Jesper Rangvid

Increasing convergence among European stock markets?: A recursive common stochastic trends analysis

Abstract The degree of convergence among three major European stock markets is analyzed within the framework of a recursive common stochastic trends analysis. The results point towards a decreasing number of common stochastic trends influencing the stock markets, i.e. the degree of convergence among European stock markets has been increased during the recent two decades.

Are Economists More Likely to Hold Stocks

Using a large panel data set containing detailed information on educational attainments as well as financial and socioeconomic variables for individual investors, we show that economists are more likely to hold stocks than otherwise identical investors. First, we consider the change in stockholdings associated with (i) completing an economics education and (ii) an economist moving into the household. Second, we model stock market participation using a probit model with unobserved individual heterogeneity. Third, instrumental variables estimation allows us to identify the causal effect of an economics education on stock market participation. Throughout, we focus explicitly on the effect of a change in educational status on the likelihood of holding stocks.

Convergence in the ERM and Declining Numbers of Common Stochastic Trends

In this article, we use recursive and rolling cointegration methods to test for a system ofseveral exchange rates being within the process of convergence. We use the methods to analyse how the convergence of five exchange rates within the (European) Exchange Rate Mechanism has developed during the ERM period. We find that the number of cointegration vectors in the system of ERM exchange rates increases as the sample period is extended, and interpret this as a sign of increased convergence of ERM exchange rates. In particular, we find no evidence of convergence in the first years of the ERM and strong evidence of convergence in the last years of the ERM. In the analyses we acknowledge that managed exchange rates, such as exchange rates in ERM target zones, can be misaligned at their observed values as compared to their fundamental free-float values. For this reason, we also study convergence of filtered shadow exchange rates. We use two filters to extract the shadow exchange rates: a linear filter and a non-linear filter.

Dividend Predictability around the World

We show that dividend-growth predictability by the dividend yield is the rule rather than the exception in global equity markets. Dividend predictability is weaker, however, in large and developed markets where dividends are smoothed more, the typical firm is large, and volatility is lower. Our findings suggest that the apparent lack of dividend predictability in the United States does not uniformly extend to other countries. Rather, cross-country patterns in dividend predictability are driven by differences in firm characteristics and the extent to which dividends are smoothed.

Second Generation Models of Currency Crises

Until the beginning of the 1990s, currency crises were typically analyzed within the framework of a generation of models that assumed that the foreign exchange reserves of a country that was running a fixed exchange rate policy were falling (because the government was running a deficit on its budget that was financed by printing money). When the foreign exchange reserves reached a lower bound, a speculative attack on the fixed exchange rate was launched. Today, this theory is no longer the benchmark when explaining the occurrence of a currency crisis. Actually, a new generation of models that seeks to take explicitly into account the costs and benefits associated with the maintenance of a fixed exchange rate has emerged. This paper surveys these ‘second generation models of currency crises’. This generation of models emphasizes that it is an endogenous decision if a government chooses to abandon a policy of fixed exchange rates. The survey pays special attention to the fact that the second generation of currency crises models often generates multiple equilibria for the rate of devaluation given one state of the economic fundamentals. A currency crisis can thus occur even if no secular trend in economic fundamentals can be identified, as in recent currency crises.

Determinants of the implied shadow exchange rates from a target zone

Abstract The paper provides a continuous-time model of the dynamic behavior of exchange rates and interest rates when exchange rates are managed within a target zone with the possibility of realignments. In the case of a realignment the exchange rate jumps to a shadow exchange rate. The timing of realignments is modelled by a Cox process with an intensity that depends on the location of the exchange rate in the target zone band as well as the distance to the shadow exchange rate. We set up an approximate maximum likelihood estimation approach and provide parameter estimates for six ERM target zones. Moreover, in the empirical analysis we filter out the shadow exchange rates and investigate which fundamental macroeconomic factors are able to explain the short-run and long-run behavior of the filtered shadow exchange rates.

Predicting returns and changes in real activity: evidence from emerging economies

Abstract This paper studies the relation between real activity and share prices in nine emerging economies. Especially, it is investigated whether the time series of real activity and share prices are cointegrated, whether the deviations from the cointegration relations contain information that can be used to predict returns and changes in real activity, and finally whether returns are proportional to the predictions of changes in real activity. The results reveal that the deviations from the cointegration relations contain information that can be used to predict returns and changes in real activity in those countries where cointegration between share prices and real activity cannot be rejected. Furthermore, it is also found that returns are not proportional to the predictions of changes in real activity.

Stock Return Predictability in a Monetary Economy

In an economy where agents hold money, the short interest rate determines the trade-off between money holdings and consumption. Building on this idea, we develop a theoretical model that shows the transmission mechanism through which the short rate finds its way to stock-return predictability regressions. We construct a cointegration relation that links share prices and dividends to the short interest rate when we investigate empirically the main implications of our model. This relationship, that we denote the pdR-ratio, strongly predict stock returns and excess returns, even when the statistical significance of long-horizon return predictability is evaluated using Hodrick (1992) t-statistics. The result that stock returns and excess returns are predictable at long horizons is different from recent findings reported by Ang & Bekaert (2006). We differ from Ang & Bekaert (2006) by explicitly accounting for the non-stationarity of the predictors in a cointegration framework. Our theoretical model also suggests that aggregate output might be better suited as a scaling variable than dividends. As a consequence, we also build a cointegration variable that relates share prices, output, and the interest rate in a cointegration framework. We denote this variable the pyR-ratio. We show that the pyR-ratio strongly predicts stock returns and excess returns at long horizons. The pyR-ratio is also found to have some predictive power for dividend growth which the pdR-ratio does not. Neither the pyR-ratio nor the pdR-ratio have predictive power for output growth and the interest rate.

Fiction or Fact: Systematic Gender Differences in Financial Investments?

We investigate whether there are systematic gender differences in financial investment decisions. We use an exceptionally comprehensive register based panel data set including a wide range of socioeconomic and financial background characteristics of both investors who do and do not hold stocks. This allows us to (i) evaluate systematic gender differences in stock market participation and to (ii) investigate if portfolio choice varies systematically across gender. Statistically, males make more risky financial investments, but in economic terms, the differences are almost negligible. The apparently large gender differences in financial investment decisions are artifacts of previous studies based on non-comprehensive and selective data.

Predicting Returns and Changes in Real Activity in Emerging and Developed Economies

This paper investigates predictions of changes in real activity and stock returns in 24 developed and emerging economies. A simple general equilibrium version of an intertemporal capital asset pricing model (I-CAPM) motivates the analysis. The model implies that share prices will be proportional to real activity, i.e. real activity and share prices are driven by the same time-series process. Furthermore, in an efficient market where investors have a desire to smooth out predictable changes in consumption, and consumption is linked to real activity, returns will be predictable when changes in real activity are predictable, i.e. the same instruments that predict changes in real activity can predict returns, and the predictions of returns should be proportional to the predictions of real activity. From the I-CAPM, three empirical questions are derived and tested: (i) are the series for real activity and share prices cointegrated and thus driven by the same common stochastic trend?, (ii) do the same variables predict both changes in real activity and returns?, and (iii) are the predictions of returns proportional to the predictions of changes in real activity? The empirical evidence in support of (i) cointegration and (ii) common predictability is strong, whereas the evidence against (iii) proportional predictions is equally strong. Finally, special attention is paid to the ability of the deviations from the cointegration relations to predict changes in real activity and returns.