Productivity and stock prices.

This study looks at the degree of correlation between stock prices and productivity at different levels, i.e. analysis of the correlations between certain components of the two variables and how correlations vary according to the different frequencies characterising these variables. It should be acknowledged that the approach used is only designed to isolate the stylised facts related to the cyclical components of the variables under review and not to explain them. In particular, the method chosen cannot be used to make forecasts or to provide a refi ned economic interpretation of these stylised facts. Nonetheless, this analysis, applied to the United States and the euro area over the period 1973(1)-1985(4), highlights the following points: • in the United States, an increase (or reduction) in the cyclical component of the rate of stock returns is positively correlated with current or future increases (or reductions) in that of the productivity growth rate; • in the euro area, this correlation is less strong. It appears, for example, that a sharp fall in stock prices precedes a marked decline in productivity (link between stock prices and future productivity) and, as a result, in profi ts. This fall could then be interpreted as a normal, even desirable, adjustment mechanism for asset prices. Correspondingly, a sharp rise in stock prices should not automatically be interpreted as the emergence of a future bubble given that such rises appear to foreshadow an increase in productivity and therefore in profi ts. Over the most recent period 1986(1)-2002(4), these correlations appear less pronounced, thus indicating a possible break. Our result is robust given that two complementary methods corroborate it and that it is similar to Estrella’s (2003) findings for the United States. This pattern appears to suggest that the cyclical component of stock prices is in phase with that of productivity.

Equity market interdependence: the relationship between European and US stock markets.

In this article, the degree of interdependence between European and US stock markets is measured by the conditional correlation between stock returns: the correlation coefficient is estimated using a model describing the variations over time in a number of variables (returns and volatility, for example), and its estimate takes account of all available information at a given time. We estimate conditional variance in the same way. Moreover, two statistical tools, recently introduced in applied finance, are combined. The first, developed by Engle in 2001 – an original specification of the conditional correlations in multivariate models – enables us to describe time-varying correlations between two or more assets. The second tool, copula functions, allows us to apply distributions that are more consistent with the stylised facts observed on financial markets than those commonly used. The approach used in this study is original in that it combines both the above tools. Using a multivariate model implies rejecting the two assumptions traditionally adopted in empirical studies in finance: correlations between assets are presumed to be constant; asymmetry or the presence of rare events are not taken into account in asset price distributions. Consequently, our empirical findings corroborate the assumption that correlations vary over time and validate the choice of an asymmetric joint distribution integrating the presence of rare events. We also observe the presence of periods of strong and weak correlations and similar periods for volatility. Furthermore, our results highlight a close link between the correlations and volatilities observed on the different equity markets: in phases of high volatility, the correlation tends to rise above its medium-term average; inversely, in phases of low volatility, markets seem to display greater independence. Lastly, the correlation coefficient of close to 1 confirms that French and German stock market indices have been converging in recent years. This may reflect the growing integration of these two markets and of the economies of these two countries within Economic and Monetary Union.

Technology Shocks and Monetary Policy in an Estimated Sticky Price Model of the Euro Area.

In this paper, we seek to characterize the dynamic effects of permanent technology shocks and the way in which European monetary authorities reacted to these shocks over the past two decades. To do so, we develop an augmented sticky price-sticky wage model of the business cycle, which is estimated by minimizing the distance between theoretical, dynamic responses of key variables to a permanent technology shock and their structural VAR counterparts. In a second step, we conduct a counterfactual experiment consisting to compare these responses with the outcome of the optimal monetary policy. A significant discrepancy emerges between these responses, suggesting the European monetary authorities might not have responded optimally to permanent technology shocks.Sticky prices and wages ; Taylor rule ; Optimal monetary policy.

Interest Rate Transmission and Volatility Transmission along the Yield Curve.

In order to analyse the interest rate transmission mechanism, we study daily Euro-rates term structure for the US, Germany, and the UK between 1983 and 1997. We estimate multivariate VECM-GARCH models, which take into account moste of the usual features of financial data (non-stationarity, cointegration, heteroskedasticity, asymmetric effects) The estimates of these models, allows us to study interest rate transmission as well as volatility transmission along the yield curve. Due to the huge number of the parameters it is quite difficult to interpret the empirical result. To avoid this problem we use the impulse responses framework to examine the transmission mechanism along both the yield and volatility curves.Term structure ; Volatility spillovers ; Financial Market ; Interest Rate

Interactions between Business Cycles, stock Market Cycles and Interest Rates: the Stylised Facts.

In this paper, we study the co-movements between stock market indices and real economic activity over the business cycle in France, Germany, Italy, the United Kingdom and the United States, using two complementary approaches in our analysis. First, we identify the turning points in real economy indicators and stock market indices and determine the extent to which these series co-move. Second, we calculate the correlations between the cyclical components of real economy indicators and excess returns, on the one hand, and the correlations between the structural components and these indicators, on the other. We then analyse the co-movements between three-month interest rates and the cyclical and structural components of the real economy and stock market indices.Stock returns ; Comovements ; Turning points ; Spectral analysis.

The impact of unconventional monetary policy on the market for collateral: The case of the French bond market

We consider the channel consisting in transferring the credit risk associated with refinancing operations between financial institutions to market participants. In particular, we analyze liquidity and volatility premia on the French government debt securities market, since these assets are used as collateral both in the open market operations of the ECB and on the interbank market. In our time-varying transition probability Markov-switching (TVTP-MS) model, we highlight the existence of two regimes. In one of them, which we refer to as the conventional regime, monetary policy neutrality is verified; in the other, which we dub the unconventional regime, monetary policy operations lead to volatility and liquidity premia on the collateral market. The existence of these conventional and unconventional regimes highlights some asymmetries in the conduct of monetary policy.Monetary policy, Collateral, Liquidity, Volatility, French bond market.

Central bank liquidity and market liquidity: the role of collateral provision on the French government debt securities market.

We examine the effects of collateral provision as a potential channel between funding liquidity tensions and the scarcity of market liquidity. This channel consists in transferring the credit risk associated with refinancing operations between financial institutions to market participants that bear new liquidity risk on the market associated with collateral. In particular, we address the issue of the liquidity of the French government debt securities market, since these assets are used as collateral both in the open market operations of the ECB and on the interbank market. We use a time-varying transition probability (TVTP) VAR model considering both the monetary policy cycle and the cycle of French treasury auctions. We highlight the existence of a specific regime in which monetary policy neutrality is not verified on the market for French bonds. Moreover, the existence of conventional and unconventional regimes leads to asymmetries in monetary policy implementation.Monetary policy, collateral, liquidity, volatility, French bond market.

Microstructure of financial and money markets: lessons learned from the conference held in Paris on 6 and 7 June 2006

The characteristics of trade and the efficiency and stability of markets depend on how such markets are organised. Market microstructure, which analyses this linkage, is an area of research that has grown extremely rapidly over the past years. However, progress has essentially been made with regard to financial markets. The few articles devoted to the money market are either descriptive (and most often applied to the case of the United States), or based on data whose frequency is insufficient to capture certain stylised facts. For central banks, it is essential to have a good understanding of the practices and the organisation of financial and money markets, in particular the way in which they respond to monetary policy impulses. From a financial stability perspective, an in-depth understanding of market practices makes it possible to identify new categories of risk, such as short-term risk. In June 2006, the Banque de France organised in partnership with the Center for Research in Economics and Staistics (CREST) and the Europlace Institute of Finance (EIF), a conference on the microstructure of markets, and notably that of money markets. This conference brought together researchers from central banks, French and foreign universities and renowned research centres. Robert Engle (New York University, Nobel prize 2003) and S. “Vish” Viswanathan (Duke University) presented two invited conferences, and Thierry Foucault (HEC Paris), Joël Hasbrouck (New York University) and Suresh Sundaresan (Columbia University and Federal Reserve Bank of New York) participated in the closing roundtable. The discussions spanned a wide variety of topics that have attracted much attention over recent years: risk measures, the quality of financial markets, the structure of financial and money markets, etc.

Interactions between business cycles, stock market cycles and interest rates: the stylised facts.

In this paper, we study the co-movements between stock market indices and real economic activity over the business cycle in France, Germany, Italy, the United Kingdom and the United States. Working on the premise that there is neither a single definition of the business cycle, nor a single method for studying it, we use two complementary approaches in our analysis. First, we identify the turning points in real economic indicators and stock market indices and determine the extent to which these series co-move, i.e. are regularly and significantly in the same phase of the cycle. Second, we decompose the series studied into a cyclical part and a structural part in order to calculate the correlations between the cyclical components of real economic indicators and excess returns, on the one hand, and the correlations between the structural components of these indicators, on the other. We then analyse the co-movements between three-month interest rates and the cyclical and structural components of real economic and stock market indices. Two main conclusions can be drawn from these different analyses: (i) there does not appear to be a strong dependence between stock prices and the level of real activity in the short term, except in the United States; (ii) in the longer term, real activity and stock prices seem to share the same determinants. However, it seems difficult to clearly identify an impact of asset price movements on the conduct of monetary policy, represented here by three-month money market interest rates. In general, we do not detect a significant relationship between the cyclical components of excess returns and those of money market rates; nor do we find a significant link between the structural components of these variables.