Seongman Moon

The Forward Discount Puzzle: Identification of Economic Assumptions

The forward discount puzzle refers to the robust empirical finding that foreign excess returns are predictable. We investigate if expectations errors are the main cause of this predictability using the serial dependence pattern of excess returns implied by economic models as identification device. This approach also allows us to explain why strong predictability of excess returns only occurs during 1980s. Using USD bilateral spot and forward rates from 1975-2009, we show that both the statistically significant positive serial dependence of excess returns in the entire sample and the very weak (mostly insignificant) positive serial dependence in the subsample excluding observations in 1980-87 are consistent with the predictions of the expectations errors explanation. We provide several pieces of new empirical evidence which support the link between the strong predictability in the 1980s and changes in forecasting techniques by foreign exchange market agents.

Predictability Tests for the Expectations Hypothesis in the Presence of MA Disturbances

This paper develops new inference methods for testing the expectations hypothesis in a general econometric framework. In particular, we consider nonparametric tests of the predictability of excess returns in the presence of MA disturbances. We discuss several alternatives of aggregation and investigate their asymptotic and finite sample properties. We illustrate that the serial dependence tests can also provide valid information for identifying particular economic alternatives when testing the expectations hypothesis in foreign exchange markets.

Delayed Overshooting: It's an 80s Puzzle

We re-investigate the delayed overshooting puzzle. We find that delayed overshooting is primarily a phenomenon of the 1980s when the Fed was under the chairmanship of Paul Volcker. Related findings are as follows: (1) Uncovered interest parity fails to hold during the Volcker era and tends to hold in the other periods considered. (2) US monetary policy shocks have substantial impacts on exchange rate variations but misleadingly appear to have small impacts when monetary policy regimes are pooled. In brief, we confirm Dornbusch’s overshooting hypothesis.

On the Properties of Regression Tests of Asset Return Predictability

This paper investigates, both in finite samples and asymptotically, statistical inference on predictive regressions where time series are generated by present value models of asset prices. We show that regression-based tests, including robust tests such as robust conditional test and Q-test, are inconsistent and thus suffer from lack of power in local-to-unity models for the regressor persistence. The main reason is that the near-integrated regressor from the present value model slows down the convergence rates of the estimates, an effect which is masked in predictive regressions analysis with exogenous constant covariance of innovations. We illustrate these properties in a simulation study and analyze the predictability of several stock returns series.

A Risk Map of Markups: Why We Observe Mixed Behaviors of Markups

This paper proposes an explanation for mixed evidence on the behaviors of markups. The key mechanism consists of two complementary channels of risk internalization that arise when firms face uninsurable business risks. One channel is based on passive risk consideration, through which firms raise prices to abide by riskier business thereby associating higher production with higher prices. The other channel is based on active risk management, through which firms lower prices to handle riskier business thereby associating higher production with lower prices. The relative responsiveness of the two channels to a shock depends on each firm’s fundamental characteristics and leads to a sharp division of markup cyclicality across sectors.

Are Korean Industry-Sorted Portfolios Mean Reverting?

This paper tests the weak-form efficient market hypothesis for Korean industry-sorted portfolios. Based on a panel variance ratio approach, we find significant mean reversion of stock returns over long horizons in the pre Asian currency crisis period but little evidence in the post-crisis period. Our empirical findings are consistent with the fact that Korea accelerated its integration with international financial market by implementing extensive capital liberalization since the crisis.

Korean Current Account Surplus and the Transmission of the Won-Dollar Exchange Rate

This paper empirically investigates the effects of exchange rate shocks on the variables of the primary interests, such as trade balance and current account, using the Korean data. The result shows that the effect of the won-dollar exchange rate on the current account is weak. This is because the effect of the won-dollar exchange rate on exports and imports are similar. We also examine the effect of the won-dollar exchange rate shock on Korea’s trade balance with major trading partners such as the US, China, Japan, and the European Union, respectively. The results show that the responses of the Korea-Japan and Korea-European Union trade accounts are weak and not statistically significant; but those from the Korea-US trade account and the Korea-China trade account are statistically significant.

Foreign Exchange Risk Premia and Goods Market Frictions

Famas (1984) volatility relations show that the risk premium in foreign exchange markets is more volatile than, and is negatively correlated with the expected rate of depreciation. This paper studies these relations from the perspective of goods markets frictions. Using a sticky-price general equilibrium model, we show that near-random walk behaviors of both exchange rates and consumption, in response to monetary shocks, can be derived endogenously. Based on this approach, the paper provides quantitative results on Famas volatility relations.

Profits in (Partial) Equilibrium and (General) Disequilibrium

In a many-sector production economy where each sectors output is used as input for every sector, a general equilibrium implies zero profit for everyone, whereas one market in excess demand implies positive profits for all others in their partial equilibrium. If more than one market is stuck in excess demand, every market allows positive profits.

Risk Channels of Pricing and Production: A Model of Inertial Prices and Cyclical Markups

We consider a firm who faces business risk due to stochastic goods market outcomes and identify two risk channels of pricing and production. One channel is based on the passive risk consideration, through which the producer raises prices to abide by riskier business and thereby associates higher production with higher prices. The other channel is based on the idea of active risk management, through which the producer lowers prices to handle riskier business and thereby associates higher production with lower prices. We bring the two risk channels together towards an alternative theory of inertial prices and cyclical markups: (i) prices exhibit inertial behaviour relative to output variation, (ii) predicted movements of markups are in accordance with the mixed evidence of countercyclical and procyclical variations, and (iii) cyclical behaviours of markups differ across sectors.