Portfolio Balance, Price Impact, and Secret Intervention

This paper tests the portfolio-balance approach to exchange rate determination in a new way. Past work on portfolio balance in foreign exchange falls into two groups: (1) tests using measures of asset supply and (2) tests using measures of central-bank asset demand. We address the demand side, but we use a broad measure of public demand, rather than focusing on demand by central banks. Under floating rates, changing public demand has no direct effect on interest rates, current or future. This provides an opportunity to test for portfolio-balance effects on price. We develop and estimate a micro portfolio-balance model that has both Walrasian and microstructure features. Portfolio-balance effects are clearly present: the immediate price impact of public trades is 0.44 percent per $1 billion (of which, about 80 percent persists indefinitely). This estimate is applicable to central-bank trades as well, as long as they are sterilized, secret, and provide no monetary-policy signal. Intervention of this type is most effective when the flow of macroeconomic news is strong.

Are Different-Currency Assets Imperfect Substitutes?

This paper provides a new test for whether different-currency assets are imperfect substitutes. The test exploits that under floating rates, changing public currency demand has no direct effect on monetary fundamentals, current or future. Price effects from imperfect substitutability are clearly present: the immediate price impact of public trades is 0.44 percent per 1 billion dollar (of which, about 80 percent persists indefinitely). This estimate is applicable to intervention trades in the special case when they are indistinguishable from private trades (i.e., when interventions are sterilized, anonymous, and provide no monetary-policy signal).

Are Different-Currency Assets Imperfect Substitutes?

This paper provides a new test for whether different-currency assets are imperfect substitutes. Past work on imperfect substitutability in foreign exchange falls into two groups: (1) tests using measures of asset supply and (2) tests using measures of central-bank asset demand. We address the demand side, but we use a broad measure of public demand rather than focusing on demand by central banks. Under floating rates, changing public demand has no direct effect on monetary fundamentals, current or future. This provides an opportunity to test for price effects from imperfect substitutability. We develop and estimate a micro portfolio balance model that has both Walrasian and microstructure features. Price effects from imperfect substitutability are clearly present: the immediate price impact of public trades is 0.44 percent per $1 billion (of which, about 80 percent persists indefinitely). This estimate is applicable to intervention trades in the special case when they are indistinguishable from private trades (i.e., when interventions are sterilized, anonymous, and provide no monetary-policy signal).

Exchange Rate Fundamentals and Order Flow

We address whether transaction flows in foreign exchange markets convey fundamental information. Our GE model includes fundamental information that first manifests at the micro level and is not symmetrically observed by all agents. This produces foreign exchange transactions that play a central role in information aggregation, providing testable links between transaction flows, exchange rates, and future fundamentals. We test these links using data on all end-user currency trades received at Citibank over 6.5 years, a sample sufficiently long to analyze real-time forecasts at the quarterly horizon. The predictions are borne out in four empirical findings that define this paper's main contribution: (1) transaction flows forecast future macro variables such as output growth, money growth, and inflation, (2) transaction flows forecast these macro variables significantly better than the exchange rate does, (3) transaction flows (proprietary) forecast future exchange rates, and (4) the forecasted part of fundamentals is better at explaining exchange rates than standard measured fundamentals.

Pan-STARRS1 Discovery of Two Ultraluminous Supernovae at z ≈ 0.9

We present the discovery of two ultraluminous supernovae (SNe) at z ≈ 0.9 with the Pan-STARRS1 Medium Deep Survey. These SNe, PS1-10ky and PS1-10awh, are among the most luminous SNe ever discovered, comparable to the unusual transients SN 2005ap and SCP 06F6. Like SN 2005ap and SCP 06F6, they show characteristic high luminosities (M_(bol) ≈ –22.5 mag), blue spectra with a few broad absorption lines, and no evidence for H or He. We have constructed a full multi-color light curve sensitive to the peak of the spectral energy distribution in the rest-frame ultraviolet, and we have obtained time series spectroscopy for these SNe. Given the similarities between the SNe, we combine their light curves to estimate a total radiated energy over the course of explosion of (0.9-1.4) × 10^(51) erg. We find photospheric velocities of 12,000-19,000 km s^(–1) with no evidence for deceleration measured across ~3 rest-frame weeks around light curve peak, consistent with the expansion of an optically thick massive shell of material. We show that, consistent with findings for other ultraluminous SNe in this class, radioactive decay is not sufficient to power PS1-10ky, and we discuss two plausible origins for these events: the initial spin-down of a newborn magnetar in a core-collapse SN, or SN shock breakout from the dense circumstellar wind surrounding a Wolf-Rayet star

Compactness of the space of causal curves

We prove that the space of causal curves between compact subsets of a separable globally hyperbolic poset is itself compact in the Vietoris topology. Although this result implies the usual result in general relativity, its proof does not require the use of geometry or differentiable structure.Comment: 15 page

Do Stationary Risk Premia Explain It All? Evidence from the Term Struct

Most studies of the expectations theory of the term structure reject the model. However, the significance of the rejections depend strongly upon the form of the test. In this paper, we use the pattern of rejection across maturities to back out the implied behavior of time-varying risk premia and/or market forecasts. We then use a new technique to test whether stationary risk premia alone can be responsible for these rejections. Surprisirj1y, this test is rejected for short maturities up to 6 months, suggesting that time-varying risk premia do not explain it all. We also describe hew this method can be used to test other asset pricing relationships.