Alan L. Tucker

The Probability Distribution of Foreign Exchange Price Changes: Tests of Candidate Processes

This study investigates empirically candidate processes for characterizing foreign exchange price changes measured over limited horizons. Extant empirical studies find distributions of exchange returns too long-tailed and leptokurtic to satisfy normality. Four processes are investigated here because of their potential to model o bserved discontinuities in exchange rates and nonstationary sample moments, as well as their economic appeal. The results favor a mixed-jump model for all six major trading currencies tested. Copyright 1988 by MIT Press.

A Reexamination of Finite- and Infinite-Variance Distributions as Models of Daily Stock Returns

This study investigates the general (asymmetric) stable Paretian distribution and three finite- variance, time-independent distributions applied to daily stock-return series. Previous empirical comparisons have, in general, ignored the existence and effects of skewness on the process parameters of stable laws. The results of log-likelihood ratio and log-odds tests indicate that finite-variance models still dominate after accounting for documented skewness. In particular, the mixed diffusion-jump and compound normal models appear to be the most descriptive time-independent models.

Predicting currency return volatility

Abstract Standard deviations and elasticity of variance coefficients implied in currency option prices are employed to predict subsequent currency return volatility. Despite documented variance non-stationarity, strong predictive relationships are found. The predictive accuracies of standard deviations and elasticity coefficients are statistically indistinguishable. Finally, predictive accuracy is invariant to the weighting techniques employed.

Currency Option Pricing with Stochastic Domestic and Foreign Interest Rates

This study develops a currency option pricing model under stochastic interest rates when interest rate parity holds, and it is assumed that domestic and foreign bond prices have local variances that depend only on time. We demonstrate how existing currency option models are simply derived from one framework. Empirical tests employing transactions option data reveal that a particularly simple form of the stochastic rate model is uniformly more accurate than a constant rate model for all boundaries and maturities tested.

Trade deficit surprises and the ex ante volatility of foreign exchange rates

Abstract We investigate the effects of US balance of trade deficit announcements on the ex ante volatility of foreign exchange rates. Specifically, we analyze the association between currency option implied standard deviation (ISDs) and the surprise component of monthly merchandise trade deficit disclosures. Our results indicate that larger surprises, regardless of their sign, are associated with increased currency ISDs. We also find that deficit disclosures, regardless of their content, temper market uncertainty on average. Finally, we find that larger than expected deficits tend to depreciate the US dollar. (JEL F31)

A study of diffusion processes for foreign exchange rates

Abstract The nature of the stochastic process generating the time path of foreign exchange rates plays an important role in dynamic theories of international financial economics. An important consideration in this stochastic process is the relationship between currency return variances and exchange rate levels. Using five years of daily data separated into quarterly intervals, this study demonstrates that currency return variances depend on exchange rate levels and the dependency is unstable intertemporally. Thus, these empirical results contradict the assumption of stable log-normal distribution and the more general assumption of constant elasticities of variances. For elasticity coefficients ordinary least squares estimates are compared to maximum likelihood estimates; the maximum likelihood estimator clearly is superior. Implications of these results for models of foreign exchange rates are discussed.

Long-term valuation effects of shareholder activism

The objective is to measure how the values of firms are affected when experiencing shareholder activism. According to several researchers, firms can benefit from increased monitoring. If activism prompts managers to focus more closely on shareholder goals, it could enhance firm value over time. Strong positive valuation effects are found for firms following shareholder activism. The valuation effects accumulated to 23% on average by the end of the third year following shareholder activism. The effects appear to be somewhat more pronounced following activism initiated by individual shareholders.

Reaction of bank share prices to the Third-World debt reduction plan

Abstract Financial institutions have been subjected to several forms of regulatory intervention in recent years. Intervention may cause a wealth transfer to depository institutions and may therefore perceive these institutions to be undervalued. This effect can be verified by a positive abnormal share price response of the depository institutions. When the intervention is in response to a problem, the potential wealth transfer is a function of the magnitude of the problem, the magnitude of the remedy, and the financial source of the remedy (the source of the wealth transfer). One of the most prominent forms of intervention in the 1980s was the Debt Reduction Plan. Our study measures the effects of the Debt Reduction Plan on commercial bank share prices. We found that announcements pertaining to the Plan elicited a favorable share price response. Furthermore, the degree of response was positively associated with the banks degree of exposure to debt of less developed countries.

A note on weekday, intraday, and overnight patterns in the interbank foreign exchange and listed currency options markets

Abstract Transactions data are used to investigate returns patterns for close-to-close, close-to-open, and intraday long positions in spot currency (interbank) and currency put options (listed) for the years 1983 through 1988. Both trading-day and calendar-day hypotheses are investigated. Under the former, spot market returns are found to be significantly higher from Friday close to Monday close and from Friday close to Monday open. Under the calendar-day hypothesis, however, no significant close-to-close pattern emerges, and the Friday close to Monday open effect is reversed. Finally, spot (put) market returns are found to be significantly lower (higher) for Tuesday and Friday afternoons.

Interest rate smoothness and the nonsettling-day behavior of banks

Abstract The variance of federal funds rates on nonsettling days was relatively low during the nonborrowed reserve period. As an explanation, we develop a model where banks maximize expected profits over the reserve maintenance period subject to transaction costs on the settling day (for simplicity, fixed costs) and a probability distribution of stochastic reserve flows. The equilibrium solution reveals the relation between the microeconomic parameters—settling-day transaction costs and the reserve flow variance—and the variance of nonsettling-day rates. Casual evidence suggests that regulatory innovations may have altered the reserve flow variance to produce the observed degree of interest rate smoothness.