Peter Vlaar

The Message in Weekly Exchange Rates in the European Monetary System: Mean Reversion, Conditional Heteroscedasticity, and Jumps

A wireline control system and method for moving a wireline into or out of a well including multiple wireline control units mounted on the well for alternately gripping and moving said wireline, each of the wireline control units being synchronized by a common fluid power system for continuously moving the wireline into or out of the well.

Value at risk models for Dutch bond portfolios

This study investigates the consequences of dynamics in the term structure of Dutch interest rates for the accurateness of value-at-risk models. Therefore, value-at-risk measures are calculated using both historical simulation, variance‐covariance and Monte Carlo simulation methods. For a ten days holding period, the best results were obtained for a combined variance‐covariance Monte Carlo method using a term structure model with a normal distribution and GARCH specification. Term structure models with a t-distribution or with cointegration performed much worse. ” 2000 Elsevier Science B.V. All rights reserved. JEL classification: E43; G28

ON THE ASYMPTOTIC DISTRIBUTION OF IMPULSE RESPONSE FUNCTIONS WITH LONG-RUN RESTRICTIONS

In this paper, the asymptotic distribution of the parameters of the moving average representation of structural VAR models with long run restrictions is derived. Moreover, it is shown that the structural model can easily be estimated in a two step procedure, where the reduced form model parameters serve as input for the structural parameters. The proposed model structure is very general, including the common trends model, in the sense that all identification schemes that can be expressed as linear zero restrictions on the contemporaneous or long-run impact of the structural shocks are allowed for. The asymptotic distribution of the moving average parameters can be used to determine asymptotic confidence intervals of impulse response functions or to perform tests of hypotheses concerning forecast error variance decompositions. The relevance of the correction for long run restrictions to the asymptotic distribution is shown in an example on German interest rates.

Shocking the eurozone

In this paper, the monetary transmission mechanism within the European Monetary Union is investigated. The impulse response functions and forecast error variance decompositions of a structural vector error correction model (SVECM) are compared with those of a New Keynesian theoretical model. The identifying restrictions of the SVECM are directly derived from the theoretical model. Two permanent shocks are identified, one having only nominal, and one having only real effects. The three transitory shocks comprise a short term interest rate shock, an aggregate demand shock and a money demand shock. The main conclusions are that permanently reducing the inflation objective depresses output in the first year, but has no real effects in the long run. Regarding output variability, the results indicate that aggregate demand shocks are most important during the first year, after which aggregate supply shocks dominate.

PALMNET: A Pension Asset and Liability Model for the Netherlands

This study presents a pension model geared to the typical pension contract in the Netherlands. It is based on a defined benefit/average earnings pension system. Nominal benefits are guaranteed and indexation is intended. The model provides a framework for analysing adjustments to such factors as the asset mix, retirement age, returns and the method of discounting, premium setting and indexation. The importance of uncertainty over interest rate movements and returns on shares is made explicit by means of stochastic and historical simulations. In this, PALMNET differs from existing, often deterministic pension models. The main findings are, first, a wage -indexed defined benefit pension is still affordable despite the current shortfall of wealth of pension funds. Second, fair value accounting considerably increases the volatility of pension premiums. Third, reducing risks by adjusting the asset mix towards more bonds is costly in terms of average premiums, but reduces the volatility. These conclusions are based on realistic to conservative assumptions regarding returns and risks.

Risk Models with Jumps and Time-Varying Second Moments

In this paper, we propose a new risk model to better address events like the recent credit crisis. First, the possible start of a crisis is modeled by including a low-probability jump process. Second, the risk characteristics of the crisis are captured by allowing for time-varying volatilities and correlations. Time variation in correlations is due to the changing importance of two sources: monetary shocks leading to a positive stock-bond correlation, and risk aversion (or “flight to safety”) shocks leading to a negative stock-bond correlation. The model stays within the essentially affine class, thereby allowing for closed-form solutions for arbitrage-free nominal and real bond prices of all maturities. Moreover, equity options and swaption prices are included in the estimation procedure to enhance the proper modeling of the volatility on the equity and interest rate markets. The model captures a large part of the time variation in financial risks for pension funds due to both changing volatilities and correlations.

Inflation differentials and excess returns in the European Monetary System

In this paper, the relationship between excess returns on foreign exchange investment and inflation differentials and a measure of volatility is investigated for the European Monetary System. A high inflation rate relative to Germany leads to a real appreciation relative to the D-mark, which might increase the probability of a parity adjustment. As a consequence, investors will demand a risk premium leading to a higher interest rate on the weak currency. The excess return remains on the weak currency as long as this currency is not devalued. If the currency is devalued lower, the loss can be considerable, especially if the timing of the devaluation was not foreseen by the market. These two effects are modeled by means of a mixture of normal distributions with endogenized weights that depend on the inflation differential. As a measure of volatility, the conditional variance of excess returns is included as an explanatory variable in the model. Using weekly D-mark rates of the Belgian franc, the Dutch guilder, the French franc and the Italian lira, it is shown that high inflation differentials are accompanied by high expected excess returns, but also high risk.

Target Zones and Realignment Risk: An Integrated Approach

In this paper, it is shown that inflation differentials and trade deficits were significant determinants for exchange rate movements in the European monetary system. Since the target zone prevents EMS exchange rates from adjusting gradually to changing economic conditions, a standard regression model cannot detect this influence however. Therefore, a new econometric model is introduced, in which deteriorating competitiveness increases the probability of large depreciations and high volatility. These depreciations can be due to large devaluations or to panic reactions of the market due to expected devaluations. It is shown that the out-of-sample predictions of the model outperform the random walk, and that large arbitrage gains can be made in the foreign exchange market if our model predictions are used.

International convergence of capital market interest rates.

This article investigates the extent of capital market interest rate convergence among six EU countries on the one hand, and a group of four countries with floating exchange rates - US, Germany, Japan, and Switzerland - on the other. We conclude that interest rate changes within the EU have been and still are converging gradually since 1980. Within the group of free-float currencies, the increase in convergence occurred abruptly around 1980, after which the extent of convergence remained roughly constant. Moreover, the presumed higher influence of US long-term interest rates on the level of German interest rates could not be detected.This article investigates the extent of capital market interest rate convergence among six EU countries on the one hand, and a group of four countries with floating exchange rates - US, Germany, Japan, and Switzerland - on the other. We conclude that interest rate changes within the EU have been and still are converging gradually since 1980. Within the group of free-float currencies, the increase in convergence occurred abruptly around 1980, after which the extent of convergence remained roughly constant. Moreover, the presumed higher influence of US long-term interest rates on the level of German interest rates could not be detected.

Exchange rate expectations and risk premia in the European Monetary System: 1985–1991

Using a new set of survey data on EMS exchange rates, we investigate exchange rate expectations and risk premia between December 1985 and August 1991 to assess credibility of the system. It appears that the EMS—with the exception of the Italian lira—had become credible since early 1990. Moreover, one of the core predictions of the target zone literature—the inverse correlation between the position of the spot rate in the fluctuation band with its expected change—is corroborated for several currencies in the period after April 1990. Although the system appeared to be more credible, the persistence of interest differentials suggested the existence of risk premia. For four out of six currencies we find a significant relationship between the risk premium and the inflation differential relative to Germany.