US Growth And Inflation

This paper tests the relation between inflation and growth in the US. This relation is negative and statistically significant even with a monthly frequency. Moreover, the impact is higher with quarterly data, relative to annual data, and higher with monthly data relative to quarterly data. The relation remains robust (1) with IV (2SLS) estimation, (2) when inflation is divided into positive and negative components, (3) when it is divided into expected and unexpected components, and (4) when the applied model is an expectations-augmented Phillips curve. Although the paper argues that the theory that should explain this negative relation is the demand for real balances, the evidence is also consistent with a simple bivariate association

Random Walks in Daily Foreign Exchange Rates? The Case of Lebanon (2010-2015)

In most of the academic literature on asset prices, like equities or foreign exchange, the words weak-form efficiency and random walk are used interchangeably. This paper makes a distinction between these two concepts. Weak-form efficiency holds when price increments are independent and random. A random walk is more stringent: it requires that the probability distribution of price increments be identical and normal, in addition of being independent. As expected the null hypothesis of a random walk is rejected with force while the null of weak-form efficiency is not. This implies that linear filter rules, chartism, and technical analysis cannot produce abnormal profits. But this implies also that non-linear filter rules, chartism, and technical analysis can be profitable. This explains the reality of finding departments of technical analysis in most Lebanese banks. If the market experience of Lebanon is generalized to other countries this would explain why international banks also have such departments

Impact of Internal and External Factors on the Short Run and the Long Run Profitability of Commercial Banks in Lebanon

The study of the determinants of bank profitability has a long history. A vast literature on these determinants has developed since the early 1980s. It is common in the literature to divide these determinants into internal and external factors. Internal factors are those factors under the control of the bank, while banks do not have control over external factors. This paper adds to the literature the effect of these same factors on the book value of bank equity, and not only on the Net Interest Margin. This is seldom tested elsewhere. Showing how the short run and the long run profitability of commercial banks is affected by these factors is important in order to identify which factors are relevant, the extent to which they are relevant, and to help banks react optimally to changes in these factors. Although theoretically the signs of the impacts of the factors are uncertain the results show that most of the factors selected have a statistically significant impact on the two measures of profitability, the Net Interest Margin, and the Net Worth. Moreover the results show that there is a statistically significant differential impact of some of these factors on large banks relative to small banks. The paper thus unveils quantitatively how banks respond to changes in economic indicators. This can help banks predict, react, and compare their performance to the market, to the industry, and to its own past evolution. Keywords: Profitability, commercial banks, Lebanon, internal and external factors, robust least square

The Equity Premium and Inflation: Evidence from the US

There is recent and strong evidence that nominal stock returns are independent of inflation. In what amounts to the same thing, when real stock returns are regressed on inflation the resulting estimated coefficient on inflation is negative and unitary. These two propositions are mathematically equivalent. The purpose of this paper is to show that the market stock return is also independent of expected inflation, as measured by the T-bill rate. Firstly, regressions of the equity premium on inflation produce invariably slope coefficients that are statistically insignificantly different from -1. The inflation variable on the right hand side of the regression picks up the sign and the magnitude of the T-bill rate in the equity premium on the left hand side of the regression. This is as expected because the T-bill rate is an unbiased predictor of the future inflation rate, or, in other terms, the T-bill rate is a proxy for expected inflation. Hence regressions of real stock returns on inflation are in substance the same as regressions of the equity premium on inflation, and in both cases nominal stock returns are independent of inflation, and of its expected proxy, the T-bill rate. Secondly, additional evidence is provided from regressions of stock market returns on the inflation rate and the T-bill rate taken together. The hypothesis that the sum of the two coefficients on these two variables is statistically insignificantly different from zero is strongly supported. Moreover, the joint null hypothesis that the first coefficient is equal to -1 and that the second coefficient is equal to +1 is also strongly supported. As a conclusion stock prices already reflect macroeconomic shocks and there is neither money illusion nor over and under adjustment on the part of investors

Risk-free Yields, Risk Aversion, and Volatility

  The classic approach to risk analysis is rooted in the belief that risk aversion is constant, determined by constant preferences. It is becoming clear that this proposition is no longer acceptable. Risk aversion can change over short time, between sovereign countries, and on different financial and capital assets. Secondly volatility of asset prices is itself variable, and can be apprehended like the VIX volatility index which is so popular. Risk-free yields are affected by this variability in aversion and volatility, contrary to what is commonly envisioned, and contrary to what intuition suggests.  This paper assumes complete markets, and simulates 14 values for the volatility, and 25 values for the coefficient of relative risk aversion (CRRA), and it measures the impact of these changes on the risk-free yield. One conclusion is that the CRRA is indeterminate, and is therefore consistent with the many different estimates in the literature. Another conclusion is that, by setting the volatility to 17.5%, roughly the average stock market volatility over a long period, there is evidence that the range of the implied risk premiums correspond to the range in the empirical literature.    Keywords: risk aversion, volatility, risk-free yields, consumption strata, simulation. JEL Classifications: D81, G12, G1

Martingales in Daily Foreign Exchange Rates: Evidence from Six Currencies against the Lebanese Pound

The purpose of this paper is to test whether the Lebanese foreign exchange rate market is weak form efficient by studying the stochastic behavior of six foreign currencies against the Lebanese pound on a daily basis. Efficiency requires that the data meet more than one condition. The first condition is the presence of a unit root process. The second one is that increments are random and uncorrelated. The third is the long term persistence of shocks. The fourth is the absence of breaks in the samples. The last one is the insignificance of pair-wise Granger causality tests. These five conditions describe a statistical behavior known as a martingale. All five conditions are found to apply to the six data series. Non-normality, conditional heteroscedasticity, other non-linear dependencies, and contemporaneous cross-correlations of the log returns of the exchange rates are features that are present in the data but that do not invalidate the general designation of a martingale. Finally, the descriptive statistics of the six series under consideration are quite similar to those of other major currencies, even when compared for different time periods, implying that daily foreign exchange rates share quasi the same characteristics globally