Atsuyuki Naka

Examining impulse response functions in cointegrated systems

A system of reduced forms with cointegrated variables may be estimated in two ways: as a vector autoregression in levels, or as a vector error correction model. The latter is a restricted version of the former. If there is cointegration, imposing this restriction will yield more efficient estimates. However, at short horizons, vector error correction estimates are known to perform poorly relative to those from a vector autoregression. We examine how this property affects impulse response functions. A Monte Carlo experiment, and an example, suggest that impulse response functions of the two models are similar at short horizons, but different at long horizons. This suggests that the loss of efficiency from vector autoregression estimation is not critical at the commonly used short horizon. Our results complement parallel arguments focusing on forecast errors made by Clements and Hendry (1995), Hoffman and Rasche (1996), and Lin and Tsay (1996).

Use of macroeconomic variables to evaluate selected hospitality stock returns in the U.S.

Abstract The economics literature has long focused on the relationship between macroeconomic variables and stock market returns. No such research has examined similar relationships with hospitality stocks. This article investigates how selected macroeconomic variables influence restaurant and hotel stock returns over a twenty-seven year period employing a regression analysis. The results suggest the direction of macroeconomic forces is consistent across the industrial, lodging and restaurant sectors although differences in significance do occur. Over the period studied, macroeconomic variables are able to explain the movement of restaurant stock returns to a greater extent than either the lodging or industrial sectors.

The unbiased forward rate hypothesis re-examined

Abstract This paper examines the unbiased forward rate hypothesis using an Error Correction Model (ECM). Previous tests have utilized mainly two specifications—differences and levels. The advantage of the ECM is that the parameters of the level specification appear in the error correction term, and hence the ECM provides a direct link to the levels specification. In this paper we fully exploit this link and demonstrate that both specifications yield essentially the same results when the ECM is explicitly derived from a levels specification and the levels parameters are estimated simultaneously with other parameters of the ECM.

Changing Risk, Return, and Leverage: The 1997 Asian Financial Crisis

This paper explores risk and return relations in six Asian equity markets affected by the 1997 Asian financial crisis. After the start of the crisis, national equity betas increased and average returns fell substantially. Beta increases due to leverage linked to exchange rates. The increase in expected return needed to accompany this rise in beta is made possible through the creation of capital losses that lower average returns. We propose a new probability-based asset pricing model that captures leverage effects using valuation ratios. Results show the role of leverage in explaining the likelihood of the financial crises. Crosssectional evidence supports time-series findings.

An empirical investigation of asset pricing models using Japanese stock market data

Abstract This article examines the empirical performance of the following asset pricing models: (i) a time-separable model; (ii) Abels model with a consumption externality; (iii) the time non-separable model; (iv) the consumption-based recursive utility model; and (v) the ad-hoc factor pricing model. The testing framework includes the Hansen-Jagannathan volatility bounds test, the Hansen-Jagannathan specification error test and Euler equation-based generalized method of moments estimation. The test evidence indicates that habit forming preferences are empirically supportable and provide a good characterization of the Japanese security market data.

Re-examining Cointegration, Unit Roots and Efficiency in Foreign Exchange Rates

This paper examines the cointegrating relationships in seven foreign exchange rates for a sample period from 1974 to 1991 by utilizing Johansens (1991) method. Three subperiods are also examined to confirm the intertemporal stability of the test results. In addition, subgroups of the seven exchange rates are analyzed to determine the consistency of the empirical results with respect to different dimensions in the system. We find that the test results are sensitive to the choice of test statistics, time trends, subperiods as well as subgroups. All results indicate either one or no cointegrating relationship exists. Further, we study time series properties of twenty one cross-currency rates and the corresponding exchange rates in terms of a common currency. None of cross-currency rates are stationary and hence the pairs of exchange rates are not cointegrated. Copyright Blackwell Publishers Ltd 1997.

Trading strategies of the US-based international mutual funds and test of the SEC regulation

Purpose - The purpose of this paper is to examine the predictability of the US-based international mutual fund returns by investigating 2,479 daily observations for all categories of international equity, bond and hybrid mutual funds. Further, trading strategies are proposed and tested under different scenario including a proposed regulation by the Security and Exchange Commission (SEC). Design/methodology/approach - The sample is split and the initial sub sample is used to investigate return patterns of international funds and to develop trading rules based on the predictable return patterns. Trading rules are then tested on the holdout sample. Findings - Empirical results demonstrate statistically significant predictabilities. Various trading strategies show that the returns of both load and no-load funds are economically significant beating a buy-and-hold strategy. Empirical findings are consistent across the fund categories irrespective of sizes and styles. The tested strategies are profitable even with various limits on frequency of trading, minimum holding periods and even under a recent SECs proposed regulation. Further, possible contracting and regulatory changes are proposed to improve the efficiency in the mutual fund industry. Originality/value - The results confirm previous findings of statistically and economically significant regularities from trading strategies that involve following the US markets. A test of SECs proposed regulation documents that short-term investors may benefit from active trading strategy even if the SECs rule is implemented.

Portfolio investment outflow and the complementary role of direct investment

Purpose - – This paper aims to uncover potential contemporaneous relationship between foreign portfolio investment (FPI) and another popular type of cross-border investment outflow, namely, foreign direct investment (FDI). Design/methodology/approach - – The relationship between FPI and FDI are modeled using simultaneous equations approach to take potential endogeneity in to account. In a panel of 45 countries over the period of 2001-2009, FPI and FDI are found to be strategically complimentary to each other. Findings - – The two-stage least square estimates suggest existence of both statistically and economically significant relationship between these two types of outflows. In particular, the FDI outflow has empirically significant predictive power in explaining the FPI outflow. Similarly, the FPI outflow also has significant explanatory power for the observed level of FDI outflow. Second, the FPI has greater explanatory power for FDI outflow than the FDI for the FPI outflow. Originality/value - – The authors believe that the paper would contribute to the relevant literature in terms of its originality and scope. The empirical findings of the paper have valuable policy implications.

The Study on Dynamic Conditional Correlation-GARCH Model and its Application

This paper studies the Dynamic Conditional Correlation-GARCH model with asymmetries in volatilities and applies the model to estimate the time-varying conditional correlations of stock market returns between Greece and other 8 European countries from January 1st, 2001 through October 31st, 2012. The results show that the cross-market correlations have varied over time and there exist asymmetries in volatilities.

Foreign Exchange Market Efficiency: A Look at London

The purpose of this study is to test the Efficient Market Hypothesis (EMH) in the London foreign exchange market. The study relates the EMH to the information set which includes past prices for four foreign currencies. The goal is to determine if a long-run equilibrium relationship exists between the price series for the different currencies. The existence of such a relationship will be considered a direct violation of the EMH.