ARCH modeling in finance: A review of the theory and empirical evidence

This bestselling and thoroughly classroom-tested textbook is a complete resource for finance students. A comprehensive and illustrated discussion of the most common empirical approaches in finance prepares students for using econometrics in practice, while detailed case studies help them understand how the techniques are used in relevant financial contexts. Worked examples from the latest version of the popular statistical software EViews guide students to implement their own models and interpret results. Learning outcomes, key concepts and end-of-chapter review questions (with full solutions online) highlight the main chapter takeaways and allow students to self-assess their understanding. Building on the successful data- and problem-driven approach of previous editions, this third edition has been updated with new data, extensive examples and additional introductory material on mathematics, making the book more accessible to students encountering econometrics for the first time. A companion website, with numerous student and instructor resources, completes the learning package.

Introductory Econometrics for Finance

The potential for rare economic disasters explains a lot of asset-pricing puzzles. I calibrate disaster probabilities from the twentieth century global history, especially the sharp contractions associated with World War I, the Great Depression, and World War II. The puzzles that can be explained include the high equity premium, low risk-free rate, and volatile stock returns. Another mystery that may be resolved is why expected real interest rates were low in the United States during major wars, such as World War II. The model, an extension of work by Rietz, maintains the tractable framework of a representative agent, timeadditive and isoelastic preferences, and complete markets. The results hold with i.i.d. shocks to productivity growth in a Lucas-tree type economy and also with the inclusion of capital formation. The Mehra-Prescott [1985] article on the equity risk-premium puzzle has received a great deal of attention. An article published three years later by Rietz [1988] purported to solve the puzzle by bringing in low-probability economic disasters, such as the Great Depression. I think that Rietz’s basic reasoning is correct, but the profession seems to think differently, as gauged by the continued attempts to find more and more complicated ways to resolve the equity-premium puzzle. I think the major reason for skepticism about Rietz’s argument is the belief that it depends on counterfactually high probabilities and sizes of economic disasters. Thus, a key aspect of my empirical analysis is the measurement of the frequency and sizes of the international economic disasters that occurred during the twentieth century. The three principal events are World War I, the Great Depression, and World War II, but post-World War II depressions have also been significant outside of OECD countries. My analysis of these events suggests a disaster probability of 1.5–2 percent per year with a distribution of declines in per capita GDP ranging between 15 percent and 64 percent. I construct a model of the equity premium that extends Lucas

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Rare Disasters and Asset Markets in the Twentieth Century

Econometric policy evaluation: A critique

A complete resource for finance students, this textbook presents the most common empirical approaches in finance in a comprehensive and well-illustrated manner that shows how econometrics is used in practice, and includes detailed case studies to explain how the techniques are used in relevant financial contexts. Maintaining the accessible prose and clear examples of previous editions, the new edition of this best-selling textbook provides support for the main industry-standard software packages, expands the coverage of introductory mathematical and statistical techniques into two chapters for students without prior econometrics knowledge, and includes a new chapter on advanced methods. Learning outcomes, key concepts and end-of-chapter review questions (with full solutions online) highlight the main chapter takeaways and allow students to self-assess their understanding. Online resources include extensive teacher and student support materials, including EViews, Stata, R, and Python software guides.

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This paper tests the long-run validity of PPP using Johansen's multivariate cointegration methodology on exchange rates and domestic and foreign price levels. Monthly data covering the recent flexible exchange rate period of the DM vis a vis 15 currencies le ad to the following conclusion: PPP seems to hold in the long run for s ix European currencies: the Pound, Lira, Norwegian Krone, Schilling, Escudo, and Peseta. However, PPP has to be rejected.for the United States and the Canadian Dollar as well as for the Belgian Franc and the Danish Krone. Nevertheless, the authors' analysis is more favorable to PPP as a long-run property of exchange rates than the recent work applying the Engle/Granger regression methodology. Copyright 1993 by MIT Press.

Multivariate cointegration analysis and the long-run validity of PPP

Non-linearities in foreign exchange markets: a different perspective

The expectations theory of the term structure of interest rates supplemented by the rational expectations and time-invariant risk premium assumption implies that the spread between the long and the short rate has in general predictive power for the short rate. This implication was consistently rejected in recent studies [Shiller, Campbell, and Schoenholtz, 1983; Fama, 1984; Mankiw and Summers, 1984] with data at the short end of the maturity spectrum (threeand six-month treasury bills). Time variations of the risk premium, which are probably important for the behavior of the yield on long-term bonds, are not an entirely satisfactory explanation for these findings. In a more recent article of Mankiw and Miron [1986], who analyzed quarterly data for threeand six-month interest rates over the period 1890-1979, an interesting new explanation for the failure of the expectations theory emerged. They showed that the spread had substantial predictive power for changes in the short rate in the period before the founding of the Federal Reserve (1890-1914), whereas for all other periods considered (1915-1933, 1934-1951, 1951-1958, and 1959-1979), the spread did not help to predict the short rate. Thus, Mankiw and Miron suggested that the rejection of the expectations theory with recent data is a consequence of the commitment of the Federal Reserve to stabilize interest rates resulting in random walk behavior of the short rate. Under these circumstances, expected future short rates are equal to the actual short rate and variations of the spread are only brought about by changes in the risk premium. In this note the short-term interest rate stabilization explanation for the failure of the predictive implications of the expectations theory of the term structure is subjected to an additional empirical test using recent monthly data. Thereby, the short end of the term structure of Swiss, German, and U. S. interest rates is analyzed for the years 1974-1986. These three cases are of great interest in our context. The Swiss National Bank and the German Federal Bank used the opportunity offered by the flexible exchange rate system to implement money supply targets and did not attempt to stabilize short-term interest rates, whereas the Federal Reserve was at

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An Empirical Note on the Term Structure and Interest Rate Stabilization Policies

This article examines developments in the syndicated loan markets during the financial crisis. The investigation of deal structures and purposes suggests that supply constraints aggravated the sharp decline of syndicated lending. An econometric analysis confirms that balance sheet constraints of international banks played a significant part in the collapse of syndicated lending.

The Collapse of International Bank Finance During the Crisis: Evidence from Syndicated Loan Markets

1. INTRODUCTION The interest in monetary analysis in the euro area has considerably increased since some studies raised substantial doubts about the existence of a stable long-run money demand function, which seemed to be firmly established with data of the 1980s and 1990s (see, for instance, Bruggeman, Donati and Warne, 2003, Carstensen, 2006). This evidence against a prerequisite for monetary analysis within the frame of the quantity theory (Friedman, 1971) has been corroborated by results obtained when analyzing the relationship between money growth and inflation. Gerlach and Svensson (2003) and Nicoletti Altimari (2001) find that the predictive power of money growth for inflation is only minor, whereas real variables like the output gap and the real money gap have higher predictive power. On the other hand, in the spirit of Lucas (1980), some authors document the relevance of "trend" or core money growth for trend or core inflation, either by estimating the trend components with the Hodrick-Prescott (HP) filter (Neumann, 2003; Neumann and Greiber, 2004), with an exponentially weighted moving average filter (Gerlach, 2004), or with a low-frequency band filter (Assenmacher-Wesche and Gerlach, 2006, Bruggeman et al. 2005). We provide additional evidence for the relevance of money growth for inflation in the euro area. We show that the link between money growth and inflation is also observable in the data without extracting the trend or core components of both time series. We do not design a structural model for inflation dynamics and do not rely on the assumption of a stable long-run money demand function as in, for example, Gerlach and Svensson (2003). Based on the statistical--the unit root and cointegration--properties of the data, we estimate a vector error correction model (VECM) for money growth and inflation, including additionally the output gap and a short-and a long-term interest rate. We find that the money stock M3 and the harmonized index of consumer prices are integrated of order 2, I(2), but cointegrated in their growth rates. Both interest rates are I(1) variables but cointegrated. This means that we work with a stationary term spread. Coenen and Vega (2001), Holtemoller (2004), and Dreger and Wolters (2006) also make a case for second-order integrated money stock and prices. The sample periods analyzed in Coenen and Vega and in Holtemoller end in 1998 and 2001, respectively. However, extending the sample beyond 2001 destroys the stable long-run money demand function estimated by these authors (Carstensen, 2006; Neumann and Greiber, 2004). Dreger and Wolters, on the other hand, estimate a stable money demand function by including the inflation rate as an additional measure for the opportunity cost of money holdings. We proceed by using the cointegration property of money growth and inflation. This means that real money growth, which in order to have no accelerating or decelerating effect on inflation should on average equal real output growth and velocity changes, followed a stationary process between 1977 and 2006. The estimates show that deviations from this "balanced growth path" initiate substantial, significant dynamical adjustments in the inflation and in the money growth rate. Money growth innovations have a significant effect on inflation and account for up to 30% in the forecast error variance of inflation. Innovations in the output gap and both interest rates have only transitory effects on inflation and vanish in the medium term. Although inflation shocks also affect money growth in the long run, their importance is minor, as the largest share (up to 66%) in the forecast error variance of money growth is accounted for by own shocks. The relationship between money growth and inflation remains stable even if we allow for generalized dynamics. The Markov switching VECM identifies a second regime, which prevailed at the end of the 1970s and beginning of the 1980s. …

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Peter Kugler

Papers

Multivariate cointegration analysis and the long-run validity of PPP

Non-linearities in foreign exchange markets: a different perspective

An Empirical Note on the Term Structure and Interest Rate Stabilization Policies

The Collapse of International Bank Finance During the Crisis: Evidence from Syndicated Loan Markets

Does money matter for inflation in the euro area