Multiple cyclical fractional structures in financial time series

This paper analyses multiple cyclical structures in financial time series. In particular, we focus on the monthly structure of the Nasdaq, the Dow Jones and the Standard&Poor stock market indices. The three series are modelled as long-memory processes with poles in the spectrum at multiple frequencies, including the long-run or zero frequency

Testing for UIP-Type Relationships: Nonlinearities, Monetary Announcements and Interest Rate Expectations

This paper tests for UIP-type relationships by estimating first a benchmark linear Cointegrated VAR including the nominal exchange rate and the interest rate differential as well as central bank announcements, and then a Smooth Transition Cointegrated VAR (STCVAR) model incorporating nonlinearities and also taking into account the role of interest rate expectations. The analysis is conducted for five inflation targeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three non-targeters (the US, the Euro-Area and Switzerland) using daily data from January 2000 to December 2020. While we cannot confirm the validity of UIP in its strictest theoretical sense, we find evidence for the existence of an equilibrium relationship between the exchange rate and the interest rate differential. Specifically, the nonlinear framework appears to be more appropriate to capture the adjustment towards the long-run equilibrium, since the estimated speed of adjustment is substantially faster and the short-run dynamic linkages more significant. Further, interest rate expectations play an important role: a fast adjustment only occurs when the market expects the interest rate to increase in the near future, namely central banks are perceived as more credible when sticking to their goal of keeping inflation at a low and stable rate. Also, central bank announcements have a more sizeable short-run effect in the nonlinear model. Finally, the equilibrium relationship between the exchange rate and the interest rate differential holds better in inflation targeting countries, where monetary authorities appear to achieve a higher degree of credibility

Exchange Rate Parities and Taylor Rule Deviations

This paper investigates the PPP and UIP conditions by taking into account possible nonlinearities as well as the role of Taylor rule deviations under alternative monetary policy frameworks. The analysis is conducted using monthly data from January 1993 to December 2020 for five inflation-targeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three non-targeting ones (the US, the Euro-Area and Switzerland). Both a benchmark linear VECM and a nonlinear Threshold VECM are estimated; the latter includes Taylor rule deviations as the threshold variable. The results can be summarised as follows. First, the nonlinear specification provides much stronger evidence for the PPP and UIP conditions, the estimated adjustment speed towards equilibrium being twice as fast. Second, Taylor rule deviations play an important role: the adjustment speed is twice as fast when deviations are small and the credibility of the central bank is higher. Third, inflation targeting tends to generate a higher degree of credibility for the monetary authorities thereby reducing deviations of the exchange rate from the PPP- and UIP-implied equilibrium

Functional Shocks to Inflation Expectations and Real Interest Rates and Their Macroeconomic Effects

This paper applies a recently developed method (Inoue and Rossi, 2021) to estimate functional inflation expectations and ex-ante real interest rate shocks, and then examines their macroeconomic effects in the context of a Functional Vector Autoregressive model with exogenous variables (Functional VARX). Monthly data from January 1998 to May 2023 for the US, the UK and the euro area are used for the analysis. The estimated impulse responses show significant effects of the functional shocks on both inflation and output. In addition, threshold functional local projections indicate that the effects are nonlinear and depend on central bank credibility. Further, inflation expectations shocks have similar effects to supply (demand) ones when they are driven by long-term (short-term) changes. In the presence of an inverted (steepening) real interest rate term structure, the effects are inflationary (deflationary) and expansionary (recessionary). Finally, the responses of inflation, output and the policy rate are driven primarily by the slope and curvature factors of the term structure shocks, which contain important information not captured by traditional scalar shocks

Functional oil price expectations shocks and inflation

This paper investigates the inflation effects of oil price expectations shocks constructed as functional shocks, i.e. as shifts in the entire oil futures term structure (both standard and risk-adjusted). The latter are then included in a vector autoregressive model with exogenous variables (VARX) to examine the US case. Counterfactual analysis is also carried out to investigate second-round effects on inflation through the inflation expectations channel. These are found to be significant, in contrast to earlier studies based on standard oil price shocks. Additional nonlinear local projections including a shock decomposition exercise show that inflation and inflation expectations are primarily driven by changes in the curvature (level and slope) factor when the latter are anchored (unanchored). These findings provide useful information to policymakers concerning the impact of oil price expectations on inflation and inflation expectations

Shipping Cost Uncertainty, Endogenous Regime Switching and the Global Drivers of Inflation

The recent Covid-19 pandemic has disrupted global supply chains and led to large increases in shipping costs. This paper first provides shipping cost mean and uncertainty measures by using the endogenous regime switching model with dynamic feedback and interactions developed by Chang et al. (2023). The uncertainty indicator measures overall risk in the shipping market and is shown to represent a useful addition to the existing set of economic and financial uncertainty indices. Both the shipping cost mean and uncertainty measures are then included in structural VAR models for the US, the UK and the euro area to examine the pass-through to headline CPI, core CPI, PPI and import price inflation vis-à-vis other global and domestic shocks. The results suggest that shipping cost uncertainty shocks have sizeable effects on all inflation measures and are characterised by a stronger pass-through than that of other domestic or global shocks. Unlike the latter, they also affect significantly core CPI inflation. These findings imply that shipping cost mean and uncertainty should also be considered by policymakers when assessing the global drivers of inflation

BFKL predictions for inclusive three jet production at the LHC

We define new observables sensitive to BFKL dynamics in the context of multijet production at the large hadron collider (LHC). We propose the study of the inclusive production of three jets well separated in rapidity from each other, with two of them being very forward. We show that the tagging of a third jet in the central region of rapidity allows for a very strong test of the BFKL formalism. In particular, we have studied two projections on azimuthal angles for the differential cross section which allow for the definition of many different observables whose behavior when varying the $p_t$ and rapidity of the central jet is a distinct signal of BFKL dynamics. In order to reduce the theoretical uncertainties and influence of higher order corrections, we propose the study of ratios of correlation functions of products of cosines of azimuthal angle differences among the tagged jets.Comment: 11 pages, 2 figure

Multi-Regge kinematics and azimuthal angle observables for inclusive four-jet production

We evaluate differential cross sections for production of four jets in multi-Regge kinematics at a hadron collider. The main focus lies on azimuthal angle dependences. As in previous studies, the ratios of correlation functions of products of cosines of azimuthal angle differences among the tagged jets offer us the cleanest quantities to compare with experimental data. The calculations are based on the jet production from a single BFKL ladder with a convolution of three BFKL Green functions where we always have two forward/backward jets tagged in the final state. We also demand the tagging of two further jets in more central regions of the detectors with a relative separation in rapidity from each other, plus the inclusive production of an arbitrary number of mini-jets. We show that dependences on the transverse momenta and rapidity of the two central jets can be a distinct signal of the onset of BFKL dynamics.Comment: 13 pages, 4 figure

Inclusive Four-jet Production at 7 and 13 TeV: Azimuthal Profile in Multi-Regge Kinematics

Recently, new observables in LHC inclusive events with three tagged jets were proposed. Here, we extend that proposal to events with four tagged jets. The events are characterised by one jet in the forward direction, one in the backward direction with a large rapidity distance $Y$ from the first one and two more jets tagged in more central regions of the detector. In our setup, non-tagged associated mini-jet multiplicity is present and needs to be accounted for by the inclusion of BFKL gluon Green functions. The projection of the cross section on azimuthal-angle components opens up the opportunity for defining new ratios of correlation functions of the azimuthal angle differences among the tagged jets that can be used as probes of the BFKL dynamics.Comment: 19 pages, 8 figures; v2: published versio