Exchange rate forecasters’ performance: evidence of skill?

This paper sheds new light on a long-standing puzzle in the international finance literature, namely, that exchange rate expectations appear inaccurate and even irrational. We find for a comprehensive dataset that individual forecasters’ performance is skill-based. ‘Superior’ forecasters show consistent ability as their forecasting success holds across currencies. They seem to possess knowledge on the role of fundamentals in explaining exchange rate behavior, as indicated by better interest rate forecasts. Superior forecasters are more experienced than the median forecaster and have fewer personnel responsibilities. Accordingly, foreign exchange markets may function in less puzzling and irrational ways than is often thought.

The regional electricity generation mix in Scotland: A portfolio selection approach

Standalone levelised cost assessments of electricity supply options miss an important contribution that renewable and non-fossil fuel technologies can make to the electricity portfolio: that of reducing the variability of electricity costs, and their potentially damaging impact upon economic activity. Portfolio theory applications to the electricity generation mix have shown that renewable technologies, their costs being largely uncorrelated with non-renewable technologies, can offer such benefits. We look at the existing Scottish generation mix and examine drivers of changes out to 2020. We assess recent scenarios for the Scottish generation mix in 2020 against mean-variance efficient portfolios of electricity-generating technologies. Each of the scenarios studied implies a portfolio cost of electricity that is between 22% and 38% higher than the portfolio cost of electricity in 2007. These scenarios prove to be “inefficient” in the sense that, for example, lower variance portfolios can be obtained without increasing portfolio costs, typically by expanding the share of renewables. As part of extensive sensitivity analysis, we find that Wave and Tidal technologies can contribute to lower risk electricity portfolios, while not increasing portfolio cost.

Development of tools to measure and explain changes in health inequalities in Scotland and benchmark performance

This project will develop a modelling framework to explain changes in income-related health inequalities and benchmark the performance of Scotland in tackling income-related health inequalities, both over time and relative to that of England and Wales.

Nominal Stability and Financial Globalization

Over the past four decades, advanced economies experienced a large growth in gross external portfolio positions. This phenomenon has been described as Financial Globalization. Over roughly the same time frame, most of these countries also saw a substantial fall in the level and variability of inflation. Many economists have conjectured that financial globalization contributed to the improved performance in the level and predictability of inflation. In this paper, we explore the causal link running in the opposite direction. We show that a monetary policy rule which reduces inflation variability leads to an increase in the size of gross external positions, both in equity and bond portfolios. This appears to be a robust prediction of open economy macro models with endogenous portfolio choice. It holds across different modeling specifications and parameterizations. We also present preliminary empirical evidence which shows a negative relationship between inflation volatility and the size of gross external positions.

The Impact of Information Provision on Agglomeration Bonus Performance: An Experimental Study on Local Networks

The Agglomeration Bonus (AB) is a mechanism to induce adjacent landowners to spatially coordinate their land use for the delivery of ecosystem services from farmland. This paper uses laboratory experiments to explore the performance of the AB in achieving the socially optimal land management configuration in a local network environment where the information available to subjects varies. The AB poses a coordination problem between two Nash equilibria: a Pareto dominant and a risk dominant equilibrium. The experiments indicate that if subjects are informed about both their direct and indirect neighbors’ actions, they are more likely to coordinate on the Pareto dominant equilibrium relative to the case where subjects have information about their direct neighbors’ action only. However, the extra information can only delay – and not prevent – the transition to the socially inferior risk dominant Nash equilibrium. In the long run, the AB mechanism may only be partially effective in enhancing delivery of ecosystem services on farming landscapes featuring local networks.

Modeling Dependence Structure and Forecasting Portfolio Value-at-Risk with Dynamic Copulas

We study the asymmetric and dynamic dependence between financial assets and demonstrate, from the perspective of risk management, the economic significance of dynamic copula models. First, we construct stock and currency portfolios sorted on different characteristics (ex ante beta, coskewness, cokurtosis and order flows), and find substantial evidence of dynamic evolution between the high beta (respectively, coskewness, cokurtosis and order flow) portfolios and the low beta (coskewness, cokurtosis and order flow) portfolios. Second, using three different dependence measures, we show the presence of asymmetric dependence between these characteristic-sorted portfolios. Third, we use a dynamic copula framework based on Creal et al. (2013) and Patton (2012) to forecast the portfolio Value-at-Risk of long-short (high minus low) equity and FX portfolios. We use several widely used univariate and multivariate VaR models for the purpose of comparison. Backtesting our methodology, we find that the asymmetric dynamic copula models provide more accurate forecasts, in general, and, in particular, perform much better during the recent financial crises, indicating the economic significance of incorporating dynamic and asymmetric dependence in risk management.