International order flows: Explaining equity and exchange rate returns

Macroeconomic models of equity and exchange rate returns perform poorly at high frequencies. The proportion of daily returns that these models explain is essentially zero. Instead of relying on macroeconomic determinants, we model equity price and exchange rate behavior based on a concept from microstructure – order flow. The international order flows are derived from belief changes of different investor groups in a two-country setting. We obtain a structural relationship between equity returns, exchange rate returns and their relationship to home and foreign equity market order flow. To test the model we construct daily aggregate order flow data from 800 million equity trades in the U.S. and France from 1999 to 2003. Almost 60% of the daily returns in the S&P100 index are explained jointly by exchange rate returns and aggregate order flows in both markets. As predicted by the model, daily exchange rate returns and order flow into the French market have significant incremental explanatory power for the daily S&P returns. The model implications are also validated for intraday returns.

Do benchmark African equity indices exhibit the stylized facts?

This paper investigates if benchmark African equity indices exhibit the stylized facts reported for financial time-series returns. The returns distributions of the Africa All-Share, Large, Medium and Small Company Indices were found to be leptokurtotic, had fat-tails, over time experienced volatility clustering and exhibited long memory in volatility. Both the All-Share and Large Company Indices were found to exhibit leverage effects. In contrast, positive shocks had a greater impact on future volatility for the Small Company Index which implies a reverse leverage effect. This finding could reflect a bull/bubble market for small capitalisation stocks in Africa.

Evolutionary agglomeration theory: increasing returns, diminishing returns, and the industry life cycle

According to Marshall’s agglomeration theory, Krugman’s New Economic Geography models, and Porter’s cluster policies, firms should receive increasing returns from a trinity of agglomeration economies: a local pool of skilled labour, local supplier linkages, and local knowledge spillovers. Recent evolutionary theories suggest that whether agglomeration economies generate increasing returns or diminishing returns depends on time, and especially the evolution of the industry life cycle. At the start of the twenty-first century, we re-examine Marshall’s trinity of agglomeration economies in the city-region where he discovered them. The econometric results from our multivariate regression models are the polar opposite of Marshall’s. During the later stages of the industry life cycle, Marshall’s agglomeration economies decrease the economic performance of firms and create widespread diminishing returns for the economic development of the city-region, which has evolved to become one of the poorest city-regions in Europe.