Clemens Kool

Tail-Index Estimates in Small Samples

Financial returns are known to be nonnormal and tend to have fat-tailed distributions. This article presents a simple methodology that accurately estimates the degree of tail fatness, characterized by the tail index, in small samples. Our method is a weighted average of Hill estimators for different threshold values that corrects for the small-sample bias apparent in the latter. Using this estimator we produce tail-index estimates for returns on exchange rates that are close to nonbiased estimates obtained from extremely large datasets. The results indicate that many documented conclusions concerning the tail behavior of financial series are likely to have overestimated the tail fatness in small samples.

Extreme support for uncovered interest parity

Abstract Concerning UIP, the common conclusion is that it may be valid but undetectable for many reasons. In this paper we take a complementary route in that we base our methodology on a random time effects panel model that controls for various biasing factors and which is invariant to the choice of the numeraire currency. We show that the rejection of UIP is not as severe as is commonly found and that it almost perfectly holds in periods where the forward premiums are large.

Tail Estimates of East European Exchange Rates

In the literature, a consensus exists that distributions of exchange-rate returns are fat tailed. We use a nonparametric tail-index estimator based on extreme-value theory to shed light on some of the characteristics of the empirical distribution of black-market exchange-rate returns for seven East European currencies between 1955 and 1990, focusing on the information in the tails of the distribution. We modify an existing tail-index estimator to take into account information in both tails. The results support the existence of finite second moments in exchange- rate returns. Implicitly, the sum-stable distribution is rejected.

Dominant interest and inflation differentials within the EMS

Abstract This paper investigates nominal interest and inflation behavior in the EMS between March 1979 and September 1989 using a modified version of principal components analysis. Neither over the whole period, nor after March 1983 has the EMS functioned as a Dmark-zone: deviating movements in inflation and interest rates between EMS countries still persist. Most important is the division between Germany, the Netherlands and the United Kingdom on the one hand, and Belgium, France and Italy on the other. Differences in deflationary policies between countries inside and outside the EMS appear to be the most important determinant of this result.

How Effective is Central Bank Forward Guidance

This paper investigates the effectiveness of forward guidance for the central banks of four countries: New Zealand, Norway, Sweden, and the United States. We test whether forward guidance improved market participants’ ability to forecast future short-term and long-term rates. We find that forward guidance improved market participants’ ability to forecast short-term rates over relatively short forecast horizons, but only for Norway and Sweden. Importantly, there is no evidence that forward guidance has increased the efficacy of monetary policy for New Zealand, the country with the longest history of forward guidance.

The tail fatness of FX returns reconsidered

: Franz C. Palm, Faculty of Economics and Business Administration, Maastricht University, P.O. Box 616, 6200 MD Maastricht, The Netherlands. Telephone: +31-43-3883833; Fax: +31-43-3884874; e-mail: F.Palm @KE.unimaas.nl. Ronald Huisman is affiliated with Erasmus University, Rotterdam; Kees Koedijk is at Erasmus University, Rotterdam, and at Maastricht University; Clemens Kool and Franz Palm are both at Maastricht University. The authors would like to thank seminar participants at Maastricht University for their helpful comments. All remaining errors pertain to the authors.

Future inflation and the information in international term structures

This paper extends previous work on the information content of the term structure of interest rates using a newly constructed dataset for the United States, Japan, Germany, Switzerland, France, Belgium and the Netherlands (1982–1991). Results significantly differ from Jorion and Mishkin (1991). Apparently, the relation between the term structure of interest rates and future inflation is highly period- and country-dependent. We provide new evidence that these results may be due to the inability of financial markets to accurately predict a term structure of inflation in combination with the conduct of monetary policy. This probably accounts for large variation in ex post real interest rate levels and the term structure of real interest rates. Consequently, it is unlikely that the term structure of nominal interest rates will serve as a good indicator of future inflationary developments.

Inflation Dynamics and Monetary Strategies: Evidence from Six Industrialized Countries

In this paper we address the issue whether a switch to inflation targeting can help build monetary policy credibility and can substitute for a track record of low inflation. To this end, we empirically evaluate the success of inflation targeting in Canada, New Zealand and the United Kingdom and investigate to what extent the joint dynamic processes of inflation and nominal interest rates in these three countries have experienced a structural break at the time of the regime switch to inflation targeting. The experience of Canada, New Zealand and the United Kingdom is matched with the United States, Australia and Germany. We find that the effectiveness of the direct inflation targeting approach to quickly increase low-inflation credibility so far is ambiguous and that this strategy is not clearly superior to intermediate monetary strategies.

The Fat-Tailedness of FX Returns

It is well known that returns on foreign exchange rates are not normal and tend to have fat-tailed distributions. Although the precise magnitude of the tail-fatness is crucial for applications such as risk analysis, little consensus exists in this respect due to estimation problems. In this paper, we apply a recent method to obtain unbiased inferences from the tails to re-examine the fat-tailedness of FX returns and show that the amount of fat-tailedness has been overestimated considerably. Additionally, goodness-of-fit statistics provide evidence of the appropriateness of assuming that a Student-t distribution underlies the data-generating process of FX returns. Both conclusions appear to hold more for floating than for fixed exchange rates.

Credibility of European economic convergence

Credibility of European Economic Convergence. — The authors analyze economic convergence and its relation to European real interest rate differentials using a clustering method on seven macroeconomic key variables for 1979–1995. The results indicate that monetary convergence has progressed considerably but that there is hardly any real convergence in the EU. They also perform pooled nominal and real interest rate regressions with the individual cluster indicators as explanatory variables. The authors find significant positive effects of external (current account) and internal (unemployment ratios, government finance) imbalances on real interest rates. They also group countries according to economic reputation and find that real indicators remain significant for the high-reputation countries.ZusammenfassungZur Glaubwürdigkeit europäischer Konvergenz. — Die Verfasser untersuchen wirtschaftliche Konvergenz und ihre Beziehung zu europäischen realen Zinsdifferenzen. Dabei benutzen sie ein Cluster mit sieben makroökonomischen Schlüsselvariablen für 1979–1995. Die Ergebnisse deuten darauf hin, daß die monetäre Konvergenz erheblich zugenommen hat, daß es aber kaum eine reale Konvergenz in der EU gibt. Die Autoren führen außerdem Querschnittsregressionen für nominale und reale Zinsen mit den einzelnen Indikatoren aus dem Cluster als erklärende Variable durch. Sie ermitteln signifikante positive Effekte von externen Ungleichgewichten (Leistungsbilanz) und internen Ungleichgewichten (Arbeitslosigkeit, Staatsfinanzen) auf die realen Zinssätze. Zudem gruppieren sie Länder nach ihrer ökonomischen Reputation und stellen fest, daß die realen Indikatoren für die Länder mit hoher Reputation signifikant bleiben.