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Taylor-type rules versus optimal policy in a Markov-switching economy

Alexandre, Fernando; Bação, Pedro; Gabriel, Vasco
Fonte: FEUC. Grupo de Estudos Monetários e Financeiros Publicador: FEUC. Grupo de Estudos Monetários e Financeiros
Tipo: Trabalho em Andamento
ENG
Relevância na Pesquisa
36.08%
We analyse the effect of uncertainty concerning the state and the nature of asset price movements on the optimal monetary policy response. Uncertainty is modeled by adding Markov-switching shocks to a DSGE model with capital accumulation. In our analysis we consider both Taylor-type rules and optimal policy. Taylor rules have been shown to provide a good description of US monetary policy. Deviations from its implied interest rates have been associated with risks of financial disruptions. Whereas interest rates in Taylor-type rules respond to a small subset of information, optimal policy considers all state variables and shocks. Our results suggest that, when a bubble bursts, the Taylor rule fails to achieve a soft landing, contrary to the optimal policy.

Evidências de bolhas de preços no mercado acionário brasileiro

Fernandes, Bruno Vinícius Ramos
Fonte: Universidade de Brasília Publicador: Universidade de Brasília
Tipo: Dissertação
PT_BR
Relevância na Pesquisa
26.5%
Dissertação (mestrado)—Universidade de Brasília, Programa Multiinstitucional e Inter-regional de Pós-Graduação em Ciências Contábeis, 2008.; Atualmente, a existência de bolhas na formação dos preços dos ativos tem sido motivo de grande preocupação para governantes e investidores nos países onde há mercados de capitais relevantes. A existência do componente de bolha na formação dos preços pode ser indicada pelo seu desvio em relação ao seu valor fundamental. No caso das ações, uma suspeita de bolha de preços pode ser evidenciada quando os preços se deslocam em relação aos dividendos no longo prazo. O presente estudo buscou encontrar evidências sobre ocorrência de bolhas de preços no mercado acionário brasileiro no período de 1994 a 2007. Foram feitos testes no mercado de forma geral e em 17 setores classificados pelo banco de dados Economática®. Para testar a evidência de bolhas no mercado como um todo, foi utilizado o Ibovespa como proxy do preço médio das ações, e como indicador médio da distribuição de dividendos, foi construído um índice, de dividendos distribuídos, baseado nas próprias carteiras do Ibovespa no período. Foram feitos os testes de cointegração Engle-Granger e Johansen...

Taylor-type rules versus optimal policy in a Markov-switching economy

Alexandre, Fernando; Gabriel, Vasco J.; Bação, Pedro
Fonte: Universidade do Minho. Núcleo de Investigação em Políticas Económicas Publicador: Universidade do Minho. Núcleo de Investigação em Políticas Económicas
Tipo: Trabalho em Andamento
Publicado em //2008 ENG
Relevância na Pesquisa
36.08%
We analyse the effect of uncertainty concerning the state and the nature of asset price movements on the optimal monetary policy response. Uncertainty is modelled by adding Markov-switching shocks to a DSGE model with capital accumulation. In our analysis we consider both Taylor-type rules and optimal policy. Taylor rules have been shown to provide a good description of US monetary policy. Deviations from its implied interest rates have been associated with risks of financial disruptions. Whereas interest rates in Taylor-type rules respond to a small subset of information, optimal policy considers all state variables and shocks. Our results suggest that, when a bubble bursts, the Taylor rule fails to achieve a soft landing, contrary to the optimal policy.; NIPE – Núcleo de Investigação em Políticas Económicas – is supported by the Portuguese Foundation for Science and Technology through the Programa Operacional Ciência e Inovação 2010 (POCI 2010) of the III Quadro Comunitário de Apoio (QCA III), which is financed by FEDER and Portuguese funds.

The Global Financial Crisis and Development Thinking

Rogers, F. Halsey
Fonte: Banco Mundial Publicador: Banco Mundial
Relevância na Pesquisa
36.11%
The global financial crisis has not only dealt a major blow to the global economy, but also shaken confidence in economic management in the developed world and the economic models that guide it. The crisis has revealed major market failures, especially in the housing bubble and its transmission to the financial system, but also glaring state failures that propagated and exacerbated the crisis. Will the events of the past two years lead to major shifts in thinking about development economics, and should they? This paper assesses that question for several key domains of development thinking, including the market-state balance, macroeconomic management, globalization, development financing, and public spending. On the one hand, changed global circumstances and new awareness of vulnerability should lead to some policy changes, as developing countries take steps to reduce and buffer risks, including risks generated in developed countries. At the same time, the crisis should largely reinforce the Post-Washington Consensus on development that has emerged over the past decade -- a world view that aims to achieve private sector-driven growth but sees a facilitating role for the state...

Placing the 2006/08 Commodity Price Boom into Perspective

Baffes, John; Haniotis, Tassos
Fonte: Banco Mundial Publicador: Banco Mundial
Relevância na Pesquisa
36.38%
The 2006-08 commodity price boom was one of the longest and broadest of the post-World War II period. Apart from strong and sustained economic growth, the recent boom was fueled by numerous factors, including low past investment in extractive commodities, weak dollar, fiscal expansion, and lax monetary policy in many countries, and investment fund activity. At the same time, the combination of adverse weather conditions, the diversion of some food commodities to the production of biofuels, and government policies (including export bans and prohibitive taxes) brought global stocks of many food commodities down to levels not seen since the early 1970s. This in turn accelerated the price increases that eventually led to the 2008 rally. The weakening and/or reversal of these factors coupled with the financial crisis that erupted in September 2008 and the subsequent global economic downturn, induced sharp price declines across most commodity sectors. Yet, the main price indices are still twice as high compared to their 2000 real levels...

A tale of five bubbles - asset price inflation and central bank policy in historical perspective

Voth, Hans-Joachim
Fonte: Universidade Nacional da Austrália Publicador: Universidade Nacional da Austrália
Tipo: Working/Technical Paper Formato: 278884 bytes; application/pdf
EN_AU
Relevância na Pesquisa
56.24%
This paper examines five bubbles that eventually popped, and discusses the feasibility of central bank policy. In all cases, we find that monetary policy was too loose during the period when the bubble was developing, and that a determined switch from an accommodating to a tight stance caused “the music to stop”. We argue that despite the severe real effects of asset bubbles in all five examples, the case for targeting them explicitly is weak. Policy was flawed because it failed to pay sufficient attention to the output gap. We also present a more formal test, showing that policy errors influence the conditional volatility of equity returns as estimated in GARCH-M models. The conclusion examines US policy today in the light of our historical findings.; no

The effect of reliability, content and timing of public announcements on asset trading behavior

Corgnet, Brice; Kujal, Praveen; Porter, David
Fonte: Universidade Carlos III de Madrid Publicador: Universidade Carlos III de Madrid
Tipo: Trabalho em Andamento Formato: application/pdf
Publicado em /03/2010 ENG
Relevância na Pesquisa
36.44%
Financial markets are overwhelmed by daily announcements. We use experimental asset markets to assess the impact of releasing public messages with different levels of reliability on asset prices. Subjects receive qualitative announcements in predetermined trading periods that are either preset by the experimenter, randomly selected, or determined by past asset market prices. We find that messages can play a significant role in bubble abatement, or rekindling. The preset message, “The price is too high,” decreases the amplitude and duration of bubbles for inexperienced subjects. Announcements that depend on the actual level of mispricing reduce bubble magnitude. Meanwhile, a preset or random message, “The price is too low,” prevents experienced subjects from abating bubbles. We account for the effect of public messages by showing that they significantly reduce inconsistent (“irrational”) trading behavior.

The effect of reliability, content and timing of public announcements on asset trading behavior

Corgnet, Brice; Kujal, Praveen; Porter, David
Fonte: Elsevier Publicador: Elsevier
Tipo: info:eu-repo/semantics/acceptedVersion; info:eu-repo/semantics/article Formato: application/pdf
Publicado em /11/2010 ENG
Relevância na Pesquisa
36.44%
Financial markets are overwhelmed by daily announcements. We use experimental asset markets to assess the impact of releasing public messages with different levels of reliability on asset prices. Subjects receive qualitative announcements in predetermined trading periods that are either preset by the experimenter, randomly selected, or determined by past asset market prices. We find that messages can play a significant role in bubble abatement, or rekindling. The preset message, “The price is too high,” decreases the amplitude and duration of bubbles for inexperienced subjects. Announcements that depend on the actual level of mispricing reduce bubble magnitude. Meanwhile, a preset or random message, “The price is too low,” prevents experienced subjects from abating bubbles. We account for the effect of public messages by showing that they significantly reduce inconsistent (“irrational”) trading behavior.; The authors acknowledge financial support from Grant ECO2008-00977/ECON from the Spanish Ministry of Education. Kujal acknowledges financial support from the Instituto Universitario de Economía, Consolider-Ingenio 2010 and the Comunidad de Madrid (grant Excelecon). Seminar participants at University of Granada and JEE 2008 conference-Dijon gave helpful comments.

The effect of earned vs. house money on price bubble formation in experimental asset markets

Corgnet, Brice; Hernán, Roberto; Kujal, Praveen; Porter, David
Fonte: Universidade Carlos III de Madrid Publicador: Universidade Carlos III de Madrid
Tipo: info:eu-repo/semantics/draft; info:eu-repo/semantics/workingPaper Formato: application/pdf
Publicado em /02/2013 ENG
Relevância na Pesquisa
36.24%
Can “house money” explain asset market bubbles? We test this hypothesis in an asset experiment with a certain dividend cash and shares is given to subjects initial portfolios are constructed using subject that bubbles still occur; however trading volumes are significantly abated and the dispersion of earnings is significantly lower when subjects earn their starting endowments. We investigate the role of cognitive ability in accounting for the differences in earnings distribution across treatments by using the Cognitive Reflection Test (CRT). We find that high CRT subjects earned more money on average than the initial value of their portfolio while low CRT subjects earned less. Subjects with low CRT scores were net purchasers (sellers) of shares when the price was above (below) fundamental value while the opposite was true for subjects with high CRT scores.

Comment on ‘It takes more than a bubble to become Japan’

de Brouwer, Gordon
Fonte: Universidade Nacional da Austrália Publicador: Universidade Nacional da Austrália
Tipo: Working/Technical Paper Formato: 226000 bytes; 356 bytes; application/pdf; application/octet-stream
EN_AU
Relevância na Pesquisa
56.38%
The focus on Japan in this conference serves two purposes. The first is to highlight the cost of bubbles and examine the place for policy action to limit the worst of excesses in asset price bubbles. This is obviously important to the debate now occurring in Australia. The second purpose is to focus on the problems of a sustained collapse in asset prices and how to deal with them. Japan matters to the global economy and the sooner it gets its economic act together the better for us all. Adam’s paper serves both these purposes. But discussants are not invited just to say how great a paper is. They are there for debate and testing ideas. To this end, I will revisit the question of the lessons of Japan’s experience for other countries, and focus especially on the place of targeted interventions in asset markets. Before I get to this, I would like to look at two structural issues in Japan that may be useful in addressing the lessons from Japan’s experience. The first issue is the interplay and connections between the prices of various asset classes. If asset market spillovers exist, policies specifically directed to one asset class may have unintended spill-over effects to other asset classes. The second issue is the degree to which asset prices matter to economic activity. If asset prices are particularly important to private decision makers...

How to Accelerate Corporate and Financial Sector Restructuring in East Asia

Claessens, Stijn; Djankov, Simeon; Klingebiel, Daniela
Fonte: World Bank, Washington, DC Publicador: World Bank, Washington, DC
Tipo: Publications & Research :: Viewpoint; Publications & Research
ENGLISH
Relevância na Pesquisa
36.18%
Resolving systemic banking and corporate distress is not easy. The large scale of the East Asian financial crisis has made the task even more daunting in Indonesia, the Republic of Korea, Malaysia, and Thailand. Two years into the process, bank and corporate restructuring is still a work in progress. Governments should act to accelerate it. Besides adopting common policy prescriptions - improving financial regulation, corporate governance, and bankruptcy procedures and shoring up banks' capital positions - governments could take three additional steps: Set up competitive, privately managed specialized funds, to hold nonperforming loans and depoliticize restructuring. Allow auctions as an alternative to negotiations, to speed debt restructuring. And allow employee ownership participation schemes, to reduce workers' resistance to changes in ownership.

Tropical Bubbles : Asset Prices in Latin America, 1980-2001

Herrera, Santiago; Perry, Guillermo
Fonte: World Bank, Washington, DC Publicador: World Bank, Washington, DC
Tipo: Publications & Research :: Policy Research Working Paper; Publications & Research
ENGLISH; EN_US
Relevância na Pesquisa
56.67%
The authors test for the existence of asset price bubbles in Latin America in 1980-2001, focusing mainly on stock prices. Based on unit root and cointegration tests, they find that they cannot reject the hypothesis of bubbles. They arrive at the same conclusion using Froot and Obstfeld's intrinsic bubbles model. To examine empirical regularities of these bubble episodes in the region, the authors identify periods of significant stock price overvaluation. They quantify the relative importance of different factors that determine the probability of bubble occurrence, focusing on the contrast between the country-specific variables and the common external factors. They include as country-specific variables both the level and the volatility of domestic credit growth, the volatility of asset returns, the capital flows to each country, and the terms of trade. As common external variables, they consider the degree of asset overvaluation in the U.S. stock and real estate markets and the term spread of U.S. Treasury securities. To quantitatively assess the relative importance of each factor...

The Unexpected Global Financial Crisis : Researching Its Root Cause

Lin, Justin Yifu; Treichel, Volker
Fonte: Banco Mundial Publicador: Banco Mundial
Tipo: Publications & Research :: Policy Research Working Paper
ENGLISH
Relevância na Pesquisa
36.58%
The world is currently still struggling with the aftermath of the worst economic crisis since the Great Depression. Following a description of the eruption, evolution and consequences of the global crisis, this paper reviews alternative hypotheses for the causes of the global financial crisis as well as their empirical evidence. The paper refutes the frequently voiced view that the global crisis was caused by global imbalances that reflected economic policies of East Asian countries. Instead, it argues that global imbalances were the result of excess demand in the United States, resulting from both the public debt in the United States arising from the Afghanistan and Iraqi wars and tax cuts and the overconsumption by households supported by the wealth effect from the housing bubble in the United States. The housing bubble itself was the outcome of the Federal Reserve's low interest rate policy in the aftermath of the burst of the "dot-com" bubble in 2001, the lack of appropriate financial regulation, and housing policies aimed at expanding the mortgage market to low-income borrowers. It was possible to maintain the large trade deficits of the United States for such a long period of time because of the dollar's reserve currency status. When the housing bubble in the United States burst...

Global Economic Prospects 2010 : Crisis, Finance, and Growth

World Bank
Fonte: World Bank Publicador: World Bank
Tipo: Publications & Research :: Publication; Publications & Research :: Publication
ENGLISH
Relevância na Pesquisa
36.27%
The world economy is emerging from the throes of a historically deep and synchronized recession provoked by the bursting of a global financial bubble. The consequences of the initial bubble and the crisis have been felt in virtually every economy, whether or not it participated directly in the risky behaviors that precipitated the boom-and-bust cycle. And while growth rates have picked up, the depth of the recession means that it will take years before unemployment and spare capacity are reabsorbed. This year's global economic prospects examines the consequences of the crisis for both the short and medium term growth prospects of developing countries. It concludes that the crisis and the regulatory reaction to the financial excesses of the preceding several years may have lasting impacts on financial markets, raising borrowing costs and lowering levels of credit and international capital flows. As a result, the rate of growth of potential output in developing countries may be reduced by between 0.2 and 0.7 percentage points annually over the next five to seven years as economies adjust to tighter financial conditions. Overall...

Three Essays On Asset Bubbles And Contagion Over Financial Networks

Shen, YUE
Fonte: Quens University Publicador: Quens University
Tipo: Tese de Doutorado
EN; EN
Relevância na Pesquisa
36.42%
This thesis studies financial market stability by exploring asset bubbles and contagions over financial markets. First I construct a model where bubbles arise from a lack of common knowledge about the asset value among traders with private information, and I evaluate the effects of capital gain tax and transaction costs on bubbles. I find that capital gains tax has no effect on the size of the bubble when there is a perfect tax credit for capital losses, and the size of the bubble decreases in the tax when there is no tax credit. Therefore dealing with bubbles with capital gains tax not only requires imposing the tax, but also tightening the policies on tax credits. In a simplified bubble model, it can be shown that the model is equivalent to an auction, and bubbles arise for the same reason that bidding prices fail to reveal the true value in that auction. Several experiments on taxes and subsidies are devised to reduce or eliminate bubbles. Then I study the contagion of bankruptcy through downward price pressure among investors with overlapping portfolios. I calculate the probability of an extensive contagion and the expected bankruptcy rate during such a contagion. System-wide contagion happens only when the diversification of portfolios is in a certain range and...

Market impacts in major events: an analysis using state price distributions

Foo, Siow Moi
Fonte: Quens University Publicador: Quens University
Tipo: Tese de Doutorado Formato: 1636421 bytes; application/pdf
EN; EN
Relevância na Pesquisa
36.18%
For the past two decades, events on the world stage and particularly in the United States have serious implications for the operations of financial markets. In this study, we will attempt to provide some insights into information dispersion before and after three particular events: the near collapse of Long Term Capital Management in August 1998, the Tech-Bubble Burst in March 2000, and the terrorist attack on September 11, 2001. A study of these events will yield insights into the resolution of information uncertainties in the financial markets. We estimated state prices and state price densities using Claims-based asset pricing (a la Ross (2000)). We then used our results to gauge investor sentiments three months before and three months after each event. We also used two new measures of the level of pessimism in the market during these events: skewness of the state price distributions and the percentages of discount states (with state price densities greater than one). Our results clearly indicate that different markets reacted differently to the three events, and that there were different levels of information leakage in the markets for each event. As expected, the impacts from the 9/11 event were immediate but short-lived in both the SPX and NDX markets. Further...

Noise, risk premium, and bubble

Andruszkiewicz, Grzegorz; Brody, Dorje C.
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 16/03/2011
Relevância na Pesquisa
36.11%
The existence of the pricing kernel is shown to imply the existence of an ambient information process that generates market filtration. This information process consists of a signal component concerning the value of the random variable X that can be interpreted as the timing of future cash demand, and an independent noise component. The conditional expectation of the signal, in particular, determines the market risk premium vector. An addition to the signal of any term that is independent of X, which generates a drift in the noise, is shown to change the drifts of price processes in the physical measure, without affecting the current asset price levels. Such a drift in the noise term can induce anomalous price dynamics, and can be seen to explain the mechanism of observed phenomena of equity premium and financial bubbles.; Comment: 15 pages

Martingale property of exponential semimartingales: a note on explicit conditions and applications to asset price and Libor models

Criens, David; Glau, Kathrin; Grbac, Zorana
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 26/06/2015
Relevância na Pesquisa
46.29%
Martingality plays a crucial role in mathematical finance, in particular arbitrage-freeness of a financial model is guaranteed by the local martingale property of discounted price processes. However, in order to compute prices as conditional expectations the discounted price process has to be a true martingale. If this is not the case, the market and the fundamental (computed) prices deviate, which is interpreted as financial bubble. Moreover, if the discounted price process is a true martingale it can be used to define an equivalent change of measure. Based on general conditions in Kallsen and Shiryaev (2002), we derive explicit sufficient conditions for the true martingality of a wide class of exponentials of semimartingales. Suitably for applications, the conditions are expressed in terms of the semimartingale characteristics. We illustrate their use for stochastic volatility asset price models driven by semimartingales. Finally, we prove the well-definedness of semimartingale Libor models given by a backward construction.; Comment: 22 pages

A simple model for asset price bubble formation and collapse

Kiselev, Alexander; Ryzhik, Lenya
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 01/09/2010
Relevância na Pesquisa
46.28%
We consider a simple stochastic differential equation for modeling bubbles in social context. A prime example is bubbles in asset pricing, but similar mechanisms may control a range of social phenomena driven by psychological factors (for example, popularity of rock groups, or a number of students pursuing a given major). Our goal is to study the simplest possible model in which every term has a clear meaning and which demonstrates several key behaviors. The main factors that enter are tendency of mean reversion to a stable value, speculative social response triggered by trend following and random fluctuations. The interplay of these three forces may lead to bubble formation and collapse. Numerical simulations show that the equation has distinct regimes depending on the values of the parameters. We perform rigorous analysis of the weakly random regime, and study the role of change in fundamentals in igniting the bubble.; Comment: 30 pages

Inferring Fundamental Value and Crash Nonlinearity from Bubble Calibration

Yan, Wanfeng; Woodard, Ryan; Sornette, Didier
Fonte: Universidade Cornell Publicador: Universidade Cornell
Tipo: Artigo de Revista Científica
Publicado em 24/11/2010
Relevância na Pesquisa
36.62%
Identifying unambiguously the presence of a bubble in an asset price remains an unsolved problem in standard econometric and financial economic approaches. A large part of the problem is that the fundamental value of an asset is, in general, not directly observable and it is poorly constrained to calculate. Further, it is not possible to distinguish between an exponentially growing fundamental price and an exponentially growing bubble price. We present a series of new models based on the Johansen-Ledoit-Sornette (JLS) model, which is a flexible tool to detect bubbles and predict changes of regime in financial markets. Our new models identify the fundamental value of an asset price and crash nonlinearity from a bubble calibration. In addition to forecasting the time of the end of a bubble, the new models can also estimate the fundamental value and the crash nonlinearity. Besides, the crash nonlinearity obtained in the new models presents a new approach to possibly identify the dynamics of a crash after a bubble. We test the models using data from three historical bubbles ending in crashes from different markets. They are: the Hong Kong Hang Seng index 1997 crash, the S&P 500 index 1987 crash and the Shanghai Composite index 2009 crash. All results suggest that the new models perform very well in describing bubbles...