Cheolbeom Park

The Impact of Oil Price Shocks on the U.S. Stock Market

It is shown that the reaction of U.S. real stock returns to an oil price shock differs greatly depending on whether the change in the price of oil is driven by demand or supply shocks in the oil market. The demand and supply shocks driving the global crude oil market jointly account for 22% of the long-run variation in U.S. real stock returns. The responses of industry-specific U.S. stock returns to demand and supply shocks in the crude oil market are consistent with accounts of the transmission of oil price shocks that emphasize the reduction in domestic final demand.

Rational beliefs or distorted beliefs: The equity premium puzzle and micro survey data

This paper examines whether the expected equity premium constructed from survey forecasts is consistent with the implications of the rational belief approach or the distorted belief approach to explaining the equity premium puzzle. To address this question, a panel data model with a fixed individual effect and a business cycle effect is analyzed. The results appear more favorable to the distorted belief approach. The average expected equity premium is lower than the average realized equity premium during the sample period. The average bias across economists is significant and varies over the business cycle, which is consistent with distorted beliefs that are excessively pessimistic over expansions and excessively optimistic over contractions.

Soccer sentiment and investment opportunities in the Korean stock market

We have found a significant sentiment effect from national soccer match outcomes on the Korean stock market, consistent with studies on other countries. Further investigation reveals, however, that such sentiment effect is extremely short-lived and the magnitude of ensuing expected returns based on the sentiment effect is about the same as the transaction costs. Therefore, we conclude that although a significant soccer-sentiment effect from losses exists, it seems almost impossible to devise reliable arbitrage opportunities from it due to its short duration and the small magnitude of expected returns.

Excess sensitivity of consumption, liquidity constraints, and mandatory saving

Using Singapore mandatory saving system, it is examined whether liquidity constraint is a major reason for the excess-sensitivity of consumption to predictable income growth. Although the mandatory saving rate for employees could be a good measure for the financial condition of a liquidity-constrained consumer, it is found, through the nonlinear instrumental variable estimation, that consumption growth is not sensitive to changes in the mandatory saving rate for employees. This finding suggests that liquidity constraints would not be a major reason for the excess-sensitivity puzzle.

Election Cycles and Stock Market Reaction: International Evidence*

This study investigates movements of the stock return volatility during election periods (from one-year before an election to one-year after the election) with the use of data from 16 countries. The main findings of this study are (1) stock return volatility declines over time as elections approach, (2) the level of the stock return volatility during election periods is lower than that during non-election periods, and (3) the stock return volatility rises quickly during election months and immediately after the elections. The first and second findings confirm conjectures made on the dynamic pattern of the volatility in previous studies such as Pantzalis et al. (2000) and Wisniewski (2009).

Real exchange rate dynamics: Relative importance of Taylor-rule fundamentals, monetary policy shocks, and risk-premium shocks

We first show that the solution to the real exchange rate under the Taylor rule with interest rate smoothing can have two alternative representations—one based on a first‐order difference equation and the other based on a second‐order difference equation. Then, by comparing error terms from these two alternative representations and analyzing their second moments, we evaluate the relative importance of Taylor‐rule fundamentals, monetary policy shocks, and risk‐premium shocks in the dynamics of the real exchange rate. Empirical results suggest that the risk‐premium shock is the largest contributor to real exchange rate movements for all the countries examined, with the Taylor‐rule fundamentals and monetary policy shocks playing a limited role. These results are robust to various alternative sets of parameter values considered for the Taylor rule with interest rate smoothing.

LIFE-CYCLE INCOME HYPOTHESIS AND DEMOGRAPHIC STRUCTURE: A SEMI-NONPARAMETRIC ANALYSIS USING A PANEL OF COUNTRIES

In this paper, we attempt to determine whether the life-cycle income (LCI) hypothesis can explain movements in the national savings rate using the panel data of countries and the semi-nonparametric approach. While relating movements in the population density function to movements in the national savings rate, we are able to estimate the age response function with a high level of precision, and the estimated age response function is hump-shaped, which is generally consistent with the prediction from the LCI hypothesis. Running time-series regressions separately for individual countries, we also demonstrate that the estimated age response functions are consistent with the LCI hypothesis in a large proportion of countries, despite limited observations in a variety of countries. Finally, our time-series and cross-sectional analysis results imply that the LCI hypothesis is more likely to hold in a country wherein the growth rate of per capita GDP and the growth rate of population are high.

Comments on ‘Reform of Financial Supervisory and Regulatory Regimes: What has Been Achieved and What is Still Missing’ by Takatoshi Ito

This paper reviews the regulatory and supervision policy in the United States before the Global Financial Crisis (GFC) and the structural reforms after GFC. The paper argues that large financial institutions were not well supervised before the GFC due to overlaps and cracks among supervisory agencies and due to the too-big-to-fail moral hazard. In response to the GFC, there was the creation of the G20 summit, Basel III proposed by the Bank of International Settlements, and the implementation of a new law to enhance financial stability in the United States, and these are discussed as reforms after the GFC. However, the paper emphasizes that despite all these reform efforts, still missing is the establishment of an orderly resolution mechanism for systemically important financial institutions (SIFI). Establishing an orderly resolution mechanism for SIFI is difficult because we need to avoid the moral hazard while maintaining financial stability. Finally, the paper makes a comparison of the GFC in the United States with the Japanese experience during the banking crisis of 1997–98. This is a very interesting paper that makes contributions of interest to both academics and policy makers. The discussion on the causes of the GFC, responses to the GFC, and what is still missing among reform efforts is particularly timely at this point of time, as more than three years has passed since the outbreak of the GFC. The paper discusses these important issues in a succinct manner, and raises one important issue –how to avoid the too-big-to-fail moral hazard while