Ian W. Marsh

An Empirical Analysis of the Dynamic Relation between Investment-Grade Bonds and Credit Default Swaps

This paper analyses the behaviour of credit default swaps (CDS) for a sample of firms and finds support for the theoretical equivalence of CDS prices and credit spreads. When this is violated, the CDS price can be viewed as an upper bound on the price of credit risk, while the spread provides a lower bound. The paper shows that the CDS market is the main forum for credit risk price discovery and that CDS prices are better integrated with firm-specific variables in the short run. Both markets equally reflect these factors in the long run, and this is primarily brought about by bond market adjustment

Currency forecasters are heterogeneous: confirmation and consequences

Using a disaggregated international survey database we demonstrate that foreign exchange forecasters hold heterogeneous expectations. We find that a major cause of these differences of opinion is the idiosyncratic interpretation of widely available information, and that this heterogeneity translates into economically meaningful differences in forecast accuracy. Finally, we show that such disagreements are key variables in determining market trading volume.

ON FUNDAMENTALS AND EXCHANGE RATES: A CASSELIAN PERSPECTIVE

Using an expanded version of the purchasing-power-parity condition we construct simultaneous equation models for three key exchange rates which incorporate meaningful long-run equilibrium relationships and complex short-run dynamics. We show that fully dynamic out-of-sample forecasts from these models are capable of significantly outperforming those of a random walk model over horizons as short as 3 months, and that they are also more accurate than the vast majority of professional forecasts.

High-frequency Markov switching models in the foreign exchange market

This paper estimates two-state Markov models for three daily exchange rate series, and investigates the profitability of following the generated forecasts using the performance of simple chartist trading rules as benchmarks. It is shown that (1) the data are well approximated by Markov models, (2) the performance of previously profitable trading rules has dramatically declined in the 1990s, and (3) the Markov models are unstable and not suitable for forecasting in their current form. Copyright

Bank Behavior with Access to Credit Risk Transfer Markets

One of the most important recent innovations in financial markets has been the development of credit derivative products that allow banks to more actively manage their credit portfolios than ever before.We analyze the effect that access to these markets has had on the lending behavior of a sample of banks, using a sample of banks that have not accessed these markets as a control group. We find that banks that adopt advanced credit risk management techniques (proxied by the issuance of at least one collateralized loan obligation) experience a permanent increase in their target loan levels of around 50%. Partial adjustment to this target, however, means that the impact on actual loan levels is spread over several years.Our findings confirm the general efficiency enhancing implications of new risk management techniques in a world with frictions suggested in the theoretical literature.

Competitiveness Indicators : A Theoretical and Empirical Assessment

This paper discusses five indicators of competitiveness: real exchange rates based on consumer price indices, export unit values of manufacturing goods, the relative price of traded to nontraded goods, normalized unit labor costs in manufacturing, and the ratio of normalized unit labor costs to value-added deflators in manufacturing. It discusses how each of these measures is associated with changes in a country`s balance of trade in goods and nonfactor services and examines the relationship among these indicators. It then examines the empirical performance of three of the indicators in terms of their ability to explain trade flows.

Customer Order Flow and Exchange Rate Movements: Is there Really Information Content?

In this paper we analyse the information content of the customer order flow seen by a leading European commercial bank’s foreign exchange desk. We attempt to distinguish between three different explanations given in the literature for the positive contemporaneous correlation between exchange rate changes and net order flows. We discount the liquidity effect since otherwise equivalent order flows from different counterparties have different correlations with exchange rate changes. While it is harder to discount the feedback trading explanation we find evidence that a measure of the degree of informedness of customers widely used in the equity microstructure literature closely corresponds to the size of the correlation between order flow and exchange rate changes. We argue that customer order flows do contain information.

An assessment of three measures of competitiveness

An Assessment of Three Measures of Competitiveness. -This paper discusses three indicators of competitiveness: real exchange rates based on consumer price indices, export unit values of manufacturing goods, and normalized unit labour costs in manufacturing. It discusses how each of these measures is associated with changes in a countrys balance of trade in goods and nonfactor services and examines how each one of these indicators is related to each other. It then examines the empirical performance of each in terms of its ability to explain trade flows. The conclusion is that in examining an issue as complex as trade competitiveness, the use of one indicator is suboptimal.ZusammenfassungEine Beurteilung dreier Maße für die Wettbewerbsfähigkeit.-Die Verfasser prüfen drei Indikatoren für die internationale Wettbewerbsfähigkeit eines Landes: Reale Wechselkurse auf der Grundlage von Konsumentenpreisindizes, von Einheitswerten der Ausfuhr gewerblicher Erzeugnisse und von standardisierten Lohnstückkosten in der Industrie. Sie untersuchen, wie jedes dieser Maße mit Änderungen in der Handels und Dienstleistungsbilanz eines Landes verbunden ist, und prüfen, wie die Indikatoren untereinander in Beziehung stehen. Sie untersuchen deren empirische Brauchbarkeit anhand ihrer Fähigkeit, Handelsströme zu erklären. Es ergibt sich, daß zur Prüfung einer so komplexen Erscheinung, wie es die Wettbewerbsfähigkeit im internationalen Handel ist, die Verwendung nur eines Indikators suboptimal wäre.

Why is Price Discovery in Credit Default Swap Markets News-Specific?

We analyse daily lead-lag patterns in US equity and credit default swap (CDS) returns. We first document that equity returns robustly lead CDS returns. However, we find that the CDS-lag is due to common (and not firm-specific) news and arises predominantly in response to positive (instead of negative) equity market news. We provide an explanation for this news-specific price discovery based on dealers in the CDS market exploiting their informational advantage vis-a-vis institutional investors with hedging demands. In support of this explanation we find that the CDS-lag and its news-specificity are related to various firm-level proxies for hedging demand in the cross-section as well as measures for economy-wide informational asymmetries over time.

A note on the performance of foreign exchange forecasters in a portfolio framework

Abstract This note investigates the ability of 22 currency forecasters to predict movements in three major exchange rates. In particular, it examines the profitability of portfolios of forward market positions constructed on the basis of the predictions of each forecaster. The key findings of the paper are that just one panel member proves significantly profitable to follow, and that investing on the basis of the naive alternative prediction of ‘no change’ produces high, though volatile, profits. We conclude that the majority of currency analysts have little ability to predict the future.