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ABSTRACT In this paper we show that standard tests for long-run Purchasing Power Parity (PPP) are misspecified if aggregate prices are sticky. Using Monte Carlo simulations, we show that in small samples the ADF test has low power to... more
ABSTRACT In this paper we show that standard tests for long-run Purchasing Power Parity (PPP) are misspecified if aggregate prices are sticky. Using Monte Carlo simulations, we show that in small samples the ADF test has low power to reject the null of no cointegration when long-run PPP is tested using current prices instead of long-run equilibrium prices. We propose an alternative two-step testing procedure, which consists of, first, estimating long-run equilibrium prices from a standard money demand function and, then, testing long-run PPP as a relationship between the current exchange rate and long-run \QTR{em}{equilibrium} price differentials. Finally, we show that in small samples our proposed test has considerably higher power than the standard ADF test for a unit root in the real exchange rate. We apply our test to the effective exchange rate of the Greek drachma in the post-Bretton Woods period and find that it is closely linked to long-run equilibrium price differentials.
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Research Interests: Economics, Econometrics, Asset Pricing, General Equilibrium, Term Structure of Interest Rates, and 12 moreSocial Science Research Network, Inflation, Inflation Cosmology, Interest Rate, Yield Spread, Yield Curve, Term Structure, Output, Price Stickiness, Output Growth, Substitution Effect, and Asset pricing model
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ABSTRACT There is evidence of a strong liquidity effect in the period October 1979-October 1982, when the Federal Reserve targeted the growth rate of M1, and thus monetary surprises were more exogenous than they were in other periods.
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This chapter reviews the developments in Greece's financial system since the beginning of the crisis. The chapter places them in a broader context by (i) evaluating the long-term performance of Greece's financial system in... more
This chapter reviews the developments in Greece's financial system since the beginning of the crisis. The chapter places them in a broader context by (i) evaluating the long-term performance of Greece's financial system in comparison to other countries, and (ii) reviewing the credit boom-and-bust cycle that Greece has experienced since Euro entry. Risks in the Greek economy remain overly concentrated to those originating them and are not well diversified. By raising the cost of equity capital for firms, this impedes investment. It also drives up corporate leverage, thus making the economy more vulnerable to shocks. These vulnerabilities manifested themselves even before the sovereign crisis hit. Strengthening investor protection, through improvements in the justice system and financial regulation, is an important part of the solution. In the shorter run, the debt overhang problem in the private sector should be addressed. The chapter discusses policy options to achieve these goals.
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ABSTRACT It has long been recognized that margin requirements, through leverage, affect the volume of speculative activity. Controlling speculative behavior is one approach to inhibiting overvaluation in stocks and reducing the potential... more
ABSTRACT It has long been recognized that margin requirements, through leverage, affect the volume of speculative activity. Controlling speculative behavior is one approach to inhibiting overvaluation in stocks and reducing the potential for a precipitate price decline fueled by the involuntary selling that stems, for example, from margin calls.
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Michael Salinger has provided a very thoughtful and well-balanced article on margin requirements. The article builds upon and extends some of my earlier work on margin requirements and stock market volatility. Professor Salinger, however,... more
Michael Salinger has provided a very thoughtful and well-balanced article on margin requirements. The article builds upon and extends some of my earlier work on margin requirements and stock market volatility. Professor Salinger, however, reaches a different conclusion than I did about the influence of margin requirements on the stock market. Similarly, Richard Roll’s article in this issue expresses strong doubts about the effectiveness of margin requirements. He surveys some recent work that calls into question the robustness of my results. Thus before I comment on Salinger’s own work, I would like to provide a more general perspective on the issue of margin requirements and answer the basic objections of my critics. I begin in section 1 by describing the main question. Then in section 2, I give an example of the effects of margin requirements on long swings in stock prices, a key variable of interest. In section 3, I respond to the econometric criticisms of Salinger and other critics. In section 4, I comment more generally on Salinger’s article. Finally, in section 5, I summarize my thoughts on the effects of margin requirements and propose possible extensions of current empirical work.
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Abstract Econometric estimates of liquidity effects produce results that are, at best, mixed. Yet the liquidity effect remains a central transmission mechanism for monetary effects. This article examines how problems of data revisions and... more
Abstract Econometric estimates of liquidity effects produce results that are, at best, mixed. Yet the liquidity effect remains a central transmission mechanism for monetary effects. This article examines how problems of data revisions and temporal aggregation affect the empirical effort. We test for liquidity effects, using both initially announced and finally revised M1 data, aggregating across different time intervals and time periods, using different aggregation techniques. We were able to uncover a liquidity effect only in the post-October 1979 period and only at a 13-week observational interval with nonaggregated end-of-period M1 data.
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ABSTRACT An increase in margin requirements in the First Section of the Tokyo Stock Exchange is followed by a decline in margin borrowing, trading volume, the proportion of trading performed through margin accounts, the growth in stock... more
ABSTRACT An increase in margin requirements in the First Section of the Tokyo Stock Exchange is followed by a decline in margin borrowing, trading volume, the proportion of trading performed through margin accounts, the growth in stock prices, and the conditional volatility of daily returns. The nonmarginable Second Section stocks show a smaller change in volatility and only a delayed weak price response. The hypothesis that margin requirements restrict the behavior of destabilizing speculators can explain these correlations but cannot explain the observation that individuals, the most active users of margin funds, appear to be good market timers. Copyright 1992, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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Abstract: The paper examines whether or not the convergence of European economies towards Economic and Monetary Union (EMU) and the launch of the single currency leads to an increase in stock market integration through a reduction in... more
Abstract: The paper examines whether or not the convergence of European economies towards Economic and Monetary Union (EMU) and the launch of the single currency leads to an increase in stock market integration through a reduction in investment barriers. We estimate a ...
Research Interests: Business, Economics, European Union, Stock Market, Social Science Research Network, and 13 moreBusiness and Management, Cost of Capital, Economic and Monetary Union, Capm, Currency risk, Market integration, Financial Integration, Common Currency, Member States, Time varying, Stock Market Integration, Resizing, and Asset pricing model
Abstract Econometric estimates of liquidity effects produce results that are, at best, mixed. Yet the liquidity effect remains a central transmission mechanism for monetary effects. This article examines how problems of data revisions and... more
Abstract Econometric estimates of liquidity effects produce results that are, at best, mixed. Yet the liquidity effect remains a central transmission mechanism for monetary effects. This article examines how problems of data revisions and temporal aggregation affect the empirical effort. We test for liquidity effects, using both initially announced and finally revised M1 data, aggregating across different time intervals and time periods, using different aggregation techniques. We were able to uncover a liquidity effect only in the post-October 1979 period and only at a 13-week observational interval with nonaggregated end-of-period M1 data.
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Page 1. THE EVOLUTION OF FEDERAL RESERVE CREDIBILITY: 1978-1984 Gikas A. Hardouvelis and Scott W. Barnhart* Abstract-A random coefficients Kalman filter model of the response of commodity prices to weekly MI ...
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ABSTRACT An increase in margin requirements in the First Section of the Tokyo Stock Exchange is followed by a decline in margin borrowing, trading volume, the proportion of trading performed through margin accounts, the growth in stock... more
ABSTRACT An increase in margin requirements in the First Section of the Tokyo Stock Exchange is followed by a decline in margin borrowing, trading volume, the proportion of trading performed through margin accounts, the growth in stock prices, and the conditional volatility of daily returns. The nonmarginable Second Section stocks show a smaller change in volatility and only a delayed weak price response. The hypothesis that margin requirements restrict the behavior of destabilizing speculators can explain these correlations but cannot explain the observation that individuals, the most active users of margin funds, appear to be good market timers. Copyright 1992, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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Abstract: The prices of Greek closed-end funds behave similarly to the prices of US funds: They deviate substantially from their net asset values (NAVs), they are more volatile than their NAVs, they are overly-sensitive to the movements... more
Abstract: The prices of Greek closed-end funds behave similarly to the prices of US funds: They deviate substantially from their net asset values (NAVs), they are more volatile than their NAVs, they are overly-sensitive to the movements of the domestic stock market index, and their premia are:(i) positively correlated cross-sectionally,(ii) positively correlated with the future NAV returns, and (iii) negatively correlated with the future returns on the funds. This is true especially for larger CEF where mean reversion is exhibited even for the ...
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The author provides evidence on the perceived existence of a strong liquidity effect. The analysis is based on the response of the term structure of interest rates to the weekly Federal Reserve announcements of bank reserves during the... more
The author provides evidence on the perceived existence of a strong liquidity effect. The analysis is based on the response of the term structure of interest rates to the weekly Federal Reserve announcements of bank reserves during the post-October 1979 time period. It is shown that unanticipated changes in the mix between borrowed and non-borrowed reserves cause expected real interest rates to change after the announcement because they provide information about a future change in the supply of money. A precise model is developed and tested during subperiods of non-borrowed and borrowed reserve targeting by the Fed. Copyright 1987 by American Finance Association.
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ABSTRACT The prices of Greek closed-end funds behave similarly to the prices of US funds: they deviate substantially from their net asset values (NAVs); they are more volatile than their NAVs; and they are overly-sensitive to the... more
ABSTRACT The prices of Greek closed-end funds behave similarly to the prices of US funds: they deviate substantially from their net asset values (NAVs); they are more volatile than their NAVs; and they are overly-sensitive to the movements of the domestic stock market index. Furthermore, their premia are: (i) positively correlated cross-sectionally; (ii) positively correlated with the future NAV returns; and (iii) negatively correlated with the future returns on the funds. Yet most Greek funds are subsidiaries of banks that have considerable influence on their pricing, whereas US funds are owned mainly by small investors. Future explanations to the closed-end fund puzzle should, therefore, transcend the narrow institutional characteristics of asset composition and ownership of US closed-end funds.
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Abstract When a country's central bank has higher output objectives than those of wage-setters, the noncooperative Nash equilibrium contains an inflationary bias, which is higher, the flatter the economy's aggregate supply curve.... more
Abstract When a country's central bank has higher output objectives than those of wage-setters, the noncooperative Nash equilibrium contains an inflationary bias, which is higher, the flatter the economy's aggregate supply curve. An economy's openness from the input side is an exogenous observable characteristic that provides a direct way of testing the theory. When the imported intermediate goods displace capital (labor) in production, a higher degree of openness flattens (steepens) the economy's aggregate supply curve and increases (decreases) the inflationary bias.
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The following sections are included:IntroductionEvolution of the Economy up to 2012The Slippery Path to the Cypriot CrisisRisks in the Short TermWill Long-Term Growth Return?ConclusionsAcknowledgementsReferences
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ABSTRACT Official margin requirements in the U.S. stock market were established in October 1934 to limit the amount of credit available for the purpose of buying stocks. Since then, higher or rising margin requirements are associated with... more
ABSTRACT Official margin requirements in the U.S. stock market were established in October 1934 to limit the amount of credit available for the purpose of buying stocks. Since then, higher or rising margin requirements are associated with lower stock price volatility, lower excess volatility, and smaller deviations of stock prices from their fundamental values. The results hold throughout the post-1934 period and are not very sensitive to the exclusion of the turbulent depression years from the sample. Thus, margin requirements seem to be an effective policy tool in curbing destabilizing speculation. Copyright 1990 by American Economic Association.