The buffer stock model redux? An analysis of the dynamics of foreign reserve accumulation

Emerging market economies have recently accumulated large stocks of foreign reserves. In this paper we address the question of what are the main factors accounting for reserve holdings in nine developing countries located in Asia and Latin America. Monthly data from January 1985 to May 2006 are used to estimate for each country the long run equilibrium reserve demand, based on the buffer stock model, the short run dynamics governing the process of reserve accumulation (decumulation) and the factors which may influence the speed of adjustment of actual to desired reserves. Cointegration analysis suggests that the buffer stock precautionary model accounts for the optimal reserve demand. The corresponding VECMs are further interpolated, using the permanent and transitory innovations decomposition procedure of Gonzalo and Ng (2001), in order to assess the relative impact of the time series on the convergence to equilibrium after a shock. Finally the (asymmetric) effect on the speed of convergence of positive/negative changes in signal variables - such as the excess reserves of the previous period, relative competitiveness and US monetary stance - is found to be significant, in line with mercantilistic and fear of floating motives for hoarding international reserves.Emerging markets reserves, cointegration, P-T components decomposition, asymmetric adjustment

Oil price Dynamics and Speculation. A Multivariate Financial Approach

This paper assesses empirically whether speculation affects oil price dynamics. The growing presence of financial operators in the oil markets has led to the diffusion of trading techniques based on extrapolative expectations. Strategies of this kind foster feedback trading that may cause large departures of prices from their fundamental values. We investigate this hypothesis using a modified CAPM that follows Shiller (1984) and Sentana and Wadhwani (1992). At first, a univariate GARCH(1,1)-M is estimated assuming that the risk premium is a function of the conditional oil price volatility. The single factor model, however, is outperformed by the multifactor ICAPM (Merton, 1973) which takes into account a larger investment opportunity set. The analysis is then carried out using a trivariate CCC GARCH-M model with complex nonlinear conditional mean equations where oil price dynamics are associated with both stock market and exchange rate behavior. We find strong evidence that oil price shifts are negatively related to stock price and exchange rate changes and that a complex web of time varying first and second order conditional moment interactions affect both the CAPM and feedback trading components of the model. Despite the difficulties, we identify a significant role of speculation in the oil market which is consistent with the observed large daily upward and downward shifts in prices. A clear evidence that it is not a fundamentals-driven market. Thus, from a policy point of view - given the impact of volatile oil prices on global inflation and growth - actions that monitor more effectively speculative activities on commodity markets are to be welcomed.oil price dynamics; feedback trading; speculation; multivariate GARCH-M

Nonlinear Regime Shifts in Oil Price Hedging Dynamics

The interaction between rational hedgers and informed oil traders is parameterized and tested empirically with the help of a complex non linear smooth transition regime shift CCC-GARCH procedure. In spite of their gyrations, futures price changes are usually self-correcting. Well informed producers and consumers will ensure that crude oil prices – and thus the prices of the corresponding futures contracts – fluctuate within a long run equilibrium range determined by market fundamentals. During the 2008 oil price upswing, however, shifts in positions in the futures markets by well informed optimizing agents, that usually dampen price changes, result in destabilizing positive feedback trading. Futures price changes that can be classified as speculative are due to hedgers’ reaction to movements in the variability of the return of their covered cash position.oil price dynamics; dynamic hedging; logistic smooth transition; multivariate GARCH.

Yes, implied volatilities are not informationally efficient: an empirical estimate using options on interest rate futures contracts

The accuracy of volatility forecast estimators has been assessed using daily overlapping and non overlapping observations on two major short-term interest rate futures contracts traded in London. The use of a panelized data set has eliminated some of the drawbacks usually associated with non overlapping data estimation, such as the lack of accuracy due to an insufficient number of observations or the arbitrariness of the choice of tenor. In the same way non stationarity and long memory characteristics of daily overlapping time series are disposed of. Information content estimation in levels associated with the Hansen (1982) variance covariance matrix estimator provides reasonably accurate estimates, broadly similar to the corresponding benchmark panel data ones.Options; stochastic volatility; panel data analysis

Yes, implied volatilities are not informationally efficient: an empirical estimate using options on interest rate futures contracts

The accuracy of volatility forecast estimators has been assessed using daily overlapping and non overlapping observations on two major short-term interest rate futures contracts traded in London. The use of a panelized data set has eliminated some of the drawbacks usually associated with non overlapping data estimation, such as the lack of accuracy due to an insufficient number of observations or the arbitrariness of the choice of tenor. In the same way non stationarity and long memory characteristics of daily overlapping time series are disposed of. Information content estimation in levels associated with the Hansen (1982) variance covariance matrix estimator provides reasonably accurate estimates, broadly similar to the corresponding benchmark panel data ones

The information content of implied volatilities of options on eurodeposit futures traded on the LIFFE: is there long memory?

Under rather general conditions Black - Scholes implied volatilities from at-the-money options appropriately quantify, in each period, the market expectations of the average volatility of the return of the underlying asset until contract expiration. The efficiency of these expectation estimates is investigated here, for options on two major short term interest rate futures contracts traded at the LIFFE, using a long memory framework. Over the 1993 – 1997 time interval the performance of implied volatilities is not homogeneous across contracts. Information content and predictive power tests consistently suggest that implied volatility from Short Sterling contracts is more accurate as a future volatility predictor than implied volatility from 3 Month Euromark contracts. The analysis of the efficiency of the transmission of news over time and between contracts provides analogous results. Underreaction of long term volatility to changes in short term volatility is more relevant for the German interest rate contract than for the British one and Short Sterling implied volatility changes do “Granger cause” 3 Month Euromark implied volatility changes pointing to a contagion – like interlinkage. Even in a sophisticated international financial market like the LIFFE implied volatilities have a country specific pattern as traders seem to be more proficient in predicting domestic interest rate volatility. A possible interpretation is that a (foreign) country risk premium introduces a bias in the Black – Scholes implied volatility estimates. Whether this result is general or is instead restricted to the time period and/or to the contracts under investigation provides the scope for future research

The information content of implied volatilities of options on eurodeposit futures traded on the LIFFE: is there long memory?

Under rather general conditions Black - Scholes implied volatilities from at-the-money options appropriately quantify, in each period, the market expectations of the average volatility of the return of the underlying asset until contract expiration. The efficiency of these expectation estimates is investigated here, for options on two major short term interest rate futures contracts traded at the LIFFE, using a long memory framework. Over the 1993 – 1997 time interval the performance of implied volatilities is not homogeneous across contracts. Information content and predictive power tests consistently suggest that implied volatility from Short Sterling contracts is more accurate as a future volatility predictor than implied volatility from 3 Month Euromark contracts. The analysis of the efficiency of the transmission of news over time and between contracts provides analogous results. Underreaction of long term volatility to changes in short term volatility is more relevant for the German interest rate contract than for the British one and Short Sterling implied volatility changes do “Granger cause” 3 Month Euromark implied volatility changes pointing to a contagion – like interlinkage. Even in a sophisticated international financial market like the LIFFE implied volatilities have a country specific pattern as traders seem to be more proficient in predicting domestic interest rate volatility. A possible interpretation is that a (foreign) country risk premium introduces a bias in the Black – Scholes implied volatility estimates. Whether this result is general or is instead restricted to the time period and/or to the contracts under investigation provides the scope for future research