Claudio Morana

Computing value at risk with high frequency data

We compare the computation of Value at Risk with daily and with high frequency data for the Deutschmark-US dollar exchange rate. Among the main points considered in the paper are: (a) the comparison of measures of Value at Risk on the basis of multi-step volatility forecasts; (b) the computation of the degree of fractional differencing for high frequency data in the context of a FIGARCH model and (c) the comparison between deterministic and stochastic models for the filtering of high frequency returns.

The effects of the introduction of the euro on the volatility of European stock markets

Have convergence of European economies and introduction of the euro produced some effects on European stock markets? Theory suggests that stabilization of fundamentals should decrease variance of stock returns for historically unstable stock markets. We test this proposition with daily data for the period 1988-1999 and apply a three-regime Markov switching model for the variance-covariance matrix among several stock indices, including the UK and the US. The analysis shows that introduction of the euro, after an initial burst of volatility common to all european stock markets, has indeed stabilized the Spanish and Italian stock markets.

Business cycle comovement in the G-7: common shocks or common transmission mechanisms?

What are the sources of macroeconomic comovement among G-7 countries? Two main candidate explanations may be singled out: common shocks and common transmission mechanisms. In the article it is shown that they are complementary, rather than alternative, explanations. By means of a large-scale Factor Vector Autoregressive (FVAR) model, allowing for full economic and statistical identification of all global and idiosyncratic shocks, it is found that both common disturbances and common transmission mechanisms of global and country-specific shocks account for business cycle comovement in the G-7 countries. Moreover, spillover effects of foreign idiosyncratic disturbances seem to be a less important factor than the common transmission of global or domestic shocks in the determination of international macro-economic comovements.

Volatility of interest rates in the euro area: Evidence from high frequency data

The paper studies the euro area money market from a microstructure perspective. The focus is on the empirical estimation of the factors underlying the volatility of the overnight interest rate and its transmission along the money market yield curve. Two sources of volatility are separated out, one related to the institutional features of the operational framework and payments system, and the other, related to the impact of policy decisions. A novel data set is used composed of hourly observations and covering several short-term interest rates. The sample runs from 4/12/2000 to 31/05/2002. Two common long-memory factors are found to drive the volatility processes. The first explains the long-memory dynamics of the shortest maturity. The other explains the transmission of volatility to other maturities. It is shown that announcements of interest rate changes exercise the strongest impact on the volatility of the shortest maturities. Persistent effects of liquidity shortages that are transmitted along the money market yield curve are documented. However, these effects are not the rule and can be explained by exceptional circumstances.

Common Persistent Factors in Inflation and Excess Nominal Money Growth and a New Measure of Core Inflation

In this paper we introduce a new common long memory factor model. The model allows to estimate the common persistent component in fractionally cointegrated processes. We find evidence of cobreaking and fractional cointegration in excess nominal money growth and inflation in the euro area, and propose a new core inflation measure which takes into account both features. A comparison with other core inflation measures reveals that the proposed core inflation process is superior in terms of forecasting properties and economic interpretability.

Regulatory Uncertainty and Share Price Volatility: the English and Welsh Water Industry's Periodic Price Review

This paper models the London stock market’s response to the 1994 Periodic Review of prices in the English and Welsh water industry using both GARCH and stochastic volatility models. The results indicate that a significant reduction in the volatility of share prices for eight of the ten water and sewerage companies followed the announcement of revised industry price-caps. Investor expectations adjusted rapidly, reflecting confidence in the credibility and political sustainability of the settlement.

Frequency Domain Principal Components Estimation of Fractionally Cointegrated Processes

This study introduces a new frequency domain principal components estimator of the cointegration space and the loading matrix for the common factors for fractionally cointegrated long memory processes. A Monte Carlo simulation exercise reveals that the proposed estimator has already good properties with relatively small sample sizes.

Measuring US core inflation: A common trends approach

In this paper the long-run trend in CPI inflation (core inflation) for the US over the 1960-2000 period is estimated using a common trends model. In this framework, core inflation is interpreted and constructed as the long-run forecast of inflation conditional on the information contained in nominal money growth, output fluctuations and movements in the oil price. Unlike other commonly used measures of core inflation, the common-trends core inflation rate exploits the long-run link between inflation and monetary growth, a strong feature of the data.

IGARCH Effects: an Interpretation

This article shows how IGARCH effects can arise as an artifact of unaccounted structural change. Using daily returns for the DM/US

A Structural Common Factor Approach to Core Inflation Estimation and Forecasting

and Yen/US