Short-horizon excess returns and exchange rate and interest rate effects

stocks. We examine the effects of foreign exchange (FX) and interest rate changes on the excess returns of U.S. stocks, for short-horizons of 1-40 days. Our new evidence shows a tendency for the volatility of both excess returns and FX rate changes to be negatively related with FX rate and interest rate effects. Both the number of firms with significant FX rate and interest rate effects and the magnitude of their exposures increase with the length of the return horizon. Our finding seems inconsistent with the view that firms hedge effectively at short-return horizons.

The sensitivity of US banks' stock returns to interest and exchange rate changes

Purpose – The purpose of this paper is to investigate the impact of foreign exchange and interest rate changes on US banks’ stock returns. Design/methodology/approach – The approach employs an EGARCH model to account for the ARCH effects in daily returns. Most prior studies have used standard OLS estimation methods with the result that the presence of ARCH effects would have affected estimation efficiency. For comparative purposes, the standard OLS estimation method is also used to measure sensitivity. Findings – The findings are as follows: under the conditional t-distributional assumption, the EGARCH model generated a much better fit to the data although the goodness-of-fit of the model is not entirely satisfactory; the market index return accounts for most of the variation in stock returns at both the individual bank and portfolio levels; and the degree of sensitivity of the stock returns to interest rate and FX rate changes is not very pronounced despite the use of high frequency data. Earlier results had indicated that daily data provided greater evidence of exposure sensitivity. Practical implications – Assuming that banks do not hedge perfectly, these findings have important financial implications as they suggest that the hedging policies of the banks are not reflected in their stock prices. Alternatively, it is possible that different GARCH-type models might be more appropriate when modelling high frequency returns. Originality/value – The paper contributes to existing knowledge in the area by showing that ARCH effects do impact on measures of sensitivity.

Predicting returns in U.S. financial sector indices

This study focuses on: (i) the responsiveness of the U.S. financial sector stock indices to foreign exchange (FX) and interest rate changes; and, (ii) the extent to which good model specification can enhance the forecasts from the associated models. Three models are considered. Only the error-correction model (ECM) generated efficient and consistent coefficient estimates. Furthermore, a simple zero lag model in differences which is clearly mis-specified, generated forecasts that are better than those of the ECM, even if the ECM depicts relationships that are more consistent with economic theory. In brief, FX and interest rate changes do not impact on the return-generating process of the stock indices in any substantial way. Most of the variation in the sector stock indices is associated with past variation in the indices themselves and variation in the market-wide stock index. These results have important implications for financial and economic policies.

Volatility transmission between stock and bond markets

A two-factor no-arbitrage model is used to provide a theoretical link between stock and bond market volatility. While this model suggests that short-term interest rate volatility may, at least in part, drive both stock and bond market volatility, the empirical evidence suggests that past bond market volatility affects both markets and feeds back into short-term yield volatility. The empirical modelling goes on to examine the (time-varying) correlation structure between volatility in the stock and bond markets and finds that the sign of this correlation has reversed over the last 20 years. This has important implications far portfolio selection in financial markets. © 2005 Elsevier B.V. All rights reserved.

A two-factor model of the U.K. yield curve

I model the forward premium in the U.K. gilt-edged market over the period 1982–96 using a two-factor general equilibrium model of the term structure of interest rates. The model permits the decomposition of the forward premium into separate components representing interest rate expectations, the risk premia associated with each of the underlying factors, and terms capturing the direct impact of the variances of the factors on the shape of the forward curve.

Econometrics of yield spreads in the money market:a note

The literature on bond markets and interest rates has focused largely on the term structure of interest rates, specifically, on the so-called expectations hypothesis. At the same time, little is known about the nature of the spread of the interest rates in the money market beyond the fact that such spreads are generally unstable. However, with the evolution of complex financial instruments, it has become imperative to identify the time series process that can help one accurately forecast such spreads into the future. This article explores the nature of the time series process underlying the spread between three-month and one-year US rates, and concludes that the movements in this spread over time is best captured by a GARCH(1,1) process. It also suggests the use of a relatively long term measure of interest rate volatility as an explanatory variable. This exercise has gained added importance in view of the revelation that GARCH based estimates of option prices consistently outperform the corresponding estimates based on the stylized Black-Scholes algorithm.

Accommodating energy price volatility in life cycle cost analysis of asphalt pavements

Energy price is related to more than half of the total life cycle cost of asphalt pavements. Furthermore, the fluctuation related to price of energy has been much higher than the general inflation and interest rate. This makes the energy price inflation an important variable that should be addressed when performing life cycle cost (LCC) studies re- garding asphalt pavements. The present value of future costs is highly sensitive to the selected discount rate. Therefore, the choice of the discount rate is the most critical element in LCC analysis during the life time of a project. The objective of the paper is to present a discount rate for asphalt pavement projects as a function of interest rate, general inflation and energy price inflation. The discount rate is defined based on the portion of the energy related costs during the life time of the pavement. Consequently, it can reflect the financial risks related to the energy price in asphalt pavement projects. It is suggested that a discount rate sensitivity analysis for asphalt pavements in Sweden should range between –20 and 30%.

Exchange rate forecasting using a combined parametric and nonparametric self-organising modelling approach

Financial prediction has attracted a lot of interest due to the financial implications that the accurate prediction of financial markets can have. A variety of data driven modellingapproaches have been applied but their performance has produced mixed results. In this study we apply both parametric (neural networks with active neurons) and nonparametric (analog complexing) self-organisingmodelling methods for the daily prediction of the exchangerate market. We also propose acombinedapproach where the parametric and nonparametricself-organising methods are combined sequentially, exploiting the advantages of the individual methods with the aim of improving their performance. The combined method is found to produce promising results and to outperform the individual methods when tested with two exchangerates: the American Dollar and the Deutche Mark against the British Pound.

Steric stabilization and dissolution characteristics of aqueous suspensions of pharmaceutical interest

The adsorption of two qroups of nonionic surface active agents and a series of hiqh molecular weiqht hydrophilic polymer fractions onto a polystyrene latex and a drug substance diloxanide furoate B.P. has been investigated. The presence of pores within the drug surface has been demonstrated and this is shown to increase the adsorption of low molecular weight polymer species. Differences in the maximum amount of polymer adsorbed at both solid-solution interfaces have been ascribed to the different hydrophobicities of the surface as determined by contact angle measurements. Adsorbed layer thicknesses of polymer on polystyrene latex have been determined by three techniques: microelectrophoresis, intensity fluctuation spectroscopy and by viscometric means. These results, in combination with adsorption data, were used to interpret the configuration of the adsorbed polymer molecules at the interface. The type of druq suspension produced on adsorbing the different polymers in the absence of electrostatic stabilization was correlated with theoretical prediuctions of suspension characteristics deduced from potential energy diagrams, The agreement was good for the adsorption of short chain length surfactants, but for the polyvinylalcohols, discrepancies were found between experiment and theory. This was attributed to the inappropriate use of a mean segment density approximation within the adsorbed layer to calculate attractive potentials between particles. A maximum in the redispersibility values for suspensions coated with adsorbed nonylphenylethoxylates was attributed to "partial static stabilization" of the particles in conjunction with the attractive forces operating in the sediment between bare surface patches on neighbouring particles. No significant change in the dissolution of the drug was observed when nonylphenylethoxylates were adsorbed due to desorption upon contact with the dissolution medium. Pluronic F68 and all the polyvinylalcohol fractions caused a reduction in the dissolution rate which is explained by the decreased diffusion of drug' through the adsorbed polymer layer.

Patterning effects in WDM RZ-DBPSK SMF/DCF optical transmission at 40 Gbit/s channel rate

Summary form only given. In this paper an important new example of a system with strong and nontrivial patterning effects is presented. There has been much interest lately in the implementation of the differential phase shift-keying (PSK) modulation format for long-haul and ultra long-haul fibre communications and, in particular, the differential binary PSK (DBPSK) modulation format, where data is encoded into the optical phase. The results of a direct computation of the error statistics for an SMF/DCF RZ-DBPSK 5-channel WDM RZ-DBPSK link with hybrid Raman/EDFA amplification at 40 Gbit/s per channel, with a channel separation of 100 GHz are presented. The statistics of bit triplets and quantify strong pattern-dependent ISI are obtained.

PSD modifications of FHRV due to interpolation and CTG storage rate

Cardiotocographic data provide physicians information about foetal development and permit to assess conditions such as foetal distress. An incorrect evaluation of the foetal status can be of course very dangerous. To improve interpretation of cardiotocographic recordings, great interest has been dedicated to foetal heart rate variability spectral analysis. It is worth reminding, however, that foetal heart rate is intrinsically an uneven series, so in order to produce an evenly sampled series a zero-order, linear or cubic spline interpolation can be employed. This is not suitable for frequency analyses because interpolation introduces alterations in the foetal heart rate power spectrum. In particular, interpolation process can produce alterations of the power spectral density that, for example, affects the estimation of the sympatho-vagal balance (computed as low-frequency/high-frequency ratio), which represents an important clinical parameter. In order to estimate the frequency spectrum alterations of the foetal heart rate variability signal due to interpolation and cardiotocographic storage rates, in this work, we simulated uneven foetal heart rate series with set characteristics, their evenly spaced versions (with different orders of interpolation and storage rates) and computed the sympatho-vagal balance values by power spectral density. For power spectral density estimation, we chose the Lomb method, as suggested by other authors to study the uneven heart rate series in adults. Summarising, the obtained results show that the evaluation of SVB values on the evenly spaced FHR series provides its overestimation due to the interpolation process and to the storage rate. However, cubic spline interpolation produces more robust and accurate results. © 2010 Elsevier Ltd. All rights reserved.

PSD modifications of FHRV due to CTG storage rate

Cardiotocographic data provide physicians information about foetal development and, through assessment of specific parameters (like accelerations, uterine contractions, ...), permit to assess conditions such as foetal distress. An incorrect evaluation of foetal status can be of course very dangerous. In the last decades, to improve interpretation of cardiotocographic recordings, great interest has been dedicated to FHRV spectral analysis. It is worth reminding that FHR is intrinsically an uneven series and that to obtain evenly sampled series, many commercial cardiotocographs use a zero-order interpolation (storage rate of CTG data equal to 4 Hz). This is not suitable for frequency analyses because interpolation introduces alterations in the FHR power spectrum. In particular, this interpolation process can produce artifacts and an attenuation of the high-frequency components of the PSD that, for example, affects the estimation of the sympatho-vagal balance (SVB - computed as low-frequency/high-frequency ratio), which represents an important clinical parameter. In order to estimate the frequency spectrum alterations due to zero-order interpolation and other CTG storage rates, in this work, we simulated uneven FHR series with set characteristics, their evenly spaced versions (with different storage rates) and computed SVB values by PSD. For PSD estimation, we chose the Lomb method, as suggested by other authors in application to uneven HR series. ©2009 IEEE.