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This paper examines to what extent the build-up of 'global imbalances' since the mid-1990s can be explained in a purely real open-economy DSGE model in which agents' perceptions of long-run growth are based on filtering observed changes in productivity. We show that long-run growth estimates based on filtering U.S. productivity data comove strongly with long-horizon survey expectations. By simulating the model in which agents filter data on U.S. productivity growth, we closely match the U.S. current account evolution. Moreover, with household preferences that control the wealth effect on labor supply, we can generate output movements in line with the data.
We investigate US households’ direct investment in stocks, bonds and liquid accounts and their foreign counterparts, in order to identify the different participation hurdles affecting asset investment domestically and overseas. To this end, we estimate a trivariate probit model with three further selection equations that allows correlations among unobservables of all possible asset choices. Our results point to the existence of a second hurdle that stock owners need to overcome in order to invest in foreign stocks. Among stockholders, we show that economic resources, willingness to assume greater financial risks, shopping around for the best investment opportunities all increase the probability to invest in foreign stocks. Furthermore, we find that households who seek financial advice from relatives, friends and work contacts are less likely to invest in foreign stocks. This result corroborates the conjecture by Hong et al. (2004) that social interactions should discourage investment in foreign stocks, given their limited popularity. On the other hand, we find little evidence for additional pecuniary or informational costs associated with investment in foreign bonds and liquid accounts. Finally, we show that ignoring correlations of unobservables across different asset choices can lead to very misleading results.
This paper addresses and resolves the issue of microstructure noise when measuring the relative importance of home and U.S. market in the price discovery process of Canadian interlisted stocks. In order to avoid large bounds for information shares, previous studies applying the Cholesky decomposition within the Hasbrouck (1995) framework had to rely on high frequency data. However, due to the considerable amount of microstructure noise inherent in return data at very high frequencies, these estimators are distorted. We offer a modified approach that identifies unique information shares based on distributional assumptions and thereby enables us to control for microstructure noise. Our results indicate that the role of the U.S. market in the price discovery process of Canadian interlisted stocks has been underestimated so far. Moreover, we suggest that rather than stock specific factors, market characteristics determine information shares.
Deutsche Börse AG plans to introduce a system (Xetra Best) allowing brokers and broker-dealers to internalize the orders of retail customers. Further, Xetra Best supports payment for order flow arrangements. Both internalization and payment for order flow may be detrimental to market quality. This paper discusses advantages and disadvantages of these arrangements. It draws on experiences made in the US. We derive policy implications that aim at a more stringent interpretation of "best execution", and at higher transparency. Klassifikation: G10, G14
Using a set of regional inflation rates we examine the dynamics of inflation dispersion within the U.S.A., Japan and across U.S. and Canadian regions. We find that inflation rate dispersion is significant throughout the sample period in all three samples. Based on methods applied in the empirical growth literature, we provide evidence in favor of significant mean reversion (ß-convergence) in inflation rates in all considered samples. The evidence on ó-convergence is mixed, however. Observed declines in dispersion are usually associated with decreasing overall inflation levels which indicates a positive relationship between mean inflation and overall inflation rate dispersion. Our findings for the within-distribution dynamics of regional inflation rates show that dynamics are largest for Japanese prefectures, followed by U.S. metropolitan areas. For the combined U.S.-Canadian sample, we find a pattern of within-distribution dynamics that is comparable to that found for regions within the European Monetary Union (EMU). In line with findings in the so-called 'border literature' these results suggest that frictions across European markets are at least as large as they are, e.g., across North American markets. Klassifikation: E31, E52, E58
This paper presents a simple new method for estimating the size of ‘wealth effects’ on aggregate consumption. The method exploits the well-documented sluggishness of consumption growth (often interpreted as ‘habits’ in the asset pricing literature) to distinguish between short-run and long-run wealth effects. In U.S. data, we estimate that the immediate (next-quarter) marginal propensity to consume from a $1 change in housing wealth is about 2 cents, with a final long-run effect around 9 cents. Consistent with several recent studies, we find a housing wealth effect that is substantially larger than the stock wealth effect. We believe that our approach is preferable to the currently popular cointegrationbased estimation methods, because neither theory nor evidence justifies faith in the existence of a stable cointegrating vector. JEL Classification: E21, E32, C22
How do fiscal and technology shocks affect real exchange rates? : New evidence for the United States
(2008)
Using vector autoregressions on U.S. time series relative to an aggregate of industrialized countries, this paper provides new evidence on the dynamic effects of government spending and technology shocks on the real exchange rate and the terms of trade. To achieve identification, we derive robust restrictions on the sign of several impulse responses from a two-country general equilibrium model. We find that both the real exchange rate and the terms of trade – whose responses are left unrestricted – depreciate in response to expansionary government spending shocks and appreciate in response to positive technology shocks.
We investigate, using the 2002 US Health and Retirement Study, the factors influencing individuals’ insecurity and expectations about terrorism, and study the effects these last have on households’ portfolio choices and spending patterns. We find that females, the religiously devout, those equipped with a better memory, the less educated, and those living close to where the events of September 2001 took place worry a lot about their safety. In addition, fear of terrorism discourages households from investing in stocks, mostly through the high levels of insecurity felt by females. Insecurity due to terrorism also makes single men less likely to own a business. Finally, we find evidence of expenditure shifting away from recreational activities that can potentially leave one exposed to a terrorist attack and towards goods that might help one cope with the consequences of terrorism materially (increased use of car and spending on the house) or psychologically (spending on personal care products by females in couples).
Using data of US domestic mergers and acquisitions transactions, this paper shows that acquirers have a preference for geographically proximate target companies. We measure the ‘home bias’ against benchmark portfolios of hypothetical deals where the potential targets consist of firms of similar size in the same four-digit SIC code that have been targets in other transactions at about the same time or firms that have been listed at a stock exchange at that time. There is a strong and consistent home bias for M&A transactions in the US, which is significantly declining during the observation period, i.e. between 1990 and 2004. At the same time, the average distances between target and acquirer increase articulately. The home bias is stronger for small and relatively opaque target companies suggesting that local information is the decisive factor in explaining the results. Acquirers that diversify into new business lines also display a stronger preference for more proximate targets. With an event study we show that investors react relatively better to proximate acquisitions than to distant ones. That reaction is more important and becomes significant in times when the average distance between target and acquirer becomes larger, but never becomes economically significant. We interpret this as evidence for the familiarity hypothesis brought forward by Huberman (2001): Acquirers know about the existence of proximate targets and are more likely to merge with them without necessarily being better informed. However, when comparing the best and the worst deals, we are able to show a dramatic difference in distances and home bias: The most successful deals display on average a much stronger home bias and distinctively smaller distance between acquirer and target than the least successful deals. Proximity in M&A transactions therefore is a necessary but not sufficient condition for success. The paper contributes to the growing literature on the role of distance in financial decisions.
This paper proposes a possible way of assessing the effect of interest rate dynamics on changes in the decision-making approach, communication strategy and operational framework of a Central bank. Through a GARCH specification we show that the USA and Euro area displayed a limited but significant spillover of volatility from money market to longer-term rates. We then checked the stability of this phenomenon in the most recent period of improved policymaking and found empirical evidence that the transmission of overnight volatility along the yield curve vanished soon after specific policy changes of the FED and ECB.