Steven J. Cochran

Inflation's negative effects on real stock prices: new evidence and a test of the proxy effect hypothesis

The present study examines the effects of inflation on real stock prices using an error-correction model of the S&P 500. Inflation is shown to have a negative and significant impact in a variety of model specifications. The study also investigates whether the observed negative relation arises because inflation proxies for more fundamental relations between stock prices and either future output, relative price uncertainty or inflation uncertainty. The evidence reveals that inflation does not merely proxy for those other factors and, thus, the proxy effect hypothesis in its various forms is rejected.

Duration dependence in the US stock market cycle: a parametric approach

This study uses parametric hazard models to investigate duration dependence in US stock market cycles over the January 1885 to July 1992 period. The results show that duration dependence exists in pre-World War II expansions and in post-World War II contractions. Pre-war contractions and post-war expansions, however, do not exhibit duration dependence. Additionally, the evidence suggests that duration dependence in market expansions has reduced over time, while duration dependence in contractions has increased. Duration dependence is consistent with predictable stock price behaviour. Although not formally addressed in this study, predictability may arise from either temporary ‘fads’ in the pricing of securities or from time-varying required returns. Regardless of the source, the shift in the pattern of duration dependence suggests that a change occurred in the cyclical behaviour of the stock market during the period studied. Discrete shifts and trends in mean phase duration do not exist, indicating that t...

Foreign Exchange Volatility Shifts and Futures Hedging: An ICSS-GARCH Approach

In this study, the impact of volatility regime shifts on volatility persistence and hedge ratio estimation is determined for four major currencies using an iterated cumulative sums of squares (ICSS)-GARCH model. Employing a standard GARCH (1,1) model as the benchmark, within-sample results demonstrate that the inclusion of volatility shifts substantially reduces volatility persistence and the significance of the ARCH and GARCH coefficients. In terms of hedging effectiveness, the ICSS-GARCH model outperforms the standard GARCH model for all four currencies. In comparison to two constant volatility models, the standard GARCH model yields the lowest performance, whereas the ICSS-GARCH model performs at least as well as these models. In out-of-sample analysis, the GARCH model provides substantial variance reductions relative to the constant volatility models. Moreover, the ICSS-GARCH model yields positive variance reductions relative to all competing models, including the standard GARCH model. The results suggest that in cases where dynamic hedging is important, sudden shifts in volatility should not be ignored.

Predictability in real exchange rates: Evidence from parametric hazard models

Abstract This study uses parametric hazard models to investigate the cyclical behavior of several real exchange rates over the January 1974 through December 1992 period. Evidence of cointegration among the real rates indicates that movement toward a stochastic trend occurs and that deviations from long-run alignment or parity are eliminated over time. The results show, however, that real exchange rate cycles do not exhibit duration dependence. The implication of this finding is that real rates do not tend to fixed cycle lenghts and that predictable periodicity is not present. Thus, while deviations in real exchange rates from long-run alignment are eliminated, the movement toward parity is unpredictable. Additionally, no evidence is obtained that trends in mean cycle duration exist. The mean length of real rate cycles appears not to have changed over the recent floating rate period, a finding consistent with a constant level of volatility in the exchange markets. Finally, the results reveal that successive cycle dependence does not exist, that is, the duration of a cycle is not dependent on the length of the prior cycle.

Predictable components in exchange rates

Abstract This study tests the validity of long-run PPP by applying the cointegration methodology of Johansen and Juselius (1990) to monthly exchange rate and price data for eleven countries. The results reveal that in all cases the theoretical PPP-vector [11-1] or [11-1, c] is not contained in the cointegration space. This finding is inconsistent with strict long-run PPP. Alternatively, evidence from unrestricted tests shows that, with one exception, one or two cointegrating relationships do exist. Given the existence of tariffs, transportation costs, and differences in the construction of price indices across countries, PPP may be consistent with a cointegrating vector other than [11-1] or [11-1, c]. In fact, the widespread evidence of cointegration obtained from the unrestricted tests suggests that the possibility of PPP for U.S. Dollar exchange rates for the recent floating rate period should not be dismissed.

Conditional higher order moments in metal asset returns

This study examines the role of higher order moments in the returns of four important metals, aluminium, copper, gold and silver, using the asymmetric GARCH (AGARCH) model with a conditional skewed generalized-t (SGT) distribution. Implications of higher order moments in metal returns are evaluated by comparing the performances of conditional value-at-risk measures obtained from the AGARCH models with SGT distributions to those obtained from the AGARCH models with normal and student-t distributions. With the exception of gold, the AGARCH model with the SGT distribution appears to have the best fit for all metals examined.

Volatility in World Equity Markets

Past research suggests that US stock market volatility was greater during the 1930s than in any other 10-year time period and the post-WWII era is a period of relative stability, despite slightly higher volatility levels during the 1970s and 1980s. More recent evidence suggests that volatility levels from 1998 to 2001 have more in common with 1930s levels than with any other time period. We extend this body of research to include the volatility experiences of seven equity markets in the US, Europe, and Asia. For each market, we compare the average monthly volatility of each five-year period, beginning with January 1923, with that for the most recent period in the study, January 1998 to August 2001. We find that when there are statistical differences between current and past levels of volatility, recent volatility is usually significantly greater than past volatility. In only a small number of cases do we find current volatility to be less than past volatility. This suggests that the 1998–2001 period was unusually volatile for most markets examined. We also find that volatility behavior tends to be country-specific and cannot be generalized on an aggregate basis.

The relationship between the Brazilian interest payments moratorium and bank equity returns: evidence from the London Stock Exchange 1

This study examines the effects of the Brazilian interest payments moratorium announcement on the equity return levels of several large US and European commericial banks traded on the London Stock Exchange. The empirical evidence suggests that, in general, the equity prives of the sample banks immediately reflected the relevant information associated with the announcement. However, some degree of pricing inefficiency was determined to exist, as the market was unable to discriminate among banks of the basis of exposure to Brazilian loans.