John T. Barkoulas

Nonlinear adjustment to purchasing power parity in the post-Bretton Woods era

This paper models the dynamics of adjustment to long-run purchasing power parity (PPP) over the post-Bretton Woods period in a nonlinear framework consistent with the presence of frictions in international trade. We estimate exponential smooth transition autoregressive (ESTAR) models of deviations from PPP using both CPI- and WPI-based measures for a broad set of U.S. trading partners. We find clear evidence of a mean-reverting dynamic process for sizable deviations from PPP, with an equilibrium tendency varying nonlinearly with the magnitude of disequilibrium.

Persistence in International Inflation Rates

We test for fractional dynamics in inflation rates based on the consumer price index (CPI) for 27 countries and inflation rates based on the wholesale price index (WPI) for 22 countries. The fractional differencing parameter is estimated using semiparametric and approximate maximum likelihood methods. Significant evidence of fractional dynamics with long-memory features is found in both CPI- and WPI-based inflation rates for industrial as well as developing countries. Implications of the findings are considered, and sources of long memory are hypothesized.

Long memory or structural breaks: can either explain nonstationary real exchange rates under the current float?

This paper considers two potential rationales for the apparent absence of mean reversion in real exchange rates in the post-Bretton Woods era. We allow for (i) fractional integration and (ii) a double mean shift in the real exchange rate process. These methods, applied to CPI-based rates for 17 countries and WPI-based rates for 12 countries, demonstrate that the unit-root hypothesis is robust against both fractional alternatives and structural breaks. This evidence suggests rejection of the doctrine of absolute long-run purchasing power parity during the post-Bretton Woods era.

Waves and persistence in merger and acquisition activity

Does merger and acquisition (M&A) activity occur in waves, that is, are there oscillations between low and high levels of M&A activity? The answer to this question is important in developing univariate as well as structural models of explaining and forecasting the stochastic behavior of M&A activity. There is evidence to suggest that aggregate U.S. time-series data on merger and acquisition (M&A) activity exhibit a wave behavior, which has been modeled by fitting either a two-state Markov switching-regime model or a sine-wave model to the data. This study provides an alternative characterization of the temporal patterns in M&A as a nonlinear process with strongly persistent or long-memory dynamics. The apparent level changes or partial cycles of differing magnitudes in aggregate M&A time series are consistent with an underlying data generating process exhibiting long memory. Time- and frequency-domain estimation methods are applied to a long M&A time series constructed by Town (1992), covering approximately a century of merger activity in the U.S. economy. We find significant evidence of long-term cyclical behavior, nonperiodic in nature, in the M&A time series, even after accounting for potential shifts in the mean level of the series. A shock to M&A activity exhibits significant persistence as it is damped at the very slow hyperbolic rate, but it eventually dissipates. We provide both theoretical and empirical rationales for the presence of fractional dynamics with long-memory features in M&A activity. Theoretically, long-term dependence may be due to persistent differences in firm valuation between stockholders and nonstockholders following an economic disturbance, as suggested by Gort (1969). Empirically, long-memory dynamics in M&A activity may reflect the statistical properties of fundamental factors underlying its behavior, as several of the proposed determinants of M&A activity have been shown to exhibit strong persistence.

Dynamics of Intra-EMS Interest Rate Linkages

Anumber of previous studies have questioned the dominant role of Germany within the European Monetary System (EMS). These conclusions are often based on empirical findings that the interest rates of EMS member countries are not affected by German interest rates, even in the long run. In this study, we demonstrate that intra-EMS interest rate differentials (vis-à-vis Germany) exhibit mean-reverting behavior characterized by long-memory dynamics. In a system incorporating six EMS countries and one non-EMS country (the U.S.A.), estimates from a fractional error correction model suggest the presence of short-run intra-EMS monetary-policy interdependencies but validate the German Dominance Hypothesis in the long run.

SHORT- AND LONG-TERM EFFECTS OF THE 9/11 EVENT: THE INTERNATIONAL EVIDENCE

This paper analyzes the short- and long-term effects of the September 11, 2001 terrorist attacks on a comprehensive sample of stock market indices from 33 industrial and emerging economies. From a finance-theoretic point of view, we employ the international capital asset pricing model (ICAPM) to analyze the incidence of the 9/11 event. Consistent with expectations, we document statistically negative short-term stock market reactions to the 9/11 event for 28 countries. More importantly, we find increases in the level of systematic risk for 10 stock markets which attest to the presence of negative permanent effects emanating for the 9/11 event. However, a great many capital markets (including the US, Canada, Japan, China, Russia, and the largest European economies) did not experience statistically significant increases in systematic risk in the post-9/11 period. The decisiveness of the evidence clearly points in the direction of resilience and flexibility of the world capital markets.

Takeover defenses, golden parachutes, and bargaining over stochastic synergy gains: a note on optimal contracting

We incorporate managerial risk aversion and stochasticity of takeover synergy gains into Harris’ (Harris, E.G. 1990. Antitakeover measures, golden parachutes, and target firm shareholder welfare. Rand Journal of Economics 21, no. 4: 614–25. bargaining model for the coexistence of antitakeover defenses and golden parachutes in corporate charters. We show that: (i) it is not always optimal that the target-firm shareholders adopt antitakeover defenses, (ii) the size of the golden parachute is proportional to the riskiness of the synergistic gains, and (iii) the target-firm shareholders are unequivocally better-off with golden parachutes than takeover-contingent stock options.

Going Public Abroad: The Dynamics of Return Spillovers in an Atypical International Cross Listing Case

In this study we investigate the dynamics of the return transmission mechanism across markets (spillover effects) in the atypical international cross listing case where the stock has gone public abroad and then cross listed in the home market. Previous studies have examined such dynamic return interactions in the typical case, where a company goes public in the domestic capital market and subsequently cross lists its stock in a foreign stock exchange. Our sample consists of Israeli stocks that went public in the US and then cross listed in the home market. The empirical evidence suggests that return spillovers are significantly positive in both directions but home-to-US return spillovers are stronger than those of US-to-home. The magnitude of the return dependencies across the home and the US markets is weaker among firms facing greater risk of information asymmetry. There is a tendency for reversal of the US market returns associated with high-volume shocks in the home market but a tendency for continuation in the opposite direction. The greater the information asymmetry facing firms the greater the tendency for continuation and the weaker the tendency for reversal.