Browsing by Subject "G12"

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  • Marzo, Massimiliano; Romagnoli, Silvia; Zagaglia, Paolo (2008)
    Bank of Finland Research Discussion Papers 25/2008
    We study the term structure implications of the fiscal theory of price level determination. We introduce the intertemporal budget constraint of the government in a general equilibrium model in continuous time. Fiscal policy is set according to a simple rule whereby taxes react proportionally to real debt. We show how to solve for the prices of real and nominal zero coupon bonds. Keywords: bond pricing, fiscal policy, mathematical methods JEL classification numbers: D9, G12
  • Keloharju, Matti; Malkamäki, Markku; Nyborg, Kjell G.; Rydqvist, Kristian (2002)
    Suomen Pankin keskustelualoitteita; Bank of Finland. Discussion papers 16/2002
    This paper presents a descriptive analysis of the primary and secondary market for Finnish treasury bonds.The paper focuses on three issues.First, we report basic descriptive statistics such as auction volumes and secondary market yields and volumes.Second, we estimate the revenues earned by primary dealers from the treasury bond market.Third, we analyse the development of the price of the auctioned bonds, relative to other benchmark bonds, around the time of the auction.We find evidence of a price decrease in the auctioned bond series before the auction and a price increase after the auction.This pattern is strongest for 1992-1994 when Treasury funding needs were heavy and secondary market trading volume of treasury bonds was modest. Key words: treasury bond auctions, secondary market JEL classification numbers: D44, G12, G20
  • Taipalus, Katja (2006)
    Bank of Finland Research Discussion Papers 29/2006
    The dividend yield ratio in the stock markets is, to an extent, comparable to the rent-price ratio in the housing market.Taking advantage of this definitional similarity, one can then use the traditional unit root test for log dividend yield in this case, the log rent-price ratio to test for the existence of real estate bubbles.Such unit root tests are conducted for Finland, USA, UK, Spain and Germany, and the simple test results strongly suggest the existence of bubbles in nearly all of these countries.In addition to this, we develop a continuous and monthly rent-price information-based method to track the periods when real estate prices diverge from their fundamental levels.This indicator seems to work quite well in most cases, indicating bubbles during periods which, according to the consensus literature, are seen as periods of sizable upward or downward shifts in house prices. Key words: house price, bubble, unit root JEL classification numbers: G12
  • Bask, Mikael (2006)
    Bank of Finland Research Discussion Papers 7/2006
    Published in European Financial Management, 14, No. 1, 2008, Pages 99-117
    It is demonstrated in this paper that adaptive learning in least squares sense may be incapable to reduce, in a satisfactory way, the number of attainable equilibria in a rational expectations model.The model investigated, as an illustration, is the monetary approach to exchange rate determination that is augmented with technical trading in the currency market in the form of moving averages since it is the most commonly used technique according to questionnaire surveys.Because of technical trading in foreign exchange, the current exchange rate is dependent on jmax lags of the exchange rate, and the model has, therefore jmax + 1 nonbubble rational expectations equilibria (REE), where most of them are adaptively learnable.However, by assuming that a solution to the model should have a solution to a nested model as its limit, it is possible to single out a unique equilibrium among the adaptively learnable equilibria that is economically meaningful.Key words: asset pricing, heterogenous agents, least squares learnability, rational expectations equilibria and technical trading JEL classification numbers: C62, F31, G12
  • Bask, Mikael (2006)
    Bank of Finland Research Discussion Papers 6/2006
    Published in International Journal of Finance and Economics, Volume 14, Issue 1, January 2009: 64-84
    The aim of this paper is to analyse the announcement effects on exchange rate movements using the basic asset pricing model, where currency trade is partly determined by technical trading in the form of moving averages since it is the most commonly used technique according to questionnaire surveys.Specifically, the announcement and implementation of temporary as well as permanent monetary policy are analysed, where the exchange rate model developed is summarised in a linear difference equation in current exogenous fundamentals, a large number of lags of the endogenous exchange rate and time-t dating of exchange rate expectations. However, since there are a large number of rational expectations equilibria, continuity is proposed as a selection criterion among the equilibria, meaning that the parameter for the time-t - 1 exchange rate should have the limit 0 when there is no technical trading to have an economically meaningful equilibrium.It turns out that there is a unique rational expectations equilibrium that satisfy the continuity criterion, and focusing on this equilibrium, it is shown that the exchange rate is much more sensitive to changes in money supply than when technical trading is absent in currency trade.This result is important since it sheds light on the so-called exchange rate disconnect puzzle in international finance.Key words: asset pricing, exchange rate disconnect puzzle, heterogeneous agents, least squares learnability, monetary policy and technical trading. JEL classification numbers: E51, E52, F31, G12
  • Lof, Matthijs; Bommel, Jos van (2018)
    Bank of Finland Research Discussion Papers 1/2018
    We propose the Volume Coefficient of Variation (VCV), the ratio of the standard deviation to the mean of trading volume, as a new and easily computable measure of information asymmetry in security markets. We use a simple microstructure model to demonstrate that VCV is strictly increasing in the proportion of informed trade. Empirically, we find that firm-year observations of VCV, computed from daily trading volumes, are correlated with extant firm-level measures of asymmetric information in the cross-section of US stocks. Moreover, VCV increases following exogenous reductions in analyst coverage induced by brokerage closures, and steeply decreases around earnings announcements.
  • Taipalus, Katja (2012)
    Suomen Pankki. E 47
    To promote the financial stability, there is a need for an early warning system to signal the formation of asset price misalignments. This research provides two novel methods to accomplish this task. Results in this research shows that the conventional unit root tests in modified forms can be used to construct early warning indicators for bubbles in financial markets. More precisely, the conventional augmented Dickey-Fuller unit root test is shown to provide a basis for two novel bubble indicators. These new indicators are tested via MC simulations to analyze their ability to signal emerging unit roots in time series and to compare their power with standard stability and unit root tests. Simulation results concerning these two new stability tests are promising: they seem to be more robust and to have more power in the presence of changing persistence than the standard stability and unit root tests. When these new tests are applied to real US stock market data starting from 1871, they are able to signal most of the consensus bubbles, defined as stock market booms for example by the IMF, and they also flash warning signals far ahead of a crash. Also encouraging are the results with these methods in practical applications using equity prices in the UK, Finland and China as the methods seem to be able to signal most of the consensus bubbles from the data. Finally, these early warning indicators are applied to data for several housing markets. In most of the cases the indicators seem to work relatively well, indicating bubbles before the periods which, according to the consensus literature, are seen as periods of sizeable upward or downward movements. The scope of application of these early warning indicators could be wide. They could be used eg to help determine the right timing for the start of a monetary tightening cycle or for an increase in countercyclical capital buffers. Key words: asset prices, financial crises, bubbles, indicator, unit-root JEL classification: C15, G01, G12
  • Isoré, Marlène; Szczerbowicz, Urszula (2017)
    Journal of Economic Dynamics and Control 1 June
    CEPII Working Paper N°2015-16, September 2015
    In RBC models, disaster risk shocks reproduce countercyclical risk premia but generate an increase in consumption along the recession and asset price fall, through their effects on agents’ preferences (Gourio, 2012). This paper offers a solution to this puzzle by developing a New Keynesian model with such a small but time-varying probability of “disaster”. We show that price stickiness, combined with an EIS smaller than unity, restores procyclical consumption and wages, while preserving countercyclical risk premia, in response to disaster risk shocks. The mechanism then provides a rationale for discount factor first- and second-moment (“uncertainty”) shocks.
  • Hasan, Iftekhar; Meslier, Céline; Tarazi, Amine; Zhou, Mingming (2018)
    Journal of Economics and Business January-February
    This paper examines the effects of bank alliance network on bonds issued by European banks during the period 1990–2009. We construct six measures capturing different dimensions of banks’ network characteristics. In opposition to the results obtained for non-financial firms, our findings indicate that being part of a network does not create value for bank’s bondholders, indicating a dark side effect of strategic alliances in the banking sector. While being part of a network is perceived as a risk-increasing event by market participants, this negative perception is significantly lower for the larger banks, and, to a lesser extent, for the more profitable banks. Moreover, during crisis times, the positive impact on bond spread of a bank’s higher centrality or of a bank’s higher connectedness in the network is stronger, indicating that market participants may fear spillover effects within the network during periods of banks’ heightened financial fragility.
  • Kinnunen, Jyri; Martikainen, Minna (2015)
    BOFIT Discussion Papers 30/2015
    ​In this paper, we explore a relation between expected returns and idiosyncratic risk. As in many emerging markets, investors in the Russian stock market cannot fully diversify their portfolios due to transaction costs, information gathering and processing costs, and short-comings in investor protection. This implies that investors demand a premium for idiosyncratic risk – unique asset-specific risk plays a role in investment decisions. We estimate the price of idiosyncratic risk using MIDAS regressions and a cross-section of Russian industry portfolios. We find that idiosyncratic risk commands an economically and statistically significant risk premium. The results remain unaffected after controlling for global pricing factors and short-term return reversal.
  • Jokipii, Terhi (2006)
    Bank of Finland Research Discussion Papers 22/2006
    This paper studies the extent to which market crashes are predictable for a set of six countries, focusing in particular on possible differences between transition economies (The Czech Republic, Hungary and Poland) and mature markets (UK, US and EU). We estimate a set of individual country and pooled specifications to find that market crashes, in the broader sense, are predictable for all countries analysed.We additionally investigate the role that investor heterogeneity, proxied by trading volume, plays in this predictability and find some varying results between countries.For the Central and Eastern European Countries (CE3), an increase in trading volume relative to trend appears to have great predictive power, a result that is supportive of the theory of investor heterogeneity outlined in the relevant background studies. For the more mature markets (G5), on the other hand, market crashes appear more likely to follow a period of increased stock prices and returns, a result fitting a number of traditional theories, in particular the stochastic bubble model.Further analysis, allowing for time-varying coefficients, confirms the volume-crash relationship for the CE3 and provides preliminary evidence that macro news releases may additionally contribute to the predictability of market crashes. Keywords: aggregate market returns, skewness, trading volume, market crash JEL classification numbers: C14, G12, G15
  • Faria, Gonçalo; Verona, Fabio (2016)
    Bank of Finland Research Discussion Papers 29/2016
    Published in Journal of Empirical Finance, 45, January, 2018, 228–242
    We generalize the Ferreira and Santa-Clara (2011) sum-of-the-parts method for forecasting stock market returns. Rather than summing the parts of stock returns, we suggest summing some of the frequency-decomposed parts. The proposed method signi cantly improves upon the original sum-of-the-parts and delivers statistically and economically gains over historical mean forecasts, with monthly out-of-sample R2 of 2.60% and annual utility gains of 558 basis points. The strong performance of this method comes from its ability to isolate the frequencies of the parts with the highest predictive power, and from the fact that the selected frequency-decomposed parts carry complementary information that captures di erent frequencies of stock market returns.
  • Faria, Gonçalo; Verona, Fabio (2018)
    Journal of Empirical Finance January 2018
    Published in Bank of Finland Research Discussion Papers 29/2016.
    We generalize the Ferreira and Santa-Clara (2011) sum-of-the-parts method for forecasting stock market returns. Rather than summing the parts of stock returns, we suggest summing some of the frequency-decomposed parts. The proposed method significantly improves upon the original sum-of-the-parts and delivers statistically and economically gains over historical mean forecasts, with monthly out-of-sample R2 of 2.60% and annual utility gains of 558 basis points. The strong performance of this method comes from its ability to isolate the frequencies of the parts with the highest predictive power, and from the fact that the selected frequency-decomposed parts carry complementary information that captures different frequencies of stock market returns.
  • Faria, Gonçalo; Verona, Fabio (2017)
    Bank of Finland Research Discussion Papers 1/2017
    We show that the out-of-sample forecast of the equity risk premium can be signi ficantly improved by taking into account the frequency-domain relationship between the equity risk premium and several potential predictors. We consider fi fteen predictors from the existing literature, for the out-of-sample forecasting period from January 1990 to December 2014. The best result achieved for individual predictors is a monthly out-of-sample R2 of 2.98 % and utility gains of 549 basis points per year for a mean-variance investor. This performance is improved even further when the individual forecasts from the frequency-decomposed predictors are combined. These results are robust for di fferent subsamples, including the Great Moderation period, the Great Financial Crisis period and, more generically, periods of bad, normal and good economic growth. The strong and robust performance of this method comes from its ability to disentangle the information aggregated in the original time series of each variable, which allows to isolate the frequencies of the predictors with the highest predictive power from the noisy parts.
  • Fedorova, Elena; Vaihekoski, Mika (2008)
    BOFIT Discussion Papers 27/2008
    Published in Finance a uver-Czech Journal of Economics and Finance, 2009, vol.59, no.1,2-19
    We study a pricing model for global and local sources of risk in six Eastern European emerging stock markets. Utilizing GMM estimation and an unconditional asset-pricing framework with and without time-varying betas, we perform estimations based on monthly data from 1996 to 2007 for Poland, Czech Republic, Hungary, Bulgaria, Slovenia and Russia. Most of these markets display considerable segmentation; the aggregate emerging market risk, as opposed to global market risk, is the significant driver for their stock market returns. It also appears that currency risk is priced into stock prices. The difference between local and global interest rates can be used to model the time-variation in the betas for both sources of risk. JEL Classification: G12, G15, G32 Keywords: market integration, segmentation, asset pricing, emerging markets, Eastern Europe country risk
  • Gwilym, Owain Ap; Wang, Qvigwei; Hasan, Iftekhar; Xie, Ru (2013)
    Bank of Finland Research Discussion Papers 10/2013
    Published in European Financial Management, Volume 22, Issue 3, 1 June 2016: 427-449
    Using a novel proxy of investors' speculative demand constructed from online search interest in "concept stocks", we examine how speculative demand affects the returns and trading volume of Chinese stock indices. We find that returns and trading volume increase with the contemporaneous speculative demand. In addition, the high speculative demand causes lower near future returns, while recent high past returns cause the high speculative demand. Moreover, the speculative demand explains more variation in returns and trading volume of A shares (more populated by retail investors) than B shares (less populated by retail investors). Our findings support the attention theory of Barber and Odean (2008). Keywords: Investor Attention, Speculative Demand, Concept Stock, Market Returns, Trading Volume JEL: G02, G12, G14
  • Silvo, Aino (2018)
    Bank of Finland. Scientific monographs. E 52
    This thesis consists of an introductory chapter and three self-contained essays that apply insights from the microeconomic theory of corporate finance in a macroeconomic setting in order to explain and understand various market failures that were at the roots of the global financial crisis of 2007–2009. In particular, I study various forms of incomplete information in the credit market, and their implications on financial stability and on business cycles in the aggregate economy. I also seek to understand how monetary and macroprudential policies can be used to maintain financial stability, and how these two policies interact.
  • Babecký, Jan; Komárek, Lubos; Komárková, Zlatuse (2012)
    BOFIT Discussion Papers 4/2012
    Published in National Institute Economic Review, Volume 223, Issue 1, 2013, Pages R16-R34 as Convergence of Returns on Chinese and Russian Stock Markets with World Markets: National and Sectoral Perspectives.
    Interest in examining the financial linkages of economies has increased in the wake of the 2008/2009 global financial crisis. Applying the concepts of beta- and sigma-convergence of stock market returns, we assess changes over time in the degree of stock market integration between Russia and China as well as between them and the United States, the euro area and Japan. Our analysis is based on national and sectoral data spanning the period September 1995 to October 2010. Overall, we find evidence for gradually increasing stock market integration after the 1997 Asian financial crisis and the 1998 Russian financial cri-sis. Following a major disruption caused by the 2008/2009 global financial crisis, the process of stock market integration resumes between Russia and China, and with world markets. Notably, the episode of sigma-divergence from the 2008/2009 crisis is stronger for China than Russia. We also find that the process of stock market integration and the impact of the recent crisis have not been uniform at the sectoral level, suggesting potential for d-versification of risk across sectors. JEL classification: C23, G15, G12. Keywords: Stock market integration, beta-convergence, sigma-convergence, China, Russia, sectoral and national analysis
  • Sihvonen, Markus (2019)
    Journal of Economic Theory July
    I analyze the survival probabilities of different types of agents in a general equilibrium model with disagreement over idiosyncratic uncertainties. I find that such biases create a separation between individual and group level survival: even when the survival probability of a single irrational agent tends to zero, these agents may still succeed as a whole. Effectively the irrational agent population can survive due to a vanishingly small group of increasingly rich agents. Disagreement over idiosyncratic uncertainties distorts savings decisions and interest rates, but idiosyncratic risks are not priced. Simulations confirm that the limiting results are relevant when the population of irrational agents is large.
  • Ravenna, Federico; Seppälä, Juha (2006)
    Bank of Finland Research Discussion Papers 25/2006
    We study the rejection of the expectations hypothesis within a New Keynesian business cycle model.Earlier research has shown that the Lucas general equilibrium asset pricing model can account for neither sign nor magnitude of average risk premia in forward prices, and is unable to explain rejection of the expectations hypothesis.We show that a New Keynesian model with habitformation preferences and a monetary policy feedback rule produces an upwardsloping average term structure of interest rates, procyclical interest rates, and countercyclical term spreads.In the model, as in U.S. data, inverted term structure predicts recessions.Most importantly, a New Keynesian model is able to account for rejections of the expectations hypothesis.Contrary to earlier work, we identify systematic monetary policy as a key factor behind this result.Rejection of the expectation hypothesis can be entirely explained by the volatility of just two real shocks which affect technology and preferences. Keywords: term structure of interest rates, monetary policy, sticky prices, habit formation, expectations hypothesis JEL classification numbers: E43, E44, E5, G12