Neil Kellard

THE PREBISCH-SINGER HYPOTHESIS: FOUR CENTURIES OF EVIDENCE

We employ a unique data set and new time-series techniques to reexamine the existence of trends in relative primary commodity prices. The data set comprises 25 commodities and provides a new historical perspective, spanning the seventeenth to the twenty-first centuries. New tests for the trend function, robust to the order of integration of the series, are applied to the data. Results show that eleven price series present a significant and downward trend over all or some fraction of the sample period. In the very long run, a secular, deteriorating trend is a relevant phenomenon for a significant proportion of primary commodities.

The Relative Efficiency of Commodity Futures Markets

The ability of futures markets to predict subsequent spot prices has been a controversial topic for a number of years. Empirical evidence to date is mixed; for any given market, some studies find evidence of efficiency, others of inefficiency. In part, these apparently conflicting findings reflect differences in the time periods analyzed and the methods chosen for testing. A limitation of existing tests is the classification of markets as either efficient or inefficient with no assessment of the degree to which efficiency is present. This article presents tests for unbiasedness and efficiency across a range of commodity and financial futures markets, using a cointegration methodology, and develops a measure of relative efficiency. In general, the findings suggest that spot and futures prices are cointegrated with a slope coefficient that is close to unity, so that the postulated long‐run relationship is accepted. However, there is evidence that the long‐run relationship does not hold in the short run; specifically, changes in the spot price are explained by lagged differences in spot and futures prices as well as by the basis. This suggests that market inefficiencies exist in the sense that past information can be used by agents to predict spot price movements. A measure of the relative degree of inefficiency (based on forecast error variances) is then used to compare the performance of different markets.

Two puzzles in the analysis of foreign exchange market efficiency

Abstract Based on our analysis of three data sets, we explore two puzzles in the literature on foreign exchange market efficiency. First, it appears that while excess returns are stationary, the forward premium could be generated by a time series process that is integrated of order one: this is theoretically impossible. Second, regressions of the future change in the spot rate on the forward premium very often generate negative estimated slopes. The implication that the forward rate has perverse merit in the prediction of future spot rates is paradoxical. We show how the first puzzle can be resolved through the properties of a simple bivariate time series model that is compatible with our data sets. The second puzzle vanishes when forecasts are corrected for autocorrelated errors.

Foreign Exchange, Fractional Cointegration and the Implied-Realized Volatility Relation

Almost all relevant literature has characterized implied volatility as a biased predictor of realized volatility. This paper provides new time series techniques to assess the validity of this finding within a foreign exchange market context. We begin with the empirical observation that the fractional order of volatility is often found to have confidence intervals that span the stationary/non-stationary boundary. However, no existing fractional cointegration test has been shown to be robust to both regions. Therefore, a new test for fractional cointegration is developed and shown to be robust to the relevant orders of integration. Secondly, employing a dataset that includes the relatively new Euro markets, it is shown that implied and realized volatility are fractionally cointegrated with a slope coefficient of unity. Moreover, the non-standard asymptotic distribution of estimators when using fractionally integrated data is overcome by employing a bootstrap procedure in the frequency domain. Strikingly, tests then show that implied volatility is an unbiased predictor of realized volatility!

Is the dollar/ECU exchange rate a random walk?

Monthly data on the

The role of long memory in hedging effectiveness

US/ECU exchange rate are analysed in light of the random walk hypothesis. A battery of tests, including procedures that are robust to conditional heteroscedasticity, are applied against linear alternatives to departures from the random walk. These tests are all based on the sample autocorrelations of the series of first differences of the logarithm of the monthly exchange rate. They were applied to the full sample of available data, and also to a subsample consisting of the most recent observations. On the whole, these tests provided just modest evidence against the random walk hypothesis.

Evaluating currency market efficiency: are cointegration tests appropriate?

A joint fractionally integrated, error-correction and multivariate GARCH (FIEC-BEKK) approach is applied to investigate hedging effectiveness using daily data 1995-2005. The findings reveal the proxied error-correction term has a long memory component that theoretically should affect hedging effectiveness. When the FIEC model empirical conditions are satisfied, the FIEC-BEKK hedging strategy outperforms the OLS benchmark out of sample in terms of both variance reduction and hedger utility. A bootstrap exercise indicates that the variance reduction is statistically significant.

Business and Management Impact Assessment in Research Excellence Framework 2014: Analysis and Reflection

This paper investigates the claim that the common finding of cointegration between spot and lagged forward exchange rates reflects the existence of covered interest arbitrage and not, as is generally accepted, long-run market efficiency. Breuer and Wohars (1996) methodology is employed to match spot and one-month forward rates correctly for three major currencies; the Deutschmark, Sterling and the Yen, relative to the US dollar. Bi-variate analysis shows that spot and lagged forward rates are cointegrated with the vector (1,-1), a necessary condition for market efficiency. However, at variance with theory, in a tri-variate VECM estimation, the spot rate, lagged forward rate and lagged interest rate differential are shown to be cointegrated with the vector (1,-1,1) for the Mark and Sterling. The ‘cointegration’ paradox is explained by investigating the relative magnitudes of the forecast error and the interest rate differential. It is demonstrated that it is impossible to distinguish between the influence of covered interest arbitrage and the existence of market efficiency using cointegration-based tests.

The Purchasing Power Parity Persistence Puzzle: Evidence from Black Market Real Exchange Rates

The evaluation of research impact is likely to remain an important element of research quality audits in the UK for the foreseeable future. With this paper, we contribute to debates on impact and relevance of business and management studies research through an analysis of Research Excellence Framework 2014 impact scores within the business and management unit of assessment. We offer insights into the organizational contexts of UK business schools within which impact is produced, drawing attention to the issues of linkages with research intensity, grant income generation, research team size, career stage and gender of academics, and whether impact activity is focused on private or public sector organizations and national or international reach. We put forward recommendations for managers responsible for business schools and higher education policymakers regarding management and organizational policies and processes, as well as possible changes to the rules guiding future research excellence audits.

Close Communications: Hedge Funds, Brokers and the Emergence of Herding

In this paper we analyse the purchasing power parity (PPP) persistence puzzle using a unique data set of black market real exchange rates for 36 emerging market economies and (exact and approximate) median unbiased univariate and panel estimation methods. We construct bootstrap confidence intervals for the half-lives, as well as exact quantiles of the median function for different significance levels using Monte Carlo simulation. Even after accounting for a number of econometric issues, the PPP persistence puzzle is still a striking characteristic of the majority of emerging market countries. However, in a minority of exchange rates, the PPP puzzle is removed.