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.

Solving exchange rate puzzles with neither sticky prices nor trade costs

We present a simple framework in which both the exchange rate disconnect and forward bias puzzles are simultaneously resolved. The flexible-price two-country monetary model is extended to include a consumption externality with habit persistence. Habitpersistence is modeled using Campbell Cochrane preferences with ‘deep’ habits along the lines of the work of Ravn, Schmitt-Grohe and Uribe. By deep habits, we mean habits defined over goods rather than countries. The model is simulated using the artificial economy methodology. It offers a neo-classical explanation of the Meese–Rogoff puzzle and mimics the failure of fundamentals to explain nominal exchange rates in a linear setting. Finally, the model naturally generates the negative slope in the standard forward market regression.

Purchasing power parity versus fixed exchange rate rules: A stability and welfare analysis

This paper evaluates the desirability of PPP rules vis-á-vis fixed exchange rates both in terms of welfare and stability properties. The analysis is conducted within a small open-economy New Keynesian framework extended to include a cost channel. In terms of stability, we find that while the equilibrium is always unique under fixed exchange rates its uniqueness critically depends upon the presence/absence of the cost channel under a PPP rule. Overall, then, in terms of welfare a fixed exchange rate always outperforms a PPP rule.

Order Flow and the Monetary Model of Exchange Rates: Evidence from a Novel Data Set

We propose an exchange rate model that is a hybrid of the conventional specification with monetary fundamentals and the Evans–Lyons microstructure approach. We estimate a model augmented with order flow variables, using a unique data set: almost 100 monthly observations on interdealer order flow on dollar/euro and dollar/yen. The augmented macroeconomic, or “hybrid,” model exhibits greater in-sample stability and out of sample forecasting improvement vis-à-vis the basic macroeconomic and random walk specifications.

Fixed versus Flexible: lessons from EMS order Flow

We extend the literature on regime-dependent volatility in two ways. First, our microstructural model provides a qualitatively new explanation. Second, we test implications of our model using Europe's recent shift to rigidly fixed rates (EMS to EMU). In the model, shocks to order flow induce more volatility under flexible rates because the elasticity of speculative demand is (endogenously) low, leading to pronounced portfolio-balance effects. New data on FF/DM transactions show that order flow had persistent effects on the exchange rate before EMU parities were announced. After announcement, the FF/DM rate was decoupled from order flow, as the model predicts.

Quantitative analysis of the reactivity of formate species seen by DRIFTS over a Au/Ce(La)O2 water–gas shift catalyst: First unambiguous evidence of the minority role of formates as reaction intermediates

The reactivity of the species formed at the surface of a Au/Ce(La)O2 catalyst during the water������¢���¯���¿���½���¯���¿���½gas shift (WGS) reaction were investigated by operando diffuse reflectance Fourier transform spectroscopy (DRIFTS) at the chemical steady state during isotopic transient kinetic analyses (SSITKA). The exchanges of the reaction product CO2 and of formate and carbonate surface species were followed during an isotopic exchange of the reactant CO using a DRIFTS cell as a single reactor. The DRIFTS cell was a modified commercial cell that yielded identical reaction rates to that measured over a quartz plug-flow reactor. The DRIFTS signal was used to quantify the relative oncentrations of the surface species and CO2. The analysis of the formate exchange curves between 428 and 493 K showed that at least two levels of reactivity were present. ������¢���¯���¿���½���¯���¿���½Slow formates������¢���¯���¿���½���¯���¿���½ displayed an exchange rate constant 10- to 20-fold slower than that of the reaction product CO2. ������¢���¯���¿���½���¯���¿���½Fast formates������¢���¯���¿���½���¯���¿���½ were exchanged on a time scale similar to that of CO2. Multiple nonreactive readsorption of CO2 took place, accounting for the kinetics of the exchange of CO2(g) and making it impossible to determine the number of active sites through the SSITKA technique. The concentration (in mol g������¢���¯���¿���½���¯���¿���½1) of formates on the catalyst was determined through a calibration curve and allowed calculation of the specific rate of formate decomposition. The rate of CO2 formation was more than an order of magnitude higher than the rate of decomposition of formates (slow + fast species), indicating that all of the formates detected by DRIFTS could not be the main reaction intermediates in the production of CO2. This work stresses the importance of full quantitative analyses (measuring both rate constants and adsorbate concentrations) when investigating the role of adsorbates as potential reaction intermediates, and illustrates how even reactive species seen by DRIFTS may be unimportant in the overall reaction scheme.

Quantitative DRIFTS investigation of possible reaction mechanisms for the water-gas shift reaction on high-activity Pt- and Au-based catalysts

The present work emphasizes the importance of including a full quantitative analysis when in situ operando methods are used to investigate reaction mechanisms and reaction intermediates. The fact that some surface species exchange at a similar rate to the reaction product during isotopic transients is a necessary but not sufficient criterion for participation as a key reaction intermediate. This is exemplified here in the case of highly active low-temperature water-gas shift (WGS) catalysts based on gold and platinum. Operando DRIFTS data, isotopic exchanges, and DRIFTS calibration curves relating the concentration of formate species to the corresponding DRIFTS band intensity were combined to obtain a quantitative measure of the specific rate of formate decomposition. Despite displaying a rapid isotopic exchange rate (sometimes as fast as that of the reaction product CO2), the concentration of formates seen by DRIFTS was found to account for at most only 10% of the CO2 produced under the experimental conditions reported herein. These new results obtained on Au/CeZrO4 and Pt/CeO2 preparations (which are among the most active low-temperature WGS catalysts reported to date), led to the same conclusions regarding the minor role of IR-observable formates as those obtained in the case of less active Au/Ce(La)O-2 and Pt/ZrO2 catalysts. (c) 2007 Elsevier Inc. All rights reserved.

On the Sources of Private Information in FX Markets

We investigate the source of information advantage in inter-dealer FX trading using data on trades and counterparty identities. In liquid dollar exchange rates, information is concentrated among dealers that trade most frequently and specialize their activity in a particular rate. In cross-rates, traders that engage in triangular arbitrage are best informed. Better-informed traders are also located on larger trading floors. In cross-rates, the ability to forecast flows explains all of the advantage of the triangular arbitrageurs. In liquid dollar rates, specialist traders can forecast both order flow and the component of exchange rate changes that is uncorrelated with flow.

Determining the Reaeration Coefficient and Hydrodynamic Properties of Rivers Using Inert Gas Tracers

Various contaminants which can be aerobically degraded find their way directly or indirectly into surface water bodies. The reaeration coefficient (K2) characterises the rate at which oxygen can transfer from the atmosphere across the air-water interface following oxygen depletion in a water body. Other mechanisms (like advection, dispersion and transient storage) determine how quickly the contaminants can spread in the water, affecting their spatial and temporal concentrations. Tracer methods involving injection of a gas into the water body have traditionally been used for direct (in-situ) measurement of K2 in a given reach. This paper shows how additional modelling of tracer test results can be used to quantify also hydrodynamic mechanisms (e.g. dispersion and storage exchange coefficients, etc.). Data from three tracer tests conducted in the River Lagan (Northern Ireland) using an inert gas (krypton, Kr) are re-analysed using two solute transport models (ADM, TSM) and an inverse-modelling framework (OTIS-P). Results for K2 are consistent with previously published values for this reach (K2(20)~10-40 d-1). The storage area constituted 30-60% of the main cross-section area and the storage exchange rate was between 2.5×10-3-3.2×10-3s-1. The additional hydrodynamic parameters obtained give insight into transport and dispersion mechanisms within the reach.

Why and how FDI stocks are a biased measure of MNE affiliate activity

Many international business (IB) studies have used foreign direct investment (FDI) stocks to measure the aggregate value-adding activity of multinational enterprises (MNE) affiliates in host countries. We argue that FDI stocks are a biased measure of that activity, because the degree to which they overestimate or underestimate affiliate activity varies systematically with host-country characteristics. First, most FDI into countries that serve as tax havens generate no actual productive activity; thus FDI stocks in such countries overestimate affiliate activity. Second, FDI stocks do not include locally raised external funds, funds widely used in countries with well-developed financial markets or volatile exchange rates, resulting in an underestimation of affiliate activity in such countries. Finally, the extent to which FDI translates into affiliate activity increases with affiliate labor productivity, so in countries where labor is more productive, FDI stocks also result in an underestimation of affiliate activity. We test these hypotheses by first regressing affiliate value-added and affiliate sales on FDI stocks to calculate a country-specific mismatch, and then by regressing this mismatch on a host country's tax haven status, level of financial market development, exchange rate volatility, and affiliate labor productivity. All hypotheses are supported, implying that FDI stocks are a biased measure of MNE affiliate activity, and hence that the results of FDI-data-based studies of such activity need to be reconsidered. [ABSTRACT FROM AUTHOR]

Evaluation of passive ventilation provision in domestic housing retrofit

Increasing energy efficiency in the residential sector, while maintaining adequate home ventilation for health and well-being, is proving to be a challenge. This study assesses the efficacy of passive ventilation strategies designed to comply with building regulations and imposed after housing energy-efficiency retrofits. In particular, it focuses on the provision of ventilation using background through-wall vents, which remains a common strategy in a number of European countries including Ireland and the UK, where vent sizes, related to floor area, are stipulated in building regulations. A collective of social housing, with background through-wall vents installed post thermal retrofit, is taken as a case study. These homes are modelled to interrogate the impact of the passive ventilation strategy on house air exchange rate and thermal heating energy loads. The reaction of occupants to through-wall vent installation is decidedly negative and many block vents to limit thermal discomfort and heat loss. Simulation studies show significant external air ingress through vents. A wide range of effective air change rates are observed when vents are sized without reference to building airtightness, and significant energy penalties result for the leakier homes. This study evaluates the provision of passive through-wall ventilation as part of a retrofit programme and shows it to have a number of drawbacks that may impact on the health of the building and its occupants and ultimately be at odds with the aims of achieving energy efficiency in the residential sector.