Fernando Restoy

Volatility transmission along the money market yield curve

Volatility Transmission along the Money Market Yield Curve. - The authors model the volatility of money market interest rates — and the transmission of volatility - along the money market yield curve in the UK, Germany, France and Spain. They find a significant volatility transmission from overnight to longer-term money market rates in France, Spain and the U.K. They also find that the countries with lower (higher) reserve requirements tend to have higher (lower) interbank interest rate volatility. However, reserve requirements generate a perverse seasonal effect at the end of the maintenance period.ZusammenfassungDie Übertragung von Volatilität entlang der Ertrags-kurve des Geldmarktes. - Die Verfasser modellieren die Volatilität der Zinssätze auf dem Geldmarkt - und die Übertragung der Volatilität - entlang der Ertragskurve des Geldmarktes in Deutschland, Frankreich und Spanien und im Vereinigten Königreich. Sie ermitteln eine signifikante Volatilitäts-Übertragung der Geldmarktsätze von Tagesgeld bis zu längerfristigen Anlagen in Frankreich, Spanien und dem Vereinigten Königreich. Sie stellen ebenfalls fest, daß die Länder mit niedrigeren (höheren) Mindestreserveanforderungen zu einer höheren (niedrigeren) Volatilität der Zinssätze zwischen Banken tendieren. Allerdings verursachen die Mindestreserven am Ende der Festlegungsperiode einen perversen saisonalen Effekt.

Can output explain the predictability and volatility of stock returns

In this paper we have studied the ability of relatively standard equilibrium asset pricing models to explain two important empirical regularities of asset returns extensively documented in the literature: i) returns can be predicted by a set of macro variables; and ii) returns are very volatile. Those empirical regularities are relevant because they have often been used to reject market efficiency. In the analysis we have made use of the approximation technology in the solution of intertemporal asset pricing models recently developed by Campbell (1993) in the form suggested by Restoy and Weil (1997). We have obtained evidence from eight OECD economies using both quarterly and annual observations. Equilibrium models seem generally to find fewer difficulties in explaining the volatility of returns than their predictability for general output processes. In the case of the United States, for annual frequencies the observed predictability and volatility of asset returns are broadly compatible with the predictions of equilibrium models for a reasonable specification of preferences.

House Prices and Rents in Spain: Does the Discount Factor Matter?

We estimate alternative price to rent ratios in the Spanish housing market by considering different stochastic discount factors in present value models similar to those used in the financial literature but where the higher rigidity that characterises this market is taken into account. We identify three robust across model regularities: i) the increase in the price to rent ratio since the late nineties helped at first to restore equilibrium, ii) further increases in house prices raised the ratio between 24% and 32% above equilibrium by 2004, although iii) at that time the ratio was only around 2% above its short term adjustment path towards a (new) long run equilibrium.

Interest rate parity and foreign exchange risk premia in the ERM

Abstract In this paper we evaluate Uncovered Interest Rate Parity in the ERM by testing market efficiency and zero risk premia in a general asset pricing framework. The overidentifying conditions derived from the model are not rejected but we strongly reject risk neutrality. Nevertheless, estimated risk premia between ERM currencies are moderate to low. Therefore, due to the diversifiability of foreign exchange risk, the standard UIP relation between exchange rates and interest rates is a reasonable approximation within the ERM.

Interest rates and fiscal discipline in monetary unions

Abstract This paper compares market-generated incentives affecting the design of national fiscal policies in a monetary union regime with those corresponding to a fixed-exchange-rate regime of limited credibility. The analysis is based on a simple model that yields equilibrium interest rates in the two regimes as a function of the degree of a governments financial and fiscal discipline. It is found that market-based mechanisms for fiscal and financial discipline under a monetary union are only more powerful than under the alternative fixed-exchange regime if goverments are not heavily indebted.

House Prices and Real Interest Rates in Spain

This paper analyses the contribution of interest rates to explain recent house price developments in Spain trying to reconcile different pieces of evidence. On the one hand, empirical evidence supports the view that interest rates are a key variable to explain house price developments. As a matter of fact, using simple asset pricing relations recent changes in house prices could be fully explained by movements in ex-post real interest rates. However, more refined asset pricing models show that the changes in the discount factor cannot fully explain the recent course of house prices in Spain. To resolve this puzzle we provide evidence that shows that the actual real cost of financing might have decreased significantly less than what the course of ex-post real rates would suggest.

Have Real Interest Rates Really Fallen that Much in Spain

This paper analyses the behaviour of real interest rates in the Spanish economy over the last 15 years. Since inflation-indexed-bonds are not available, changes in implicit real interest rates are estimated using several approaches suggested by macroeconomic and financial theory. In particular, we employ equilibrium conditions of a representative agent under several specifications of preferences. Moreover, we exploit no-arbitrage conditions in securities markets. The evidence we report indicates that inflation uncertainty could account for a notable part of the observed decrease in nominal rates. Consequently, the actual real cost of financing might have decreased significantly less than what the course of ex-post real rates would suggest.

Macroeconomic Modelling in EMU: How Relevant is the Change in Regime?

We analyse the likely effects of changes in the monetary and financial regimes of EMU countries on the dynamics of output and inflation. In particular, we evaluate the impact of the regime shift on the forecasting performance of reduced-form models. Data for both the pre-EMU and the EMU regimes are generated by a relatively standard open-economy-DSGE model with sticky prices and wages and restricted access to financial markets for some individuals. We find that the effects of the shift in the monetary regime on the processes followed by macroeconomic variables depend on the nature of the shocks hitting the economy. For plausible shocks distributions the reduction in the accuracy of VAR-based inflation forecasts is relatively large and significant. The effect of the regime shift on output forecasts seem rather more modest and statistically insignificant. The impact on ouput forecasting accuracy would be comparatively much larger if the new monetary union regime is accompanied by a moderate relaxation of constraints affecting financial market access.