An Empirical Model of Daily Highs and Lows

We construct an empirical model for daily highs and daily lows of US stock indexes based on the intuition that highs and lows do not drift apart over time. Our empirical results show that daily highs and lows of three main US stock price indexes are cointegrated. Data on openings, closings, and trading volume are found to offer incremental explanatory power for variations in highs and lows within the VECM framework. With all these variables, the augmented VECM models explain 40% to 50% of variations in daily highs and lows. The generalized impulse response analysis shows that the responses of daily highs and daily lows to the shocks depend on whether data on openings, closings, and trading volume are included in the analysis.high, low open, close, trading volume, VECM model

Equity Price Dynamics Before and After the Introduction of the Euro

Daily data from the German and U.S. equity markets before and after the introduction of the Euro are used to study the effect of exchange rate regime choices on equity markets. It is found that, since the introduction of the Euro, the volatility and the persistence of the German stock index have fallen significantly relative to those of the U.S. index. However, the switch in exchange rate arrangement appears to have no significant implication for the causal relationships - both the mean and varianc causalities - between the two equity markets

Deviations from the Law of One Price in Japan

Using 25 years of monthly data on individual Japanese retail prices, we study the behavior of product-specific Law of One Price (LOP) deviations. Individual tradable products, compared with nontradables, are more likely to have different distributions of LOP deviations across cities. Their distributions are also more likely to change over time. Individual LOP deviation series are found to display considerable persistence and there is limited evidence that tradability enhances price convergence. In addition, deviations from the LOP are found to display nonlinear trends, and these trends are not linearly related to a product’s tradability. For individual products, LOP deviations are affected by their own inflation rates and, to a lesser extent, by aggregate inflation, output variations, and monetary variability. Interestingly, the trend behavior remains significant in the presence of these economic variables.price dispersion, tradability, asymmetric inflation effects, market integration

An Output Perspective on a Northeast Asia Currency Union

The prospect of creating a currency union consisting of China, Japan, and Korea is evaluated using output data. After a brief discussion on the interactions between the three countries, the study investigates whether these three countries have common synchronous business cycles, which are perceived as one of the preconditions of a currency union. Then, we assess the potential costs of giving up monetary policy autonomy to form a currency union. It is found that the three national output series tend to move together in the long run and share common business cycles. While the output loss estimates depend on assumptions used to generate shocks, they tend to be small. However, there are potential conflicts between these countries on the choice of the policy target of the common monetary authorities.common stochastic trend, business cycles, output losses, exchange rate regime, Asian economies

Speculative Attacks: A Laboratory Study in Continuous Time

We examine speculative attacks in a controlled laboratory environment featuring continuous time, size asymmetries, and varying amounts of public information. Attacks succeeded in 233 of 344 possible cases. When speculators have symmetric size and access to information: (a) weaker fundamentals increase the likelihood of successful speculative attacks and hasten their onset, and (b) contrary to some theory, success is enhanced by public access to information about either the net speculative position or the fundamentals. The presence of a larger speculator further enhances success, and experience with large speculators increases small speculators’ response to the public information. However, giving the large speculator increased size or better information does not significantly strengthen his impact.currency crisis, speculative attack, laboratory experiment, coordination game, pre-emption, large player

The Empirics of China's Outward Direct Investment

We investigate the empirical determinants of China’s outward direct investment (ODI). It is found that China’s investments in developed and developing countries are driven by different sets of factors. Subject to the differences between developed and developing countries, there is evidence that a) both market seeking and resources seeking motives drive China’s ODI, b) the Chinese exports to developing countries induce China’s ODI, c) China’s international reserves promote its ODI, and d) the Chinese capital tends to agglomerate among developed economies but diversify among developing economies. Similar results are obtained using alternative ODI data. We do not find substantial evidence that China invests in African and oil-producing countries mainly for their natural resources.market seeking, resources seeking, servicing exports, international reserves, agglomeration effect

Exchange Rate Misalingment Estimates - Sources of Differences

We study the differences of currency misalignment estimates obtained from alternative datasets derived from two International Comparison Program (ICP) surveys. A decomposition exercise reveals that the year 2005 misalignment estimates are substantially affected by the ICP price revision. Further, we find that differences in misalignment estimates are systematically affected by a country’s participation status in the ICP survey and its data quality – a finding that casts doubt on the economic and policy relevance of these misalignment estimates. The patterns of changes in the estimated degree of misalignment across individual countries, as illustrated by the BRIC economies, are quite variable.Penn Effect Regression, data revision, PPP-based data, measurement factors, economic factors

Output Dynamics of the G7 Countries - Stochastic Trends and Cyclical Movements

Using a time series framework, the paper studies the interac tions of the annual real per capita GDP data of the G7 countries. We find evidence of six common nonstationary processes behind the international output dynamics. In addition, there is evidence for the existence of a common business cycle among these coun t ries. The trend and cycle components of each output series are obtained with a procedure that accounts for the presence of both the common nonstationary and cyclical factors. It is found that the relative variability and the correlation of the trend and cycle components are not similar across the G7 countries.

Exchange Rate Dynamics under Alternative Optimal Interest Rate Rules

We explore the role of interest rate policy in the exchange rate determination process. Specifically, we derive exchange rate equations from interest rate rules that are theoretically optimal under a few alternative settings. The exchange rate equation depends on its underlying interest rate rule and its performance could vary across evaluation criteria and sample periods. The exchange rate equation implied by the interest rate rule that allows for interest rate and inflation inertia under commitment offers some encouraging results – exchange rate changes “calibrated” from the equation have a positive and significant correlation with actual data, and offer good direction of change prediction. Our exercise also demonstrates the role of the foreign exchange risk premium in determining exchange rates and the difficulty of explaining exchange rate variability using only policy based fundamentals.Taylor Rule, exchange rate determination, mean squared prediction error, direction of change, foreign exchange risk premium

Accumulation of reserves and keeping up with the Joneses: the case of LATAM economies

In this paper we explore the ‘Mrs. Machlup's Wardrobe’ hypothesis to understand the growing trend of Latin American economies amassing large stocks of international reserves. Using annual data from 1980 to 2007, we examine the relevance of the argument that economies continue to add to their existing reserves stock in order to keep up with the Joneses. We find strong evidence of presence of the Joneses effect. The effect is robust to the inclusion of traditional determinants of reserve accumulation as well as region specific factors including commodity exports that set the Latin American economies apart from other emerging economies.Demand for international reserves; ‘Mrs. Machlup's Wardrobe’ hypothesis; Speculative attack; Competitive hoarding Financial crisis