Richard J. Sweeney

Some New Filter Rule Tests: Methods and Results

Mechanical trading rules seem to have more potential than previous tests found. Fama and Blume (1966), looking at the Dow 30 of the late 1950s, found no profits for the best (½-percent) rule after adjusting for transactions costs. Fifteen of these stocks looked profitable in their sample, however; for the same rule, the surviving fourteen show statistically significant profits for 1970–1982 for transactions costs obtainable by floor traders. The test used here assumes constant risk premia, or more generally, that risk premia are on average approximately the same on days “in” as for the total period.

Corporate International Diversification and Market Assigned Measures of Risk and Diversification

Recent evidence supports the notion that capital markets are substantially integrated in a return/systematic risk sense [1, 12]. Other studies show that investors can reduce the total level of risk borne without reducing expected returns by holding an internationally diversified portfolio [8, 9, 17]. Together these studies imply that the various economies mirrored by financial markets are not perfectly integrated. Some assert, however, that because of controls on capital flows, differential trading costs, different tax structures, and a number of other factors, markets are imperfectly (albeit substantially) integrated. Hence investors may not actually be diversifying internationally and thus forego advantages which would accrue to them if they were willing to hold foreign security issues.

Mean reversion in real exchange rates: evidence and implications for forecasting

Abstract The stationarity of real exchange rates over the recent flexible exchange rate period is an issue that has long bedeviled researchers in international finance. Using a constrained multivariate framework, this paper provides the strongest evidence yet that real exchange rates were mean-reverting over the 1973-93 period. We also investigate shifts in long-run real exchange rates, which may be important for the purpose of forecasting. Out-of-sample forecasting shows that the random walk model is outperformed by a mean-stationary model, especially at long horizons. In addition, there are substantial forecasting benefits from using a multivariate approach.

Do central banks lose on foreign-exchange intervention? A review article

Abstract Estimates of central bank intervention losses or profits vary widely; some estimates find substantial losses, others profits. In most cases, estimated profits are not risk-adjusted, and risk adjustment can have large effects. Furthermore, profit estimates involve variables integrated of order one, and because of this test-statistics may have nonstandard distributions; few studies take this into account. Estimates of risk-adjusted profits for the US Fed and the Swedish Riksbank, with allowances for possible nonstandard distributions, suggest that neither made losses and might have made significant profits.

Predictable patterns after large stock price changes on the Tokyo Stock Exchange

This paper extends to Japanese stocks recent research on short-term stock price adjustment to new information. Using standard methodologies, we find that stock returns of firms included in the Nikkei 300 tend to be significantly positive after large price decreases. This is similar to the pattern observed for American stocks in other research. The pattern remains when returns are adjusted for market movements, and exists independently of the October 1987 market break. We find little evidence of significant patterns following large stock price increases. We also find little evidence that non-transaction prices explain the persistent, significant returns observed following large price decreases on the Tokyo Stock Exchange. We conjecture that broker/dealers and TSE member firms respond to large price decreases not by trading for their own profit, but rather by selectively supplying liquidity to their preferred retail customers. We conclude that ordinary investors probably cannot earn economic profits from these statistically significant patterns.

Inflation and Real Growth: Some Empirical Results: A Note

What is the relationship between the average rate of inflation and the variability of real economic growth? Recent studies by Gordon [3], Okun [7], Logue and Willett [6], Klein [5], and Jaffee and Kleiman [4] have attempted to f1ll some of the gaps in our knowledge of inflations effect on the economy; these studies have generally demonstrated the positive empirical relationship between the rate of inflation and its variability or unpredictability. Such heightened uncertainty may produce greater variability of real growth which, in turn, undoubtedly increases welfare costs. Using annual data for twenty-four countries, we Elnd a positive relationship between the mean inflation rate and the variability of real economic growth. This finding strengthens the commonly held belief that inflation is undesirable on welfare grounds.

Speculative behavior of foreign exchange rates during the current float

Abstract The current regime of floating exchange rates has been characterized by a number of informed observers as economically unsatisfactory. Use of terms such as “overshooting”, “bandwagon effects”, “destabilizing”, and “insufficient speculation” reflects serious misgivings on the part of many toward the long-run viability of a floating, rather than a fixed or semi-fixed, rate regime. Using fairly standard procedures, the authors have attempted to determine the extent to which the foreign exchange market exhibits the adverse features noted above. The authors conclude that by and large foreign exchange markets have not performed particularly poorly. The foreign exchange markets seem to be efficient at least in the weak form sense. Past exchange rate changes are not useful in predicting future exchange rate changes. This empirical finding contrasts sharply with the view that the markets “overshoot”, or that there are “bandwagon effects”, or that the amount of price stabilizing speculation is inadequate.

The ranking of alternative tariff and quota policies in the presence of domestic monopoly

Abstract Bhagwati demonstrated the nonequivalence between tariffs and quotas in the presence of monopoly. This paper also assumes domestic production to be monopolized and shows that giving import licenses or tariff revenues to the domestic producer may raise or lower the welfare cost of protection and the price paid by consumers from the price under other tariff and quota arrangements which maintain the same market share for the domestic producer. However, if the monopolist realizes that commercial policy is an instrument used to maximize the policymakers welfare function, instead of being a goal in itself, the equivalence of tariffs and quotas re-emerges.

Profit-Making Speculation in Foreign Exchange Markets.

Previous studies of technical analysis statistical tests of risk-adjusted profits from trading rules - the X-test selected trading rules equally-weighted portfolios of currencies, with rules tailored for each currency variably-weighted portfolios of currencies, with rules tailored for each currency speculating on indexes of currencies speculating with a portfolio upgrade approach comparing the performances of technical trading strategies the stability of speculative profits implications for the theory and practice of financial economics implications for policymakers.

The Market Value of Debt, Market Versus Book Value of Debt, and Returns to Assets

Empirical studies usually measure the value of debt based on book rather than market value, even though the underlying theory is almost always based on market values. This paper documents how using book value to measure debt can distoret debt-equity rations and cost of capital calculations.