Financial Investment and Economic Policy Uncertainty in the UK

UK based financial firms following Brexit reported net disinvestment of 15 billion pounds. This was the fifth time financial disinvestment occurred since the production of this data: 1987. Parallel to this event, Economic Policy Uncertainty (EPU) in the UK experienced its biggest rise during Brexit June 2016. This note studies the relationship between EPU and its particular components and financial investment. I find that overall EPU and specifically fiscal policy, monetary policy, geopolitical, regulation and liquidity uncertainty have the highest negative sensitivity to financial investment

Modelling UK house prices with structural breaks and conditional variance analysis

This paper differs from previous research by examining the existence of structural breaks in the UK regional house prices as well as in the prices of the different property types (flats, terraced, detached and semi-detached houses) in the UK as a whole, motivated by the uncertainty in the UK housing market and various financial events that may lead to structural changes within the housing market. Our paper enhances the conventional unit root tests by allowing for structural breaks, while including structural break tests strengthens our analysis. Our empirical results support the existence of structural breaks in the mean equation in seven out of thirteen regions of the UK as well as in three out of four property types, and in the variance equation in six regions and three property types. In addition, using a multivariate GARCH approach we examine both the behaviour of variances and covariances of the house price returns over time. Our results have significant implications for appropriate economic policy selection and investment management

Effects of Uncertainty on Household Saving Rate

In this master thesis we attempted to investigate the role of economic uncertainty in driving the behavior of household savings for six European countries: Germany, France, Finland, United Kingdom (UK), Portugal and Italy. We focused on three main sources of economic uncertainty: Unemployment Risk, Fiscal Policy Uncertainty and Financial Crisis-Investment risk. We used Unemployment rate as a proxy for labor income uncertainty and the risk of an income loss. We computed the volatility of financial stock prices for each country as an indicator for the presence of a financial crisis. With regard to policy uncertainty, we employed three different measures: a Policy Uncertainty Index constructed by Baker, Bloom, and Davis; Debt to GDP ratio and Government Surplus / Deficit over GDP. We estimated first a Structural Vector Autoregressive (SVAR) model, separately for each country, using quarterly data from 1999 to 2012 and we compared country-specific impulse responses on savings rates. We found that household savings rate reacts in response to fiscal and unemployment shocks differently in each country, whereas we didn’t find any significant response to financial stock price volatility. We then proceeded with the Bayesian estimation of the reduced form VARs for the panel of countries mentioned above as a Hierarchical Linear Model. We focused our analysis on the Average Impulse Responses with the aim of analyzing the aggregate effect on household savings of shocks shared by all countries

Effects of Uncertainty on Household Saving Rate

In this master thesis we attempted to investigate the role of economic uncertainty in driving the behavior of household savings for six European countries: Germany, France, Finland, United Kingdom (UK), Portugal and Italy. We focused on three main sources of economic uncertainty: Unemployment Risk, Fiscal Policy Uncertainty and Financial Crisis-Investment risk. We used Unemployment rate as a proxy for labor income uncertainty and the risk of an income loss. We computed the volatility of financial stock prices for each country as an indicator for the presence of a financial crisis. With regard to policy uncertainty, we employed three different measures: a Policy Uncertainty Index constructed by Baker, Bloom, and Davis; Debt to GDP ratio and Government Surplus / Deficit over GDP. We estimated first a Structural Vector Autoregressive (SVAR) model, separately for each country, using quarterly data from 1999 to 2012 and we compared country-specific impulse responses on savings rates. We found that household savings rate reacts in response to fiscal and unemployment shocks differently in each country, whereas we didn’t find any significant response to financial stock price volatility. We then proceeded with the Bayesian estimation of the reduced form VARs for the panel of countries mentioned above as a Hierarchical Linear Model. We focused our analysis on the Average Impulse Responses with the aim of analyzing the aggregate effect on household savings of shocks shared by all countries

Quarterly Economic Commentary, Winter 2011/Spring 2012

The euro zone financial crisis remains unresolved. The euro zone economy is slipping into recession due to the impact of both the austerity measures and the effect of policy uncertainty in the euro zone on investment, consumer spending and employment. The euro zone banking system needs to be recapitalised, and account must be taken of the effect that the write‐down of Greek debt will have on this. The UK economy has been adversely affected by the euro zone crisis and is unlikely to meet its fiscal targets unless more restrictive measures are introduced, which in turn will worsen its economic performance. By contrast the US economy seems to be performing somewhat better than many had expected. Thus in the two regions that are of great importance in trade terms for Ireland – the euro zone and the UK – the country is facing weak or declining demand, while in the US, demand is growing modestly. The overall picture is weak

Impact of Central Bank Decisions and Communications on Sentiment, Uncertainty, Risk Aversion and Investment Behaviour

Central bank’s policy decisions and communication influence financial markets through managing investor expectations related to the current and future economic scenario and achieve desired macroeconomic goals. This thesis empirically evaluates the role of signals given in the central bank’s actions and communication in driving investor sentiment, formulating the expected risk premium and shifting the investment behaviour in financial markets. This thesis comprises of three empirical chapters focusing on the response of market participants to the central bank quantitative and qualitative announcements. Chapter 2 investigates the impact of the United States (US) and domestic monetary policy announcements on consumer and managers’ confidence in the United Kingdom (UK) and 10 countries within the euro area during conventional and unconventional policy times. More specifically, using the confidence indicators of the European Commission, the study examines the response of consumers and managers to monetary policy surprises around the global financial crisis. The findings confirm that during the conventional policy period, the domestic expansionary shock has a significant positive impact on the consumer and manager confidence in the UK and across the ten countries in the euro area. Furthermore, the US conventional monetary policy has more impact on managers’ sentiment compared to domestic policy. However, after the introduction of unconventional policy programme, the monetary announcements turn to be less effective in boosting the confidence of households and businesses. Chapter 3 analyses the influence of the Federal Reserve’s (Fed’s) communications on investors’ risk perception and appetite in the global equity markets. The results suggest that the Fed’s optimism (pessimism) decreases (increases) the market-wide uncertainty and investors’ risk aversion not only in the US but also in the UK and the euro area. In addition, investors respond to the signals inbound in the communications more significantly during recessionary and uncertain times. Moreover, after estimating unique topics and their relative tone from the Fed’s commutations, this chapter finds that investors pay attention particularly to the discussion related to the financial market, credit conditions, employment, and economic growth in forming their response. Finally, investors react heterogeneously to the discussion about prospering economic outlook and future contractionary policy. Chapter 4 investigates the effect of the Fed’s communications on the returns and traders’ positions in the commodity markets. Using computational linguistic analysis, this study extracts the policymakers’ indication of the future path of the policy rate. This study documents that the degree of hawkishness in the Fed’s communications decreases the one month ahead returns on metal, energy and overall commodity indexes. In addition, the Fed’s hawkish tone increases (decreases) the commodity traders’ speculating (hedging) positions. This implies that the central bank tone contains information about the economic conditions and provides signals about the future path of the policy which drive the traders’ positions and affect the commodity returns. Furthermore, a topic modelling analysis of the central bank communications reveals that a hawkish discussion about consumption, financial market, and inflation plays a particularly important role in influencing the commodity returns and traders’ positions

Inward foreign direct investment and constitutional change in Scotland

Purpose - To undertake an analysis of the implications of potential Scottish independence for inward foreign direct investment (FDI), multinational enterprise strategies, and the local economy.<p></p> Design/methodology/approach - Takes a multidisciplinary approach drawing upon literature and evidence in the international business and management, political economy, and economic geography fields to analyze the role and impact of inward FDI in Scotland following possible Scottish independence.<p></p> Findings - Scotland continues as an attractive location for FDI, with greater diversity than hitherto. While the country’s comparative advantages in immobile natural resources provide some protection from uncertainty, weak embeddedness is a risk factor irrespective of independence. A range of transition costs of independence are identified, which could be high and of indeterminate duration, and some will be sector-specific. There are also new possibilities for tailoring of policies, and potential reindustrialization opportunities in renewable technologies. The foreign investors most vulnerable to political risks and uncertainties are those whose market scope is the rest of the UK (rUK) either as exporters or value chain integrators, in addition to the high political risk industries of energy, banking, and financial services and defence. Scottish subsidiaries’ significance within their parent MNE groups will also be a major factor in determining responses to political risks and uncertainties.<p></p> Originality/value - Specific focus upon the impact of potential independence on the foreign-owned sector as a major contributor to the Scottish economy.<p></p&gt

UK energy strategies under uncertainty: synthesis report

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Essays on macroeconomic uncertainty

Recent data shows that more than £440 billion in cash has been piling up in the accounts of UK companies. At the same time, the investment outlays and corporate payouts have reached a 60-year low. What makes firms hold such enormous cash stocks instead of spending them on investment or returning them to shareholders? To what extent has the rising degree of uncertainty about macroeconomic conditions affected companies’ decisions? In this thesis we try to address these questions and, controlling for cyclical changes and financial factors, quantify the extent to which macroeconomic uncertainty has affected investments, cash holdings and equity payouts of UK companies. In the first substantive chapter we describe how information about macroeconomic uncertainty can be obtained from surveys of professional forecasters by applying a method initially proposed by Lucas (1972). We construct a theoretical model in which professional forecasters combine predictions based on public information with private beliefs which are defined as predictions based solely on private information sets. In the model, the combination of predictions produced on the basis of public and private information sets leads to a combined forecast which is reported by forecasters in their regular statements. We extract private beliefs from reported forecasts and then use them to construct our measure of macroeconomic uncertainty. The use of predictions based on private knowledge instead of reported forecasts makes our measure of macroeconomic uncertainty distinct from other uncertainty proxies and highlights the important role of beliefs as the driving force of uncertainty. Based on the measure constructed here we conclude that macroeconomic uncertainty increases either when the overall volatility of the underlying economic processes increases or when economic conditions are perceived as more changeable. We then take the model to the data using outcomes of surveys of economic forecasters and compute a measure of macroeconomic uncertainty for the UK and the US. The results point to an interesting phenomenon. In both countries the most variation in macroeconomic uncertainty comes from changes in the perceived volatility, and not from changes in the volatility of underlying economic processes. Moreover, a comparison of our measure of macroeconomic uncertainty with other uncertainty proxies reveals that in the US our uncertainty measure is most similar to an uncertainty proxy based on disagreement among forecasters, while in the UK it is most similar to an uncertainty proxy based on average variance reported by professional forecasters. Furthermore, it appears that the period of elevated uncertainty in the UK was more prolonged than it has been believed so far. In the second substantive chapter we examine the effects of uncertainty on corporate investments of a large panel of UK companies between 1998–2012 using the measure described earlier. Our regression equation is based on an extended version of a Tobin’s Q model and is estimated by the system GMM estimator. Apart from including the value of Tobin’s Q, which captures the ratio of the market value of capital to its book value, we also control for cash flow ratios, sales dynamic, individual uncertainty, business cycle and macroeconomic uncertainty. Our hypothesis is that macroeconomic uncertainty, defined as the expected volatility of the purely unforecastable component of the GDP growth rate conditional on information available at time t, negatively affects corporate investment ratios. We find indeed that a surge in macroeconomic uncertainty measured in this way is linked to a significant fall in investment ratios even after controlling for cyclical changes and a range of other factors. We also show that the effect of macroeconomic uncertainty on corporate investment is mainly driven by companies that are averagely financially constrained. These results are consistent with theories suggesting that the asymmetry of information is an important channel in the investment-uncertainty relationship and validate our measure of uncertainty. In the third substantive chapter we analyse the effects of changes in the degree of macroeconomic uncertainty on corporate cash management practices. Our analysis indicates that an increase in the degree of uncertainty about macroeconomic conditions leads to an increase in corporate cash holdings even after controlling for a range of factors. We also find that the effects of macroeconomic uncertainty are particularly strong among the most financially constrained companies. Such companies increase cash holdings significantly more than the less financially constrained companies. To complete the analysis of cash management practices we show that in uncertain times firms pay out lower dividends and reduce share buybacks. These results suggest that when uncertainty is rising firms adjust payout policy to obtain additional cash which they use to hedge unpredictable future cash flows. Our empirical results are consistent with the theoretical findings made by Almeida et al. (2004) and Han and Qiu (2007). Two important policy implications can be drawn from these results. First, if policy makers want to encourage companies to reduce their excessive cash holdings, which are sometimes referred to as “dead money”, they need to address sources of uncertainty which induces companies to accumulate cash in order to hedge unpredictable future cash flows. Second, smaller, less mature companies tend to be particularly affected by uncertain economic conditions. Well-designed policy needs to be developed that would address the problem of credit tightness and asymmetry of information between lenders and borrowers which may lead to suboptimal level of investment and excessive cash stocks in years when macroeconomic uncertainty is particularly high

Regional Dimensions of the Financial and Economic Crisis, Paper to the 30th meeting of the European Policy Research Consortium (EoRPA)

Report explaining the regional dimensions of the financial and economic crisis