Exchange rate policy modeling and forecasting the exchange rate: Indian rupee vis‐à‐vis the U.S. dollar

The exchange rate is a very important key financial variable that affects decisions made by the foreign exchange investors, exporters, importers, bankers, businesses, financial institutions, policymakers, and tourists in the developed as well as the developing world. Exchange rate fluctuations affect the value of international investment portfolios, competitiveness of exports and imports, value of international reserves, currency value of debt payments, and the cost of tourists. Movements in exchange rates thus have very important implications for any country's economy's business cycle, trade, and capital flows and are therefore crucial for understanding financial developments and changes in economic policy. The study will be looking at the various aspects of country's economic policy with respect to the exchange rate and modeling and forecasting the exchange rate. The study will be analyzing India's exchange rate story and will be discussing the structure of the foreign exchange market in India in terms of participants, instruments, and trading platform as also a turnover in the Indian foreign exchange market and forward premia. The study will be attempting to develop a model for the rupee–dollar exchange rate taking into account variables from monetary and microstructure models as well as other variables including intervention by the central bank. The main focus will be on the exchange rate of the Indian rupee vis‐à‐vis the U.S. dollar, that is, the Re/$ rate. The data will be covering from January 1990 through April 2013. This study will be examining the forecasting performance of the monetary model and various extensions of it in the vector autoregressive and Bayesian vector autoregressive framework.     

Discounting procedures for environmental (and other) projects: A comment on Kolb and Scheraga

We compare two alternative methods to discount the costs and benefits of environmental projects. These are (1) the shadow price of capital, which can be practically expressed by using the cost of capital and thus the discount rate on government bonds, and (2) the two-stage discounting procedure advocated by Kolb and Scheraga. We suggest that the two-stage approach is in many cases inconsistent with the shadow price of capital approach and will therefore lead to misallocations of resources. We further argue that the use of the cost of capital as the discount rate will be easier than the two-stage procedure, will yield results that are consistent with the shadow price of capital approach, and will be justified by the potential Pareto criterion. Finally, use of the shadow price of capital approach has a potential for achieving considerable consensus in practice as well as in theory, a result that could considerably enhance project evaluation.     

Exchange rate (USD/INR) pass‐through and wholesale price index: A flexible least square approach

The paper explores the exchange rate (USD/INR) pass‐through and the wholesale price index in India. Exchange rate pass‐through (ERPT) has a stimulated effect on the wholesale prices over the period of time. We use flexible least square approach to estimate time varying approach of ERPT and wholesale price, monthly data for the period from April 1994 to May 2019, find exchange rate over the period of time as well as change the wholesale price. It implies that the ERPT provides heterogeneity information that change the whole price index, even both export/import goods and services play a vital role in fluctuating on exchange rate and also change whole price in the domestic market.     

The causal nexus of interest rate policy and gold market: The case of Turkey

The relevance of gold to the financial market and global economies is responsible for the commodity's (gold) link with financial instruments such as the oil price, currency and gold price, stock index, and other commodities price. In this case, the causal analysis between the interest rate and the gold price has been examined in a novel approach. This study uses the standard Granger causality approach to test the relationship for the economy of Turkey over the period June 1, 2000–June 1, 2017. The results revealed that while gold price depends on daily announcements, demand, and supply, the interest rate depends on some factors such as the monetary policy of the central bank, inflation rate, and different macroeconomic parameters. Thus, the causality between the two financial instruments is observed to be significant. According to the conducted statistical analysis, the interest rate and gold price have interaction between each other. Because there is insufficient evidence in the extant literature that establishes a causality relationship between the two variables, the current study is believed to enhance policy directives and contribute to the financial literature. Considering the peculiar situation of the Turkish financial market, this novel approach presents significant policy directions.     

Government Partisanship, Elections, and the Stock Market: Examining American and British Stock Returns, 1930–2000

We construct a model of speculative trading to examine how the mean and volatility of stock prices is affected both by government partisanship and by traders' expectations of electoral victory by the right-wing or left-wing party. Our model predicts that rational expectations of higher inflation under left-wing administrations lowers the volume of stocks traded in the stock market. The decline in trading volume leads to a decrease in the mean and volatility of stock prices not only during the incumbency of left-wing governments, but also when traders expect the left-wing party to win elections. Conversely, expectation of lower inflation under right-wing administrations leads to higher trading volume. This leads to an increase in the mean and volatility of stock prices during the tenure of right-wing governments and when traders anticipate the right-wing party to win elections. Daily and monthly data from U.S. and British equity markets between 1930 and 2000 statistically corroborate the predictions from our formal model.     

Presidential Elections and the Stock Market: Comparing Markov-Switching and Fractionally Integrated GARCH Models of Volatility

Bumba Mukherjee Department of Political Science, Florida State University, 554 Bellamy Building, Tallahassee, FL 32306 e-mail: smukherj{at}mailer.fsu.edu Existing research on electoral politics and financial marketspredicts that when investors expect left parties—Democrats(US), Labor (UK)—to win elections, market volatility increases.In addition, current econometric research on stock market volatilitysuggests that Markov-switching models provide more accuratevolatility forecasts and fit stock price volatility data betterthan linear or nonlinear GARCH (generalized autoregressive conditionalheteroskedasticity) models. Contrary to the existing literature,we argue here that when traders anticipate that the Democraticcandidate will win the presidential election, stock market volatilitydecreases. Using two data sets from the 2000 U.S. presidentialelection, we test our claim by estimating several GARCH, exponentialGARCH (EGARCH), fractionally integrated exponential GARCH (FIEGARCH),and Markov-switching models. We also conduct extensive forecastingtests—including RMSE and MAE statistics as well as realizedvolatility regressions—to evaluate these competing statisticalmodels. Results from forecasting tests show, in contrast toprevailing claims, that GARCH and EGARCH models provide substantiallymore accurate forecasts than the Markov-switching models. Estimatesfrom all the statistical models support our key prediction thatstock market volatility decreases when traders anticipate aDemocratic victory.     

Offshore democracy: launch and landfall of a socio-technical experiment

Germany's bank-based financial system has been generally perceived as good at providing long-term debt finance to traditional industry but poor at supplying equity capital to high-tech start-ups. In 1997 a special segment of the Frankfurt stock exchange, the Neuer Markt , was founded to improve the supply of high-risk equity capital in Germany. The subsequent listing of over 300 companies on the Neuer Markt , many of them in technology-intensive sectors, has led to speculation that Germany is rapidly closing the gap with the US, the world leader in high technology. Contrary to this view, this article suggests that these companies have more in common with traditional German small and medium-sized companies (SMEs) than with the Silicon Valley model of governance and innovation.     

Nonlinear Granger causality between oil price and stock returns in India

The nonlinear causal dimension in oil price and stock returns aspect is less explored in literature. This study provides such evidence by applying Hiemstra and Jones (1994) nonlinear Granger causality test to the VAR residuals in case of India. Our result indicates that there exists bi‐directional nonlinear causality between oil price and stock returns. It implies that the lagged information of oil price and stock returns can be able to predict each other efficiently.     

Pay‐as‐You‐Go Financing and Capital Outlay Volatility: Evidence from the States over Two Recent Economic Cycles

Pay‐as‐you‐go (pay‐go or cash) and pay‐as‐you‐use (pay‐use or debt) are two mechanisms to finance capital projects. While pay‐go faces multiple constraints, pay‐use smoothes outlays, stabilizes tax rates, and improves inter‐generational equity. Thus, pay‐use has dominated infrastructure financing for decades. In recent years, there has been revived academic interest in pay‐go as an alternate financing mechanism; however, there is a large gap in the literature and inadequate evidence on the effects of pay‐go, especially its effects on capital outlay volatility. This paper fills in the niche. Examining state experience over the two recent economic cycles, this paper finds evidence that suggests that pay‐go is associated with lower volatility in capital spending in the long run, but may increase short‐run variability. We recommend that states couple pay‐go in boom years with pay‐use in lean years. In unison, the two mechanisms can reduce aggregate volatility and increase long‐run stability of capital expenditures.     

'These mad abandon'd times'

Abstract

The existing academic literature on financialization points to multiple instances in which firms attempt to demonstrate the vitality of their stock-market position in ways which ultimately prove to be self-harming. I demonstrate, in the first instance as a matt er of immanent logic, that these actions are linked to the interplay of contradictory tendencies in the microfoundations of financialization. Under conditions of financialization, firms create additional sources of credit to capitalize their productive activities by driving their stock price into greater increases than the market average, thereby generating capital gains. Yet, the more it becomes public knowledge that the financing tricks used to inflate the stock price provide no productive benefit to the firm, the more it would seem to create incentives for fund managers to hold portfolios that replicate the stock market as a whole. In this way, they will minimize their exposure to financial misrepresentation. Such a stance undermines financialized business models, but it does in any case conform to fund managers’ basic theoretical training, which revolves around the logical demonstration that an individual stock cannot systematically out-perform the market average. I review the available empirical studies of fund manager decision-making to show that they find against the existence of a simple performativity loop operating between finance theory and fund manager behaviour. However, on many points the empirical evidence does confirm the theoretically derived conclusion concerning the potentially contradictory microfoundations of financialization. Fund managers often do act in a way which is consistent with finance theory's core claim that an index-tracking strategy represents the only equilibrium portfolio, even if this is only rarely as a result of the direct performativity of the theory.     

Currency convertibility, cost of capital control and capital account liberalization in China

This paper provides a synthetic view of the capital account liberalization, capital control and currency convertibility issues in China. A quantitative analysis following Henry’s study¹ fails to provide clear links between liberalization, diminishing capital controls and Chinese stock market returns. An institutional explanation is then offered to complement the quantitative analysis. We suggest that the property rights regime is an indispensable institutional variable when studying this topic. Originating from the current property rights regime; price distortion, moral hazard and monetary overhang are the main impediments towards capital account liberalization and full convertibility. Therefore, property rights reform should be given the first priority in Chinese economic reform. He is the author ofProperty Rights, Renminbi Full Convertibility and Economic Development [Chanquan Zhidu, Renminbi Ziyou Duihuan yu Jingji Fazhan] (Wuhan, China: Wuhan University Press, 2003). This research is supported by National Natural Science Foundation of China (Project No. 70273030). The authors thank Dr. Sujian Guo, Mr. Robin Child and two anonymous referees for their helpful comments and Miss Cate Bain and Mrs. Patricia Merton for their proofreading. The authors are responsible for any remaining errors.     

Stock prices,inflation, and output in India: An empirical analysis

This study focusses on the negative relationship between inflation and stock returns (the puzzle of fisher hypothesis). Fama hypothesis examined the relationship between macroeconomic variable and stock return and found the strong relationship between the real output and stock prices. This study revisits Fama's hypothesis from the period 1990M1 to 2016M6 for emerging country perspective. The results documented that there is a significant negative relationship between inflation and output whereas positive between stock price and output.     

What stock market returns to expect for the future?

In evaluating proposals for reforming Social Security that involve stock investments, the Office of the Chief Actuary (OCACT) has generally used a 7.0 percent real return for stocks. The 1994-96 Advisory Council specified that OCACT should use that return in making its 75-year projections of investment-based reform proposals. The assumed ultimate real return on Treasury bonds of 3.0 percent implies a long-run equity premium of 4.0 percent. There are two equity-premium concepts: the realized equity premium, which is measured by the actual rates of return; and the required equity premium, which investors expect to receive for being willing to hold available stocks and bonds. Over the past two centuries, the realized premium was 3.5 percent on average, but 5.2 percent for 1926 to 1998. Some critics argue that the 7.0 percent projected stock returns are too high. They base their arguments on recent developments in the capital market, the current high value of the stock market, and the expectation of slower economic growth. Increased use of mutual funds and the decline in their costs suggest a lower required premium, as does the rising fraction of the American public investing in stocks. The size of the decrease is limited, however, because the largest cost savings do not apply to the very wealthy and to large institutional investors, who hold a much larger share of the stock market's total value than do new investors. These trends suggest a lower equity premium for projections than the 5.2 percent of the past 75 years. Also, a declining required premium is likely to imply a temporary increase in the realized premium because a rising willingness to hold stocks tends to increase their price. Therefore, it would be a mistake during a transition period to extrapolate what may be a temporarily high realized return. In the standard (Solow) economic growth model, an assumption of slower long-run growth lowers the marginal product of capital if the savings rate is constant. But lower savings as growth slows should partially or fully offset that effect. The present high stock prices, together with projected slow economic growth, are not consistent with a 7.0 percent return. With a plausible level of adjusted dividends (dividends plus net share repurchases), the ratio of stock value to gross domestic product (GDP) would rise more than 20-fold over 75 years. Similarly, the steady-state Gordon formula--that stock returns equal the adjusted dividend yield plus the growth rate of stock prices (equal to that of GDP)--suggests a return of roughly 4.0 percent to 4.5 percent. Moreover, when relative stock values have been high, returns over the following decade have tended to be low. To eliminate the inconsistency posed by the assumed 7.0 percent return, one could assume higher GDP growth, a lower long-run stock return, or a lower short-run stock return with a 7.0 percent return on a lower base thereafter. For example, with an adjusted dividend yield of 2.5 percent to 3.0 percent, the market would have to decline about 35 percent to 45 percent in real terms over the next decade to reach steady state. In short, either the stock market is overvalued and requires a correction to justify a 7.0 percent return thereafter, or it is correctly valued and the long-run return is substantially lower than 7.0 percent (or some combination). This article argues that the "overvalued" view is more convincing, since the "correctly valued" hypothesis implies an implausibly small equity premium. Although OCACT could adopt a lower rate for the entire 75-year period, a better approach would be to assume lower returns over the next decade and a 7.0 percent return thereafter.     

民间私募证券投资基金运营中的涉罪问题研究

对于民间私募证券投资基金运作中的危害行为,刑法既要积极干预又要慎重适度。民间私募证券投资基金募集中可能构成的罪名有:非法吸收公众存款罪,集资诈骗罪,组织、领导传销活动罪,擅自设立金融机构罪,伪造、变造、转让金融机构经营许可证、批准文件罪,非法经营罪,虚假广告罪,擅自发行股票、公司企业债券罪,欺诈发行股票、债券罪,虚报注册资本罪,虚假出资、抽逃出资罪;民间私募证券投资基金运作中可能构成的罪名有:内幕交易、泄露内幕信息罪,利用未公开信息交易罪,操纵证券、期货市场罪,编造并传播证券、期货交易虚假信息罪,违规披露、不披露重要信息罪,隐匿、故意销毁会计凭证、会计账簿、财务会计报告罪;民间私募证券投资基金清算中可能构成的罪名是妨害清算罪。     

Interest group activity and long-run stock market performance

This paper provides evidence that interest group activity is negatively related to aggregate stock market performance. In particular, the findings imply that a one percent increase in the number of interest groups in a country is associated with a reduction in average annual stock market returns of roughly 2–5%, and a reduction in the volatility of annual stock returns of roughly 6–14%. In addition, the findings indicate that many of the same fundamentals that drive economic growth also explain stock market performance.     

Discounting the benefits and costs of environmental regulations

This paper develops a two-stage procedure for discounting the benefits and costs of environmental regulations that is a variant of the shadow price of capital approach. Under this approach, the capital costs imposed by a regulation are annualized using the marginal rate of return on capital and then both benefits and costs are discounted using the social rate of time preference. This approach yields results that differ significantly from those of conventional discounting when benefits occur with a substantial lag or when benefits are long term.     

Partisan politics and stock market performance: The effect of expected government partisanship on stock returns in the 2002 German federal election

Rational partisan theory suggests that firms perform better under right- than left-leaning governments. In the pre-election time, investors should anticipate these effects of government partisanship. This is the first study to investigate such anticipated partisan effects in Germany. Applying conditional volatility models we analyze the impact of expected government partisanship on stock market performance in the 2002 German federal election. Our results show that small-firm stock returns were positively (negatively) linked to the probability of a right- (left-) leaning coalition winning the election. Moreover, we find that volatility increased as the electoral prospects of right-leaning parties improved, while greater electoral uncertainty had a volatility-reducing effect.     

Capital mobility,perspectives and central bank independence: Exchange rate policy since 1945

Hegemonic stability theory has been the traditional explanation in International Political Economy for the trend from fixed to floating exchange rates which was brought about by the collapse of Bretton Woods. This approach is found to be problematic. A more powerful explanation is the postwar rise in capital mobility, which produces a trade-off between exchange rate stability and policy autonomy. Preferences for these two policies have been a function of perspectives on economic policy and the degree of central bank independence. Independent central banks prefer domestic policy autonomy to exchange rate management, as they have no socio-political incentives to produce competitive, stable exchange rates. Their interests are predominantly in achieving low domestic inflation. In addition, current perspectives hold that the best way of securing international exchange rate stability is to pursue stable macroeconomic policies at home, resulting in the predominance of floating exchange rate policies. This trend will continue into the near future despite opportunities for international cooperation presented by the rationalization of world monetary politics into a G3 following the introduction of the euro. This may have adverse effects on the global economy for three reasons. First, there is a long-term danger that triad regionalization will result in a revival of neo-mercantilist policies, in which the exchange rate could play a part. Second, a high proportion of world trade and finance will be denominated in dollars and euros, rendering the stability of the dollar/euro exchange rate a global public good. Third, dollar/euro exchange rate misalignments which harm either the U.S. or EMU will be harmful to the global economy because of the high percentage of world GDP accounted for by these two areas.     

Capital Budgeting and Management Practices: Smoothing Out Rough Spots in Government Outlays

Public capital budgeting and management literature recommends long‐term capital and fiscal planning practices to prevent large fluctuations in outlays caused by fiscal stresses. This study extends the literature by examining the effects of long‐term capital planning and management practices such as the use of a capital budget, separate impact analyses, and the use of bond financing and dedicated revenue sources on capital spending volatility. The empirical results confirm that several of these practices smooth out state government capital outlays that vary because of socio‐economic and financial factors.     

Culture,equality and polemic

Abstract

The Black-Scholes-Merton formula has been put to widespread use by options traders because it provides a means of calculating the theoretically ‘correct’ price of stock options. Traders can therefore see whether the market price of stock options undervalues or overvalues them compared with their hypothetical Black-Scholes-Merton price, before choosing to buy or sell options accordingly. As a consequence of this close relationship between options pricing theory and options pricing practice, a strong performativity loop was activated, whereby market prices quickly converged on the hypothetical Black-Scholes-Merton prices following the dissemination of the formula. The theory has therefore had significant real-world effects, but how should we characterize the initial instinct to derive the theory from a philosophy of science perspective? The two books under review suggest that a Kuhnian reading of the advancement of scientific knowledge might well be the most appropriate. But, on closer inspection, it becomes clear that the publication of the Black-Scholes-Merton formula should not be seen as a Kuhnian moment with paradigm-shaping attributes. It is shown that, at most, the formula acts as an important exemplar which, via its use in the training of options pricing theorists and options pricing practitioners, reinforces the entrenchment of finance theory within the orthodox economics worldview.