The Forward Premium Puzzle And Risk Premiums

This paper re-evaluates the forward premium puzzle using the Euro/US dollar exchange rate. Unlike previous studies, a state-space model is used to measure the significance of this puzzle by estimating the time-specific parameter. Then we provide evidence that the forward premium puzzle became more prominent around the time of the Lehman Shock, and this additional effect of the puzzle is more clearly seen in longer maturity assets. Furthermore, while the risk premium does not tell the whole story about the time-varying puzzle, we show nevertheless that the puzzle can be lessened by this extra factor particularly at times of financial crises

Macroeconomic Interdependence in East Asia

This paper analyzes macroeconomic interdependence among 10 Asian economies. In this connection, we decompose their macroeconomic activities (real GDP) into common and country-specific components using the Bai-Ng method (2004). Our results suggest first that both components are nonstationary and have permanent effects on their overall economy. Second, we find the relative importance of common factors in all countries in terms of their contribution to variations in real GDP. But evidence is also obtained of country-specific effects becoming increasingly important in countries like China in recent years. Therefore, if, for example, China is expected to grow at a fast pace in future, our findings imply that creation of a regional monetary union of these 10 countries needs to be held back until the Chinese economy has become more dominant in the region.Asian economic integration, factor models, common and factors

The Term Structure of Interest Rates and Monetary Policy during a Zero Interest Rate Period

This paper empirically evaluates the validity of the term structure of interest rates in a low interest rate environment using high-frequency Japanese data. Allowing for the time-varying term premium, we obtain evidence that when interest rates are low and the short end of the term structure is studied, there is no evidence to support the term- structure relationship. This poor performance is attributed to little information in the interest rate spread that can be used to predict future economic activity and/or to the absence of the persistent term premium. In contrast, some evidence for the term-structure relationship is found when the long end of the term-structure data is considered during a relatively high interest rate period.

The threshold nonstationary panel data approach to forward premiums

This paper analyzes the stationarity of forward premiums in the foreign exchange markets. Considering a wide range of countries and contract periods and taking into account cross-sectional correlations and heterogeneities in nonstationary environments, we confirmed mixed evidence of stationary forward premiums. However, mounting evidence to support the stationarity is provided when regime shifts which likely reflect the effects of the Lehman Shock and changing monetary policies are considered. Thus these events seem to have increased the nonstationary element in the premiums, and our further analysis suggests the effect of these events can be captured by interest rates, leaving the covered interest parity condition as a valid long-run concept.Panel unit root tests, structural shifts, forward premiums, Lehman shock

Financial Innovation and Regional Money

This paper studies the effect that financial innovation, which seems very prominent in recent years, has on money. Using Japanese regional data and the money demand specification, we first provide evidence of instability in the simple money-output relationship. However, when this relationship is extended to include a proxy for a comprehensive measure of financial innovation, the model is found to be stable. Furthermore, consistent with economic theory, evidence is obtained of financial innovation leading to decreased demand for liquid financial assets. In this respect, demand deposits seem to possess very similar characteristics to cash in Japan in recent years.Regional money, panel cointegration

Regional deposits and demographic changes

This paper empirically analyzes the relationship between regional deposits and demographic changes. Using different types of deposit data from Japan which has experienced a sharp increase in the number of retirees, we provide clear evidence that an increase in the dependency ratio is negatively correlated with overall deposits but positively with the most liquid deposits.Regional deposits, Demographic changes, Panel cointegration, Panel DOLS

Economic Factors Contributing to Time-Varying Conditional Correlations in Stock Returns

This paper attempts to find economic and financial factors contributing to the changing correlations of stock returns. Time-varying correlations were documented in previous studies, but a few attempts have been made to investigate their evolution. Using daily data from the Asia-Pacific region, this paper provides evidence that return correlations are negatively correlated with the distance between the markets. Furthermore, correlations tend to be higher in advanced countries and increase at times of the active trading (e.g., around the Lehman shock). Instead, the level of correlations declines among pairs of countries with less financial integration.Conditional correlations, DCC

The Common Component in the Forward Premium: Evidence from the Asia-Pacific Region

This paper empirically analyzes the behavior of the forward premium. Unlike previous research, we use data from Asia-Pacific countries and adopt the panel data approach (Bai and Ng 2004) which allows us to decompose the forward premium into common and idiosyncratic (country-specific) components. Our data suggest the presence of one common factor and the stationarity of both common and idiosyncratic factors for short maturities, leading to the conclusion of a stationary forward premium. In contrast, the stationarity of the premium is less supported by the longer maturity data. Furthermore, a large portion of the premium fluctuation is shown to be due to a common factor, particularly over the short time horizon, which in turn can be explained by economic and financial developments in the US. In particular, when the US interest rate increases and the economy declines, the common factor tends to fall.Forward premium, common factor, panel unit root test

Regional Inflation in China

This paper empirically examines developments in price and inflation in China from 1991 to 2005. Unlike most previous studies, their determinants were investigated in the panel data context, and our findings are as follows. First, using the panel cointegration method, we confirm a long-run relationship between price, money and output. Secondly, we provide evidence that inflation can be explained by economic fundamentals such as money, credits, productivity, and exchange rate growth. Furthermore, while an increased concern about regional discrepancies in recent years, this relationship is more sensitive to the sample period than to the region type. Notably, money does not seem to be closely associated with inflation over recent years.China, inflation, panel data, panel cointegration

The threshold consumption correlation-based approach to international capital mobility: evidence from advanced and developing countries

Using the consumption correlation-based criterion, this paper analyzes international capital mobility for both advanced and developing countries. We provide evidence that global capital markets are imperfectly integrated for both advanced and developing countries. However, a clear difference between these groups of countries emerges when their consumption growth has stagnated; in developing countries at such times, the opportunity to smooth their consumption drops dramatically.International capital mobility; Panel data approach; Threshold model; Consumption correlation