard Options, Peter Carr, Liuren Wu
CRIF Working Paper series
We consider the hedging of derivative securities when the price movement of the underlying asset can exhibit random jumps. Under a one factor Markovian setting, we derive a spanning relation between a long term option and a continuum of short term options. We then apply this spanning relation to the static hedging of long term options with a finite choice of short term, more liquid options based on a quadrature rule. We use Monte Carlo simulation to determine the hedging error introduced by the quadrature approximation and compare this hedging error to the hedging error from a delta hedging strategy …
Term Structure Of Interest Rates, Yield Curve Residuals, And The Consistent Pricing Of Interest Rates And Interest Rate Derivatives, Massoud Heidari, Liuren Wu
Term Structure Of Interest Rates, Yield Curve Residuals, And The Consistent Pricing Of Interest Rates And Interest Rate Derivatives, Massoud Heidari, Liuren Wu
CRIF Working Paper series
Dynamic term structure models (DTSMs) price interest rate derivatives based on the modelimplied fair values of the yield curve, ignoring any pricing residuals on the yield curve that are either from model approximations or market imperfections. In contrast, option pricing in practice often takes the market observed yield curve as given and focuses exclusively on the specification of the volatility structure of forward rates. Thus, if any errors exist on the observed yield curve, they will be carried over permanently. This paper proposes a new framework that consistently prices both interest rates and interest rate derivatives. In particular, under such …
Time-Changed L´Evy Processes And Option Pricing, Pete Carr, Liuren Wu
Time-Changed L´Evy Processes And Option Pricing, Pete Carr, Liuren Wu
CRIF Working Paper series
As is well known, the classic Black-Scholes option pricing model assumes that returns follow Brownian motion. It is widely recognized that return processes differ from this benchmark in at least three important ways. First, asset prices jump, leading to non-normal return innovations. Second, return volatilities vary stochastically over time. Third, returns and their volatilities are correlated, often negatively for equities. We propose that time-changed L´evy processes be used to simultaneously address these three facets of the underlying asset return process. We show that our framework encompasses almost all of the models proposed in the option pricing literature. Despite the generality …
What Type Of Process Underlies Options? A Simple Robust Test, Peter Carr, Liuren Wu
What Type Of Process Underlies Options? A Simple Robust Test, Peter Carr, Liuren Wu
CRIF Working Paper series
We develop a simple robust test for the presence of continuous and discontinuous (jump) components in the price of an asset underlying an option. Our test examines the prices of at-the-money and out-of-the-money options as the option maturity approaches zero. We show that these prices converge to zero at speeds which depend upon whether the sample path of the underlying asset price process is purely continuous, purely discontinuous, or a mixture of both. By applying the test to S&P 500 index options data, we conclude that the sample path behavior of this index contains both a continuous component and a …
The Internationalization Of Money And Finance And The Globalization Of Financial Markets, James R. Lothian
The Internationalization Of Money And Finance And The Globalization Of Financial Markets, James R. Lothian
CRIF Working Paper series
In this paper I combine long multi-country time series data for interest rates and stock returns with the institutional evidence for much earlier centuries amassed by economic historians to study the question of financial globalization and how it has altered since the late classical era. At their longest, for Dutch and English short-term interest rates, the quantitative data that I use extend back slightly more than three centuries. The institutional history provides information on an additional millennium’s worth of experience. The conclusion that I reach is that the internationalization of money and finance and the globalization of financial markets are …
International Money And Common Currencies In Historical Perspective, Gerald P. Dwyer Jr., James R. Lothian
International Money And Common Currencies In Historical Perspective, Gerald P. Dwyer Jr., James R. Lothian
CRIF Working Paper series
We review the history of international monies and the theory related to their adoption and use. There are four key characteristics of these currencies: high unitary value; relatively low inflation rates for long periods; issuance by major economic and trading powers; and spontaneous, as opposed to planned, adoption internationally. The economic theory of the demand for money provides support for the importance of these characteristics. The value of a unit is arbitrary for a fiat money, but the other characteristics are likely to be important for determining any fiat money that will be the international money in the future. If …
The Finite Moment Log Stable Process And Option Pricing, Peter Carr, Liuren Wu
The Finite Moment Log Stable Process And Option Pricing, Peter Carr, Liuren Wu
CRIF Working Paper series
We document a surprising pattern in market prices of S&P 500 index options. When implied volatilities are graphed against a standard measure of moneyness, the implied volatility smirk does not flatten out as maturity increases up to the observable horizon of two years. This behavior contrasts sharply with the implications of many pricing models and with the asymptotic behavior implied by the central limit theorem (CLT). We develop a parsimonious model which deliberately violates the CLT assumptions and thus captures the observed behavior of the volatility smirk over the maturity horizon. Calibration exercises demonstrate its superior performance against several widely …
Time-Varying Arrival Rates Of Informed And Uninformed Trades, David Easley, Robert F. Engle, Maureen O’Hara, Liuren Wu
Time-Varying Arrival Rates Of Informed And Uninformed Trades, David Easley, Robert F. Engle, Maureen O’Hara, Liuren Wu
CRIF Working Paper series
In this paper we extend the model of Easley and O’Hara (1992) to allow the arrival rates of informed and uninformed trades to be time-varying and forecastable. We specify a generalized autoregressive bivariate process for the arrival rates of informed and uninformed trades and estimate the model on 16 actively traded stocks on the New York Stock Exchange over 15 years of transaction data. Our results show that uninformed trades are highly persistent. Uninformed order arrivals clump together, with high uninformed volume days likely to follow high uninformed volume days, and conversely. This behavior is consistent with the passive characterization …
A Dynamic Equilibrium Model Of Real Exchange Rates With General Transaction Costs, Gautam Goswami, Milind Shrikhande, Liuren Wu
A Dynamic Equilibrium Model Of Real Exchange Rates With General Transaction Costs, Gautam Goswami, Milind Shrikhande, Liuren Wu
CRIF Working Paper series
We study the behavior of real exchange rates in a two-country dynamic equilibrium model. In this model, consumers can only consume domestic goods but can invest costlessly in capital stocks of both countries. Nevertheless, transporting goods between the two countries is costly and, hence, the rebalancing of the capital stock can only happen finitely often. We propose a realistic cost structure for goods transportation, wherein the total cost increases with the amount of shipment but the unit cost decreases with it due to economies of scale. Given such a cost structure, the optimal decisions on when and how much to …
Asset Pricing Under The Quadratic Class, Markus Leippold, Liuren Wu
Asset Pricing Under The Quadratic Class, Markus Leippold, Liuren Wu
CRIF Working Paper series
We identify and characterize a class of term structure models where bond yields are quadratic functions of the state vector. We label this class the quadratic class and aim to lay a solid theoretical foundation for its future empirical application. We consider asset pricing in general and derivative pricing in particular under the quadratic class. We provide two general transform methods in pricing a wide variety of fixed income derivatives in closed or semi-closed form. We further illustrate how the quadratic model and the transform methods can be applied to more general settings.
Are Interest Rate Derivatives Spanned By The Term Structure Of Interest Rates?, Massoud Heidari, Liuren Wu
Are Interest Rate Derivatives Spanned By The Term Structure Of Interest Rates?, Massoud Heidari, Liuren Wu
CRIF Working Paper series
We investigate whether the same finite dimensional dynamic system spans both interest rates (the yield curve) and interest rate options (the implied volatility surface). We find that the options market exhibits factors independent of the underlying yield curve. While three common factors are adequate to capture the systematic movement of the yield curve, we need three additional factors to capture the movement of the implied volatility surface.
Design And Estimation Of Quadratic Term Structure Models, Markus Leippold, Liuren Wu
Design And Estimation Of Quadratic Term Structure Models, Markus Leippold, Liuren Wu
CRIF Working Paper series
We consider the design and estimation of quadratic term structure models. We start with a list of stylized facts on interest rates and interest rate derivatives, classified into three layers: (1) general statistical properties, (2) forecasting relations, and (3) conditional dynamics. We then investigate the implications of each layer of property on model design and strive to establish a mapping between evidence and model structures. We calibrate a two-factor model that approximates these three layers of properties well, and illustrate how the model can be applied to pricing interest rate derivatives.
Real Exchange-Rate Behaviour Under Fixed And Floating Exchange Rate Regimes, James R. Lothian, Cornelia H. Mccarthy
Real Exchange-Rate Behaviour Under Fixed And Floating Exchange Rate Regimes, James R. Lothian, Cornelia H. Mccarthy
CRIF Working Paper series
In this paper we examine the stability of the real exchange rate and the macroeconomic effects of alternative exchange-rate regimes, including currency union, on real exchange-rate behaviour. We focus on the Irish punt in order to exploit its diversity of experience over different nominal exchange rate regimes. We make both temporal and cross-country comparisons of real-exchange-rate stability for the Irish punt with sterling, the US dollar and the German mark. We reach two conclusions on the basis of our results. The first is that for Ireland, as for most other countries, purchasing power parity provides a reasonably good description of …
Equity Returns And Inflation: The Puzzlingly Long Lags, James R. Lothian, Cornelia Mccarthy
Equity Returns And Inflation: The Puzzlingly Long Lags, James R. Lothian, Cornelia Mccarthy
CRIF Working Paper series
This paper examines data for stock prices and price levels of 14 developed countries during the post-WWII era and compares their behavior in that sample with behavior over the past two centuries in the UK and the US. Contrary to much of the literature of the past several decades, we find that nominal equity prices do, in fact, keep pace with movements in the overall price level. Our results suggest, however, that this is only the case over long periods. The puzzle therefore is not that equities fail the test as inflation hedges, as had been quite widely believed, but …
Currency Union And Real Exchange Rate Behavior, James R. Lothian, Cornelia Mccarthy
Currency Union And Real Exchange Rate Behavior, James R. Lothian, Cornelia Mccarthy
CRIF Working Paper series
In this paper we study the behavior of the real exchange rate of three North American currencies vis-a-vis the U.S. dollar: the Canadian dollar the Mexican peso, and the Panamanian Balboa. Our principal object is to design an experiment in which meaningful comparisons of behavior across regimes would be possible. In the main we were unable to find any. The allegation of problems created due to aggregating data across regimes therefore receives no support at all in these data. A second criterion for choosing the countries in our sample was differences in level of economic development. The object here was …
Jumps And Dynamic Asset Allocation, Liuren Wu
Jumps And Dynamic Asset Allocation, Liuren Wu
CRIF Working Paper series
This paper provides a general framework for analyzing optimal dynamic asset allocation problems in economies with infrequent events and where the investment opportunities are stochastic and predictable. Analytical solutions are obtained, with which I do a thorough comparative study of the impacts of jumps on the dynamic decision. I also calibrate the model to the U.S. equity market and assess the quantitative impacts of jumps under a dynamic environment. I find that jump risk not only makes the investor's allocation more conservative overall but also makes her dynamic portfolio rebalancing less dramatic over time.
Predictable Changes In Yields And Forward Rates, David Backus, Silverio Foresi, Abon Mozumdar, Liuren Wu
Predictable Changes In Yields And Forward Rates, David Backus, Silverio Foresi, Abon Mozumdar, Liuren Wu
CRIF Working Paper series
We make two contributions to the study of interest rates. The first is to characterize their dynamics in a new way. We estimate forecasting relations based on one-period changes in forward rates, which are more easily compared than earlier work on yields to the stationary theory of bond pricing. The second is to approximate these dynamics and other salient features of interest rates with an affine model. We show that models with "negative" factors come closer to accounting for the properties of interest rates, including their dynamics, than multifactor Cox-Ingersoll-Ross models.
Liquidity And Contagion In Financial Markets, David Backus, Silverio Foresi, Liuren Wu
Liquidity And Contagion In Financial Markets, David Backus, Silverio Foresi, Liuren Wu
CRIF Working Paper series
This paper presents a model on contagion in financial markets. We use a bank run framwork as a mechanism to initiate a crisis and argues that liquidity crunch and imperfect information are the key culprits for a crisis to be contagious. The model proposes that a crisis is more likely to be contagious when (1) banks have similar cost-efficiency structures (clustering) and (2) a large fraction of the investment is in the illiquid sector (illiquidity). The latter is an endogenous decision made by the banks. It increases with (1) the prospect of the risky asset (risk-return trade-off) and (2) the …