The effect of asymmetries on stock index return value-at-risk estimates

It is widely accepted that equity return volatility increases more following negative shocks rather than positive shocks. However, much of value-at-risk (VaR) analysis relies on the assumption that returns are normally distributed (a symmetric distribution). This article considers the effect of asymmetries on the evaluation and accuracy of VaR by comparing estimates based on various models

Shocking the Eurozone

In this paper, the monetary transmission mechanism within the European Monetary Union is investigated. The impulse response functions and forecast error variance decompositions of a structural vector error correction model (SVECM) are compared with those of a New Keynesian theoretical model. The identifying restrictions of the SVECM are directly derived from the theoretical model. Two permanent shocks are identified, one having only nominal, and one having only real effects. The three transitory shocks comprise a short term interest rate shock, an aggregate demand shock and a money demand shock. The main conclusions are that permanently reducing the inflation objective depresses output in the first year, but has no real effects in the long run. Regarding output variability, the results indicate that aggregate demand shocks are most important during the first year, after which aggregate supply shocks dominate.Monetary transmission; Taylor rule; rational expectations; generalized common trends model

Currency Crises Models for Emerging Markets

In this paper, a new method is introduced to predict currency crises. The method models a continuous crisis index, based on depreciations and reserve losses. The fact that during currency crises, the behaviour of market participants differs from normal circumstances is modelled by means of model with two regimes, one for troubled, and one for normal times. Both the probability of entering the crisis regime, and the expected depreciation and volatility in this regime depend on economic circumstances. The probability of crisis can be explained by the real exchange rate, the inflation rate, the growth of the short-term debt over reserves ratio, the reserves over M2 ratio, and the imports over exports ratio, whereas the depth of a crisis is primarily related to local depreciations and the short term debt over reserves ratio. The most important factors for explaining current month's crisis index are recent changes in the exchange rate and reserves themselves however. The model is reasonably successful in predicting currency crises, also out of sample.Panel data; endogenous jumps; two regime econometric model; fundamentals

On the Strength of the US dollar: Can it be Explained by Output Growth?

One popular view on the current strength of the US dollar is that the higher growth in the US compared to Europe has stimulated foreigners to buy American assets, thereby driving up the exchange rate. In this paper a modified portfolio balance model is presented, in which it is shown that the impact of output growth on the exchange rate depends crucially on the origin of this growth. An improvement of the output gap is shown to actually depress the exchange rate whereas an increase in potential output growth leads to an appreciation, especially if this improvement is likely to be persistent. In an empirical example, it is shown that the equilibrium Dmark dollar rate is indeed positively affected by a positive trend growth differential between the US and Germany, whereas it is negatively affected by a positive output gap differential.rational expectations; portfolio balance model; Taylor rule; Kalman filter; foreign direct in-vestment

Capital requirements and competition in the banking industry

This paper focuses on the interaction between regulation and competition in an industrial organisation model. We analyse how capital requirements affect the profitability of two banks that compete as Cournet duopolists on a market for loans. Bank management of both banks choose optimal levels of loans provided, equity ratio and effort to reduce loan losses so as to maximise profits. From the regulator's point of view, the free market solution is not optimal as private banks do not take into account the consumer surplus and the social cost of bankruptcy (financial stability aspects). It is shown that capital requirements may improve welfare, even under conditions that both banks would never default. Moreover, we find that higher capital requirements impose a higher burden on the inefficient bank than on the efficient one, even though the requirement may only be binding for the efficient bank. If the inefficient bank chooses a strategy that might result in bankrutpcy, capital requirements are particularly welfare improving.Cournot duopoly; Capital requirements; Profit paradox; level playing field

International convergence of capital market interest rates.

This article investigates the extent of capital market interest rate convergence among six EU countries on the one hand, and a group of four countries with floating exchange rates - US, Germany, Japan and Switzerland - on the other. We conclude that interest rate changes within the EU have been and still are converging gradually since 1980. Within the group of free-float currencies, the increase in convergence occurred abruptly around 1980, after which the extent of convergence remained roughly constant. Moreover, the presumed higher influence of US long-term interest rates on the level of German interest rates could not be detected