Do Foreign Institutional Investors Destabilize China’s A-Share Markets?

This paper investigates the eect of foreign institutional investors on the sta- bility of Chinese stock markets. Previous literature views this investor group as destabilizing feedback traders. We use the abolition of ownership restrictions on A shares as a natural experiment. There is strong evidence that foreign in- stitutions have a stabilizing eect on Chinese stock markets and contribute to market eciency. This nding is robust across exchanges, sample periods, size quintiles and alternative model specications. By contrast, domestic investors appear to engage in positive feedback trading. Our results have important implications for market regulation.Foreign Institutional Investors, Feedback Trading, Chinese Stock Markets, Regulation, Ownership Restrictions

Empirical Evidence on Feedback Trading in Mature and Emerging Stock Markets

We investigate the hypothesis that some participants in mature and emerging capital markets engage in feedback trading. The analysis is based on the Shiller-Sentana-Wadhwani noise trader model. It has the attractive property that it yields testable implications about the presence of positive and negative feedback traders in stock markets. This theoretical framework, together with an asymmetric GARCH-type model, allows us to draw conclusions about whether differences exist between mature and emerging capital markets in terms of the degree of feedback trading. The empirical results show that positive and negative feedback trading strategies exist in both types of markets but are more pronounced in emerging stock markets than in their mature counterparts. Hence, non-fundamental trading strategies seems to play a more important role in emerging relative to mature stock markets.feedback trading; return autocorrelation; emerging capital markets in central and eastern european contries; asymmetric GARCH models

The demand for money by private firms in a regulated economy: Theoretical underpinnings and empirical evidence for Germany 1960 - 1998

Based on a cash-in-advance approach, this paper investigates theoretically the determinants of money holdings of firms under the conditions of a highly regulated labor market and analyses empirically the demand for money of German businesses during the period 1960-1998. As a result of our theoretical analysis the demand for cash balances by firms for shadow market activities depends among other things positively on the expected wage wedge. The empirical results show that the coefficient of the wage wegde has a positive sign in the long-run cointegrating relationship and is statistically significant positive in the short-run dynamics of the error correction model. -- Auf der Grundlage eines Cash-in-advance-Ansatzes untersucht der vorliegende Beitrag die Bestimmungsgründe der Geldnachfrage von deutschen Unternehmen (1960-1998) - vor dem Hintergrund eines hoch regulierten Arbeitsmarktes. Das theoretische Modell ergibt, daß Unternehmen Kasse für Aktivitäten auf dem Markt für Schwarzarbeit unterhalten und zwar um so mehr, je größer die Kluft zwischen den Bruttoarbeitskosten und den Nettolöhnen (wage wedge) ist. Der Koeffizient der wage wedge weist ein positives Vorzeichen in der Kointegrationsbeziehung auf und ist statistisch signifikant positiv in der kurzfristigen Dynamik des Fehler-Korrektur-Modells.Money Demand by Firms,Wage Wedge,Cash-in-Advance Model,Cointegration,Error-Correction,Geldnachfrage von Unternehmen,Cash-in-advance-Modell,Kointegration,FehlerKorrektur-Modell,Lohnzusatzkosten

Policy Words and Policy Deeds: The ECB and the Euro

This paper examines the role of the ECB communication activities on daily Eurodollar exchange rate and interest rates. We estimate the relationship between monetary policy and the exchange rate using a technique that explicitly recognizes the joint determination of both the levels and volatilities of these variables. We also consider more traditional estimation strategies as a test of the robustness of our main results. We introduce a new indicator of ECB communications policies that focuses on what the ECB says about the future economic outlook for the euro area along five different economic dimensions. The impact of ECB communications policies is more apparent in the time series framework than in the heteroskedasticity estimator approach. Time series estimates reveal that interest rate changes generally have a much larger impact on exchange rate movements, and their volatility, than do ECB verbal pronouncements. Previous studies that conclude that news effects are significant at the daily frequency may have reached such a conclusion because the measurement of news was too highly aggregated. The endogeneity of the exchange rate-interest rate relationship is more apparent when the proxy for monetary policy is the euro area-US differential than when any other proxy for monetary policy is employed.Central bank communication, Eurodollar exchange rate

The Bundesbank's Communications Strategy and Policy Conflicts with the Federal Government

In this paper we provide an estimate of the likelihood of conflict between the federal government and the Bundesbank for the 1989 – 1998 period. We rely on a novel proxy for the impact of public communication by Bundesbank officials on the probability of conflict, in addition to interest rate, exchange rate, money supply behavior, as well as electoral influences. The empirical evidence is consistent with the view that speeches by the Bundesbank President dealing with inflation and economic policy are a positive source of conflict in a probabilistic sense. Conflict was not a constant but flared up at times of economic stress and could be exacerbated by the "talking" of Bundesbank officials. --Deutsche Bundesbank,Conflict,Central Bank Communication,Political Factors

Asset Prices as Indicators of Euro Area Monetary Policy: An Empirical Assessment of Their Role in a Taylor Rule

This paper estimates forward-looking and forecast-based Taylor rules for France, Germany, Italy, and the euro area. Performing extensive tests for over-identifying restrictions and instrument relevance, we find that asset prices can be highly relevant as instruments in policy rules. While asset prices improve Taylor rule estimates, different assets prove most relevant across countries and this result could be seen as complicating the tasks of the European Central Bank. Encompassing tests show that forecast-based outperform forward-looking Taylor rules. A policy implication is that central banks ought to release their own forecasts and the basis upon which they are generated.Monetary policy reaction functions, Asset prices, Instruments, European Central Bank

Trading Behavior During Stock Market Downturns: The Dow, 1915 - 2004

Stock markets periodically experience sharp falls with some referred to as outright crashes. The extant literature has generally resorted to survey type evidence to determine the behavior of investors during such episodes. These kind of studies come to the conclusion that fundamentals play little role in explaining sharp stock market downturns as in October 1987. We know of no econometric study that asks whether feedback, momentum or trend chasing type behavior might explain the behavior of large stock market downturns. Resorting to a feedback trader model, we estimate a variety of asymmetric GARCH-type models. Based on daily data on the Dow Jones Industrial Average index since 1915 we find that there is evidence of positive feedback trading during episodes of stock market crashes. Hence, the econometric evidence is broadly consistent with findings based on surveys. --

Dectecting speculative bubbles in stock prices: A new approach and some evidence for the US

A large part of the current debate on US stock price behavior concentrates on the question of whether stock prices are driven by fundamentals or by non-fundamental factors. In this paper we put forward the hypothesis that a present value model with time-varying expected returns provides an empirically valid description of US stock price behavior in the long-run, while short-run deviations of actual share prices from present value prices are driven by nonfundamental factors like speculative bubbles and/or noise trading behavior. Our empirical findings for the US stock market covering the 1871:1 - 2000:12 period provide strong and robust support for the hypothesis that in the short-run US stock prices exhibit nonfundamental run-ups followed by crashes, while in the long-run US share prices adhere to fundamentals. --Present Value Model,US Stock Prices,Asymmetric Adjustment,Cointegration

The Other January Effect: International Evidence

This paper investigates the predictive power of stock market returns in January for the subsequent eleven months' returns across 19 countries, thereby contributing to the literature on stock market seasonalities. Only two out of 19 countries' stock markets exhibit a robust Other January Eect. In light of this evidence, we conclude that the Other January Eect is not an international phenomenon.Stock market efciency, Other January Efect, Stock market anomalies

Institutional investors and stock market efficiency: The case of the January anomaly

In this paper, we investigate the effect of institutional investors on the January stock market anomaly. The Polish and Hungarian pension system reforms and the associated increase in investment activities of pension funds are used as a unique institutional characteristic to provide evidence on the impact of individual versus institutional investors on the January effect. We find robust empirical results that the increase in institutional ownership has reduced the magnitude of an anomalous January effect induced by individual investors’ trading behavior.Institutional traders; Individual investors; January effect; Polish and Hungarian pension fund investors