Monetary policy and risk taking : [draft january 2013]

We assess the effects of monetary policy on bank risk to verify the existence of a risk-taking channel - monetary expansions inducing banks to assume more risk. We first present VAR evidence confirming that this channel exists and tends to concentrate on the bank funding side. Then, to rationalize this evidence we build a macro model where banks subject to runs endogenously choose their funding structure (deposits vs. capital) and risk level. A monetary expansion increases bank leverage and risk. In turn, higher bank risk in steady state increases asset price volatility and reduces equilibrium output

Essays on Momentum Strategies and Investor Sentiment

The thesis comprises three independent research papers with several co-authors. The articles are briefly summarized. 1. Separating Momentum from Reversal in International Stock Markets Taking into account expected return characteristics like firm size and book-to- market in the selection of winners and losers helps to ex ante separate stocks with momentum from those that exhibit reversal in international equity markets. A strategy that buys small value winners and sells large growth losers generates significantly larger momentum profits than a standard momentum strategy, is robust to common return controls, and does not suffer from return reversals for holding periods up to three years. The superior performance of the strategy is attributable to a rather systematic exploitation of cross-sectional mispricing among momentum stocks. 2. Continuing Overreaction: European Evidence This paper tests Byun, Liam and Yun (2016) continuing overreaction measure using weighted signed volumes in European equity markets. As in the U.S., firms with high measures of continuing overreaction outperform firms with low measures. The observed premium is even higher than within a standard momentum approach and does not suffer from return reversal for holding periods up to three years. Furthermore, the observed premium is robust to common controls, such as firm size, book-to-market and momentum, as well as more recent controls for investment and operating profitability. Within different business conditions, the novel measure has a clear superiority towards momentum especially during contracting/pessimistic periods. 3. Overnight Returns: An International Sentiment Measure The suitability of overnight returns as a firm-specific investor sentiment measure, previously found in the US, is similarly present in international equity markets. This delivers a completely novel approach to measure investor sentiment at the firm level. For applicability reasons overnight returns have to fulfill three characteristics that would be expected of a sentiment measure. First, overnight returns persist in the short-run, second, this persistence is stronger among harder-to-value firms, and third, stocks with high overnight returns underperform in the long-run. Implementing this novel sentiment measure on a common anomaly, we find explanatory power even beyond a market-wide sentiment measure

Liquidity, term spreads and monetary policy

We propose a model that delivers endogenous variations in term spreads driven primarily by banks' portfolio decision and their appetite to bear the risk of maturity transformation. We first show that fluctuations of the future profitability of banks' portfolios affect their ability to cover for any liquidity shortage and hence influence the premium they require to carry maturity risk. During a boom, profitability is increasing and thus spreads are low, while during a recession profitability is decreasing and spreads are high, in accordance with the cyclical properties of term spreads in the data. Second, we use the model to look at monetary policy and show that allowing banks to sell long-term assets to the central bank after a liquidity shock leads to a sharp decrease in long-term rates and term spreads. Such interventions have significant impact on long-term investment, decreasing the amplitude of output responses after a liquidity shock. The short-term rate does not need to be decreased as much and inflation turns out to be much higher than if no QE interventions were implemented. Finally, we provide macro and micro-econometric evidence for the U.S. confirming the importance of expected financial business profitability in the determination of term spread fluctuations

Trans-Tasman transmission of monetary shocks : evidence from a VAR approach : a thesis submitted in partial fulfillment of the requirements of the Master of Business Studies (Financial Economics) at Massey University, Albany, 2004

This study investigates the cross-country transmission of monetary shocks, using evidence from Australia and New Zealand. A vector autoregressive model is constructed, using data from 1985:1-2003:4. The empirical results indicate that a contractionary monetary shock in either Australia or New Zealand has real effects in the short-run in both countries, however an Australian shock generates more significant responses of most variables. Australian output is found to be significantly more sensitive than New Zealand output to monetary innovations in either country

Relationship between macroeconomic variables and stock market indices: cointegration evidence from stock exchange of Singapore’s all-S sector indices

The relationship between macroeconomic variables and stock market returns is, by now, well-documented in the literature. However, a void in the literature relates to examining the cointegration between macroeconomic variables and stock market’s sector indices rather than the composite index. Thus in this paper we examine the long-term equilibrium relationships between selected macroeconomic variables and the Singapore stock market index (STI), as well as with various Singapore Exchange Sector indices—the finance index, the property index, and the hotel index. The study concludes that the Singapore’s stock market and the property index form cointegrating relationship with changes in the short and long-term interest rates, industrial production, price levels, exchange rate and money supply. Implications of the study and suggestions for future research are provide

An empirical investigation of the relationship between the real economy and stock returns for the United States

This paper tests for the relationship between excess returns and economic growth rates in the U.S., using a Seemingly Unrelated Regression (SUR) approach. The system includes monthly data for inflation, consumption, narrow money supply and personal disposable income and each equation has up to 24-lagged Autoregressive terms. After removing the four major shocks associated with Black Monday, the Asian Crisis, “9·11” and its anniversary, we cannot find any ARCH behaviour in either the excess returns or the money series. The models are reduced to their parsimonious forms and the inflation and real consumption equations are corrected for ARCH. To make the result more robust we reduce our system to four equations by conditioning on income and testing the remaining equations for stability. The SUR model suggests strong long-run feedback between the financial sector and the real economy firstly through inflation, then consumption while the influence of real money supply appears transitory. Consumption is more sensitive to the economic variables in short and long run as compared with stock market windfalls

The risks of investing in the real estate markets of the asian region

The Asian region has become a focus of attention for investors in recent years. Due to the strong economic performance of the region, the higher expected returns in the area compared with Europe and the USA and the additional diversification benefits investment in the region would offer. Nonetheless many investors have doubts about the prudence of investing in such areas. In particular it may be felt that the expected returns offered in the countries of the Asian region are not sufficient to compensate investors for the increased risks of investing in such markets. These risks can be categorised into under four headings: investment risk, currency risk, political risk, and institutional risk. This paper analyses each of these risks in turn to see if they are sufficiently large to deter real estate investment in the region in general or in a particular country

Macro economy, stock market and oil prices: Do meaningful relationships exist among their cyclical fluctuations?

This paper examines the relationship among consumer price index, industrial production, stock market and oil prices in Greece. Initially we use a unified statistical framework (cointegration and VECM) to study the data in levels. We then employ a multivariate VAR model to examine the relationship between the cyclical components of our series. The period of the study is from 1996:1 – 2008:6. Findings suggest that oil prices and the stock market exercise a positive effect on the Greek CPI, in the long run. Cyclical components analysis suggests that oil prices exercise significant negative influence to the stock market. In addition, oil prices are negatively influencing CPI, at a significant level. However, we find no effect of oil prices on industrial production and CPI. Finally, no relationship can be documented between the industrial production and stock market for the Greek market. The findings of this study are of a particular interest and importance to policy makers, financial managers, financial analysts and investors dealing with the Greek economy and the Greek stock market

An empirical investigation of the relationship between the real economy and stock returns for the United States

This is the post-print version of the final paper published in the Journal of Policy Modeling. The published article is available from the link below. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. Copyright @ 2009 Elsevier B.V.US asset prices are modelled in the short- and long-run with the use of a seemingly unrelated system using monthly data over the time period, 1983–2004. Once the shocks of 1987, 1997 and post-“9·11” have been accounted for, then volatility only affects the consumption and inflation equations. In the long run excess returns and inflation are driven by consumption growth. Money growth impacts excess returns and inflation via consumption. Income is super exogenous implying that policy can be made conditional on this variable and that in the long run investors are primarily concerned with income growth