Jumps and time-varying correlations in daily foreign exchange rates

Article Abstract:

This paper extends the multivariate latent factor ARCH model approach of Diebold and Nerlove (Journal of Applied Econometrics 4 (1989) 1) as a parsimonious alternative that pays particular attention to time series properties of daily foreign exchange rates such as jumps and to changing volatilities in both the common and country-specific factors. Using seven major daily dollar exchange rates from January 1 1992 to December 31 1996, this paper finds evidence of significant time-varying correlations and the country-specific variances. Consistent with the finding of Alexius and Sellin (1997) (A latent factor model of European exchange rate risk premia. Manuscript, The Economic Research Institute, Stockholm School of Economics), the two factor model appears to be a reasonable description of the major exchange rates. JEL classification: E32; C32 Keywords: EMS crisis; Correlation forecasts; Foreign exchange rate; Latent factor model; Multivariate GARCH; Value at risk; Volatility

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Introducing new futures contracts: reinforcement versus cannibalism

Article Abstract:

In order to assure survival, futures exchanges around the world are in constant search of new futures contracts that will generate a profitable level of trading volume. Introducing new futures contracts may increase or decrease the volume for those contracts already listed. Using a multi-product hedging model in which the perspective has been shifted from portfolio to exchange management, we study these effects. Using data from two exchanges that differ regarding assets traded and market liquidity (Amsterdam Exchanges versus Chicago Board of Trade) we show the usefulness of the proposed method. The method may also be used to evaluate the benefits for exchanges that plan to internationalize their activities by merging with another exchange or by cross listing other exchanges' futures contracts. JEL classification: G1 Keywords: Cannibalism; Futures exchange; New futures contracts; Multi-product hedging model; Reinforcement

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Living with the "enemy": an analysis of foreign investment in the Japanese equity market

Article Abstract:

This paper studies the impact of foreign investment on domestic financial markets. In particular, it examines the empirical validity of some protectionist claims used by regulators to restrict foreign investment. These people argue that: (1) trading by foreign investors tends to increase market volatility more than trading by domestic investors; (2) foreign investors have more sophisticated investment technology than do their domestic counterparts, causing domestic investors to "lose out" to foreign ones; and (3) foreign investors tend to make investment decisions on the basis of short-term gains rather than long-term fundamentals, such as corporate dividend growth. We find no evidence supporting these claims from the Japanese experience. To the contrary, we find that foreign investors tend to be long-term contrarian players in the market. JEL classification: F39; G15

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