Javier Gómez Biscarri

Financial liberalization, stock market volatility and outliers in emerging economies

In this article, we test whether the structure of emerging market volatility has changed and assess the link between the structural changes in volatility behaviour and financial liberalization events. The opening of financial markets tends to generate outlying returns around the opening dates, thus giving the appearance of increases in market volatility. We include outlier detection methodologies in our location of endogenous breaks in order to filter out this effect. Our results suggest that changes in volatility behaviour have indeed been induced by financial liberalization of emerging markets, but the change is not always in the same direction: Latin American countries have enjoyed lower volatility whereas Asian countries seem to have suffered increases in market instability. Additionally, all markets become more subject to occasional large shocks.In this article, we test whether the structure of emerging market volatility has changed and assess the link between the structural changes in volatility behaviour and financial liberalization events. The opening of financial markets tends to generate outlying returns around the opening dates, thus giving the appearance of increases in market volatility. We include outlier detection methodologies in our location of endogenous breaks in order to filter out this effect. Our results suggest that changes in volatility behaviour have indeed been induced by financial liberalization of emerging markets, but the change is not always in the same direction: Latin American countries have enjoyed lower volatility whereas Asian countries seem to have suffered increases in market instability. Additionally, all markets become more subject to occasional large shocks.

Nonparametric Estimation of Convergence of Interest Rates: Effects on Bond Pricing.

We present and estimate, using nonparametric regression techniques, a model of short term interest rate dynamics and use the estimation to value bonds. We study the case of two European countries - Spain and Italy - that belong to EMU, and compare the resulting bond prices of a one factor model with that of a two factor, the second factor being a stochastic mean. The pricing errors for both models are 34% smaller than those reported on the parametric literature. Furthermore, the two factor model, which takes into account the convergence with Europe of the domestic economies, obtains better results than the one factor model. Our findings give strong support to the importance of a correct specification of the volatility of interest rates.

Financial Development and the Asymmetry of Monetary Policy

In this paper we develop a simple model of the relationship between financial market development and investment by entrepreneurs in the presence of a Central Bank. The model analyzes how the level of financial development affects the way credit spreads, and therefore the volume of credit and output, react to monetary policy actions. We show that in countries where financial markets are poorly developed, lending rates may react in an asymmetric manner to monetary expansions and contractions; i.e. monetary contractions generate a larger impact on credit than expansions. Other implications of the model are in line with those in the literature. Cross-country empirical evidence for this asymmetry is obtained from a large panel dataset.

Exchange rate behavior and exchange rate puzzles: why the 18th century might help

This article explores the behavior of exchange rates in Spain during the XVIII century. We posit that exchange rates were the result of both government intervention over nominal values of currencies and the estimate that the market of bills of exchange- gave to the value of the currency. We analyze the exchange rates quoted in London on three Spanish cities between 1699 and 1826. After a brief overview of the functioning of the Spanish monetary system and of exchange rate determination, we assess the extent to which the exchange rate responded to market fundamentals by testing some theoretical models of exchange rate determination. The results suggest that purchasing power parity held during the XVIII century, with the exchange rate tracking quite closely the behavior of inflation differentials. Deviations from PPP appeared at the end of the century, due mostly to changes in the real exchange rate caused by the bilateral trade balance between Spain and Great Britain and, maybe, to productivity differentials.

Frequency of Consumption Adjustment and the Equity Premium

We show that two types of consumption risk are priced in the equity premium: the risk of aggregate consumption growth and that of changing the composition of the consumption basket, when goods have heterogeneous costs of adjustment. We use the property that the frequency of consumption adjustment is inversely related to adjustment costs and split consumption into two components that proxy for consumption of low and high adjustment cost goods. We then estimate a version of the CCAPM with two components of consumption and show that our proposed split helps resolve the equity premium puzzle, while simultaneously generating sufficient volatility of marginal utility to satisfy volatility bounds at all frequencies.