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ABSTRACT Studies of emerging stock market anomalies are based on underspecified models. Extreme bound analysis (EBA), a technique to remedy specification bias, indicates that no anomaly is robust, given panel data covering sixteen... more
ABSTRACT Studies of emerging stock market anomalies are based on underspecified models. Extreme bound analysis (EBA), a technique to remedy specification bias, indicates that no anomaly is robust, given panel data covering sixteen countries from March 1988 through January 1995. Only under a relaxed decision rule does the author fund thar five of the fifteen factors studied are sturdy: price/book long-run lagged returns, population demographics, country risk, and relative market size. What is move sobering, time series EBA produces no sturdy aggregate determinants.
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This study examines the effects of cross-border flows - FDI, FPI, and FBL - on growth and savings rates using data on 56 countries from 1969 through 1998. Very generally, few flow measures are significant determinants of real variables.... more
This study examines the effects of cross-border flows - FDI, FPI, and FBL - on growth and savings rates using data on 56 countries from 1969 through 1998. Very generally, few flow measures are significant determinants of real variables. However, consideration of the initial level of financial depth - including measures of private credit, bank lending, and stock market development - seems to produce more significant results, as some data indicate that flows have a more deleterious (benevolent) effect in countries with lower (higher) levels of development. Moreover, extreme bound analysis (EBA) of significant results indicates that these findings are robust.
A growing empirical literature addresses the determinants of the sacrifice ratio, an imperfect measure of the tradeoff between inflation and aggregate output. This study endeavors to advance previous studies in three ways. First, the... more
A growing empirical literature addresses the determinants of the sacrifice ratio, an imperfect measure of the tradeoff between inflation and aggregate output. This study endeavors to advance previous studies in three ways. First, the literature does not satisfactorily examine key fiscal and monetary policy practices that arguably affect policymaking credibility. These include the stock (and flow) of government debt, the issuance of inflation-indexed bonds, and the existence of explicit inflation targets. Second, previous studies unfortunately exclude non-OECD countries. Third, the literature is divided with respect to research design, and therefore this study produces sensitivity analyses of previous results. Given these addenda, the results generally suggest that credibility proxies are largely sensitive to research design. However, some data do support the hypothesis that governments with an incentive, rather than perhaps a publicized objective, to lower inflation achieve lower sa...
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Recent studies report that equity market liberalisation positively correlates with total return, which in turn purportedly increases private investment growth. While the finding on reform and performance is generally robust to alternative... more
Recent studies report that equity market liberalisation positively correlates with total return, which in turn purportedly increases private investment growth. While the finding on reform and performance is generally robust to alternative perspectives on capital account liberalisation that emphasise over-heating and volatility, this crucial first link in the causal chain is not wholly robust empirically. For example, previous findings are very sensitive to alternative definitions of precise liberalisation event dates. Also, spatial variance seems to drive significant results in panel regressions, which is problematic for interpreting the particular path from equity prices to private investment. Finally, existing studies do not satisfactorily control for other determinants of returns, and extreme bound analysis (EBA) suggests that liberalisation is spurious.
A small but ambitious literature uses affine arbitrage-free models to estimate jointly U.S. Treasury term premiums and the term structure of equity risk premiums. Within this approach, this paper identifies the parameter restrictions that... more
A small but ambitious literature uses affine arbitrage-free models to estimate jointly U.S. Treasury term premiums and the term structure of equity risk premiums. Within this approach, this paper identifies the parameter restrictions that are consistent with a simple dividend discount model, extends the cross-section to Germany and France, averages across multiple observable-factor and market prices of risk specifications, and considers alternative samples for parameter estimation. The results produce intuitive trajectories for both sets of premiums given standard samples starting from July 1993. However, the decomposition of nominal U.S. Treasury yields, but not long-run equity risk premiums, is sensitive to data beyond 2008, which raises some questions about the net effects of unconventional monetary policy measures. Nonetheless, the rotation from sharp inversion during the financial crisis to an upward-sloping term structure of equity risk premiums more recently, with modest read...
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The consensus suggests that subdued nominal U.S. Treasury yields on balance since the onset of the global financial crisis primarily reflect exceptionally low, if not occasionally negative, term premiums as opposed to low anticipated... more
The consensus suggests that subdued nominal U.S. Treasury yields on balance since the onset of the global financial crisis primarily reflect exceptionally low, if not occasionally negative, term premiums as opposed to low anticipated short rates. Depressed term premiums plausibly owe to unconventional Federal Reserve policy as well as to net flight-to-quality flows after 2007. However, two strands of evidence raise questions about this story. First, a purely survey-based expected forward term premium measure, as opposed to an approximate spot estimate, has increased rather than decreased in recent years. Second, with respect to the time-series dynamics of factors underlying affine term structure models, simple econometrics of recent data produce not only a more persistent level of the term structure but also a depressed long-run mean, which in turn implies an implausibly low expected short rate path. Strong caveats aside, an implication for central bankers is that unconventional mon...
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A vast literature reports excess returns to momentum strategies across many financial asset classes. However, no study examines trading rules based on price history along individual government-bond term structures — that is, with respect... more
A vast literature reports excess returns to momentum strategies across many financial asset classes. However, no study examines trading rules based on price history along individual government-bond term structures — that is, with respect to duration buckets across the curve — as opposed to across sovereign markets or individual term structures as a whole over time. Under duration-neutral and long-only constraints as well as low trading costs, this paper reports excess annualized returns of up to 120 basis points and information ratios as high as 0.79 using U.S. Treasury total return data from December 1996 through July 2013. Given a corresponding long-short strategy with no absolute duration risk, excess returns and information ratios are up to 207 basis points and 1.01, respectively. Unlike momentum strategies in some other asset classes, the excess return distributions are positively skewed, and momentum loads, if in any way, favorably on broad risk factors. Returns correlate to a...
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This article addresses some shortcomings in the empirical literature on disinflation costs. Namely, previous studies do not satisfactorily examine key fiscal and monetary policy practices that arguably affect policymaking credibility.... more
This article addresses some shortcomings in the empirical literature on disinflation costs. Namely, previous studies do not satisfactorily examine key fiscal and monetary policy practices that arguably affect policymaking credibility. These include the stock (and flow) of government debt, the issuance of inflation-indexed bonds, and the existence of explicit inflation targets. Examining data from 1957 to 2001, covering 78 higher- and lower-income countries, I find that the effects of credibility proxies are sensitive to research design. However, some data do support the hypothesis that governments with an incentive, rather than perhaps a publicized objective, to fight inflation achieve lower disinflation costs.
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Recent studies report that equity market liberalisation positively correlates with total return, which in turn purportedly increases private investment growth. While the finding on reform and performance is generally robust to alternative... more
Recent studies report that equity market liberalisation positively correlates with total return, which in turn purportedly increases private investment growth. While the finding on reform and performance is generally robust to alternative perspectives on capital account liberalisation that emphasise over-heating and volatility, this crucial first link in the causal chain is not wholly robust empirically. For example, previous findings are very sensitive to alternative definitions of precise liberalisation event dates. Also, spatial variance seems to drive significant results in panel regressions, which is problematic for interpreting the particular path from equity prices to private investment. Finally, existing studies do not satisfactorily control for other determinants of returns, and extreme bound analysis (EBA) suggests that liberalisation is spurious.
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Recent literature suggests that stock market liberalisation has positive effects on macroeconomic growth and private investment. However, econometric relations are largely dependent on the inclusion of higher income countries in such... more
Recent literature suggests that stock market liberalisation has positive effects on macroeconomic growth and private investment. However, econometric relations are largely dependent on the inclusion of higher income countries in such samples, which quite conceivably limits the relevance for lower income nations. Indeed, some evidence in this study indicates that stock market development has a more positive impact on growth for greater levels of per capita GDP. Similarly, lagged equity price appreciation seems to boost private investment growth, but only in rich countries. Curiously, neither financial nor legal development variables, which are more serviceably relevant than initial income, seem to be mitigating factors, but these data imply subdued enthusiasm regarding emerging equity market development.
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ABSTRACT The literature on anomalies in developed stock markets produces no consensus on specification. This study uses extreme bound analysis (EBA) to evaluate the robustness of 15 stock-return anomalies given data covering 16 developed... more
ABSTRACT The literature on anomalies in developed stock markets produces no consensus on specification. This study uses extreme bound analysis (EBA) to evaluate the robustness of 15 stock-return anomalies given data covering 16 developed markets from May 1984 to March 1999. Two factors are sturdy according to the “extreme” decision rule in the panel design – D/P and momentum. Under a less stringent EBA criterion, long-run lagged returns, country risk, and the January effect are also robust. Time-series EBA for individual markets produces one robust result according to relaxed decision rules across a majority of cases – long-run government bond yields.
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ABSTRACT Do institutions help explain macroeconomic performance? This article addresses two issues. First, especially given the practical implications of the literature, measurement of institutions should avoid tautologies, and therefore... more
ABSTRACT Do institutions help explain macroeconomic performance? This article addresses two issues. First, especially given the practical implications of the literature, measurement of institutions should avoid tautologies, and therefore this study uses econometrics to estimate the effect of objectively measurable institutions such as labor market organization, financial development, fiscal federalism, and political regime-type. Second, the growing literature on these promising factors, in turn, is unfortunately incommensurable because previous studies fail to control for other institutional and, in some cases, standard economic variables. Given data on up to ninety-four countries from 1961 through 2000, extreme-bound analysis (EBA), an econometric technique that addresses the sensitivity of previous findings to alternative assumptions about model specification, suggests that some institutions associated with the organization of labor and capital are robust correlates of investment. Few data support the view that variables related to the organization of the state, including fiscal federalism and political regime-type, affect macroeconomic performance.Without implication, the author thanks Richard Nelson, Doug Chalmers, Robert Shapiro, Alessandra Casella, Brendan O Flaherty, Geoffrey Garrett, Alexander Hicks, Brett Hammond, Mark Kesselman, the editor (Lisa Martin), and two anonymous referees for helpful comments. Also, Ross Levine, Peter Rousseau, Geoffrey Garrett, and Torben Iversen were very helpful in locating data. The views expressed in this article do not necessarily reflect those of the Board of Governors of the Federal Reserve System or any member of its staff.
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ABSTRACT Some studies have argued that monetary policy affects stock market performance over monthly or quarterly horizons, which has important implications for both investors and central bankers. Previous findings, however, are not... more
ABSTRACT Some studies have argued that monetary policy affects stock market performance over monthly or quarterly horizons, which has important implications for both investors and central bankers. Previous findings, however, are not robust to the sensitivity analysis reported here. For example, division of the sample period into subperiods and use of rolling regressions for the time-series data indicate that for the vast majority of countries (including the United States), the relationship largely vanished in more recent periods. Also, panel regressions that incorporate cross-sectional variance among the 16 countries suggest that the relationship between monetary policy and sotck returns is weak or nonexistent. Analysis of excess stock price return, as opposed to raw return, also indicates no relationship. Finally, alternative measures of monetary policy indicate no correlation between easing/tightening cycles and stock returns.
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ABSTRACT Recent research suggests a persistent empirical relation between U.S. monetary policy and stock returns since the mid-1980s. The findings seem questionable and incomplete, however, for at least three reasons. First, the results... more
ABSTRACT Recent research suggests a persistent empirical relation between U.S. monetary policy and stock returns since the mid-1980s. The findings seem questionable and incomplete, however, for at least three reasons. First, the results are sensitive to sample selection. Second, this research does not distinguish between anticipated and unanticipated monetary policy decisions. Third, such analysis does not satisfactorily consider that returns and policy are probably determined simultaneously because prices contain information about market expectations for the economy and, in turn, policy. Together, these issues suggest that investors are unlikely to profit from strategies based on past or anticipated Federal Reserve decisions.
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This study examines the effects of foreign direct investment (FDI) and equity foreign portfolio investment (EFPI) on economic growth using data on 80 countries from 1979 through 1998. The results largely suggest that lagged FDI and EFPI... more
This study examines the effects of foreign direct investment (FDI) and equity foreign portfolio investment (EFPI) on economic growth using data on 80 countries from 1979 through 1998. The results largely suggest that lagged FDI and EFPI do not have direct, unmitigated positive ...
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Recent literature argues that stock market liberalisation has positive long-and short-run effects on macroeconomic growth and private investment, respectively. However, given a sample of up to 64 countries from 1981 through 1998, positive... more
Recent literature argues that stock market liberalisation has positive long-and short-run effects on macroeconomic growth and private investment, respectively. However, given a sample of up to 64 countries from 1981 through 1998, positive results for long-run growth are largely ...
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This study examines the effects of foreign direct investment (FDI) and equity foreign portfolio investment (EFPI) on economic growth using data on 80 countries from 1979 through 1998. The results largely suggest that lagged FDI and EFPI... more
This study examines the effects of foreign direct investment (FDI) and equity foreign portfolio investment (EFPI) on economic growth using data on 80 countries from 1979 through 1998. The results largely suggest that lagged FDI and EFPI do not have direct, unmitigated positive ...
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... Technical Analysis ... 100 EXTREME BOUND ANALYSIS OF EMERGING STOCK MARKET ANOMALIES WINTER 2000 EXHIBIT 2 TIME SERIES EBA THIRTEEN DOUBTFULSTOCK MARKET ANOMALIES MARCH 1988-JANUARY 1995 ...
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9 This study examines the e ects of foreign direct investment (FDI) and equity foreign portfolio investment (EFPI) on economic growth using data on 80 countries from 1979 through 1998. The 11 results largely suggest that lagged FDI and... more
9 This study examines the e ects of foreign direct investment (FDI) and equity foreign portfolio investment (EFPI) on economic growth using data on 80 countries from 1979 through 1998. The 11 results largely suggest that lagged FDI and EFPI do not have direct, unmitigated positive e ects on growth, but some data are consistent with the view that the e ects of FDI and EFPI are 13 contingent on the 'absorptive capacity' of host countries, with particular respect to ÿnancial or institutional development. Moreover, extreme bound analysis (EBA) of signiÿcant results 15 indicates that the estimates are robust compared to other empirical studies on growth.