This study presents a framework for extracting long-run GDP growth and inflation expectations from financial market data on a real-time basis.The framework uses information from both stock and bond markets.It builds on a dividend discount model of stock valuation and on a linearized consumption Euler equation. Furthermore, expected long-run dividend growth for a broad equity index is assumed to be related to expected long-run GDP growth. Short-run and long-run dividend growth expectations are allowed to differ.The former are measured using equity index futures.We extract growth and inflation expectations for the euro area and for the United States. Key words: inflation expectations, growth expectations, equity index futures JEL classification numbers: E31, E44, E66

The purpose of this paper is to provide an explanation for relative pricing of futures contracts with respect to underlying stocks using a model incorporating short sales constraints and informational lags between the two markets.In this model stocks and futures are perfect substitutes, except for the fact that short sales are only allowed in futures markets.The futures price is more informative than the stock price, because the existence of short sales constraints in the stock market prohibits trading in some states of the world.If an informed trader with no initial endowment in stocks receives negative information about the common future value of stocks and futures, he is only able to sell futures.Uninformed traders also face a similar short sales constraint in the stock market.As a result of the short sales constraint, the stock price is less informative than the futures price even if the informed trader has received positive information.Stocks can be under- and overpriced in comparison with futures, provided that market makers in stocks and futures only observe the order flow in the other market with a lag.Our theory implies that: 1) the basis is positively associated with the contemporaneous futures returns; 2) the basis is negatively associated with the contemporaneous stock return; 3) futures returns lead stock returns; 4) stock returns also lead futures returns, but to a lesser extent; and 5) the trading volume in the stock market is positively associated with the contemporaneous stock return.The model is tested using daily data from the Finnish index futures markets.Finland provides a good environment for testing our theory, since short sales were not allowed during the period for which we have data (27 May 1988 - 31 May 1994).We find strong empirical support for the implications of our theory.

The optimum behavior of a competitive risk-averse international trader who supplies or demands commodities invoiced in foreign currency is examined when his profits are subject to several forms of risk: production, domestic cost, the exchange rate and the commodity price.The focus of the analysis lies in the optimality conditions for the level of trade and the extent of forward exchange and commodity futures commitments.New results on the implications of the framework for the separation and the double-hedging theorems are derived.The behavior of the same firm with and without complete markets is compared and conditions are obtained for a domestic price guarantee or a gradual introduction of missing markets to promote the level of international trade. (JEL D81, D84, F19, F31)

This paper introduces a methodology for identifying oil supply shocks in a restricted VAR system for a small open economy. Financial market information is used to construct an identification scheme that forces the response of the restricted VAR model to an oil shock to be the same as that implied by futures markets. Impulse responses are then calculated by using a bootstrapping procedure for partial identification. The methodology is applied to Finland and Sweden in illustrative examples in a simple 5-variable model. While oil supply shocks have an inflationary effect on domestic inflation in these countries during the past decade or so, the effect on domestic GDP is more ambiguous. Keywords: oil futures, partial identification, macroeconomic shocks JEL classification numbers: C01, E32, E44

This paper estimates switching autoregressive conditional heteroscedasticity (SWARCH) time series models for weekly returns of nine Asian forward exchange rates. We find two regimes with different volatility levels, whereby each regime displays considerable persistence. Our analysis provides evidence that the knock-on effects from China's U.S. dollar future rates upon other Asian countries have been modest, in that little evidence exists for co-dependence of volatility regimes. Keywords: China, renminbi, Asia, forward exchange rates, non-deliverable forward market, SWARCH models JEL-Classification: C22, F31, F36