Real exchange rate volatility, financial crises and nominal exchange regimes

This paper examines the sources of real exchange rate (RER) volatility in eighty countries around the world, during the period 1970 to 2011. Our main goal is to explore the role of nominal exchange rate regimes and financial crises in explaining the RER volatility. To that end, we employ two complementary procedures that consist in detecting structural breaks in the RER series and decomposing volatility into its permanent and transitory components. The results confirm that exchange rate volatility does increase with the global financial crises and detect the existence of an inverse relationship between the degree of flexibility in the exchange rate regime and RER volatility using a de facto exchange rate classification.

Modelling and testing volatility spillovers in oil and financial markets for USA, UK and China

The primary purpose of the paper is to analyze the conditional correlations, conditional covariances, and co-volatility spillovers between international crude oil and associated financial markets. The paper investigates co-volatility spillovers (namely, the delayed effect of a returns shock in one physical or financial asset on the subsequent volatility or co-volatility in another physical or financial asset) between the oil and financial markets. The oil industry has four major regions, namely North Sea, USA, Middle East, and South-East Asia. Associated with these regions are two major financial centers, namely UK and USA. For these reasons, the data to be used are the returns on alternative crude oil markets, returns on crude oil derivatives, specifically futures, and stock index returns in UK and USA. The paper will also analyze the Chinese financial markets, where the data are more recent. The empirical analysis will be based on the diagonal BEKK model, from which the conditional covariances will be used for testing co-volatility spillovers, and policy recommendations. Based on these results, dynamic hedging strategies will be suggested to analyze market fluctuations in crude oil prices and associated financial markets.

Testing co-volatility spillovers for natural gas spot, futures and ETF spot using dynamic conditional covariances

There is substantial empirical evidence that energy and financial markets are closely connected. As one of the most widely-used energy resources worldwide, natural gas has a large daily trading volume. In order to hedge the risk of natural gas spot markets, a large number of hedging strategies can be used, especially with the rapid development of natural gas derivatives markets. These hedging instruments include natural gas futures and options, as well as Exchange Traded Fund (ETF) prices that are related to natural gas stock prices. The volatility spillover effect is the delayed effect of a returns shock in one physical, biological or financial asset on the subsequent volatility or co-volatility of another physical, biological or financial asset. Investigating volatility spillovers within and across energy and financial markets is a crucial aspect of constructing optimal dynamic hedging strategies. The paper tests and calculates spillover effects among natural gas spot, futures and ETF markets using the multivariate conditional volatility diagonal BEKK model. The data used include natural gas spot and futures returns data from two major international natural gas derivatives markets, namely NYMEX (USA) and ICE (UK), as well as ETF data of natural gas companies from the stock markets in the USA and UK. The empirical results show that there are significant spillover effects in natural gas spot, futures and ETF markets for both USA and UK. Such a result suggests that both natural gas futures and ETF products within and beyond the country might be considered when constructing optimal dynamic hedging strategies for natural gas spot prices.

Volatility spillovers for spot, futures, and ETF prices in energy and agriculture

The agricultural and energy industries are closely related, both biologically and financially. The paper discusses the relationship and the interactions on price and volatility, with special focus on the covolatility spillover effects for these two industries. The interaction and covolatility spillovers or the delayed effect of a returns shock in one asset on the subsequent volatility or covolatility in another asset, between the energy and agricultural industries is the primary emphasis of the paper. Although there has already been significant research on biofuel and biofuel-related crops, much of the previous research has sought to find a relationship among commodity prices. Only a few published papers have been concerned with volatility spillovers. However, it must be emphasized that there have been numerous technical errors in the theoretical and empirical research, which needs to be corrected. The paper not only considers futures prices as a widely-used hedging instrument, but also takes an interesting new hedging instrument, ETF, into account. ETF is regarded as index futures when investors manage their portfolios, so it is possible to calculate an optimal dynamic hedging ratio. This is a very useful and interesting application for the estimation and testing of volatility spillovers. In the empirical analysis, multivariate conditional volatility diagonal BEKK models are estimated for comparing patterns of covolatility spillovers. The paper provides a new way of analyzing and describing the patterns of covolatility spillovers, which should be useful for the future empirical analysis of estimating and testing covolatility spillover effects.

Robust solutions to multi-objective linear programs with uncertain data

In this paper we examine multi-objective linear programming problems in the face of data uncertainty both in the objective function and the constraints. First, we derive a formula for the radius of robust feasibility guaranteeing constraint feasibility for all possible scenarios within a specified uncertainty set under affine data parametrization. We then present numerically tractable optimality conditions for minmax robust weakly efficient solutions, i.e., the weakly efficient solutions of the robust counterpart. We also consider highly robust weakly efficient solutions, i.e., robust feasible solutions which are weakly efficient for any possible instance of the objective matrix within a specified uncertainty set, providing lower bounds for the radius of highly robust efficiency guaranteeing the existence of this type of solutions under affine and rank-1 objective data uncertainty. Finally, we provide numerically tractable optimality conditions for highly robust weakly efficient solutions.

Forecasting Elections with High Volatility

This article uses data from the social survey Allbus 1998 to introduce a method of forecasting elections in a context of electoral volatility. The approach models the processes of change in electoral behaviour, exploring patterns in order to model the volatility expressed by voters. The forecast is based on the matrix of transition probabilities, following the logic of Markov chains. The power of the matrix, and the use of the mover-stayer model, is debated for alternative forecasts. As an example of high volatility, the model uses data from the German general election of 1998. The unification of two German states in 1990 caused the incorporation of around 15 million new voters from East Germany who had limited familiarity and no direct experience of the political culture in West Germany. Under these circumstances, voters were expected to show high volatility.

The EU and Brazil: Partnering in an uncertain world? CEPS Working Document No. 382, 13 May 2013

The international system is changing fast and both the European Union and Brazil will need to adapt. This paper argues that such a process of adjustment may bring the two closer together, even if their starting points differ considerably. Europe looks at the ongoing redistribution of power as a challenge, Brazil as an opportunity. Europe is coping with the detrimental impact of the economic crisis on its international profile; Brazil is enhancing its influence in its region and beyond. Their normative outlook is broadly compatible; their political priorities and behaviour in multilateral frameworks often differ, from trade to development and security issues. Despite the crisis, however, there are signals of renewed engagement by the EU on the international stage, with a focus on its troubled neighbourhood and partnerships with the US and large emerging actors such as Brazil. The latter is charting an original course in international affairs as a rising democratic power from the traditional South with no geopolitical opponents and a commitment to multilateralism. In testing the limits of its international influence, Brazil will need dependable partners and variable coalitions that go well beyond the BRICS format, which is not necessarily sustainable. This contribution suggests that the strategic partnership between the EU and Brazil may grow stronger not only as a platform to deepen economic ties and sustain growth, but also as a tool to foster cooperation in political and security affairs including crisis management, preventive diplomacy and human rights.

Reforms in Moldova: Moderate progress and an uncertain outlook for the future. OSW Commentary No. 100, 2013-01-22

After coming to power in September 2009, the Alliance for European Integration (AIE)1 coalition began implementing a wide-ranging programme of reforms, with a view to bringing Moldova closer to the European Union, and ultimately to ensure the country’s full membership of the EU. Today, Moldova is considered a clear leader in European integration among the members of the EU’s Eastern Partnership programme. This, however, has less to do with the concrete reforms introduced by the Moldovan government, and more to do with, on the one hand, Chișinău’s excellent public relations with Brussels, achieved through effective diplomacy; and on the other hand, the growing disillusionment with the lack of progress in other Eastern Partnership countries, particularly in Ukraine. Attempts to evaluate Moldova’s reforms have proven rather problematic. On the one hand, the ruling coalition has managed to make significant progress in the areas of civil liberties, human rights and electoral reform. The government has also successfully implemented regulations which have brought Moldova closer to signing a Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU, and it has made headway in talks on visa liberalisation with Brussels. On the other hand, Chișinău has still not carried out the structural and economic reforms without which real change in the country will be impossible. No reforms have been introduced in the Ministry of the Interior, the Moldovan police force, or the judiciary. The AIE has also failed to decentralise governance and has had no real success in reducing corruption; its attempts to rebuild the country’s financial institutions have proved equally unsuccessful. The main reasons for this poor performance include mutual mistrust and conflicting interests among the coalition members, a shortage of financial resources, strong resistance to change by public administration staff, and significant pressure from those political and business groups whose interests could suffer as a result of the proposed reforms. It should also be noted that since the AIE took power, the international context of the reform efforts has undergone significant changes. On the one hand, the EU has been facing an economic crisis, which has had a negative impact on Moldovan exports and contributed to the worsening of the economic situation in the country; and on the other hand, Moldova has been offered membership of the Customs Union as a viable alternative to EU membership.

Turkey's economy: a story of success with an uncertain future. OSW Commentary No. 120, 2013-11-05

In the decade since the Justice and Development Party (AKP) came to power, Turkey’s economy has become synonymous with success and well-implemented reforms. Economic development has been the basis of both socio-political stability inside the country and of an ambitious foreign policy agenda pursued by the AKP. However, the risks associated with a series of unresolved issues are becoming increasingly apparent. These include the country’s current account deficit, its over-reliance on short-term external financing, and unfinished reforms, for example of the education sector. This leaves Turkey exposed to over-dependence on investors, especially from the West. Consequently, Ankara has become a hostage of its own image as an economically successful state with a stable socio-political system. Any changes to this image would cause capital flight, as exemplified by the outflow of portfolio investment1 and an increase in the cost of external debt2 that followed the nationwide protests over the proposed closure of Gezi Park last summer. In addition, Turkey remains vulnerable to potential changes in investor sentiment towards emerging markets.

An appropriated state? Moldova’s uncertain prospects for modernisation. OSW COMMENTARY 168, 22.04.2015,

From the Introduction. There have been several significant changes on Moldova’s domestic political scene in the wake of the November 2014 parliamentary elections there. Negotiations lasted nearly two months and resulted in the formation of a minority coalition composed of two groupings: the Liberal-Democratic Party (PLDM) and the Democratic Party (PDM). New coalition received unofficial support from the Communist Party (PCRM), which had previously been considered an opposition party. Contrary to their initial announcements, PDLM and PDM did not admit the Liberal Party led by Mihai Ghimpu to power. Moreover, they blocked the nomination for prime minister of the incumbent, Iurie Leancă. Leancă has been perceived by many as an honest politician and a guarantor of reforms. This situation resulted in the political model present in Moldova since 2009 being preserved. In this model the state’s institutions are subordinated to two main oligarch politicians: Vlad Filat (the leader of PLDM) and Vlad Plahotniuc (a billionaire who de facto controls PDM).

A captured state? Moldova’s uncertain prospects for modernisation. OSW Commentary No. 168, 22 April 2015

There have been several significant changes on Moldova’s domestic political scene in the wake of the November 2014 parliamentary elections there. Negotiations lasted nearly two months and resulted in the formation of a minority coalition composed of two groupings: the Liberal-Democratic Party (PLDM) and the Democratic Party (PDM). New coalition received unofficial support from the Communist Party (PCRM), which had previously been considered an opposition party. Contrary to their initial announcements, PDLM and PDM did not admit the Liberal Party led by Mihai Ghimpu to power. Moreover, they blocked the nomination for prime minister of the incumbent, Iurie Leancă. Leancă has been perceived by many as an honest politician and a guarantor of reforms. This situation resulted in the political model present in Moldova since 2009 being preserved. In this model the state’s institutions are subordinated to two main oligarch politicians: Vlad Filat (the leader of PLDM) and Vlad Plahotniuc (a billionaire who de facto controls PDM).

The uncertain future of the coal energy industry in Germany. OSW COMMENTARY #188, 2015-10-20

Germany’s current energy strategy, known as the “energy transition”, or Energiewende, involves an accelerated withdrawal from the use of nuclear power plants and the development of renewable energy sources (RES). According to the government’s plans, the share of RES in electricity production will gradually increase from its present rate of 26% to 80% in 2050. Greenhouse gas emissions are expected to fall by 80–95% by 2050 when compared to 1990 levels. However, coal power plants still predominate in Germany’s energy mix – they produced 44% of electricity in 2014 (26% from lignite and 18% from hard coal). This makes it difficult to meet the emission reduction objectives, lignite combustion causes the highest levels of greenhouse gas emissions. In order to reach the emission reduction goals, the government launched the process of accelerating the reduction of coal consumption. On 2 July, the Federal Ministry for Economic Affairs and Energy published a plan to reform the German energy market which will be implemented during the present term of government. Emission reduction from coal power plants is the most important issue. This problem has been extensively discussed over the past year and has transformed into a conflict between the government and the coal lobby. The dispute reached its peak when lignite miners took to the streets in Berlin. As the government admits, in order to reach the long-term emission reduction objectives, it is necessary to completely liquidate the coal energy industry in Germany. This is expected to take place within 25 to 30 years. However, since the decision to decommission nuclear power plants was passed, the German ecological movement and the Green Party have shifted their attention to coal power plants, demanding that these be decommissioned by 2030 at the latest.

Electoral Volatility, Political Sophistication, Trust and Efficacy

In this article we investigate voter volatility and analyze the causes and motives of switching vote intentions. We test two main sets of variables linked to volatility in literature; political sophistication and ‘political (dis)satisfaction’. Results show that voters with low levels of political efficacy tend to switch more often, both within a campaign and between elections. In the analysis we differentiate between campaign volatility and inter-election volatility and by doing so show that the dynamics of a campaign have a profound impact on volatility. The campaign period is when the lowly sophisticated switch their vote intention. Those with higher levels of interest in politics have switched their intention before the campaign has started. The data for this analysis are from the three wave PartiRep Belgian Election Study (2009).

Alternative-fueled vehicles: progress made in accelerating federal purchases, but benefits and costs remain uncertain.

Mode of access: Internet.