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

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

Is M&A different during a crisis? Evidence from the European banking sector

The financial crisis has affected the landscape of the banking sector around the world. We use a sample of transactions taking place in Europe in 2007-2010 to study the acquirer’s stock price market reaction to announcements and completions of acquisitions. We find that there are no significant abnormal returns around the announcement of an acquisition while there are positive abnormal returns at completions. We study the cross-sectional determinants of abnormal returns and find that announcement returns are mainly explained by the acquirer bank characteristics, while completion returns depend on opacity of the target and in large part on the drop in volatility associated with a reduction of uncertainty.Mergers and Acquisitions; Banks; Opacity; Financial crisis

Country Default Risk: An Empirical Assessment

We provide benchmarks to evaluate what is an optimal foreign debt and a maximal foreign debt (debt-max), when risk is explicitly considered. When the actual debt exceeds debt-max, then the economy will default when a "bad shock" occurs. This paper is an application of the stochastic optimal controls models of Fleming and Stein (2001), which gives empirical content to the question of how one should measure "vulnerability" to shocks, when there is uncertainty concerning the productivity of capital. We consider two sets of high- risk countries during the period 1978-99: a subset of 21 countries that defaulted on the debt, and another set of 13 countries that did not default. Default is a situation where the firms or government of a country reschedule the interest/principal payments on the external debt. We thereby explain how our analysis can anticipate default risk, and add another dimension to the literature of early warning signals of default/credit risk.Default risk, foreign debt, stochastic optimal control, debt rescheduling, uncertainty

Exchange Rate Misalignments and Crises

The problem is to evaluate the likelihood that a country will face a currency or balance of payments crisis over a given horizon. When is it rational for market participants to expect a depreciation of the currency? On the basis of considerable empirical studies we know that in both banking and currency crises, there is a multitude of weak and deteriorating economic fundamentals. Our theme is that there is an economic logic to medium and longer-term m ovements in exchange rates, within the context of a consistent dynamic stock-flow model. The equilibrium real exchange rate is a trajectory, not a point. We provide objective measures of the real fundamentals that determine the moving equilibrium real ex c hange rate, and explain the dynamic economic mechanism whereby the actual exchange rate converges to this moving equilibrium exchange rate, called the NATREX. The fundamentals are primarily social consumption/GDP, which is generally driven by fiscal polic y, and the productivity of the economy. Trends in social consumption/GDP, and in fiscal policy, reflected political regime changes in France, Germany and Italy

Country Default Risk: An Empirical Assessment

We provide benchmarks to evaluate what is an optimal foreign debt and a maximal foreign debt (debt-max), when risk is explicitly considered. When the actual debt exceeds debt-max, then the economy will default when a bad shock occurs. This paper is an application of the stochastic optimal controls models of Fleming and Stein (2001), which gives empirical content to the question of how one should measure vulnerability to shocks, when there is uncertainty concerning the productivity of capital. We consider two sets of high- risk countries during the period 1978-99: a subset of 21 countries that defaulted on the debt, and another set of 13 countries that did not default. Default is a situation where the firms or government of a country reschedule the interest/principal payments on the external debt. We thereby explain how our analysis can anticipate default risk, and add another dimension to the literature of early warning signals of default/credit risk

Ask a question, get an answer. A study of the framing effect on financial literacy in Italy

This paper takes its cue from the relevance of the framing effect related to behavioural biases associated with economic decision-making. Most attempts to measure financial literacy rely on surveys that include standardized questions about the knowledge of three or four fundamental concepts. A survey conducted in October 2021 that involved 2500 individuals representative of the Italian population made it possible to evaluate whether questions with different wording created higher respondent engagement, determined other answers and improved performance in terms of financial literacy. The descriptive and regression analysis showed that the wording mattered in three out of four questions. More engaging wording mitigated the gender effect by reducing the probability of women choosing the ‘I do not know’ option. However, while there was evidence of an increase in the percentage of correct answers in single questions, the overall level of financial literacy showed no signs of improvement. The regression analysis found that the likelihood of being financially literate, independently of the type of question, depends on sociodemographic variables (gender, age, geographical area and level of education) and on self-evaluation of digital and economic skills. In addition, knowledge of basic maths plays a key role. Whoever knows how to compute a percentage correctly has a notably higher probability of being financially literate. This evidence has clear policy indications

Quanto conta il modo in cui viene posta la domanda? Un’analisi dell’effetto “framing” sul livello di alfabetizzazione finanziaria in Italia.

This article takes its cue from the relevance of the framing effect in the field related to behavioural biases associated with economic decision-making. Most of the attempts made to measure financial literacy relies on surveys that include standardized questions about the knowledge of three or four fundamental concepts. A survey, conducted in October 2021 and involving 2500 individuals representative of the Italian population, made it possible to evaluate whether questions with different wording, aimed to create a higher degree of engagement of the interviewee, determine other answers, and better performance in terms of financial literacy. The descriptive and regression analysis shows that “wording” matters in three out of four questions. A more engaging wording mitigates the gender effect and reduces the probability of women choosing the “I do not know” option. However, as for single questions, there is evidence of an increase in the percentage of answering right, whereas the overall level of financial literacy does not show signs of improvement

Structural Models vs Random Walk: The Case of the Lira/$ Exchange Rate

After presenting the structural models of exchange-rate determination, the authors show that their out-of-sample predictive performance of the lira/$exchange rate is inferior to that of the random walk model. Only by moving away from these single-equation, semireduced form models toward suitable economywide macroeconometric models can one hope to beat the random walk. Following this course, the authors show that the Mark V version of their continuous time macroeconometric model of the Italian economy outperforms both the existing structural models and the random-walk process in out-of-sample forecasting tests of the lira/$ exchange rate.