Kyongwook Choi

Structural changes and the US money demand function

Previous literature on the stability of the US money demand function suggests mixed results. In this article, we study the stability of the money demand function from the standpoint of structural changes in the function. We first investigate if a stable money demand function can be found for the US for the period from the first quarter of 1959 to the fourth quarter of 2000. The results show that a stable long-run money demand function does not exist for the sample period under consideration. We then estimate unknown structural break points in the variables of the money demand function using Bai and Perrons (1998) method and test if there is a stable relationship in each sub-sample period of the break points. The results show that a stable relationship exists for each sub-sample period. The estimated income elasticity and interest rate semi-elasticity are relatively smaller than Balls (2001) estimates, but consistent with his argument.

The relationship between stock returns and inflation in four European markets

We study the effects of expected and unexpected inflation on real stock returns for France, Germany, Italy and the UK. We find evidence that unexpected inflation affects stock returns in France, Italy and the UK, but that expected inflation does not. Unexpected interest rates also affect real stock returns in the three countries. However, we find no evidence of these variables affecting real stock returns in Germany.

Revisiting structural change and market integration in late 19th century American capital markets

This article draws on a variety of time series tools to more deeply explore issues surrounding the emergence of a national capital market in the late 19th century. Our focus is on the timing of the emergence of a national capital market. Rather than relying on the absolute narrowing of regional interest rate differentials, which is a common approach in this literature, we use Gregory and Hansen cointegration tests, which allow us not only to test for cointegrating relations in the interest rate series but to identify unknown structural change dates as a byproduct. We also use dynamic conditional correlations to determine the dates at which regional interest rate correlations began increasing. Our results suggest that structural changes are centred around the year 1900, which is consistent with Syllas argument that the lowering of capital requirements by the Gold Standard Act of 1900 increased bank entry and competition and facilitated regional capital market convergence.

Are stocks really riskier than bonds

Conventional wisdom holds that stocks are riskier than bonds; thus when the stock market becomes volatile, money flows from the stock market into the perceived safe haven of the bond market. In this article, we find that this notion is not necessarily accurate and might lead people to make incorrect investment decisions. In fact, intermediate- and long-term bonds are riskier than stocks when we measure risk by the coefficient of variation. We examine a case where an inaccurate perception regarding the relative riskiness of the two types of assets could play a part in what appears to be short-sighted and potentially costly behaviour of investors in financial markets.

Time-Varying Co-Movements and Contagion Effects In Asian Sovereign CDS Markets

We investigate interconnectedness and the contagion effect of default risk in Asian sovereign CDS markets since the global financial crisis. Using dynamic conditional correlation analysis, we find that there are significant co-movements in Asian sovereign CDS markets; that such co-movements tend to be larger between developing countries than between developed and developing countries; and that in the comovements intra-regional nature is stronger than inter-regional nature. With the Spillover Index model, we measure contagion probabilities of sovereign default risk in CDS markets of seven Asian countries and find evidence of contagion effects among six of them; Japan is the exception. In addition, we find that these six countries are affected more by cross-market spillovers than by their own-market spillovers. Furthermore, a rolling-sample analysis reveals that contagion in the Asian sovereign CDS markets expands during episodes of extreme economic and financial distress, such as the Lehman Brothers bankruptcy, the European financial crisis, and the US-credit downgrade.

The start of interest rate smoothing in the US: is it a monetary or fiscal story?

This article revisits the key issue raised by researchers who have empirically investigated the behaviour of short term US interest rates during the period 1890–1933. The seminal article of Mankiw, Miron and Weil (1987) argues that changes in the behaviour of nominal interest rates is best explained as a monetary regime shift that occurred with the founding of the Federal reserve in 1914. This explanation is rejected by Newbold, Lehybourne, Sollis and Wohar (2001) who show that fiscal and regulatory changes (driven by the needs of World War1 financing) best explain the changing behaviour of interest rates that they identify as beginning in mid-1917. We find, using three different statistical procedures that a structural break in the second moment of interest rates occurred in early 1915. This supports the monetary regime shift argument of MMW by illustrating that the interest rate smoothing policies of the FED can be observed as a variance break in short term interest rates.

Are Stocks Riskier than Bonds

Many economics principles textbooks mention that stocks and bonds are substitutes, and some textbook authors state that stocks are riskier than bonds. Most people seem to believe this idea. Whenever the stock market is volatile, money flows from the stock market into the safe haven of the bond market. This notion, however, is not accurate and might lead people to make incorrect investment decisions. In this paper, we examine how economics textbooks treat this question and if their treatment is accurate. We find that the notion that stocks are riskier than bonds is inaccurate. The textbooks that provide students with this notion might lead them to make faulty investment decisions. We also provide a case where this inaccurate notion could lead to an irrational behavior of investors in financial markets.