Carry Trades: Betting Against Safe Haven

We examine contagion and flight-to-quality phenomena implied by carry strategies. More specifically, we analyze correlation dynamics between returns on a global equity index and returns on an investment strategy with a long position in high-yield and a short position in low-yield markets. Modeling information spillovers in a multivariate GARCH framework reveals that correlation increases considerably in response to a negative stock market shock. Moreover, a test for symmetry in exceedance correlation shows that correlation is indeed significantly larger for joint market downturns as opposed to joint market upturns. Our findings suggest that conditional correlation exposes carry traders to a severe diversification meltdown in times of global stock market crises.Carry trades, contagion, multivariate GARCH, exceedance correlation

Volatility and Long Term Relations in Equity Markets: Empirical Evidence from Germany, Switzerland, and the UK

The aim of this paper is twofold. First it aims to compare several GARCH family models in order to model and forecast the conditional variance of German, Swiss, and UK stock market indexes. The main result is that all GARCH family models show evidence of asymmetric effects. Based on the “out of sample” forecasts I can say that for each market considered there is a model that will lead to better volatility forecasts. Secondly a long run relation between these markets was investigated using the cointegration methodology. Cointegration tests show that DAX30, FTSE100, and SMI indexes move together in the long term. The VECM model indicates a positive long run relation among these indexes, while the error correction terms indicate that the Swiss market is the initial receptor of external shocks. One of the main findings of this analysis is that although the UK, Switzerland and Germany do not share a common currency, the diversification benefits of investing in these countries could be very low given that their stock markets seem to move together in the lung term.Stock Returns; Volatility; GARCH models; Cointegration

Volatility Spillovers between Stock and Currency Markets: Evidence from Emerging Eastern Europe

The purpose of this study is threefold. First, we look at the linkages between Eastern European emerging equity markets and Russia. Second, we investigate the relationships between the currency markets of Poland, Hungary, Russia, and the Czech Republic. Finally, we examine the interdependence between Emerging Eastern European and Russian equity and currency markets. We estimate a bivariate GARCH-BEKK model proposed by Engle and Kroner (1995) using weekly returns. We find evidence of direct linkages between the equity markets in terms of both returns and volatility, as well as in the currency markets. When analyzing the relationships between currency and stock markets we find unidirectional volatility spillovers from currency to stock markets. The results show clear evidence of integration of Eastern European markets within the region and with Russia as well.GARCH-BEKK, volatility spillovers, stock market, currency market, Emerging Eastern Europe, Russia

Foreign Exchange Market Volatility Information: An Investigation of Real-Dollar Exchange Rate

Price distributions estimation has become a relevant subject for risk and pricing literature. Special concern resides on tail probabilities, which usually presents more severe observations than those predicted by Normal distributions. This work aims to verify whether the volatility implied in dollar-real options contains useful information about unexpected large-magnitude returns. Implied volatility is also checked as a predictor for realized volatility. Our results indicate that implied volatilities indeed provide useful information on unusual returns and also work as a good predictor for observed volatility. Finally, we implement an early-warning system and implied volatilities seem to signalize large-magnitude returns.

The Dynamic Relationship between Stock Prices and Exchange Rates: evidence for Brazil

This paper studies the dynamic relationship between stock prices and exchange rates in the Brazilian economy. We use recently developed unit root and cointegration tests, which allow endogenous breaks, to test for a long run relationship between these variables. We performed linear, and nonlinear causality tests after considering both volatility and linear dependence. We found that there is no long-run relationship, but there is linear Granger causality from stock prices to exchange rates, in line with the portfolio approach: stock prices lead exchange rates with a negative correlation. Furthermore, we found evidence of nonlinear Granger causality from exchange rates to stock prices, in line with the traditional approach: exchange rates lead stock prices. We believe these findings have practical applications for international investors

New Technology Stock Market Indexes Contagion: A VAR-dccMVGARCH Approach

The episodes of stock market crises in Europe and the U.S.A. since the year 2000,and the fragility of the New Technology sector after the explosion of the speculative bubble,have sparked the interest of researchers in understanding and in modeling this marketâs high volatility to prevent against crises.The strong linkage of the American and European New Technology sectors has brought up the co-movement and the contagion hypothesis,especially after the fall in new technology stock prices in Europe following the explosion of the IT speculative bubble in the U.S.A.In this article,we attempt to show that the NASDAQ- 100 is a major origin for the shocks that the IT.CAC and the NEMAX undergo.We construct a VAR model with GARCH errors to show this linkage and we find that the NASDAQ-100 has a strong effect on the French IT.CAC;this approach is an original work on contagion in the case of stock market indexes.Conditional Variance,Regime Changes,New Technologies,Contagion, Volatility,VAR,Causality.

To What Extent Crude Oil, International Stock Markets and Exchange Rates Are Interdependent in Emerging and Developed Countries?

Investors in stock markets under react to oil price changes in the short run. As a consequence changes in oil prices predict future stock market and exchange rates returns. Recent volatility in crude oil prices has affected economies around the world, especially the US, which is the largest consumer of oil. This paper uses monthly crude oil, stock indexes and exchange rates prices data from April 2003 until December 2014 to test and model the international markets’ volatility in both emerging and developed countries. Trivariate BEKK GARCH (1, 1) model and statistical tests show several co-movements and interactions between international stock markets, exchange rates and crude oil. Keywords: volatility spillovers, international markets, Granger causality test, variance decomposition, Trivariate GARCH BEKK (1, 1)

Bond Yield Compression in the Countries Converging to the Euro

We demonstrate that bond yield compression is under way in the countries converging to the euro and that German yields are significant drivers of local currency yields. Based on the evidence from Poland, Hungary and the Czech Republic, we conclude that these new Member States of the European Union are ready to adopt the euro without risking a disruptive shock to their financial stability. This message transpires from investigating the daily volatility dynamics of local bond yields as a function of German yields, conditional on changes in local term spreads, exchange rates and adjustments to central bank reference rates. Similar results of high sensitivity of local currency bond yields to changes in German yields are obtained from testing monthly series of macroeconomic fundamentals. These findings provide evidence of the potential usefulness of term spreads as indicators of monetary convergence.http://deepblue.lib.umich.edu/bitstream/2027.42/40185/3/wp799.pd

A Double-threshold GARCH Model for the French Franc/Deutschmark exchange rate

This paper combines and generalizes a number of recent time series models of daily exchange rate series by using a SETAR model which also allows the variance equation of a GARCH specification for the error terms to be drawn from more than one regime. An application of the model to the French Franc/Deutschmark exchange rate demonstrates that out-of-sample forecasts for the exchange rate volatility are also improved when the restriction that the data it is drawn from a single regime is removed. This result highlights the importance of considering both types of regime shift (i.e. thresholds in variance as well as in mean) when analysing financial time series

Quantile Dependence between the Stock, Bond and Foreign Exchange Markets - Evidence from the UK

In the wake of Brexit, this paper aims to provide a measure for the quantile dependence amongst different financial assets – bond, stock, and currency – within the UK market and their cross–border linkages with the European equity market. We implement a nonparametric estimation method for both the tail and quantile dependence parameters on weekly data over the period 1989-2016 using copula. Our results suggest that the contagion effects between stock and currency markets are limited, even under extreme fluctuations. We also find a weak comovement between currency and bond markets, however, evidence of asymmetry is found in the dependence structure, possibly due to the ‘risk-reward’ scenario of international investors. Finally, our results indicate a weak dependence between stock returns and bond yields, possibly due to the low-yielding gilt and the thirst for income, pushing investors to diversify globally into other financial markets