Stefan Reitz

Nonlinearities and Cyclical Behavior: The Role of Chartists and Fundamentalists

We develop a behavioral exchange rate model with chartists and fundamentalists to study cyclical behavior in foreign exchange markets. Within our model, the market impact of fundamentalists depends on the strength of their belief in fundamental analysis. Estimation of a STAR GARCH model shows that the more the exchange rate deviates from its fundamental value, the more fundamentalists leave the market. In contrast to previous findings, our paper indicates that due to the nonlinear presence of fundamentalists, market stability decreases with increasing misalignments. A stabilization policy such as central bank interventions may help to deflate bubbles.

Non Linear Oil Price Dynamics - A Tale of Heterogeneous Speculators?

While some of the recent surge of oil prices can be attributed to robust global demand at a time of tight production capacities, commentators occasionally also blame the impact of speculators for part of the price pressure. We propose an empirical oil market model with heterogeneous speculators. Whereas trend-extrapolating chartists may tend to destabilize the market, fundamentalists exercise a stabilizing effect on the price dynamics. Using monthly data for WTI oil prices, our STR-GARCH estimates indicate that oil price cycles may indeed emerge due to the nonlinear interplay between different trader types.

The Influence of Positive Feedback Trading on Return Autocorrelation: Evidence for the German Stock Market

There can be no doubt that some investors try to discover trends in past stock prices and base their portfolio decisions on the expectation that these trends will persist. In the behavioral finance literature this type of investors is usually called a feedback trader. Positive feedback traders buy stocks in a rising market and sell stocks in a falling market, while negative feedback traders adhere to a “buy low, sell high” investment strategy. One of the consequences of the existence of a sufficiently large number of feedback traders in the stock market is the autocorrelation of returns and, hence, the partial predictability of aggregate stock returns. On the one hand, the behavioral finance literature provides a fair amount of theoretical models of feedback trading. Furthermore, the experimental findings and the survey evidence overwhelmingly support the existence of positive feedback traders.1 On the other hand, there is only a limited number of empirical investigations on the impact of feedback trading on stock price dynamics. According to these studies the empirical evidence is mixed with respect to the presence of feedback traders in stock markets and the resulting consequences for return behavior.

End-user order flow and exchange rate dynamics – a dealer's perspective

This paper empirically investigates the Evans and Lyons’ [2002. Understanding order flow. International Journal of Finance and Economics 11: 3–23] model of the foreign exchange market from a dealers perspective. We provide evidence of the suggested information aggregation process using a rich database on a German banks end-user order flow from 2002 to 2003. Although customer order flow is unambiguously the vehicle incorporating non-public information into exchange rates over time, our empirical analysis does not support the idea that customer order flow is a high-powered source of information easily exploitable for short-run speculation.

Capital Flows, Financial Asset Prices and Real Financial Market Exchange - Rate: A Case Study for an Emerging Market, India

In this paper we empirically investigate the relationship between capital flows and exchange rates in India based on a new index of real effective exchange rates for the Indian Rupee. Instead of using consumer price indices we deflate exchange rates by MSCI asset price indices. The cointegration analysis indicates a long-run equilibrium relationship between real financial market exchange rate and the net outstanding equity investment in India. In the short run capital inflows are accompanied by an appreciation of real financial exchange rate of the Rupee

Japanese and Federal Reserve Intervention in the Yen-US Dollar Market: A Coordination Channel of FX Operations?

The coordination channel has recently been established as an additional means by which foreign exchange market intervention may be effective. In Sarno and Taylor (2001) it is conjectured that strong and persistent misalignments of the exchange rate are caused by a coordination failure among fundamentals-based traders. In such situations official intervention may act as a coordinating signal, encouraging traders to engage in stabilizing speculation. We apply the framework developed in Reitz and Taylor (2008) to daily data on the yen-US dollar exchange rate and on Federal Reserve and Japanese Ministry of Finance intervention operations. The results provide further support for the coordination channel of intervention effectiveness.

Consensus among FX forecasters

This article investigates whether there exists a consensus among foreign exchange rate forecasters. The data set under consideration is the semi-annual survey of the Wall Street Journal. In most of all cases we find evidence in favor of a consensus. However, in a few cases, no-consensus is found due to skewness of the forecast distribution.

Dealer behaviour in the Euro money market during times of crisis

ABSTRACT This article shows how the recent money market disruptions with elevated counterparty risks and uncertainty about the fundamental value of liquidity influenced the trading behaviour of a key dealer in the Euro money market. The complete trading record in the unsecured segment of the money market for 2007 and 2008 is used to estimate a stylized pricing model, which explicitly accounts for the over-the-counter structure. The empirical results suggest that the market maker learns from order flow, but this information aggregation was increasingly hampered as the crisis unfolded.

The role of global financial conditions for credit supply in EMU periphery countries

ABSTRACT The article analyses the role of global financial conditions for credit supply and growth performance in individual member states of the European Monetary Union (EMU). In line with the risk-taking channel of monetary policy, we find that in the short run, the Fed and European Central Bank (ECB) interest rate policy compensate for changes in global risk assessment thereby supporting net private credit flows to the European periphery. However, in later periods, a worsened risk sentiment weighs on credit flows to these countries. In contrast, EMU core countries are generally less affected by global financial shocks. This asymmetric influence of global conditions on EMU member states are smoothed by the uniform access of commercial banks to the Eurosystem’s open market operations in conjunction with the redistribution of liquidity via the TARGET mechanism.

Is Globalization Reducing the Ability of Central Banks to Control Inflation? A Literature Review with an Application to the Euro Area

Abstract Globalization influences inflation and the transmission channels of monetary policy in various ways. The effects of globalization on the ability of monetary policy to control inflation have been discussed intensively. However, in the light of recent experiences following the global financial crisis with extended periods of disinflation in many advanced economies, the question whether the ability of monetary policy to control inflation has suffered significantly from increasing globalization has received new relevance. Based on a review of the literature, this paper discusses whether globalization is reducing the ability of central banks to control inflation and draws conclusion for the current situation in the euro area. We find that globalization has made it more complicated for central banks to ensure price stability and that it has tended to reduce the ability of monetary policy to control inflation in the short- to medium-run. However, in principle the ECB is still able to control inflation but may have to tolerate deviations from its inflation target for somewhat longer periods.