Evaluating the Bank of England density forecasts of inflation

We consider evaluating the UK Monetary Policy Committee's inflation density forecasts using probability integral transform goodness-of-fit tests. These tests evaluate the whole forecast density. We also consider whether the probabilities assigned to inflation being in certain ranges are well calibrated, where the ranges are chosen to be those of particular relevance to the MPC, given its remit of maintaining inflation rates in a band around per annum. Finally, we discuss the decision-based approach to forecast evaluation in relation to the MPC forecasts

Quantile forecasts of daily exchange rate returns from forecasts of realized volatility

Quantile forecasts are central to risk management decisions because of the widespread use of Value-at-Risk. A quantile forecast is the product of two factors: the model used to forecast volatility, and the method of computing quantiles from the volatility forecasts. In this paper we calculate and evaluate quantile forecasts of the daily exchange rate returns of five currencies. The forecasting models that have been used in recent analyses of the predictability of daily realized volatility permit a comparison of the predictive power of different measures of intraday variation and intraday returns in forecasting exchange rate variability. The methods of computing quantile forecasts include making distributional assumptions for future daily returns as well as using the empirical distribution of predicted standardized returns with both rolling and recursive samples. Our main findings are that the Heterogenous Autoregressive model provides more accurate volatility and quantile forecasts for currencies which experience shifts in volatility, such as the Canadian dollar, and that the use of the empirical distribution to calculate quantiles can improve forecasts when there are shifts

Identification of forged Bank of England £20 banknotes using IR spectroscopy

Bank of England notes of £20 denomination have been studied using infrared spectroscopy in order to generate a method to identify forged notes. An aim of this work was to develop a non-destructive method so that a small, compact Fourier transform infrared spectrometer (FT-IR) instrument could be used by bank workers, police departments or others such as shop assistants to identify forged notes in a non-lab setting. The ease of use of the instrument is the key to this method, as well as the relatively low cost. The presence of a peak at 1400 cm−1 arising from νasym () from the blank paper section of a forged note proved to be a successful indicator of the note’s illegality for the notes that we studied. Moreover, differences between the spectra of forged and genuine £20 notes were observed in the ν(OH) (ca. 3500 cm−1), ν(CH) (ca. 2900 cm−1) and ν(CO) (ca. 1750 cm−1) regions of the IR spectrum recorded for the polymer film covering the holographic strip. In cases where these simple tests fail, we have shown how an infrared microscope can be used to further differentiate genuine and forged banknotes by producing infrared maps of selected areas of the note contrasting inks with background paper.

Forecasting real estate returns using financial spreads

This paper examines the predictability of real estate asset returns using a number of time series techniques. A vector autoregressive model, which incorporates financial spreads, is able to improve upon the out of sample forecasting performance of univariate time series models at a short forecasting horizon. However, as the forecasting horizon increases, the explanatory power of such models is reduced, so that returns on real estate assets are best forecast using the long term mean of the series. In the case of indirect property returns, such short-term forecasts can be turned into a trading rule that can generate excess returns over a buy-and-hold strategy gross of transactions costs, although none of the trading rules developed could cover the associated transactions costs. It is therefore concluded that such forecastability is entirely consistent with stock market efficiency.

Linkages between property asset returns and interest rates: evidence for the UK

This paper considers the effect of short- and long-term interest rates, and interest rate spreads upon real estate index returns in the UK. Using Johansen's vector autoregressive framework, it is found that the real estate index cointegrates with the term spread, but not with the short or long rates themselves. Granger causality tests indicate that movements in short term interest rates and the spread cause movements in the returns series. However, decomposition of the forecast error variances from VAR models indicate that changes in these variables can only explain a small proportion of the overall variability of the returns, and that the effect has fully worked through after two months. The results suggest that these financial variables could potentially be used as leading indicators for real estate markets, with corresponding implications for return predictability.

The effect of phase-correlated returns and spatial smoothing on the accuracy of radar refractivity retrievals

Radar refractivity retrievals have the potential to accurately capture near-surface humidity fields from the phase change of ground clutter returns. In practice, phase changes are very noisy and the required smoothing will diminish large radial phase change gradients, leading to severe underestimates of large refractivity changes (ΔN). To mitigate this, the mean refractivity change over the field (ΔNfield) must be subtracted prior to smoothing. However, both observations and simulations indicate that highly correlated returns (e.g., when single targets straddle neighboring gates) result in underestimates of ΔNfield when pulse-pair processing is used. This may contribute to reported differences of up to 30 N units between surface observations and retrievals. This effect can be avoided if ΔNfield is estimated using a linear least squares fit to azimuthally averaged phase changes. Nevertheless, subsequent smoothing of the phase changes will still tend to diminish the all-important spatial perturbations in retrieved refractivity relative to ΔNfield; an iterative estimation approach may be required. The uncertainty in the target location within the range gate leads to additional phase noise proportional to ΔN, pulse length, and radar frequency. The use of short pulse lengths is recommended, not only to reduce this noise but to increase both the maximum detectable refractivity change and the number of suitable targets. Retrievals of refractivity fields must allow for large ΔN relative to an earlier reference field. This should be achievable for short pulses at S band, but phase noise due to target motion may prevent this at C band, while at X band even the retrieval of ΔN over shorter periods may at times be impossible.

Residential property loans and bank performance during property price booms: evidence from Europe

Understanding the performance of banks is of the utmost importance due to the impact the sector may have on economic growth and financial stability. Residential mortgage loans constitute a large proportion of the portfolio of many banks and are one of the key assets in the determination of their performance. Using a dynamic panel model, we analyse the impact of residential mortgage loans on bank profitability and risk, based on a sample of 555 banks in the European Union (EU-15), over the period from 1995 to 2008. We find that an increase in residential mortgage loans seems to improve bank’s performance in terms of both profitability and credit risk in good market, pre-financial crisis, conditions. These findings may aid in explaining why banks rush to lend to property during booms because of the positive effect it has on performance. The results also show that credit risk and profitability are lower during the upturn in the residential property cycle.

(Re)shaping the South Bank: the (post)politics of sustainable place-making

While the private sector has long been in the vanguard of shaping and managing urban environs, under the New Labour government business actors were also heralded as key agents in the delivery of sustainable places. Policy interventions, such as Business Improvement Districts (BIDs), saw business-led local partnerships positioned as key drivers in the production of economically, socially and environmentally sustainable urban communities. This research considers how one business-led body, South Bank Employer’s Group (SBEG), has inserted itself into, and influenced, local (re)development trajectories. Interview, observational and archival data are used to explore how, in a neighbourhood noted for its turbulent and conflictual development past, SBEG has led on a series of regeneration programmes that it asserts will create a “better South Bank for all”. A belief in consensual solutions underscored New Labour’s urban agenda and cast regeneration as a politically neutral process in which different stakeholders can reach mutually beneficial solutions (Southern, 2001). For authors such as Mouffe (2005), the search for consensus represents a move towards a ‘post-political’ approach to governing in which the (necessarily) antagonistic nature of the political is denied. The research utilises writings on the ‘post-political’ condition to frame an empirical exploration of regeneration at the neighbourhood level. It shows how SBEG has brokered a consensual vision of regeneration with the aim of overriding past disagreements about local development. While this may be seen as an attempt to enact what Honig (1993: 3) calls the ‘erasure of resistance from political orderings’ by assuming control of regeneration agendas (see also Baeten, 2009), the research shows that ‘resistances’ to SBEG’s activities continue to be expressed in a series of ways. These resistances suggest that, while increasingly ‘post-political’ in character, local place shaping continues to evidence what Massey (2005: 10) calls the ‘space of loose ends and missing links’ from which political activity can, at least potentially, emerge.

Speculative bubbles and the cross-sectional variation in stock returns

Evidence suggests that rational, periodically collapsing speculative bubbles may be pervasive in stock markets globally, but there is no research that considers them at the individual stock level. In this study we develop and test an empirical asset pricing model that allows for speculative bubbles to affect stock returns. We show that stocks incorporating larger bubbles yield higher returns. The bubble deviation, at the stock level as opposed to the industry or market level, is a priced source of risk that is separate from the standard market risk, size and value factors. We demonstrate that much of the common variation in stock returns that can be attributable to market risk is due to the co-movement of bubbles rather than being driven by fundamentals.

Liquidity effects and FFA returns in the international shipping derivatives market

The study examines the impact of liquidity risk on freight derivatives returns. The Amihud liquidity ratio and bid–ask spreads are utilized to assess the existence of liquidity risk in the freight derivatives market. Other macroeconomic variables are used to control for market risk. Results indicate that liquidity risk is priced and both liquidity measures have a significant role in determining freight derivatives returns. Consistent with expectations, both liquidity measures are found to have positive and significant effects on the returns of freight derivatives. The results have important implications for modeling freight derivatives, and consequently, for trading and risk management purposes.

House price dynamics and bank herding: European empirical evidence

This paper investigates the behavior of residential property and examines the linkages between house price dynamics and bank herding behavior. The analysis presents evidence that irrational behaviour may have played a significant role in several countries, including; United Kingdom, Spain, Denmark, Sweden and Ireland. In addition, we also provide evidence indicative of herding behaviour in the European residential mortgage loan market. Granger Causality tests indicate that non-fundamentally justified prices dynamics contributed to herding by lenders and that this behaviour was a response by the banks as a group to common information on residential property assets. In contrast, in Germany, Portugal and Austria, residential property prices were largely explained by fundamentals. Furthermore, these countries show no evidence of either irrational price bubbles or herd behaviour in the mortgage market. Granger Causality tests indicate that both variables are independent.

Bank integration and co-movements across housing markets

This paper investigates whether bank integration measured by cross-border bank flows can capture the co-movements across housing markets in developed countries by using a spatial dynamic panel model. The transmission can occur through a global banking channel in which global banks intermediate wholesale funding to local banks. Changes in financial conditions are passed across borders through the banks’ balance-sheet exposure to credit, currency, maturity, and funding risks resulting in house price spillovers. While controlling for country-level and global factors, we find significant co-movement across housing markets of countries with proportionally high bank integration. Bank integration can better capture house price co-movements than other measures of economic integration. Once we account for bank exposure, other spatial linkages traditionally used to account for return co-movements across region – such as trade, foreign direct investment, portfolio investment, geographic proximity, etc. – become insignificant. Moreover, we find that the co-movement across housing markets decreases for countries with less developed mortgage markets characterized by fixed mortgage rate contracts, low limits of loan-to-value ratios and no mortgage equity withdrawal.

The new localism, anti-political development machines, and the role of planning consultants: lessons from London's South Bank

This paper draws on a study of the politics of development planning in London’s South Bank to examine wider trends in the governance of contemporary cities. It assesses the impacts and outcomes of so-called new localist reforms and argues that we are witnessing two principal trends. First, governance processes are increasingly dominated by anti-democratic development machines, characterized by new assemblages of public- and private-sector experts. These machines reflect and reproduce a type of development politics in which there is a greater emphasis on a pragmatic realism and a politics of delivery. Second, the presence of these machines is having a significant impact on the politics of planning. Democratic engagement is not seen as the basis for new forms of localism and community control. Instead, it is presented as a potentially disruptive force that needs to be managed by a new breed of skilled private-sector consultant. The paper examines these wider shifts in urban politics before focusing on the connections between emerging development machines and local residential and business communities. It ends by highlighting some of the wider implications of change for democratic modes of engagement and nodes of resistance in urban politics.

Collusion in a Bertrand duopoly model with decreasing returns and product differentiation

We study cartel stability in a differentiated price-setting duopoly with returns to scale. We show that a cartel may be equally stable in the presence of lower differentiation, provided that the decreasing returns parameter is high. In addition we demonstrate that for a given factor of discount, there are technologies that can have decreasing returns to scale where the cartel always is stable independent of the differentiation degree.