Bento J. Lobo

Exchange rate volatility: Does politics matter?*

We examine the weekly volatility of the Japanese Yen, British Pound, German Mark and Canadian Dollar relative to the U.S. Dollar through five recent U.S. presidential terms. Our EGARCH-M model adds several new findings to the literature. Our results suggest that: 1) the volatility of all four exchange rates is impacted by either the year in the electoral cycle and/or the political party in office; 2) past innovations exert an asymmetric impact on the conditional volatility of exchange rates, and 3) close to a U.S. election, an unexpected dollar depreciation impacts the volatility of the Yen and Mark significantly more than does an unexpected dollar appreciation.

Interest Rate Surprises and Stock Prices

This paper examines the impact of unexpected changes in the federal funds target on stock prices from 1988 to 2001. Measures of interest rate surprises are constructed from survey data and changes in the 3-month T-bill yield. I find that surprises associated with decreases in the target cause stock prices to rise significantly. Surprises associated with increases in the target increase stock market volatility on the announcement day, with volatility reverting to pre-surprise levels on the day after the announcement. This volatility pattern is only evident since 1994. An implication is that concerns about immediate disclosure causing persistent and heightened stock market volatility might be misplaced. Copyright 2002 by the Eastern Finance Association.

Jump risk in the U.S. stock market: Evidence using political information

Abstract We examine the impact of U.S. elections and partisan politics on the stock market using jump–diffusion models of daily stock returns from 1965 to 1996. Our approach permits us to track jump risk in stock markets stemming from political incentives, and to separate the impact of routine trading and informational surprises, or jumps, on the mean and volatility of stock returns in election years and across partisan administrations. Our estimates reveal that the pattern of jumps and of routine trading varies with the political calendar. We find that midterm elections are a more important source of uncertainty compared to presidential elections. Jump risk increases by 10 and 20 percent for small and large-cap stocks, respectively, in midterm election years. We also find that small stocks perform better under Democrats relative to Republicans. However, unexpected events are more frequent during Democratic administrations and these increase the jump risk, especially for large stocks, in these regimes.

The Asymmetric Impact of Monetary Policy on Currency Markets

This study examines whether tightening and easing actions of the Federal Reserve symmetrically influence currency markets. Using daily data on four exchange rates from 1989 to 2001, we find that changes in the Feds interest rate target are positively related to changes in the value of the dollar. Surprises associated with monetary tightening have a larger announcement effect as compared to monetary easing for the British pound, German mark, and Canadian dollar, whereas the opposite is true for the Japanese yen. The results appear to be driven by the reactions of foreign central banks to Fed actions, the Feds credibility as a policymaker, and by the change in the Feds disclosure policy beginning in 1994.

Large changes in major exchange rates: a chronicle of the 1990s

In the continuing effort to understand exchange rate changes, this article chronicles and analyses, for the first time, the proximate reasons for large daily movements in four leading US dollar exchange rates in the 1990s. A sample of 111 events highlights the importance of expectations and the role of subtle political influences on currency markets. While 19% of all events studied had mainly economic reasons, over 60% of all events could be partly or wholly attributed to political factors. Events related to monetary policy changes were the most significant economic factor, while intervention activity and war/coup attempts were the most significant political factors. This research indicates that large changes in the Japanese yen were caused mostly by the political dynamics of the bilateral trade balance, while big moves in the German mark and British pound stemmed mainly from European politico-economic events. The enigmatic Canadian dollar was driven by domestic politics related to the Quebec secession issue.

Econometric error nullifies finding of the impact of broadband speed on county-level employment

In a 2017 Information Economics and Policy article, Bai (2017) used a pooled first-differenced regression to find a positive relationship between broadband availability and the county-level employment rate for 8 states between 2011 and 2014. Upon further investigation, these results were driven by an error that inappropriately calculated differences across counties (and years) in the dataset. This error has been acknowledged by the author. When corrected, the specification in the original paper produces no statistical significance for any of the broadband variables of interest. Thus, the reported finding of a positive association between broadband speed and employment is not valid. This updated result is in agreement with several other studies using the first-differenced methodology and county-level data from the U.S., and suggests that more work needs to be done to refine existing models and units of analysis to uncover the relationship (if one exists) between broadband speed and employment.

An empirical investigation of the financial value of a college degree

ABSTRACT We generate selection-adjusted NPV and IRR estimates for a bachelor’s degree in the U.S. which account for time-to-graduation, debt financing and tuition levels. We find that a college degree is generally worthwhile, but the private value of the investment is a declining function of time-to-graduation. Selection-adjustments show that for students at the lower end of the ability distribution and in some areas of study, a college degree may never be a good financial proposition; as such, we provide breakeven thresholds for tuition at which college remains viable. Debt financing generates higher returns but greater risk compared to self-financing.

Equity Duration and Portfolio Risk Management

The authors adopt the perspective of a portfolio manager simultaneously holding long and short equity positions and investigate whether portfolio standard deviation is reduced by calibrating the overall portfolio duration to be zero. Although numerous studies have suggested that equity duration may be useful in portfolio risk management, this study directly tests this proposition. The authors first identify some methodological issues involved with measuring equity duration and then explore the use of equity duration as a tool in portfolio risk management. They present strong evidence that equity duration can be used in equity portfolios to reduce volatility and introduce a novel test that involves the comparison of market-neutral portfolios that are duration hedged with those that are duration exposed. Portfolio standard deviations form a “volatility smile” that reaches a minimum when duration is fully hedged. The results suggest that duration may be measuring risk not captured by beta.