The Economic Value of Fundamental and Technical Information in Emerging Currency Markets

We measure the economic value of information derived from macroeconomic variables and from technical trading rules for emerging markets currency investments. Our analysis is based on a sample of 21 emerging markets with a floating exchange rate regime over the period 1997-2007 and explicitly accounts for trading restrictions on foreign capital movements by using non-deliverable forward data. We document that both types of information can be exploited to implement profitable trading strategies. In line with evidence from surveys of foreign exchange professionals concerning the use of fundamental and technical analysis, we find that combining the two types of information improves the risk-adjusted performance of the investment strategies.emerging markets;foreign exchange rates;heterogeneous agents;technical trading;structural exchange rate models

Contagion as Domino Effect in Global Stock Markets

This paper shows that stock market contagion operates through a domino effect, where small crashes evolve into more severe crashes. Using a novel unifying framework we model the occurrence of local, regional and global crashes in terms of past occurrences of these different crashes and financial variables. We find convincing evidence that global crashes do not occur abruptly but are preceded by local and regional crashes. Additionally, interest rates, bond returns and volatility affect the probabilities of different crash types, indicating interdependence. We show that in forecasting global crashes our model outperforms a binomial model for global crashes only

Time Variation in Asset Return Dependence: Strength or Structure?

The dependence between asset returns varies. Its strength can become stronger or weaker. Also, its structure can change, for example, when asymmetries related to bull and bear markets become more or less pronounced. To analyze these different types of variations, we develop a model that separately accommodates these changes. It combines a mixture of structurally different copulas with time variation. Our model shows both types of changes in the dependence between several equity market returns. Ignoring them leads to biases in risk measures. An underestimation of Value-at-Risk by maximum 15% occurs exactly when most harmful, during crisis periods

The Economic Value of Fundamental and Technical Information in Emerging Currency Markets

We measure the economic value of information derived from macroeconomic variables and from technical trading rules for emerging markets currency investments. Our analysis is based on a sample of 21 emerging markets with a floating exchange rate regime over the period 1997-2007 and explicitly accounts for trading restrictions on foreign capital movements by using non-deliverable forward data. We document that both types of information can be exploited to implement profitable trading strategies. In line with evidence from surveys of foreign exchange professionals concerning the use of fundamental and technical analysis, we find that combining the two types of information improves the risk-adjusted performance of the investment strategies

Testing for rational bubbles in the presence of structural breaks: Evidence from nonstationary panels

This is the post-print version of the final paper published in Journal of Banking & Finance. The published article is available from the link below. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. Copyright @ 2011 Elsevier B.V.This paper presents new results on the rational bubbles hypothesis for a panel of 18 OECD countries using the model developed by Campbell (2000). We provide an analysis of international data that exploits increased power deriving from the panel unit root and cointegration methodology, together with the flexibility of allowing explicitly for multiple endogenous structural breaks in the individual series. Differently from the time series methodology, the panel data approach allows for a global analysis of the financial crashes that are related to rational bubbles. We find strong evidence in favor of bubbles phenomena

Extreme returns in the European financial crisis

We examine the transmission of financial shocks among three groups of countries: the Euro-periphery countries (Portugal, Ireland, Italy, Greece, Spain), the Euro-core countries (Germany, France, the Netherlands, Finland, Belgium), and the major European Union - but not Euro - countries (Sweden, UK, Poland, Czech Republic, Denmark). Using extreme returns on daily stock market data from January 2004 until March 2013, we find that transmission effects are present for the tails of the returns distributions for the Pre-crisis, the US-crisis and the Euro-crisis periods from the Euro-periphery group to the Non-euro and the Euro-core groups. Within group effects are stronger in the crisis periods. Even before the two crises there was a significant shock transmission channel from the Euro-periphery to the Euro-core and the Non-euro. During the crises the shocks transmitted were more substantial (in some cases, extreme bottom returns doubled). As extreme returns have become much more severe during the financial crisis periods, the expected losses on extreme return days have increased significantly. Given the fact that stock market capitalizations in these country groups are in trillions of Euros, a 1% or 2% increase in extreme bottom returns (in crisis periods) can lead to aggregate losses of tens of billions Euros in one single trading day

Extreme Dependence in Asset Markets Around the Globe

The dependence between large stock returns is higher than the dependence between small to moderate stock returns. This is defined as extreme dependence, and it is particularly observed for large negative returns. Therefore, diversification gains calculated from the overall dependence will overestimate the true potential for diversification during turmoil periods. This thesis answers questions on how the dependence between large negative stock returns can appropriately be modelled. The main conclusions of this thesis read that extreme dependence is often present, can become rather strong, should not be ignored, and shows substantial time-variation. More specifically, extreme dependence shows up as contagion, with small local crashes evolving into more severe crashes. In addition, due to financial globalization, and emerging market liberalization in particular, extreme dependence between regional stock markets has substantially increased. Furthermore, extreme dependence can vary over time by becoming weaker or stronger, but it can also be subject to structural changes, such as a change from symmetric dependence to asymmetric dependence. Using return data at the highest possible level of detail, improves the accuracy of forecasting joint extreme negative returns. Finally, this thesis shows how different econometric techniques can be used for modelling extreme dependence. The use of copulas for financial data is relatively new, therefore a substantial part of this thesis is devoted to new copula models and applications. Other techniques used in this thesis are GARCH, regime-switching, and logit models

Forecasting Value-at-Risk under temporal and portfolio aggregation

We examine the impact of temporal and portfolio aggregation on the quality of Value-at-Risk (VaR) forecasts over a horizon of 10 trading days for a well-diversified portfolio of stocks, bonds and alternative investments. The VaR forecasts are constructed based on daily, weekly, or biweekly returns of all constituent assets separately, gathered into portfolios based on asset class, or into a single portfolio. We compare the impact of aggregation with that of choosing a model for the conditional volatilities and correlations, the distribution for the innovations, and the method of forecast construction. We find that the level of temporal aggregation is most important. Daily returns form the best basis for VaR forecasts. Modeling the portfolio at the asset or asset class level works better than complete portfolio aggregation, but differences are smaller. The differences from the model, distribution, and forecast choices are also smaller compared with temporal aggregation

Pledge-based accountability: Voter responses to fulfilled and broken election pledges

Political parties communicate their plans to voters via promises made during election campaigns. While it has been found that governments generally take these promises they make seriously, it has also been established that many voters believe otherwise. Less is known, however, about whether governments are held to account for the extent to which they fulfil their promises. This dissertation examines the effects of broken and fulfilled election pledges on voter evaluations of government performance. The findings challenge the idea that rewards and punishments for election pledge performance are straightforwardly administered by voters, instead emphasising that pledge-based accountability processes are asymmetric and affected by the biases of voters. The main conclusion is that pledge fulfilment is not the procedural value for voters suggested in some classical theoretical contributions. Instead, while most voters find it important that election promises are not broken, they find it even more important that the decisions that are taken align with their own preferences