Volatile and persistent real exchange rates with or without sticky prices

The flexible-price two-country monetary model is extended to include a consumption externality with habit persistence. Two methodologies are employed to explore this model's ability to generate volatile and persistent exchange rates. In the first, actual data is used for the exogenous driving processes. In the second, the model is simulated using estimated forcing processes. The theory, in both cases, is capable of explaining the high volatility and persistence of real and nominal exchange rates as well as the high correlation between real and nominal rates. © 2007 Elsevier B.V. All rights reserved.

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.

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.

Less of a Puzzle: a new look at the forward forex market

The two-country monetary model is extended to include a consumption externality with habit persistence. The model is simulated using the artificial economy methodology. The 'puzzles' in the forward market are re-examined. The model is able to account for: (a) the low volatility of the forward discount; (b) the higher volatility of expected forward speculative profit; (c) the even higher volatility of the spot return; (d) the persistence in the forward discount; (e) the martingale behavior of spot exchange rates; and (f) the negative covariance between the expected spot return and expected forward speculative profit. It is unable to account for the forward market bias because the volatility of the expected spot return is too large relative to the volatility of the expected forward speculative profit.

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.

Genetic Algorithm Search for Predictive Patterns in Multidimensional Time Series

Based on an algorithm for pattern matching in character strings, we implement a pattern matching machine that searches for occurrences of patterns in multidimensional time series. Before the search process takes place, time series are encoded in user-designed alphabets. The patterns, on the other hand, are formulated as regular expressions that are composed of letters from these alphabets and operators. Furthermore, we develop a genetic algorithm to breed patterns that maximize a user-defined fitness function. In an application to financial data, we show that patterns bred to predict high exchange rates volatility in training samples retain statistically significant predictive power in validation samples.

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]

A conserved spider silk domain acts as a molecular switch that controls fibre assembly

A huge variety of proteins are able to form fibrillar structures(1), especially at high protein concentrations. Hence, it is surprising that spider silk proteins can be stored in a soluble form at high concentrations and transformed into extremely stable fibres on demand(2,3). Silk proteins are reminiscent of amphiphilic block copolymers containing stretches of polyalanine and glycine-rich polar elements forming a repetitive core flanked by highly conserved non-repetitive amino-terminal(4,5) and carboxy-terminal(6) domains. The N-terminal domain comprises a secretion signal, but further functions remain unassigned. The C-terminal domain was implicated in the control of solubility and fibre formation(7) initiated by changes in ionic composition(8,9) and mechanical stimuli known to align the repetitive sequence elements and promote beta-sheet formation(10-14). However, despite recent structural data(15), little is known about this remarkable behaviour in molecular detail. Here we present the solution structure of the C-terminal domain of a spider dragline silk protein and provide evidence that the structural state of this domain is essential for controlled switching between the storage and assembly forms of silk proteins. In addition, the C-terminal domain also has a role in the alignment of secondary structural features formed by the repetitive elements in the backbone of spider silk proteins, which is known to be important for the mechanical properties of the fibre.

Correlation between ΔAbs, ΔRGB (red) and stearic acid destruction rates using commercial self-cleaning glass as the photocatalyst

A resazurin (Rz) based photocatalyst indicator ink is used to test the activity of a commercial self-cleaning glass, using UV–vis spectroscopy and digital photography to monitor the photocatalyst-driven change in colour of the ink. UV–vis spectroscopy allows the change in film absorbance, ΔAbs, to be monitored as a function of irradiation time, whereas digital photography is used to monitor the concomitant change in the red component of the RGB values, i.e. ΔRGB (red). Initial work reveals the variation in ΔAbst and ΔRGB (red)t as a function of irradiation time, t, are linearly correlated. The rates of change of these parameters are also linearly correlated to the rates of oxidative destruction of stearic acid on self-cleaning glass under different irradiances. This work demonstrates that a measure of photocatalyst activity of self-cleaning glass, i.e. the time taken to change the colour of an Rz photocatalyst indicator ink, can be obtained using inexpensive digital photography, as alternative to more expensive lab-based techniques, such as UV–vis spectrophotometry.

Response consistency in young adolescents’ drug use self-reports: a recanting rate analysis.

Aims: To assess the reliability of drug use reports by young respondents, this study examined the extent of recanting previous drug use reports within an ongoing longitudinal survey of adolescent drug use. Here, recanting was defined as a positive report of life-time drug use that was subsequently denied 1 year later. The covariates of recanting were also studied. Design: An ongoing longitudinal survey of young adolescents (Belfast Youth Development Study) in Northern Ireland. Setting: Pencil and paper questionnaires were administered to pupils within participating schools. Measurements: Measures analysed included (a) recanting rates across 13 substances, (b) educational characteristics, (c) offending behaviour and (d) socioeconomic status. Findings: High levels of drug use recanting were identified, ranging from 7% of past alcohol use to 87% of past magic mushroom use. Recanting increased with the social stigma of the substance used. Denying past alcohol use was associated with being male, attending a catholic school, having positive attitudes towards school, having negative education expectations and not reporting any offending behaviour. Recanting alcohol intoxication was associated with being male and not reporting serious offending behaviour. Cannabis recanting was associated with having negative education expectations, receiving drugs education and not reporting serious offending behaviour. Conclusions: The high levels of recanting uncovered cast doubts on the reliability of drug use reports from young adolescents. Failure to address this response error may lead to biased prevalence estimates, particularly within school surveys and drug education evaluation trials.