Real Effective Exchange Rate Misalignment in the Euro Area: A Counterfactual Analysis
Makram El-Shagi, Axel Lindner, Gregor von Schweinitz
Abstract
Were real effective exchange rates (REER) of Euro area member countries drastically misaligned at the outbreak of the global financial crisis? The answer is difficult to determine because economic theory gives no simple guideline for determining the equilibrium values of real exchange rates, and the determinants of those values might have been distorted as well. To overcome these limitations, we use synthetic matching to construct a counterfactual economy for each member as a linear combination of a large set of non-Euro area countries. We find that Euro area crisis countries are best described by a mixture of advanced and emerging economies. Comparing the actual REER with those of the counterfactuals gives sensible estimates of the misalignments at the start of the crisis: All peripheral countries were strongly overvalued, while high undervaluation is only observed for Finland.
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Devaluation Expectations Based on Cross-listed Stocks: Evidence for Financial Crises in Argentina Then and Now
Stefan Eichler
Applied Economics Letters,
No. 10,
2014
Abstract
I use the relative prices of American Depositary Receipts and their underlying stocks to derive devaluation expectations. I find that stockholders currently perceive an overvalued peso. Devaluation expectations are driven by the incentive of competitive devaluation and sovereign default risk.
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Flight Patterns and Yields of European Government Bonds
Gregor von Schweinitz
IWH Discussion Papers,
No. 10,
2013
Abstract
The current European Debt Crisis has led to a reinforced effort to identify the sources of risk and their influence on yields of European Government Bonds. Until now, the potentially nonlinear influence and the theoretical need for interactions reflecting flight-to-quality and flight-to-liquidity has been widely disregarded. I estimate government bond yields of the Euro-12 countries without Luxembourg from May 2003 until December 2011. Using penalized spline regression, I find that the effect of most explanatory variables is highly nonlinear. These nonlinearities, together with flight patterns of flight-to-quality and flight-to-liquidity, can explain the co-movement of bond yields until September 2008 and the huge amount of differentiation during the financial and the European debt crisis without the unnecessary assumption of a structural break. The main effects are credit risk and flight-to-liquidity, while the evidence for the existence of flight-to-quality and liquidity risk (the latter measured by the bid-ask spread and total turnover of bonds) is comparably weak.
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Islamic Finance in Europe
Pierluigi Caristi, Stéphane Couderc, Angela di Maria, Filippo di Mauro, Beljeet Kaur Grewal, Lauren Ho, Sergio Masciantonio, Steven Ongena, Sajjad Zaher
ECB Occasional Paper,
No. 146,
2013
Abstract
Islamic finance is based on ethical principles in line with Islamic religious law. Despite its low share of the global financial market, Islamic finance has been one of this sector's fastest growing components over the last decades and has gained further momentum in the wake of the financial crisis. The paper examines the development of and possible prospects for Islamic finance, with a special focus on Europe. It compares Islamic and conventional finance, particularly as concerns risks associated with the operations of respective institutions, as well as corporate governance. The paper also analyses empirical evidence comparing Islamic and conventional financial institutions with regard to their: (i) efficiency and profitability; and (ii) stability and resilience. Finally, the paper considers the conduct of monetary policy in an Islamic banking context. This is not uncomplicated given the fact that interest rates - normally a cornerstone of monetary policy - are prohibited under Islamic finance. Liquidity management issues are thus discussed here, with particular reference to the euro area.
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Stale Information, Shocks, and Volatility
Reint E. Gropp, A. Kadareja
Journal of Money, Credit and Banking,
No. 6,
2012
Abstract
We propose a new approach to measuring the effect of unobservable private information on volatility. Using intraday data, we estimate the effect of a well-identified shock on the volatility of stock returns of European banks as a function of the quality of public information available about the banks. We hypothesize that as publicly available information becomes stale, volatility effects and its persistence increase, as private information of investors becomes more important. We find strong support for this idea in the data. We further show that stock volatility is higher just before important announcements if information is stale.
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Extreme Dependence with Asymmetric Thresholds: Evidence for the European Monetary Union
Stefan Eichler, R. Herrera
Journal of Banking and Finance,
No. 11,
2011
Abstract
Existing papers on extreme dependence use symmetrical thresholds to define simultaneous stock market booms or crashes such as the joint occurrence of the upper or lower one percent return quantile in both stock markets. We show that the probability of the joint occurrence of extreme stock returns may be higher for asymmetric thresholds than for symmetric thresholds. We propose a non-parametric measure of extreme dependence which allows capturing extreme events for different thresholds and can be used to compute different types of extreme dependence. We find that extreme dependence among the stock markets of ten initial EMU member countries, the United Kingdom, and the United States is largely asymmetrical in the pre-EMU period (1989–1998) and largely symmetrical in the EMU period (1999–2010). Our findings suggest that ignoring the possibility of asymmetric extreme dependence may lead to an underestimation of the probability of co-booms and co-crashes.
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Bericht über den IWH/INFER-Workshop on Applied Economics and Economic Policy
Katja Drechsel, Makram El-Shagi
Wirtschaft im Wandel,
No. 4,
2011
Abstract
Am 14. und 15. Februar 2011 fand am IWH erstmalig in Zusammenarbeit mit dem International Network for Economic Research (INFER) der Workshop „Applied Economics and Economic Policy“ statt. Wissenschaftlerinnen und Wissenschaftler europäischer Universitäten und internationaler Organisationen stellten einem breiten Publikum neueste Forschungsergebnisse zu aktuellen ökonomischen Fragen und Problemen vor. Der Workshop richtete sich neben einem wissenschaftlichen Publikum vor allem auch an Mitarbeiterinnen und Mitarbeiter internationaler Organisationen, wie beispielsweise der Europäischen Kommission und der Europäischen Zentralbank (EZB), sowie der verschiedenen Ministerien, wie z. B. der Wirtschaftsministerien. Ziel der Veranstaltung war es somit, nicht nur aktuelle Forschungsergebnisse vorzustellen, sondern auch mit Vertretern aus Wissenschaft und Praxis über aktuelle Wirtschaftspolitik und über das Spezialthema „The Empirics of Imbalances and Disequilibria“
zu diskutieren. Mit Lorenzo Bini Smaghi, Mitglied des Direktoriums der EZB, und Martin Hallet aus der Generaldirektion Wirtschaft und Finanzen der Europäischen Kommission konnten zwei hochrangige Vertreter aus den politischen Institutionen als Keynote-Speaker gewonnen werden.
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Exchange Rate Expectations and the Pricing of Chinese Cross-listed Stocks
Stefan Eichler
Journal of Banking and Finance,
No. 2,
2011
Abstract
I show that the price discounts of Chinese cross-listed stocks (American Depositary Receipts (ADRs) and H-shares) to their underlying A-shares indicate the expected yuan/US dollar exchange rate. The forecasting models reveal that ADR and H-share discounts predict exchange rate changes more accurately than the random walk and forward exchange rates, particularly at long forecast horizons. Using panel estimations, I find that ADR and H-share investors form their exchange rate expectations according to standard exchange rate theories such as the Harrod–Balassa–Samuelson effect, the risk of competitive devaluations, relative purchasing power parity, uncovered interest rate parity, and the risk of currency crisis.
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Exploring the Economic Convergence in the EU New Member States by Using Nonparametric Models
Monica Raileanu Szeles
IWH Discussion Papers,
No. 2,
2011
Abstract
This paper analyzes the process of real economic convergence in the New Member States (NMS) bein g formerly centrally planned economies, using nonparametric methods instead of conventional parametric measurement tools like beta and sigma models. This methodological framework allows the examining of the relative income distribution in different periods of time, the number of modes of the density distribution, the existence of “convergence clubs” in the distribution and the hypothesis of convergence at a single point in time. The modality tests (e.g. the ASH-WARPing procedure) and stochastic kernel are nonparametric techniques used in the empirical part of the study to examine the income distribution in the NMS area. Additionally, random effects panel regressions are used, but only for comparison reasons. The main findings of the paper are the bimodality of the income density distribution over time and across countries, and the presence of convergence clubs in the income distribution from 1995 to 2008. The findings suggest a lack of absolute convergence in the long term (1995-2008) and also when looking only from 2003 onwards. The paper concludes that, in comparison with the parametrical approach, the nonparametric one gives a deeper, real and richer perspective on the process of real convergence in the NMS area.
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