52 research outputs found
Asset prices and exchange rates: a time dependent approach
No full textThe paper studies the relationship between exchange rates and asset prices. It takes the approach of order ows to exchange rates. Specifically, it focuses on the effect of time-dependent risk aversion. The switch in the parameter causes the equilibrium of the system to alternate between two regimes: an optimistic and a pessimistic one. The paper is complete of a wide empirical section where the two equilibria are identified and specified for three of the main world markets. The regimes appear to be persistent and consistent with the existing literature on risk aversion. This also includes recent events of the financial crisis. The analysis uncovers a new development for exchange rate microstructure models. 3 of the 4 markets studied are consistent with both the order flow and the Markov switching models. The markets analyzed are the UK, Switzerland, Germany and Japan.Exchange rates, Microstructure, Markov chains
Asset prices and exchange rates: a time dependent approach.
No full textThe paper studies the relationship between exchange rates and asset prices. It takes the approach of order ows to exchange rates. Specifically, it focuses on the effect of time-dependent risk aversion. The switch in the parameter causes the equilibrium of the system to alternate between two regimes: an optimistic and a pessimistic one. The paper is complete of a wide empirical section where the two equilibria are identified and specified for three of the main world markets. The regimes appear to be persistent and consistent with the existing literature on risk aversion. This also includes recent events of the financial crisis. The analysis uncovers a new development for exchange rate microstructure models. 3 of the 4 markets studied are consistent with both the order flow and the Markov switching models. The markets analyzed are the UK, Switzerland, Germany and Japan.
Unpacking Economic Uncertainty: Measuring the Firm, Sector and Aggregate Components
No full textWe introduce a novel method for measuring economic uncertainty at the firm, sector, and aggregate levels using sales volatility and validate it by comparison with existing macroeconomic uncertainty measures. We use Compustat firms data in the period 2000-2022 to construct our uncertainty measures for the U.S. economy. Our findings highlight that 1) macroeconomic conditions are the predominant source of firms’ uncertainty, 2) diverse firm traits yield notable heterogeneity, and 3) the manufacturing sector exhibits the highest uncertainty among sectors. Our findings shed light on the importance of firm and sectoral heterogeneity in studying uncertainty and its effects on economic activit
Foreign exchange and stock market: tow related markets?
No full textThis paper studies the relationship between the stock market and the exchange rate in several countries. The approach taken in the first part of this study is a linear VAR, to be compared in the following part to a MSVAR. The data is also analyzed by Granger causality tests in both contexts and a thorough description of the empirical results obtained is shown. The research uncovers a spread (but not constant over time) causality from the exchange rate and American stock market to the local markets of the different nations studied. The non-linear, time varying approach allows several considerations on the dynamics of the relationship. The markets analyzed are the Japanese, the British and the German (pre-Euro) market against the US Dollar and the US stock market. The frequency of the data used is daily.
Asset prices and exchange rates: a time dependent approach
No full textThis paper studies the relationship between exchange rates and asset prices. It takes the novel approach of modeling both the markets in a framework of heterogeneous agents. Investors maximize their profits from the international equity markets by solving a Mean-Variance problem. As a result, agents choose between different combinations of rules in the home and foreign equity market as well as in the foreign exchange market. Given the incomplete information setting, agents check the past profitability of their rules and switch behavior in the effort to maximize their profits. Due to the heuristics embedded within the model, this simple frame-work alone is able to create a complex, time-varying dynamics. This dynamics is analyzed for different parameters and conditions. Finally the model is brought to the data, to check the fitness of the predictions on the real world markets.Behavioral finance, exchange rates, asset prices
Foreign exchange and stock market: two related markets?.
No full textThis paper studies the relationship between the stock market and the exchange rate in several countries. The approach taken in the first part of this study is a linear VAR, to be compared in the following part to a MSVAR. The data is also analyzed by Granger causality tests in both contexts and a thorough description of the empirical results obtained is shown. The research uncovers a spread (but not constant over time) causality from the exchange rate and American stock market to the local markets of the different nations studied. The non-linear, time varying approach allows several considerations on the dynamics of the relationship. The markets analyzed are the Japanese, the British and the German (pre-Euro) market against the US Dollar and the US stock market. The frequency of the data used is daily.
Essays on macroeconomics and international finance.
No full textThis work is a collection of articles in a logical progression. We begin by studying the relationship between the exchange rate and the stock markets. These markets have many properties in common. Both are dependent on the fundamentals of the economy, while still exhibiting large fluctuations and excess, clustered, volatility. Financial data is widely available, which gives an opportunity to test the validity of specific models.We focus on this field for the first two chapters, by adopting different theoretical axioms in each contribution. Finally, in the last chapter we take one of the most restrictive theoretical assumptions seen in the previous chapters, rational expectations, and we relax it for the wider class of dynamic stochastic general equilibrium models.More in detail, in the first chapter we impose a theoretical framework. This is the approach of order flows to exchange rates (Rey and Hau, 2006). More specifically we analyze the effect of a time-dependent risk aversion. We find that the switch in the parameter causes the equilibrium of the system to alternate between two regimes: an optimistic and a pessimistic one. The paper is complemented with an empirical section where the two equilibria are identified and specified for three of the main world markets. The regimes appear to be persistent and consistent with the existing literature on risk aversion. This also includes recent events of the financial crisis. The analysis uncovers a new development for exchange rate microstructure models. 3 of the 4 markets studied are consistent with both the order flow and the Markov switching models. The markets analyzed are the UK, Switzerland, Germany and Japan.The second chapter assumes a more complex structure of expectations. To do this we merge two branches of the literature. On the one hand we study a heterogeneous agents framework (of the type of De Grauwe and Grimaldi, 2006), which is used to model exchange rates and stock prices. On the other hand we model the macroeconomic relationship between these two series through a small open economy DSGE model. From the behavioral finance literature, investors may choose one of two rules to form their expectations and maximize profits. One rule is based on an open economy general equilibrium model, which gives forecasts as it reacts to the information coming from the financial markets. Through this macroeconomic structure, exchange rate misalignments may influence stocks and vice versa. The second rule follows a statistic, backward looking approach. As a result, agents endogenously choose between different combinations of rules as they invest in the home equity market and in the foreign exchange market. We show that the simulated series replicate the dynamics of the real data, including the specific correlation between stock prices and exchange rates. The main finding is that disequilibria (and bubbles) in one market may create values in the other that are similar to chartists bubbles, while following only DSGE driven expectations.The last chapter follows logically from the previous ones. In particular, we take chapter two and reverse the model. In stead of using a DSGE model to construct fundamentalist expectations, chapter four sees heterogeneous agents who live in a DSGE world (and therefore maximize utility of consumption and labor...) and have rational beliefs.We study the behavior of this New Keynesian Model with diverse beliefs in the presence of a technology shock and a cost push shock.We take the model developed in Kurz, Piccillo, Wu (2012). This is its first application in a setting with a technology shock, therefore we set the ranges for the new parameters. Then we add the cost push and check the effect on the model. The difference of this model with its rational expectations counterpart is significant. From the point of view of replicating the actual data's volatilities, this model does so with shocks that are considerably smaller than the ones normally assumed in rational expectations.In particular, the technology shock that we assume is in line with the literature on total factor productivity. The cost push shock is also very small and with low persistence. Finally, we look at monetary policy under this more general assumption. We study the case when the central bank chooses the traditional weights on output and inflation as well as address the issue of optimal monetary policy. This application shows that when the uncertainty in an economy is amplified by diverse beliefs the central bank has the means to control excess volatility. Monetary policy takes up a crucial role to stabilize this economy. However the way that the central bank can stabilize the economy is different than in the policy guidelines given by using models with rational expectations.status: Publishe
Foreign exchange and stock market: two related markets?
No full textThis paper studies the relationship between the stock market and the exchange rate in several countries. The approach taken in the first part of this study is a linear VAR, to be compared in the following part to a MSVAR. The data is also analyzed by Granger causality tests in both contexts and a thorough description of the empirical results obtained is shown. The research uncovers a spread (but not constant over time) causality from the exchange rate and American stock market to the local markets of the different nations studied. The non-linear, time varying approach allows several considerations on the dynamics of the relationship. The markets analyzed are the Japanese, the British and the German (pre-Euro) market against the US Dollar and the US stock market. The frequency of the data used is daily.status: Publishe
Uncertainty, ambiguity aversion and illusory pattern perception
No full textWe test the correlation between Ambiguity Aversion (AA) and illusory pattern perception (IPP). We use different realizations of Illusory pattern perception: recognizing human faces in noisy pictures, conspiracy theories and belief in fake news. Our hypothesis is that in the cross section AA will be higher for the subjects for which any of these realizations is higher. We believe that this correlation will be stronger for people who are facing a salient (relevant) form of uncertainty in their lives. We define our variables according to the attached study. The attached study gives details on how we plan to compute all our variables (except for fake news, which is made of news-like posts invented by us). We also check, according to this file, if people who recently dropped their social contacts the most (due to COVID-19) have a significantly higher AA than the others. We test these correlations on a representative sample of the US, a few days before the presidential elections (from October 29). We are going to post the survey shortly
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