An estimated stochastic dynamic general equilibrium model of the euro area

This paper develops and estimates a stochastic dynamic general equilibrium (SDGE) model with sticky prices and wages for the euro area. The model incorporates various other features such as habit formation, costs of adjustment in capital accumulation and variable capacity utilisation. It is estimated with Bayesian techniques using seven key macro-economic variables: GDP, consumption, investment, prices, real wages, employment and the nominal interest rate. The introduction of ten orthogonal structural shocks (including productivity, labour supply, investment, preference, cost-push and monetary policy shocks) allows for an empirical investigation of the effects of such shocks and of their contribution to business cycle fluctuations in the euro area. Using the estimated model, the paper also analyses the output (real interest rate) gap, defined as the difference between the actual and model-based potential output (real interest rate). JEL Classification: E4, E5euro area, monetary policy, SDGE models

Are Trump and Bitcoin Good Partners?

During times of extreme market turmoil, it is acknowledged that there is a tendency towards "flight to safety". A strong (weak) safe haven is defined as an asset that has a significant positive (negative) return in periods where another asset is in distress, while hedge has to be negatively correlated (uncorrelated) on average. The Bitcoin's surge alongside the aftermath of Trump's win in the 2016 U.S. presidential elections has strengthened its status as the modern safe haven. This paper uses a truly noise-assisted data analysis method, termed as Ensemble Empirical Mode Decomposition-based approach, to examine whether Bitcoin can act as a hedge and safe haven for U.S. stock price index. The results document that the Bitcoin's safe-haven property is time-varying and that it has primarily been a weak safe haven in the short term and the long-term. We also demonstrate that precious metals lost their safe haven properties over time as the correlation between gold/silver and U.S. stock price declines from short-to long-run horizons

An estimated dynamic stochastic general equilibrium model of the euro area

This paper develops and estimates a dynamic stochastic general equilibrium (DSGE) model with sticky prices and wages for the euro area. The model incorporates various other features such as habit formation, costs of adjustment in capital accumulation and variable capacity utilisation. It is estimated with Bayesian techniques using seven key macro-economic variables: GDP, consumption, investment, prices, real wages, employment and the nominal interest rate. The introduction of ten orthogonal structural shocks (including productivity, labour supply, investment, preference, cost-push and monetary policy shocks) allows for an empirical investigation of the effects of such shocks and of their contribution to business cycle fluctuations in the euro area. Using the estimated model, the paper also analyses the output (real interest rate) gap, defined as the difference between the actual and model-based potential output (real interest rate).DSGE models, monetary policy, euro area

Prediction of stocks: a new way to look at it.

While the traditional $R^{2}$ value is useful to evaluate the quality of a fit, it does not work when it comes to evaluating the predictive power of estimated financial models in finite samples. In this paper we introduce a validated $R_{V}^{2}$ value that is Taylor made for prediction. Based on data from the Danish stock market, using this measure we find that the dividend-price ratio has good predictive power for time horizons between one year and five years. We explain how the $R_{S}^{2}$ s for different time horizons could be compared, respectively, how they must not be interpreted. For our data we can conclude that the quality of prediction is almost the same for the five different time horizons. This is in contradiction to earlier studies based on the traditional $R^{2}$ value, where it has been argued that the predictive power increases with the time horizon up to a horizon of about five or six years. Furthermore, we find that while inflation and interest rate do not add to the predictive power of the dividend-price ratio then last years excess stock return does