Intraday patterns in FX returns and order flow

Using 10 years of high-frequency foreign exchange data, we present evidence of time-of-day effects in foreign exchange returns through a significant tendency for currencies to depreciate during local trading hours. We confirm this pattern across a range of currencies and find that, in the case of EUR/USD, it can form a simple, profitable trading strategy. We also find that this pattern is present in order flow and suggest that both patterns relate to the tendency of market participants to be net purchasers of foreign exchange in their own trading hours. Data from alternative sources appear to corroborate that interpretation.foreign exchange, microstructure, order flow, liquidity

The 2008 Financial Crisis and Taxation Policy

The 2008 financial crisis is the worst economic crisis since the Great Depression of 1929. It has been characterised by a housing bubble in a context of rapid credit expansion, high risk-taking and exacerbated financial leverage, leading to deleveraging and credit crunch when the bubble burst. This paper discusses the interactions between tax policy and the financial crisis. In particular, it reviews the existing evidence on the links between taxes and many characteristics of the crisis. Finally, it examines some possible future tax options to prevent such crises.financial crisis, tax policy, taxation, fiscal stimulus, financial transaction tax, property tax

Equity Home Bias in the Czech Republic

Investors reveal a tendency to prefer domestic over foreign equities despite the financial losses. From institutional perspective the factors that cause home biasness are the barriers to entry the foreign markets, transaction costs, illiquidity, asymmetric information and information costs, corporate governance and inflation and exchange rate risks. Behavioral finance argues that irrationality of investors cause the home biasness. Investors tend to be under the influence of psychological biases: optimism, overconfidence, social identity, narrow framing and loss aversion. In this paper we introduce a model of optimal portfolio of Czech investors with three utility functions: Markowitz, exponential and CRRA. The prediction of the model without short selling suggests that Czech investors should have more than 60 % (between 72 - 83 % for feasible levels of risk aversion) in domestic equities. The OECD data claims that they hold around 87 % in domestic equities.Equity home bias, optimal investment portfolio, behavioral finance

The Tobin Tax A Review of the Evidence

The debate about the Tobin Tax, and other financial transaction taxes (FTT), gives rise to strong views both for and against. Unfortunately, little of this debate is based on the now considerable body of evidence about the impact of such taxes. This review attempts to synthesise what we know from the available theoretical and empirical literature about the impact of FTTs on volatility in financial markets. We also review the literature on how a Tobin Tax might be implemented, the amount of revenue that it might realistically produce, and the likely incidence of the tax. We conclude that, contrary to what is often assumed, a Tobin Tax is feasible and, if appropriately designed, could make a significant contribution to revenue without causing major distortions. However, it would be unlikely to reduce market volatility and could even increase it.Tobin tax, financial transaction taxes, volatility, revenue, incidence, feasibility

A Banker’s Perspective on the Financial Crisis

During the last several years Robert Amzallag as Senior Fellow at CIRANO has taken an active interest in the research and transfer activities undertaken by the Finance Group. He has suggested initiatives that would be relevant to the financial industry in Montreal, particularly in derivative products and concerning practical issues in governance at the director’s level. As the former President and CEO at BNP Paribas (Canada), Mr. Amzallag is certainly well placed to offer insightful commentary on the financial crisis that has preoccupied us over the last several months. Mr. Amzallag’s presentation combines a retrospective analysis of root causes of the crisis followed by some thoughts on what’s to come. As to causes, he isolates three trends that have been gathering force over several decades. These include the erosion of certain stabilizing factors, particularly in the credit market, that has lead to extreme concentrations of risk. Looking to the future, Mr. Amzallag cautiously explores the consequences of several scenarios or responses to the crisis. The first two represent the pursuit of policies reflecting established political sensibilities involving different degrees of government intervention. The third represents a more thoughtful re-appraisal of the different functions that the key players—governments, central banks, regulators and financial institutions —should pursue and should be left to pursue. We have also invited CIRANO Fellow Michel Magnan, Professor of Accounting at Concordia’s John Molson School of Business to present an overview of the controversy surrounding marking to market, an issue highlighted by Mr. Amzallag as an important aspect of the crisis. Professor Michel Magnan takes up the technical but crucial issue of whether fair-value accounting [FVA] was an inadvertent messenger of the financial crisis or was an actual contributor to the crisis. The point is far from academic. By way of appendices to these presentations, the Finance Group has prepared a graphic tool that permits the time-series presentation of key financial indicators against the historical background of the crisis. As well, we have prepared a primer on structured products, including synthetic CDOs, that have played a lead role in the current crisis. This presentation leads naturally to the software module developed at CIRANO that explores the risk management dimensions of these products.

Impact Of Proposed Commodity Transaction Tax On Futures Trading In India

Trading in commodity derivatives on exchange platforms is an instrument to achieve price discovery, better price risk management, besides helping macro-economy with better resource allocation. Since the inception (2003) of national online trading on multi-commodity exchange platforms, the trade volumes have grown exponentially. In the union budget 2008-09, the government has proposed to impose a commodity transaction tax (CTT) of 0.017%. Though the stated rationale for imposing higher taxes is to contain price rise and volatility, to generate revenue, and to increase transparency, these arguments are debatable and not much rooted in the available literature. In this context, we examine the relationship between trading activity, volatility and transaction cost using a three-equation structural model for five top selected commodities namely Gold, Copper, Petroleum Crude, Soya Oil and Chana (Chickpea). Results suggest that there exists a negative relationship between transaction cost and liquidity, and a positive relationship between transaction cost and volatility. Therefore, if the government imposes CTT, it would lead to higher volatility and lower trading activity affecting market efficiency and liquidity.However, agricultural commodities such as refined Soya oil and Chana are least affected in terms of volume and volatility in response to the imposition of transaction tax. Increased volatility may lead to more speculative activity and fail to achieve the price discovery and resource allocation objectives of the commodity markets. Further, the granger causality results reveal the efficiency of futures markets but do not provide any conclusive evidence about the nexus between price rise and futures trading.Commodity Transaction Tax, Futures Market, Liquidity, Volatility

Foreign-currency bonds: currency choice and the role of uncovered and covered interest parity

Using count-data techniques, this paper studies the determinants of currency choice in the issuance of foreign-currency-denominated bonds. In particular, we investigate whether bond issuers choose their issuance currency in order to exploit the borrowing-cost savings associated with deviations from uncovered and covered interest parity. Our sample includes issuers from both the public sector and private sector. Our findings show that the choice of issuance currency is sensitive to deviations from uncovered interest parity but insensitive, in general, to deviations from covered interest parity. Furthermore, the influence of deviations from uncovered interest parity is stronger for financial issuers than for nonfinancial issuers. JEL Classification: F31, F36, G14, G15, G32bonds, currency choice, foreign exchange, interest-rate parity, international debt securities

Liberalisation of European energy markets: challenges and policy options

The European electricity and gas markets have been going through a process of liberalisation since the early 1990s. This process has changed the sector from a regulated structure of, predominantly, publicly owned monopolists controlling the entire supply chain, into a market where private and public generators and retailers compete on a regulated and unbundled system of transport infrastructure. This report assesses the evidence of the effects of liberalisation on efficiency, security of energy supply and environmental sustainability.

Exchange rate modelling and forecasting

The objective of this thesis is to assess the current state of exchange rate modelling and forecasting. The thesis has four distinct essays, each one analysing a current interest topic in this wide and vibrant area of economic research. But a common thread runs through all four: to determine whether it is possible to use the results of this research to develop trading strategies that can add persistent value to international investment portfolios with significant exposure to the foreign exchange market. This market has a daily turnover of $1.9 trillion (BIS, 2004) and is the most liquid financial exchange in the world, by some distance. Nonetheless, we argue that the market is also inefficient, in the sense that profitable trading opportunities persist and that prices do not reflect all available public information on a continuous basis. If we are correct-and we present simulation results that suggest we are-then the opportunity to derive and test plausible trading rules for the management of international investment portfolios though rigorous academic research is enormous. Yet all too often academic exchange rate research appears to be conducted in a cocoon, with the result that conclusions are sometimes difficult to apply in a practical context by portfolio managers. These difficulties reflect the computational requirements of implementing highly intensive trading strategies, associated trading costs and size limitations, and the practical limitations on implementation raised by publication lags and general data limitations. We aim to address these difficulties throughout this thesis. By assessing the merits of various theoretical models that collectively encompass all of the main themes on the current research agenda, we will be in a position to appreciate both the statistical and economic value of existing academic research, isolating areas of real merit for the investment community, and suggesting areas for further attention