Remco Zwinkels - Academia.edu (original) (raw)

Papers by Remco Zwinkels

SSRN Electronic Journal, 2000

ABSTRACT The start of EMU and the global financial crisis constitute two major shocks to European... more ABSTRACT The start of EMU and the global financial crisis constitute two major shocks to European financial market integration. Therefore, in this paper we study the time-varying importance of country versus industry factors in the European corporate bond market over a period that covers these two events. Using a unique dataset that is representative for the universe of actively quoted Eurobonds, we find that although unconditionally the country factor dominates the industry factor, there is substantial time variation. Following the introduction of the Euro, country factors become less important. The global financial crisis though reverses this trend and the country factor regains its importance in explaining bond returns.

SSRN Electronic Journal, 2000

This paper examines the existence of heterogeneous expectations among market participants in the ... more This paper examines the existence of heterogeneous expectations among market participants in the foreign exchange market by using a data set of individual market expectations for the major currencies, and approaches the formation of expectations from a bounded-rationality approach. We find that that there are distinct periods of high and low dispersion in which market participants disagree as to what will happen to the future level of the exchange rates. Furthermore, we document that the frequency at which extremist differences in expectations among market participants occurs, is higher than that what would occur under normality. Dispersion of beliefs seems to occur as a result of the combined effects of market participants holding individual expectations and attaching different weights on various elements from their information sets. Finally, we find that market volatility Granger-causes trader heterogeneity.

SSRN Electronic Journal, 2000

ABSTRACT This paper contributes to the discussion whether changes in house prices can be explaine... more ABSTRACT This paper contributes to the discussion whether changes in house prices can be explained by fundamental factors or trends. Using a long-term time series covering 350 years of house prices along the Herengracht in Amsterdam, we examine whether a fundamental factor or a trend explains house prices and whether their explanatory power is time varying. We find that agents in the housing market switch in their formation of expectations about future changes in house prices between fundamental and momentum strategies. Specifically, we show that agents base their expectations more on fundamentals during economic slowdowns and more on recent trends or momentum during economic booms.

In this paper, we contribute to the literature investigating the impact of FDI on host country ec... more In this paper, we contribute to the literature investigating the impact of FDI on host country economic growth by distinguishing between the growth effects of horizontal (market seeking) FDI and vertical (efficiency seeking) FDI. Using a new database, we estimate the growth effects of vertical and horizontal US MNE activity into 44 host countries over the period 1983-2003, also using traditional total FDI figures as a benchmark. Controlling for endogeneity and absorptive capacity effects, we find that horizontal and vertical FDI have positive and significant growth effects in developed countries. Moreover, our results indicate a superior growth effect of horizontal FDI over vertical FDI. In line with existing literature, we find no significant effects of horizontal or vertical FDI in developing countries. r

SSRN Electronic Journal, 2000

There is an established literature suggesting that correlations between international equity mark... more There is an established literature suggesting that correlations between international equity markets is increasing. In this paper, we examine this increase in comovement and investigate the sources of this comovement. Our analysis shows that correlations between international equity indeed have been growing. However, decomposing returns into a fundamental and non-fundamental part reveals that the increase in correlation is driven by the non-fundamental part. Further analysis shows that the comovement of returns is driven by investor sentiment (American Association of Individual Investors index) and this sentiment only explains the comovement of the non-fundamental part of returns. Our findings provide evidence for behavioral explanations of comovement, such as categorization and habitat formation (see , Journal of Finance). JEL Codes: C32; G15.

SSRN Electronic Journal, 2000

SSRN Electronic Journal, 2000

ABSTRACT This paper examines style-based feedback trading behavior of US domestic equity mutual f... more ABSTRACT This paper examines style-based feedback trading behavior of US domestic equity mutual fund managers. As such, we provide an empirical extension to the theoretical model for style switching behavior of Barberis and Shleifer (2003). We find strong evidence for style-based feedback trading : nearly 76% of the funds in our sample engage in style switching, half of which engage in positive (negative) feedback trading. There is evidence for “twin-style” switching: capital is channeled between value and growth, and between large cap and small cap funds. Overall, we find that growth funds tend to behave more as positive feedback (momentum) traders, whereas value funds tend to behave more as negative feedback (contrarian) traders. We find that funds that engage more aggressively in style switching tend to be younger and have higher total expense ratios. There is substantial time variation in the average tendency to switch, though there is persistence in the switching at the fund level. Finally, linking the style switching behavior of fund managers to risk-adjusted performance, we find that positive (negative) feedback trading yields positive (negative) alpha. Twin-style switching, however, does not benefit performance.

SSRN Electronic Journal, 2000

This paper studies the aggregation of investor expectations of stock market return variation and ... more This paper studies the aggregation of investor expectations of stock market return variation and its implications. We motivate theoretically that the market's expected return variance can be decomposed into the average of individuals' expected variance plus the dispersion in individuals' expected mean returns. The former can be seen as risk, while the latter is a measure of uncertainty. We illustrate this result empirically by setting up a unique survey measuring investors' expected returns and volatilities. Our finding is important to the issue of aggregating heterogeneous beliefs at the micro level in relation to pricing in financial markets. For instance, as a result it is almost per definition that individual investors are overconfident in the sense of overly narrow forecast bounds, due to neglecting individual differences of opinion about mean returns. We furthermore show that investors display a risk-return trade-off, whereas the market seems to price uncertainty.

SSRN Electronic Journal, 2000

ABSTRACT We study the importance of risk in the foreign exchange market from the perspective of a... more ABSTRACT We study the importance of risk in the foreign exchange market from the perspective of a carry trade investor, thereby considering ‘known unknowns’ (volatility) and ‘unknown unknowns’ (uncertainty) and their relative importance. First we present a theoretical framework to show how volatility and uncertainty affect risk and risk premia in the foreign exchange market. Based on this framework, we empirically examine the relation between risk, expected volatility and uncertainty of foreign exchange returns. We find that uncertainty is the most important factor driving risk, and therefore only focusing on volatility gives an incomplete representation of risk. Moreover, we find that volatility and uncertainty are also important for the expected risk premium. In times of high volatility and/or uncertainty, investors expect to receive a higher risk premium in the near future. We contribute to the foreign exchange asset market debate by showing that interest rate risk and uncertainty about fundamentals have a significant impact on exchange rate risk.

SSRN Electronic Journal, 2000

This paper introduces a Heterogeneous Agent Model (HAM) for foreign exchange fund managers, and e... more This paper introduces a Heterogeneous Agent Model (HAM) for foreign exchange fund managers, and estimates it on currency trader indices. Fund managers dynamically allocate capital conditional on recent performance to a value strategy, a momentum strategy, and a carry strategy.. Estimation results reveal that 1) a large part of the behavior of currency managers can indeed be described by these three simple strategies, and 2) currency managers behave like positive feedback traders at the short run, but as negative feedback traders at the longer run. We finally show that fund managers are switching in the correct direction, but could improve performance by switching less aggressively. We would like to thank the editor and two anonymous referees for helpful comments and suggestions. The usual disclaimer applies.

Quantitative Finance, 2013

ABSTRACT This paper estimates an Heterogeneous Agent Model (HAM) on currency trader indices to ex... more ABSTRACT This paper estimates an Heterogeneous Agent Model (HAM) on currency trader indices to explain the large shifts in profitability in currency styles surrounding the global financial crisis. In the model, fund managers allocate capital conditional on recent performance to a value strategy, a momentum strategy, and a carry strategy. Subsequent estimation results reveal that (1) a large part of the behavior of currency managers can indeed be described by these three simple strategies, and (2) currency managers shift capital from recent winning styles to recent losing styles, and hence apply a negative feedback strategy. We finally show that a negative feedback strategy is indeed optimal, but currency managers could improve performance by applying it less aggressively if they were able to.

Quantitative Finance, 2013

This paper proposes a novel approach to determine whether mutual funds time the market.

Journal of International Money and Finance, 2013

ABSTRACT This paper investigates the time-varying nature of expectation formation rules for insti... more ABSTRACT This paper investigates the time-varying nature of expectation formation rules for institutional investors in the foreign exchange market. Using a unique dataset of survey expectations for four exchange rates, we first distinguish three different general rules. We find a momentum rule, a fundamental rule, and a rule that takes advantage of interest differentials between countries. Apart from heterogeneity in expectation formation rules, we show that the rules are time-varying conditional on a number of different factors, such as the sign of the most recent return, the forecast horizon, the distance to the PPP rate, and the extent to which the rule produces forecast errors vis-à-vis the market exchange rate. Although we find dynamics in expectation formation for all four exchange rates, the results for the currencies against the Japanese yen deviate from the others.

Journal of International Money and Finance, 2010

We develop and estimate a dynamic heterogeneous agent model for the EMS period. Our empirical res... more We develop and estimate a dynamic heterogeneous agent model for the EMS period. Our empirical results suggest that the existence of heterogeneous interacting agents is indeed a possible explanation for the dynamics of exchange rates during the EMS; we find strong evidence in favor of our model using in-and out-of-sample tests. Moreover, we show that the heterogeneous agent model outperforms the random walk in out-of-sample forecasting in all country/period combinations. Finally, we study the dynamic limit properties of the estimated non-linear system.

Journal of Economic Dynamics and Control, 2009

In this paper we develop and estimate a heterogeneous agents model with three different types of ... more In this paper we develop and estimate a heterogeneous agents model with three different types of agents, switching beliefs, and two equity markets, Hong Kong and Thailand, in the period surrounding the Asian crisis. We find that investors are heterogeneous in their expectation formation strategies and that they switch between strategies conditional on previous performance of these strategies. The model shows that the crisis is triggered in Thailand as a result of an increased focus on the fundamental price. Furthermore, it is shown that the crisis spills to the Hong Kong market; therefore, there is evidence of shift-contagion.

Journal of Economic Dynamics and Control, 2012

ABSTRACT This paper combines survey forecasts with a heterogeneous agent model to examine the dis... more ABSTRACT This paper combines survey forecasts with a heterogeneous agent model to examine the dispersion of expectations of participants in the foreign exchange market. We find distinct variations in the level of dispersion and document that dispersion arises because of the combined effect of market participants holding private information and attaching different weights to fundamental, technical, and carry trade analyses. We estimate a heterogeneous agent model on the survey forecasts and show that the weight attached to the three forecast rules is adjusted over time in response to the relative importance of the rules in the actual foreign exchange market. The weights are related to market circumstances; the switching model is finally shown to outperform the random walk model in an out-of-sample forecast exercise.

International Business Review, 2010

Gravity equations are a widely used tool in the International Business (IB) literature to explain... more Gravity equations are a widely used tool in the International Business (IB) literature to explain country-level trade and FDI flows. Against the background of its increased popularity and data availability, a range of commonly made econometric mistakes have recently been discussed in the literature, mostly pertaining to the (omitted) characteristics of countries or country pairs in gravity models. In this paper we complement this literature by focusing on the time-series aspects of gravity models, something that has become crucial with the increased use of panel data. Specifically, we concentrate on the possible non-stationarity of both the dependent variable (trade or FDI flows) and of one or more of the explanatory variables. In this paper we (i) show that there is indeed a problem with the non-stationarity of variables commonly used in gravity equations; (ii) show that not correcting for this yields overestimated results; and (iii) propose an effective solution.

International Business Review, 2008

In this paper, we contribute to the literature investigating the impact of FDI on host country ec... more In this paper, we contribute to the literature investigating the impact of FDI on host country economic growth by distinguishing between the growth effects of horizontal (market seeking) FDI and vertical (efficiency seeking) FDI. Using a new database, we estimate the growth effects of vertical and horizontal US MNE activity into 44 host countries over the period 1983-2003, also using traditional total FDI figures as a benchmark. Controlling for endogeneity and absorptive capacity effects, we find that horizontal and vertical FDI have positive and significant growth effects in developed countries. Moreover, our results indicate a superior growth effect of horizontal FDI over vertical FDI. In line with existing literature, we find no significant effects of horizontal or vertical FDI in developing countries. r

SSRN Electronic Journal, 2000

ABSTRACT The start of EMU and the global financial crisis constitute two major shocks to European... more ABSTRACT The start of EMU and the global financial crisis constitute two major shocks to European financial market integration. Therefore, in this paper we study the time-varying importance of country versus industry factors in the European corporate bond market over a period that covers these two events. Using a unique dataset that is representative for the universe of actively quoted Eurobonds, we find that although unconditionally the country factor dominates the industry factor, there is substantial time variation. Following the introduction of the Euro, country factors become less important. The global financial crisis though reverses this trend and the country factor regains its importance in explaining bond returns.

SSRN Electronic Journal, 2000

This paper examines the existence of heterogeneous expectations among market participants in the ... more This paper examines the existence of heterogeneous expectations among market participants in the foreign exchange market by using a data set of individual market expectations for the major currencies, and approaches the formation of expectations from a bounded-rationality approach. We find that that there are distinct periods of high and low dispersion in which market participants disagree as to what will happen to the future level of the exchange rates. Furthermore, we document that the frequency at which extremist differences in expectations among market participants occurs, is higher than that what would occur under normality. Dispersion of beliefs seems to occur as a result of the combined effects of market participants holding individual expectations and attaching different weights on various elements from their information sets. Finally, we find that market volatility Granger-causes trader heterogeneity.

SSRN Electronic Journal, 2000

ABSTRACT This paper contributes to the discussion whether changes in house prices can be explaine... more ABSTRACT This paper contributes to the discussion whether changes in house prices can be explained by fundamental factors or trends. Using a long-term time series covering 350 years of house prices along the Herengracht in Amsterdam, we examine whether a fundamental factor or a trend explains house prices and whether their explanatory power is time varying. We find that agents in the housing market switch in their formation of expectations about future changes in house prices between fundamental and momentum strategies. Specifically, we show that agents base their expectations more on fundamentals during economic slowdowns and more on recent trends or momentum during economic booms.

In this paper, we contribute to the literature investigating the impact of FDI on host country ec... more In this paper, we contribute to the literature investigating the impact of FDI on host country economic growth by distinguishing between the growth effects of horizontal (market seeking) FDI and vertical (efficiency seeking) FDI. Using a new database, we estimate the growth effects of vertical and horizontal US MNE activity into 44 host countries over the period 1983-2003, also using traditional total FDI figures as a benchmark. Controlling for endogeneity and absorptive capacity effects, we find that horizontal and vertical FDI have positive and significant growth effects in developed countries. Moreover, our results indicate a superior growth effect of horizontal FDI over vertical FDI. In line with existing literature, we find no significant effects of horizontal or vertical FDI in developing countries. r

SSRN Electronic Journal, 2000

There is an established literature suggesting that correlations between international equity mark... more There is an established literature suggesting that correlations between international equity markets is increasing. In this paper, we examine this increase in comovement and investigate the sources of this comovement. Our analysis shows that correlations between international equity indeed have been growing. However, decomposing returns into a fundamental and non-fundamental part reveals that the increase in correlation is driven by the non-fundamental part. Further analysis shows that the comovement of returns is driven by investor sentiment (American Association of Individual Investors index) and this sentiment only explains the comovement of the non-fundamental part of returns. Our findings provide evidence for behavioral explanations of comovement, such as categorization and habitat formation (see , Journal of Finance). JEL Codes: C32; G15.

SSRN Electronic Journal, 2000

SSRN Electronic Journal, 2000

ABSTRACT This paper examines style-based feedback trading behavior of US domestic equity mutual f... more ABSTRACT This paper examines style-based feedback trading behavior of US domestic equity mutual fund managers. As such, we provide an empirical extension to the theoretical model for style switching behavior of Barberis and Shleifer (2003). We find strong evidence for style-based feedback trading : nearly 76% of the funds in our sample engage in style switching, half of which engage in positive (negative) feedback trading. There is evidence for “twin-style” switching: capital is channeled between value and growth, and between large cap and small cap funds. Overall, we find that growth funds tend to behave more as positive feedback (momentum) traders, whereas value funds tend to behave more as negative feedback (contrarian) traders. We find that funds that engage more aggressively in style switching tend to be younger and have higher total expense ratios. There is substantial time variation in the average tendency to switch, though there is persistence in the switching at the fund level. Finally, linking the style switching behavior of fund managers to risk-adjusted performance, we find that positive (negative) feedback trading yields positive (negative) alpha. Twin-style switching, however, does not benefit performance.

SSRN Electronic Journal, 2000

This paper studies the aggregation of investor expectations of stock market return variation and ... more This paper studies the aggregation of investor expectations of stock market return variation and its implications. We motivate theoretically that the market's expected return variance can be decomposed into the average of individuals' expected variance plus the dispersion in individuals' expected mean returns. The former can be seen as risk, while the latter is a measure of uncertainty. We illustrate this result empirically by setting up a unique survey measuring investors' expected returns and volatilities. Our finding is important to the issue of aggregating heterogeneous beliefs at the micro level in relation to pricing in financial markets. For instance, as a result it is almost per definition that individual investors are overconfident in the sense of overly narrow forecast bounds, due to neglecting individual differences of opinion about mean returns. We furthermore show that investors display a risk-return trade-off, whereas the market seems to price uncertainty.

SSRN Electronic Journal, 2000

ABSTRACT We study the importance of risk in the foreign exchange market from the perspective of a... more ABSTRACT We study the importance of risk in the foreign exchange market from the perspective of a carry trade investor, thereby considering ‘known unknowns’ (volatility) and ‘unknown unknowns’ (uncertainty) and their relative importance. First we present a theoretical framework to show how volatility and uncertainty affect risk and risk premia in the foreign exchange market. Based on this framework, we empirically examine the relation between risk, expected volatility and uncertainty of foreign exchange returns. We find that uncertainty is the most important factor driving risk, and therefore only focusing on volatility gives an incomplete representation of risk. Moreover, we find that volatility and uncertainty are also important for the expected risk premium. In times of high volatility and/or uncertainty, investors expect to receive a higher risk premium in the near future. We contribute to the foreign exchange asset market debate by showing that interest rate risk and uncertainty about fundamentals have a significant impact on exchange rate risk.

SSRN Electronic Journal, 2000

This paper introduces a Heterogeneous Agent Model (HAM) for foreign exchange fund managers, and e... more This paper introduces a Heterogeneous Agent Model (HAM) for foreign exchange fund managers, and estimates it on currency trader indices. Fund managers dynamically allocate capital conditional on recent performance to a value strategy, a momentum strategy, and a carry strategy.. Estimation results reveal that 1) a large part of the behavior of currency managers can indeed be described by these three simple strategies, and 2) currency managers behave like positive feedback traders at the short run, but as negative feedback traders at the longer run. We finally show that fund managers are switching in the correct direction, but could improve performance by switching less aggressively. We would like to thank the editor and two anonymous referees for helpful comments and suggestions. The usual disclaimer applies.

Quantitative Finance, 2013

ABSTRACT This paper estimates an Heterogeneous Agent Model (HAM) on currency trader indices to ex... more ABSTRACT This paper estimates an Heterogeneous Agent Model (HAM) on currency trader indices to explain the large shifts in profitability in currency styles surrounding the global financial crisis. In the model, fund managers allocate capital conditional on recent performance to a value strategy, a momentum strategy, and a carry strategy. Subsequent estimation results reveal that (1) a large part of the behavior of currency managers can indeed be described by these three simple strategies, and (2) currency managers shift capital from recent winning styles to recent losing styles, and hence apply a negative feedback strategy. We finally show that a negative feedback strategy is indeed optimal, but currency managers could improve performance by applying it less aggressively if they were able to.

Quantitative Finance, 2013

This paper proposes a novel approach to determine whether mutual funds time the market.

Journal of International Money and Finance, 2013

ABSTRACT This paper investigates the time-varying nature of expectation formation rules for insti... more ABSTRACT This paper investigates the time-varying nature of expectation formation rules for institutional investors in the foreign exchange market. Using a unique dataset of survey expectations for four exchange rates, we first distinguish three different general rules. We find a momentum rule, a fundamental rule, and a rule that takes advantage of interest differentials between countries. Apart from heterogeneity in expectation formation rules, we show that the rules are time-varying conditional on a number of different factors, such as the sign of the most recent return, the forecast horizon, the distance to the PPP rate, and the extent to which the rule produces forecast errors vis-à-vis the market exchange rate. Although we find dynamics in expectation formation for all four exchange rates, the results for the currencies against the Japanese yen deviate from the others.

Journal of International Money and Finance, 2010

We develop and estimate a dynamic heterogeneous agent model for the EMS period. Our empirical res... more We develop and estimate a dynamic heterogeneous agent model for the EMS period. Our empirical results suggest that the existence of heterogeneous interacting agents is indeed a possible explanation for the dynamics of exchange rates during the EMS; we find strong evidence in favor of our model using in-and out-of-sample tests. Moreover, we show that the heterogeneous agent model outperforms the random walk in out-of-sample forecasting in all country/period combinations. Finally, we study the dynamic limit properties of the estimated non-linear system.

Journal of Economic Dynamics and Control, 2009

In this paper we develop and estimate a heterogeneous agents model with three different types of ... more In this paper we develop and estimate a heterogeneous agents model with three different types of agents, switching beliefs, and two equity markets, Hong Kong and Thailand, in the period surrounding the Asian crisis. We find that investors are heterogeneous in their expectation formation strategies and that they switch between strategies conditional on previous performance of these strategies. The model shows that the crisis is triggered in Thailand as a result of an increased focus on the fundamental price. Furthermore, it is shown that the crisis spills to the Hong Kong market; therefore, there is evidence of shift-contagion.

Journal of Economic Dynamics and Control, 2012

ABSTRACT This paper combines survey forecasts with a heterogeneous agent model to examine the dis... more ABSTRACT This paper combines survey forecasts with a heterogeneous agent model to examine the dispersion of expectations of participants in the foreign exchange market. We find distinct variations in the level of dispersion and document that dispersion arises because of the combined effect of market participants holding private information and attaching different weights to fundamental, technical, and carry trade analyses. We estimate a heterogeneous agent model on the survey forecasts and show that the weight attached to the three forecast rules is adjusted over time in response to the relative importance of the rules in the actual foreign exchange market. The weights are related to market circumstances; the switching model is finally shown to outperform the random walk model in an out-of-sample forecast exercise.

International Business Review, 2010

Gravity equations are a widely used tool in the International Business (IB) literature to explain... more Gravity equations are a widely used tool in the International Business (IB) literature to explain country-level trade and FDI flows. Against the background of its increased popularity and data availability, a range of commonly made econometric mistakes have recently been discussed in the literature, mostly pertaining to the (omitted) characteristics of countries or country pairs in gravity models. In this paper we complement this literature by focusing on the time-series aspects of gravity models, something that has become crucial with the increased use of panel data. Specifically, we concentrate on the possible non-stationarity of both the dependent variable (trade or FDI flows) and of one or more of the explanatory variables. In this paper we (i) show that there is indeed a problem with the non-stationarity of variables commonly used in gravity equations; (ii) show that not correcting for this yields overestimated results; and (iii) propose an effective solution.

International Business Review, 2008

In this paper, we contribute to the literature investigating the impact of FDI on host country ec... more In this paper, we contribute to the literature investigating the impact of FDI on host country economic growth by distinguishing between the growth effects of horizontal (market seeking) FDI and vertical (efficiency seeking) FDI. Using a new database, we estimate the growth effects of vertical and horizontal US MNE activity into 44 host countries over the period 1983-2003, also using traditional total FDI figures as a benchmark. Controlling for endogeneity and absorptive capacity effects, we find that horizontal and vertical FDI have positive and significant growth effects in developed countries. Moreover, our results indicate a superior growth effect of horizontal FDI over vertical FDI. In line with existing literature, we find no significant effects of horizontal or vertical FDI in developing countries. r