Does the ECB Care about Shifts in Investors’ Risk Appetite?

A key problem facing monetary policy makers is determining whether serious financial instability is present. Periods of financial instability are linked with low investors’ risk appetite (or in other words high risk aversion). Two different measures of investors’ risk aversion are used: (a) the implied volatility from the Eurostoxx 50 index (VSTOX) and (b) an index based on principal component analysis applied to risk premia of several stock portfolios in the eurozone area (12 countries) with different fundamental and size characteristics. By using an unrestricted VAR model and impulse response analysis for the period January 1999 to August 2007, our results show that a shock in the risk aversion indicator affects negatively future real activity in the eurozone in a similar way to an exchange rate shock. The ECB reacts significantly to a risk aversion shock by reducing the interest rate in order to provide liquidity. Moreover, assuming rational expectations and using a forward-looking specification of the Taylor rule, we found that investors’ risk aversion affects the ECB behavior as the leading indicator of future economic activity but not as an independent argument for the monetary policy. It views price stability and economic and financial stability as highly complementary and mutually consistent objectives to be pursued within a unified policy framework.European Central Bank; monetary policy; Taylor rule; transmission mechanism; VAR model; GMM

Selecting Strategies to Foster Economists' Critical Thinking Skills: A Quantile Regression Approach

We consider three models of teaching strategies and their effect on developing economics graduates' 'analysis', 'deduction' and 'induction' skills. For each model we compute quantile regression estimates for total sample, male, and female graduates separately. Results show that enriched lectures have a different effect on each critical thinking skill, while their effect differs for low, medium and high quantiles. Student-engaging strategies help more low-to-medium achievers. The third model is more explanatory, especially for low and high achievers. Male and female graduates respond differently to the use of each model. In conclusion, suggestions for strategy selection and further research are made.

Financial Markets are Not Efficient: Financial Literacy as an Effective Risk Management Tool

This paper advances the view that the deep confidence of market regulators in the assumptions and premises of the Efficient Market Hypothesis (EMH) has led to the underestimation of market risks, thus inactivating the market education of existing and future investors. Hence, they have not responded to financial illiteracy, which exacerbated the recent financial crisis. Investor education may be considered as a systemic risk management tool for future financial crises and, especially, financial literacy can drive a wedge between the regulation and the prevention of severe financial crises based on expected benefits versus losses. This also will help to regain investors’ trust in the market after the crisis and instill investors with more confidence. This approach has not yet received the attention it deserves

The determinants for the survival of firms in the Athens Exchange

This study examines the survival of firms in the Athens Exchange for the period 1993-2006, by applying a number of alternative parametric and non-parametric models. A company is considered not to survive, if its shares have been either under supervision or their trading is suspended for over six months. According to the results, firms characterised by a high degree of debt or by small size or firms that are active in sectors in which new competitors can penetrate easily, run higher risks of non-survival. By contrast, factors such as the corporate governance and the business cycle do not seem to offer a plausible explanation for the probability of non-survival. In addition, it appears that the risk of non-survival is increasing during the first years of a firm's listing in the stock exchange, peaking after approximately 7 years and then decreasing; this suggests that investments in stocks should have a long-term focus.survival models; company delisting

Examining the forecasting performance of a modified affine model with macroeconomic and latent factors

Various studies model the dynamics of the yield curve assuming that some of the yields are measured without error but this methodology lacks economic interpretation. We overcome this problem by estimating a modified affine model with macroeconomic and latent factors which introduces measurement noise on both yields and macroeconomic determinants. Our results suggest that under the proposed model there is a significant reduction in the persistence of the latent factors and an increase in the effect of macroeconomic shocks to the entire yield curve. We provide a comparative analysis of these models, and we conduct out of sample comparative forecasts to investigate if our specification has a superior performance. We find important differences concerning the magnitude of the dynamics that move the yield curve. Our model provides better forecasts for the entire yield curve while it also beats random walk in many cases. This is an important finding since according to the relative literature it is very difficult for any affine model to outperform random walk

Stock markets and industrial production in north and south of Euro-zone: Asymmetric effects via threshold cointegration approach

© 2015 PublishedbyElsevierB.V. In this paper, we investigate the relationship between stock prices and industrial production both for South and North of Euro-zone during the period 2004-2013. In contrast to previous studies we identify additional price interaction and dynamics investigating asymmetric adjustment behavior combined with long-run relationship using the Threshold cointegration approach. This method is proper as well because takes into consideration the type of shocks which appears in period 2004-2013. The results demonstrate symmetric adjustment process for the North and asymmetric for the South when stock prices and industrial production adjust to achieve the long-run equilibrium. The main cause of asymmetry is the difference in structural competitiveness which is weakest in South with respect to North. This finding is particularly important because provides the direction of economic policy that should adopt the governments of South of Euro-zone

Money Factors and EMU Government Bond Markets\u27 Convergence

Purpose - “ The authors aim to investigate the cointegrating relationship of the government bond yields, driven by the common money factors in European Monetary Union (EMU). Design/methodology/approach - “ By adopting a dynamic ARDL transformation, the paper provides short-/long-term estimates of bond yields convergence before the burst of the current debt crisis. It also investigates how the degree of convergence between bond yields, driven by money factors, is affected in short/long runs. Findings - “ The findings indicate that the introduction of the common currency has not a uniform effect on the bond yields, and there is a nominal convergence between EMU bond yields based on money market determinants. Originality/value - “ The current financial crisis indicates that the EMU bond market convergence was temporary and it can be highly affected by an exogenous shocks and the sentiment of international investors. The findings imply the necessity for a common monetary and fiscal policy in Euro zone countries

The Information Content of VFTSE

The FTSE 100 Volatility Index (VFTSE) reflects the market expectations of the future monthly volatility of the UK benchmark equity index, FTSE100. VFTSE is calculated using the model-free methodology that involves option prices summations and is independent from the Black and Scholes pricing formula. This study tests and documents the information content of VFTSE regarding both the realized volatility and the returns of the underlying equity index. The empirical findings suggest that VFTSE includes information about future volatility beyond that contained in past volatility and in addition show that there is a statistically significant negative and asymmetric contemporaneous relationship between implied volatility changes and the underlying equity index returns

The January barometer in emerging markets: New evidence from the Gulf Cooperation Council stock exchanges

© Costas Siriopoulos, Layal Youssef, 2019 International investors\u27 interest in the capital markets in the region of Gulf countries has dramatically increased in last two decades. Thus, it would be motivating to investigate their characteristics, where the January anomaly is a major one. This paper studies the veracity of the January effect rule in the Gulf Cooperation Council (GCC) stock markets and examines the predictive power of January returns. Seven GCC stock markets are tested - the market indices in Bahrain, Abu Dhabi, Dubai, Kuwait, Oman, Qatar, and Saudi Arabia - from January 1, 2001 until December 31, 2018, a timeframe which has rarely been analyzed. Ordinary least square (OLS)-based dummy variable regression equation was used as the conventional econometric procedure in the works of financial calendar anomalies in stock markets. Some evidence is reported for the markets of Dubai and Kuwait. The paper also provides an additional explanation for the performance of stock market of Kuwait. The findings are opposite to the well documented evidence that emerging markets are less efficient and hence it is likely that several market anomalies are further pronounced. The results suggest that the predictive power of the January anomaly can be considered as a temporary anomaly in the GCC markets, since it is concentrated in only a couple of GCC markets and does not persist in time

An explanation of spread’s ability to predict economic activity: A regime switching model

© 2016, © Emerald Group Publishing Limited. Purpose – For over two decades numerous studies have provided evidence on the predictive ability of the yield spread for real economic growth. While all this large literature has focussed on how well the spread helps predict real activity, none of these has given an answer on why the spread predicts. The purpose of this paper is to deal with this issue by trying to find an answer on the reason and the economic conditions under which the spread proves to be so powerful predictor of economic activity. Design/methodology/approach – The authors examine whether the explanation of spread’s predictive ability lies behind interest rate volatility supposing that the economy oscillates between high- and low-volatility regimes. For this reason the authors nest GARCH models into Markov regime switching models. Findings – When the authors assume that the economy simply oscillates between different regimes, interest rate volatility does not explain the spread’s predictive ability. However, the authors obtain a very interesting result when the authors augment the conditional variance with a level effects term. This ensures that in an environment with high levels of interest rates – in which the rational agents expect the economy to slow down – there is a greater possibility for the economy to switch to a high-volatility regime. Under these economic conditions, interest rate volatility appears to be the reason of spread’s predictive power from one up to three years. Originality/value – This study contributes to the relevant literature by providing an explanation on the reason and the economic conditions under which the spread proves to be so powerful predictor of economic activity