Macroeconomic Effects of Inflation Targeting Policy in New Zealand

In this paper we analyze macroeconomic effects of inflation targeting policy in New Zealand using Markov switching model with one time permanent break. Our results show that the inflation targeting policy has significantly changed the inflation dynamics in the New Zealand economy. The Markov switching model clearly detects a structural break date that is very close to the actual date of the policy change. The volatility in the inflation rate shows a considerable reduction after the structural break date. Our results also show that the inflation targeting policy led to a structural change in real GDP growth rate. The policy change significantly reduced the volatility of real GDP growth rate after the break date. We find that there is a lag of about one year and six months between the monetary policy change and its actual effect on output growth.

Holding a commodity futures index fund in a globally diversified portfolio: A placebo effect?

An increasing number of investors are including futures-based commodity index funds in their portfolios. The argument is that these funds increase diversification, enhance returns and serve as an inflation hedge. Much of the recent literature served to reinforce these ideas. We update the literature by examining recent data on returns and volatility. We further extend the literature by comparing the efficient frontiers of globally diversified stock and bond portfolios with and without the inclusion of futures index funds. We find little difference between the portfolios. Additionally, the returns from such funds do not appear significantly different than zero. They also lag the returns on spot commodities which have lagged inflation over the long haul.Commodity futures index fund, stationary bootstrap, efficient portfolio frontier

Will retiring boomers really cause a stock market meltdown?

The meltdown hypothesis predicts a large fall in stock prices when baby boomers cash in their equity holdings to fund their retirement. Using an estimated vector autoregression model this paper finds empirical evidence that retiring baby boomers will induce a drag on the stock market, but most likely not of meltdown proportions. An important discovery is that the response to shocks to the supply of equity securities is a key factor in short-term market price movements. Foreign buying associated with the current account deficit is shown to be a minor influence on stock prices.

Oops, we should have diversified!

This article extends the research on the improvements to the efficient portfolio frontier in globally diversified portfolios. We examine efficient frontiers of regional equity portfolios from developed and undeveloped countries. We show that a globally diversified portfolio has higher reward with less risk than individual regional portfolios. We also show that, in the past 8 years, a US investor would have achieved higher returns for the same risk if diversified in emerging and frontier markets. These results have implications for practical portfolio selection as well as empirical applications of Capital Asset Pricing Model (CAPM).

Are there exploitable inefficiencies in the futures market for oil?”

Abstract If the crude oil futures market is not efficient in the Fama sense, profitable trading opportunities may exist. This paper uses an artificial neural network model with moving average crossover inputs to predict price in the crude oil futures market. The predictions of price are used to construct buy and sell signals for traders. Compared to those of benchmark models, cumulative returns, year-to-year returns, returns over a market cycle, and Sharpe ratios all favor the ANN model by a large factor. The significant profitability of the ANN model casts doubt on the efficiency of the oil futures market.

The relationship between stock returns and inflation in four European markets

We study the effects of expected and unexpected inflation on real stock returns for France, Germany, Italy and the UK. We find evidence that unexpected inflation affects stock returns in France, Italy and the UK, but that expected inflation does not. Unexpected interest rates also affect real stock returns in the three countries. However, we find no evidence of these variables affecting real stock returns in Germany.

Are stocks really riskier than bonds?

Conventional wisdom holds that stocks are riskier than bonds; thus when the stock market becomes volatile, money flows from the stock market into the perceived safe haven of the bond market. In this article, we find that this notion is not necessarily accurate and might lead people to make incorrect investment decisions. In fact, intermediate- and long-term bonds are riskier than stocks when we measure risk by the coefficient of variation. We examine a case where an inaccurate perception regarding the relative riskiness of the two types of assets could play a part in what appears to be short-sighted and potentially costly behaviour of investors in financial markets.