Simon Hayes

Crisis costs and debtor discipline: the efficacy of public policy in sovereign debt crises

Recent debate on the reform of the international financial architecture has highlighted the potentially important role of the official sector in crisis management. We examine how such public intervention in sovereign debt crises affects efficiency, ex ante and ex post. Our results shed light on the scale of capital inflows in such a regime, and we establish conditions under which this leads to an improvement in debtor country welfare. The efficacy of measures such as officially sanctioned stays on creditor litigation depend critically on the quality of public sector surveillance and the size of the costs of sovereign debt crises.

Explaining movements in UK stock prices

Abstract We examine movements in aggregate UK stock prices by decomposing the variance of unexpected real stock returns into components due to revisions in expectations of future dividends, discount rates, and the covariance between the two. The contribution of news about future discount rates is about four times that of news about future dividends, with no significant covariance between them. Our analysis of excess returns uncovers a positive covariance between news about dividends and news about real interest rates. Since these two elements have opposite effects on current stock prices, their combined effect is negligible. Persistence in expected returns, as well as predictability, are found to be important in explaining stock price movements.

Interest Rates in Germany and the UK: Cointegration and Error Correction Models

The authors test the expectations hypothesis (EH) of the term structure using U.K. and German weekly data on short dated instruments with maturities up to one year. For both data sets comprising k interest rates the authors find that the rank of the cointegrating space is (k - 1); but they can only accept that the cointegrating parameter estimates are of the form (-1, 1, 0,...) etc. when considering bilateral combinations of interest rates. When the authors test the joint null that the set of (k - 1) spreads forms a basis for the cointegration space, this is rejected. However, the point estimates of the cointegration parameters are close to unity and there is no diminution in outside sample forecasting performance of the ECM equations when the spread restrictions are imposed. On balance, one might conclude that the EH is not grossly at variance with the data. Copyright 1998 by Blackwell Publishers Ltd and The Victoria University of Manchester

Market Segmentation and Stock Price Behaviour

We employ Campbell and Shiller’s (1989) VAR methodology to examine the relative performance of the CAPM and the consumption-CAPM. We find that although neither provides a complete description of stock price behaviour, the former clearly dominates the latter. We then consider the implications for sub-sectors of the market. According to the CAPM, sub-sector returns depend on the covariance of sub-sector returns with market returns. However, if analysts are more skilled at eliminating mis-pricing in sub-sectors of the market than in the market as a whole, the required return on a sectoral portfolio may depend only on the expected return variance within that sub-sector. Using quarterly UK data for five industry-based portfolios, we find little support for the covariance model at the sectoral level, whereas the own-variance model fares better. It seems therefore that moving from return variances to covariances produces little if any improvement in the performance of the CAPM.