Willem Verschoor - Academia.edu (original) (raw)
Papers by Willem Verschoor
Oxford Bulletin of Economics and Statistics, 2008
This paper presents a new empirical approach to address the problem of trading time differences b... more This paper presents a new empirical approach to address the problem of trading time differences between markets in studies of financial contagion. In contrast to end-ofbusiness-day data common to most contagion studies, we employ price observations, which are exactly aligned in time to correct for time-zone and end-of-business-day differences between markets. Additionally, we allow for time lags between price observations in order to test the assumption that the shock is not immediately transmitted from one market to the other. Our analysis of the financial turmoil surrounding theAsian crisis reveals that such corrections have an important bearing on the evidence for contagion, independent of the methodology employed. Using a correlation-based test, we find more contagion the faster we assume the shock to be transmitted.
SSRN Electronic Journal, 2000
... Stefanie Kleimeier,*,1 Thorsten Lehnert,* and Willem FC Verschoor* February, 2003 Abstract ..... more ... Stefanie Kleimeier,*,1 Thorsten Lehnert,* and Willem FC Verschoor* February, 2003 Abstract ... countries including the UK and Australia (Sydney). For example, from autumn 1996 the rule of changing from standard time to daylight saving time is changed. The new ...
SSRN Electronic Journal, 2000
We find strong evidence in favor of the existence of economies of scale in hedging and that Europ... more We find strong evidence in favor of the existence of economies of scale in hedging and that European firms engage in hedging programs in response to tax convexity. Our results tend to support financial distress motives to hedge, but no evidence is found in favor of agency costs related motives. Whereas the degree of international involvement strongly determines the magnitude and significance of a firm's exchange rate exposure, it appears that large firms benefit from the diversification of their foreign operations and are to a greater extent capable of implementing operational hedging strategies. Our findings show furthermore that European firms use FCDs to hedge and not to speculate and that managers hedge only a small proportion of the currency risk they are facing.
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
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.
SSRN Electronic Journal, 2000
This paper studies the value-relevance of FCD disclosures of European non-financial firms. Our fi... more This paper studies the value-relevance of FCD disclosures of European non-financial firms. Our findings show that these firms use FCDs to hedge and not to speculate but that the impact of hedging strategies' disclosures is statistically and economically weak revealing that either (i) managers hedge only a small proportion of the currency risk they are facing, or that (ii) investors make systematic errors when assessing the link between disclosed FCD usage and firms' risk exposures. We find strong evidence in favor of the existence of economies of scale in hedging and that European firms engage in hedging programs in response to tax convexity.
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.
Managerial Finance, 2007
ABSTRACT Purpose – This paper aims to increase understanding of the (time-varying) relationship b... more ABSTRACT Purpose – This paper aims to increase understanding of the (time-varying) relationship between exchange rates and stock prices at the individual firm level. Rather than analyzing the impact of exchange rate movements on firm value by regressing multinationals’ stock returns on exchange rate changes, it is proposed to examine the impact of increased exchange rate variability on the stock return volatility of US multinationals by focusing on the 1997 Asian financial turmoil. Design/methodology/approach – In a first step, it is investigated whether the enhanced uncertainty about the future performance of US multinationals active in Asia resulted in an increased stock return variability. The second step separates the impact of increased exchange rate variability on the stock return volatility of US multinationals into systematic and diversifiable risk. Findings – It is found that the stock return variability of US multinationals increases significantly in the aftermath of the financial turmoil. In conjunction with this increase in total volatility, there is also an increase in market risk (beta) for US multinationals. Moreover, trade- and service-oriented industries appear to be particularly sensitive to these changing exchange rate conditions. Practical implications – If the additional risk imparted to exposed firms from increased exchange rate variability is systematic in nature, it will affect the required rate of (equity) return (i.e. investors demand higher returns for holding the firm's shares). Consequently, this effect of exchange rate fluctuations increases the cost of (equity) capital for US multinationals with real foreign operations in the crisis countries. Originality/value – This paper demonstrates the impact of increased exchange risk on stock return volatility and market risk.
Journal of the Japanese and International Economies, 2007
Journal of Multinational Financial Management, 2008
This article examines whether there exists any relationship between individual U.S. multinational... more This article examines whether there exists any relationship between individual U.S. multinationals' stock returns and fluctuations in Latin American exchange rates. By using a disaggregated dataset of weekly stock returns and real exchange rate movements, it appears that the apparent lack of currency exposure previously documented is mainly due to both the use of too aggregated economic variables and the ignorance of the intervaling effect. We find that about 4% (12%) of the firms experienced economically significant positive (negative) exposure effects for the period of January 1970 to December 2001. While there is time-variation in significant exposure effects, the overall extent of exposure is not sample dependent -a depreciating (appreciating) dollar against Latin American currencies has a net positive (negative) impact on U.S. multinationals. Individual firms in industry groups show high positive as well as negative exposure suggesting that exposure is not necessarily economically significant in the aggregate. The extent to which firms are exposed to Latin American currency fluctuations varies with return horizons; shortterm exposure seems to be relatively well hedged, where considerable evidence of long-term exposure is found.
Journal of Multinational Financial Management, 2006
Assessing the sensitivity of firm value to exchange rate changes has been one of the most challen... more Assessing the sensitivity of firm value to exchange rate changes has been one of the most challenging issues in international financial management over the last two decades. This paper reviews the rapidly growing exchange exposure literature, with particular reference to recent developments. The studies reviewed focus on two primary areas of inquiry: the theoretical foundations of exchange risk exposure and the empirical evidence on the link between stock returns and currency fluctuations. Although much has been learned in each field, this survey highlights the areas of research in which our understanding of the mechanism of exchange exposure is still incomplete.
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, 2012
While in previous literature foreign currency exposure is estimated to be surprisingly small and ... more While in previous literature foreign currency exposure is estimated to be surprisingly small and insignificant, we question in this paper the rationality assumption and show that the traditional use of realized exchange rate changes to approximate unexpected currency shocks leads to a strong underestimation of the influence that exchange rates play in determining firm valuations. In light of a unique survey data base of individual exchange rate expectations, we distinguish between 'realized' and 'unexpected' foreign currency movements and find that half of our sample of 935 U.S. firms with real operations in foreign countries is significantly exposed to 'unexpected' exchange rate movements. In line with previously reported results, foreign exchange risk exposure is found to become increasingly perceptible when the return horizon is lengthened. The difference between the exposure to 'realized' versus 'unexpected' exchange rate movements is however decreasing when lengthening the horizon, suggesting that the more market participants disagree about the future path of currency values, the less investors and/or managers are likely to use the publicly available forecasts in their pricing and hedging decisions.
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 International Money and Finance, 2005
This paper develops a test of contagion in financial markets by considering a measure of co-movem... more This paper develops a test of contagion in financial markets by considering a measure of co-movement based on the notion of common cycles. In contrast to studies based on simple correlation analysis, as proposed by Rigobon (2001, 2002), we rely on the concept of serial correlation common feature (SCCF) to detect short run co-movements between a set of time series. Monte Carlo simulations suggest that robust GMM and nonparametric orthogonality tests are helpful in testing for the stability in the mechanism of crisis transmission across countries even with volatile series. In order to test whether international transmission mechanisms change during financial crisis, we apply our methodology to the international effects of the 1994 Mexican peso crisis and the 1997 Asian crisis. Our results can be interpreted as evidence of a high level of market co-movement during all states of the world and, therefore, question the hypothesis of shift-contagion in the international transmission of financial shocks during the 1997 Asian crisis, and to a lesser extend, the 1994 Mexican peso crisis. This is in line with the findings of Forbes and Rigobon , according to which there is "no contagion, only interdependence"; large cross-market linkages after a shock are merely a continuation of strong transmission mechanisms that existed before the crisis.
Journal of Empirical Finance, 2006
... Asymmetric foreign exchange risk exposure: Evidence from US multinational firms. ...
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.
Journal of Banking & Finance, 2009
We examine the relationship between financial crisis exchange rate variability and equity return ... more We examine the relationship between financial crisis exchange rate variability and equity return volatility for US multinationals. Empirical analysis of the major financial crises of the last decades reveals that stock return variability increases significantly in the aftermath of a crisis, even relative to the increase in stock return volatility for other firms belonging to the same industry and market capitalization class. In conjunction with this increase in total volatility, there is also an increase in stock market risk (b) for multinational firms. Moreover, trade and service oriented industries appear to be particularly sensitive to these changing exchange rate conditions. us to explicitly verify the presence of a positive currency premium under currency boards if these currency boards are not fully credible anymore.
Oxford Bulletin of Economics and Statistics, 2008
This paper presents a new empirical approach to address the problem of trading time differences b... more This paper presents a new empirical approach to address the problem of trading time differences between markets in studies of financial contagion. In contrast to end-ofbusiness-day data common to most contagion studies, we employ price observations, which are exactly aligned in time to correct for time-zone and end-of-business-day differences between markets. Additionally, we allow for time lags between price observations in order to test the assumption that the shock is not immediately transmitted from one market to the other. Our analysis of the financial turmoil surrounding theAsian crisis reveals that such corrections have an important bearing on the evidence for contagion, independent of the methodology employed. Using a correlation-based test, we find more contagion the faster we assume the shock to be transmitted.
SSRN Electronic Journal, 2000
... Stefanie Kleimeier,*,1 Thorsten Lehnert,* and Willem FC Verschoor* February, 2003 Abstract ..... more ... Stefanie Kleimeier,*,1 Thorsten Lehnert,* and Willem FC Verschoor* February, 2003 Abstract ... countries including the UK and Australia (Sydney). For example, from autumn 1996 the rule of changing from standard time to daylight saving time is changed. The new ...
SSRN Electronic Journal, 2000
We find strong evidence in favor of the existence of economies of scale in hedging and that Europ... more We find strong evidence in favor of the existence of economies of scale in hedging and that European firms engage in hedging programs in response to tax convexity. Our results tend to support financial distress motives to hedge, but no evidence is found in favor of agency costs related motives. Whereas the degree of international involvement strongly determines the magnitude and significance of a firm's exchange rate exposure, it appears that large firms benefit from the diversification of their foreign operations and are to a greater extent capable of implementing operational hedging strategies. Our findings show furthermore that European firms use FCDs to hedge and not to speculate and that managers hedge only a small proportion of the currency risk they are facing.
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
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.
SSRN Electronic Journal, 2000
This paper studies the value-relevance of FCD disclosures of European non-financial firms. Our fi... more This paper studies the value-relevance of FCD disclosures of European non-financial firms. Our findings show that these firms use FCDs to hedge and not to speculate but that the impact of hedging strategies' disclosures is statistically and economically weak revealing that either (i) managers hedge only a small proportion of the currency risk they are facing, or that (ii) investors make systematic errors when assessing the link between disclosed FCD usage and firms' risk exposures. We find strong evidence in favor of the existence of economies of scale in hedging and that European firms engage in hedging programs in response to tax convexity.
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.
Managerial Finance, 2007
ABSTRACT Purpose – This paper aims to increase understanding of the (time-varying) relationship b... more ABSTRACT Purpose – This paper aims to increase understanding of the (time-varying) relationship between exchange rates and stock prices at the individual firm level. Rather than analyzing the impact of exchange rate movements on firm value by regressing multinationals’ stock returns on exchange rate changes, it is proposed to examine the impact of increased exchange rate variability on the stock return volatility of US multinationals by focusing on the 1997 Asian financial turmoil. Design/methodology/approach – In a first step, it is investigated whether the enhanced uncertainty about the future performance of US multinationals active in Asia resulted in an increased stock return variability. The second step separates the impact of increased exchange rate variability on the stock return volatility of US multinationals into systematic and diversifiable risk. Findings – It is found that the stock return variability of US multinationals increases significantly in the aftermath of the financial turmoil. In conjunction with this increase in total volatility, there is also an increase in market risk (beta) for US multinationals. Moreover, trade- and service-oriented industries appear to be particularly sensitive to these changing exchange rate conditions. Practical implications – If the additional risk imparted to exposed firms from increased exchange rate variability is systematic in nature, it will affect the required rate of (equity) return (i.e. investors demand higher returns for holding the firm's shares). Consequently, this effect of exchange rate fluctuations increases the cost of (equity) capital for US multinationals with real foreign operations in the crisis countries. Originality/value – This paper demonstrates the impact of increased exchange risk on stock return volatility and market risk.
Journal of the Japanese and International Economies, 2007
Journal of Multinational Financial Management, 2008
This article examines whether there exists any relationship between individual U.S. multinational... more This article examines whether there exists any relationship between individual U.S. multinationals' stock returns and fluctuations in Latin American exchange rates. By using a disaggregated dataset of weekly stock returns and real exchange rate movements, it appears that the apparent lack of currency exposure previously documented is mainly due to both the use of too aggregated economic variables and the ignorance of the intervaling effect. We find that about 4% (12%) of the firms experienced economically significant positive (negative) exposure effects for the period of January 1970 to December 2001. While there is time-variation in significant exposure effects, the overall extent of exposure is not sample dependent -a depreciating (appreciating) dollar against Latin American currencies has a net positive (negative) impact on U.S. multinationals. Individual firms in industry groups show high positive as well as negative exposure suggesting that exposure is not necessarily economically significant in the aggregate. The extent to which firms are exposed to Latin American currency fluctuations varies with return horizons; shortterm exposure seems to be relatively well hedged, where considerable evidence of long-term exposure is found.
Journal of Multinational Financial Management, 2006
Assessing the sensitivity of firm value to exchange rate changes has been one of the most challen... more Assessing the sensitivity of firm value to exchange rate changes has been one of the most challenging issues in international financial management over the last two decades. This paper reviews the rapidly growing exchange exposure literature, with particular reference to recent developments. The studies reviewed focus on two primary areas of inquiry: the theoretical foundations of exchange risk exposure and the empirical evidence on the link between stock returns and currency fluctuations. Although much has been learned in each field, this survey highlights the areas of research in which our understanding of the mechanism of exchange exposure is still incomplete.
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, 2012
While in previous literature foreign currency exposure is estimated to be surprisingly small and ... more While in previous literature foreign currency exposure is estimated to be surprisingly small and insignificant, we question in this paper the rationality assumption and show that the traditional use of realized exchange rate changes to approximate unexpected currency shocks leads to a strong underestimation of the influence that exchange rates play in determining firm valuations. In light of a unique survey data base of individual exchange rate expectations, we distinguish between 'realized' and 'unexpected' foreign currency movements and find that half of our sample of 935 U.S. firms with real operations in foreign countries is significantly exposed to 'unexpected' exchange rate movements. In line with previously reported results, foreign exchange risk exposure is found to become increasingly perceptible when the return horizon is lengthened. The difference between the exposure to 'realized' versus 'unexpected' exchange rate movements is however decreasing when lengthening the horizon, suggesting that the more market participants disagree about the future path of currency values, the less investors and/or managers are likely to use the publicly available forecasts in their pricing and hedging decisions.
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 International Money and Finance, 2005
This paper develops a test of contagion in financial markets by considering a measure of co-movem... more This paper develops a test of contagion in financial markets by considering a measure of co-movement based on the notion of common cycles. In contrast to studies based on simple correlation analysis, as proposed by Rigobon (2001, 2002), we rely on the concept of serial correlation common feature (SCCF) to detect short run co-movements between a set of time series. Monte Carlo simulations suggest that robust GMM and nonparametric orthogonality tests are helpful in testing for the stability in the mechanism of crisis transmission across countries even with volatile series. In order to test whether international transmission mechanisms change during financial crisis, we apply our methodology to the international effects of the 1994 Mexican peso crisis and the 1997 Asian crisis. Our results can be interpreted as evidence of a high level of market co-movement during all states of the world and, therefore, question the hypothesis of shift-contagion in the international transmission of financial shocks during the 1997 Asian crisis, and to a lesser extend, the 1994 Mexican peso crisis. This is in line with the findings of Forbes and Rigobon , according to which there is "no contagion, only interdependence"; large cross-market linkages after a shock are merely a continuation of strong transmission mechanisms that existed before the crisis.
Journal of Empirical Finance, 2006
... Asymmetric foreign exchange risk exposure: Evidence from US multinational firms. ...
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.
Journal of Banking & Finance, 2009
We examine the relationship between financial crisis exchange rate variability and equity return ... more We examine the relationship between financial crisis exchange rate variability and equity return volatility for US multinationals. Empirical analysis of the major financial crises of the last decades reveals that stock return variability increases significantly in the aftermath of a crisis, even relative to the increase in stock return volatility for other firms belonging to the same industry and market capitalization class. In conjunction with this increase in total volatility, there is also an increase in stock market risk (b) for multinational firms. Moreover, trade and service oriented industries appear to be particularly sensitive to these changing exchange rate conditions. us to explicitly verify the presence of a positive currency premium under currency boards if these currency boards are not fully credible anymore.