72 research outputs found
Testing the Fisher hypothesis in the G-7 countries using I(d) techniques
This paper revisits the Fisher hypothesis concerning the determination of real rates by estimating fractional integration and cointegration models for nominal interest rates and expected inflation in the G7 countries. Two sets of results are obtained under the alternative assumptions of white noise and Bloomfield (1973) autocorrelated errors respectively. The univariate analysis suggests that the differencing parameter is higher than 1 for most series in the former case, whilst the unit root null cannot be rejected for the majority of them in the latter case. The multivariate results imply that there exists a positive relationship, linking nominal interest rates to inflation; however, there is no evidence of the full adjustment of the former to the latter required by the Fisher hypothesis
U.S. house prices by census division: persistence, trends and structural breaks
This paper uses fractional integration methods to examine persistence, trends and structural breaks in United States house prices, more specifically the monthly Federal Housing Finance Agency House Price Index for census divisions, and the United States as a whole over the period from January 1991 to August 2022. The full sample estimates imply that the order of integration of the series is above one in all cases, and is particularly high for the aggregate series, implying high levels of persistence. However, when the possibility of structural breaks is taken into account, segmented trends are detected. The subsample estimates of the fractional differencing parameter tend to be lower, with mean reversion occurring in a number of cases. This means that shocks in the series are expected to be transitory in these subsamples, disappearing in the long run by themselves. In addition, the time trend coefficient is at its highest in the last subsample, which in most cases starts around May 2020 coincident with the beginning of the coronavirus pandemic. The results provide clear evidence of differences between census divisions, which implies that appropriate housing policies should be designed at the local (rather than at the federal) level
Fractional Integration and the Persistence of UK Inflation, 1210–2016*
This note examines the degree of persistence of UK inflation by applying fractional integration methods to historical data spanning the period 1210–2016;
the chosen approach is more general than the popular ARMA models based
on the classical I(0) vs. I(1) dichotomy. The full-sample results do not suggest
that UK inflation is a persistent process; however, the recursive analysis indicates an increase in the degree of persistence in the 16th century and more
recently after WWI and in the last quarter of the 20th century. On the whole,
monetary and exchange rate regime changes do not appear to have had a significant impact on the stochastic behaviour of inflation if one takes a longrun, historical perspective
Prospects for a monetary union in the East Africa community: Some empirical evidence
This paper examines generalised purchasing power parity (G-PPP) and business cycle synchronisation
in the East Africa Community with the aim of assessing the prospects for a monetary union. The
univariate fractional integration analysis shows that the individual series exhibit unit roots and are
highly persistent. The fractional bivariate cointegration tests suggest that there exist bivariate fractional
cointegrating relationships between the exchange rate of the Tanzanian shilling and those of the other
EAC countries, and also between the exchange rates of the Rwandan franc, the Burundian franc and
the Ugandan shilling. The Fractionally Cointegrated Vector AutoRegressive (FCVAR) results imply
the existence of a single cointegrating relationship between the exchange rates of the EAC countries.
On the whole, there is evidence in favour of G-PPP. In addition, there appears to be a high degree
of business cycle synchronisation between these economies. On both grounds, one can argue that a
monetary union should be feasible
The EMBI in Latin America: Fractional integration, non-linearities and breaks
This paper analyses the main statistical properties of the Emerging Market Bond Index (EMBI), namely long-range dependence or persistence, non-linearities, and structural breaks, in four Latin American countries (Argentina, Brazil, Mexico, Venezuela). For
this purpose it uses a fractional integration framework and both parametric and semiparametric methods. The evidence based on the former is sensitive to the specification
for the error terms, whilst the results from the latter are more conclusive in ruling out
mean reversion. Further, non-linearities do not appear to be present. Both recursive and
rolling window methods identify a number of breaks. Overall, the evidence of long-range
dependence as well as breaks suggests that active policies might be necessary for achieving financial and economic stability in these countrie
Volatility persistence in the Russian stock market
This paper applies a fractional integration framework to analyse the stochastic behaviour of two
Russian stock market volatility indices (namely the originally created RTSVX and the new RVI
that has replaced it) using daily data over the period 2010–2018. The empirical findings are
consistent and imply in all cases that the two series are mean-reverting, i.e. they are not highly
persistent and the effects of shocks disappear over time. This is true regardless of whether the
errors are assumed to follow a white noise or autocorrelated process; this is confirmed by the
rolling window estimation, and it holds for both subsamples, before and after the detected break.
On the whole, it seems shocks do not have permanent effects on volatility in the Russian stock
market
Long memory and data frequency in financial markets
This paper investigates persistence in financial time series at three
different frequencies (daily, weekly and monthly). The analysis is
carried out for various financial markets (stock markets, FOREX, commodity markets) over the period from 2000 to 2016 using two different long memory approaches (R/S analysis and fractional integration) for robustness purposes. The results indicate that persistence
is higher at lower frequencies, for both returns and their volatility.
This is true of the stock markets (both developed and emerging)
and partially of the FOREX and commodity markets examined. Such
evidence against the random walk behaviour implies predictability and is inconsistent with the Efficient Market Hypothesis (EMH),
since abnormal profits can be made using trading strategies based
on trend analysis
Is market fear persistent? A long-memory analysis
This paper investigates the degree of persistence of market fear in the VIX index over the sample
period 2004–2016, as well as some sub-periods. The findings indicate that its properties change
over time: in normal periods it exhibits anti-persistence, whilst during crisis period the level of
persistence is increasing. These results can be informative about the nature of financial bubbles
and anti-bubbles, and provide evidence on whether there exist market inefficiencies that could be
exploited to make abnormal profits by designing appropriate trading strategies
Persistence in the cryptocurrency market
This paper examines persistence in the cryptocurrency market. Two different long-memory
methods (R/S analysis and fractional integration) are used to analyse it in the case of the four
main cryptocurrencies (BitCoin, LiteCoin, Ripple, Dash) over the sample period 2013–2017. The
findings indicate that this market exhibits persistence (there is a positive correlation between its
past and future values), and that its degree changes over time. Such predictability represents
evidence of market inefficiency: trend trading strategies can be used to generate abnormal profits
in the cryptocurrency market
Short-term price overreactions: Identification, testing, exploitation
This paper examines short-term price reactions after one-day abnormal
price changes and whether they create exploitable profit opportunities in various financial markets. Statistical tests confirm the presence of overreactions and also suggest
that there is an “inertia anomaly”, i.e. after an overreaction day prices tend to move
in the same direction for some time. A trading robot approach is then used to test two
trading strategies aimed at exploiting the detected anomalies to make abnormal profits.
The results suggest that a strategy based on counter-movements after overreactions
does not generate profits in the FOREX and the commodity markets, but in some
cases it can be profitable in the US stock market. By contrast, a strategy exploiting
the “inertia anomaly” produces profits in the case of the FOREX and the commodity
markets, but not in the case of the US stock market
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