Under rational expectations and risk neutrality the linear projection of exchange rate change on the forward premium has a unit coefficient. However, empirical estimates of this coefficient are significantly less than one and often negative. We investigate whether replacing rational expectations by discounted least squares (or “perpetual”) learning can explain the result. We calculate the asymp...

This paper applies an established bid-ask spread decomposition model to short-term interest rate (STIR) futures to assess the impact of both the migration from floor to electronic trading and European Monetary Union (EMU). Additionally, the paper presents and tests a modified decomposition model which is specifically adapted to the features of order-driven markets. The latter model provides muc...

Sharp exchange rate depreciations in the East Asian crisis countries (Indonesia, Korea, and Thailand) raised doubts about the efficacy of increasing interest rates to defend the currency. Using a standard monetary model of exchange rate determination, this paper shows that tighter monetary policy was in fact associated with an appreciation of the exchange rate in these countries and during the ...

We extend the Pukthuanthong and Roll (2009) measure of integration to provide an estimate of systemic risk within international equity markets. Our measure indicates an increasing likelihood of market crashes. The conditional probability of market crashes increases substantially following increases of our risk measure. High levels of our risk measure indicate the probability of a global crash i...

This paper presents a new measure of international gross capital flows and applies it to a global panel from 1970 to 2004. We explain why paying attention to the gross flows underlying net capital flows may be important and how our gross flow measure differs from the standard measure in the literature. For example, while by the standard measure a capital inflow decline more than fully explains ...

The objective of this paper is to situate the MENA area within the emerging markets universe. We first discuss the various components of market emergence and generate four bootstrapped indexes reflecting market size, market activity, market pricing and transparency. We then draw inter-regional and country-level comparisons using a probit model and a hierarchical cluster analysis. Our results su...

Although dealership government and equity securities have, on the surface, similar market structures, the author demonstrates that some subtle differences exist between them that are likely to significantly affect the way market-makers trade, and as such have an impact on the liquidity that they provide. The author reviews some of the concepts recently introduced in the literature, examining mu...

This paper investigates how financial weakness among Japanese banks in the second half of the 1990s was reflected in pricing in the financial markets. Two indicators, the Japan premium (JP) and the stock price spread (SP)}deviation between the bank stock index (BINDEX) and stock price index excluding banks (NINDEX)}were examined. The structural change occurring in the relationship between BINDE...

The paper analyzes the interactions between the precision of information, trade and welfare within a decision framework of an exporting firm. Information in a financial market is described in terms of a publicly observable signal. With higher transparency, the signal conveys more precise information about the random foreign exchange rate. More precise information about exchange rate changes has...