Search Results
Working Paper
The Taylor rule and forecast intervals for exchange rates
This paper attacks the Meese-Rogoff (exchange rate disconnect) puzzle from a different perspective: out-of-sample interval forecasting. Most studies in the literature focus on point forecasts. In this paper, we apply Robust Semi-parametric (RS) interval forecasting to a group of Taylor rule models. Forecast intervals for twelve OECD exchange rates are generated and modified tests of Giacomini and White (2006) are conducted to compare the performance of Taylor rule models and the random walk. Our contribution is twofold.> ; First, we find that in general, Taylor rule models generate tighter ...
Working Paper
Can long-horizon forecasts beat the random walk under the Engel-West explanation?
Engel and West (EW, 2005) argue that as the discount factor gets closer to one, present-value asset pricing models place greater weight on future fundamentals. Consequently, current fundamentals have very weak forecasting power and exchange rates appear to follow approximately a random walk. We connect the Engel-West explanation to the studies of exchange rates with long-horizon regressions. We find that under EW's assumption that fundamentals are I(1) and observable to the econometrician, long-horizon regressions generally do not have significant forecasting power. However, when EW's ...
Working Paper
International trade price stickiness and exchange rate pass-through in micro data: a case study on U.S.–China trade
Price-setting behavior of exporters and exchange rate pass-through (ERPT) are crucial issues in international macroeconomics. This paper studies these topics, using a novel dataset of goods-level US-China trade prices collected by the US Bureau of Labor Statistics. We document that the duration of U.S.?China trade prices has declined almost 30 percent since China began appreciating its currency in 2005. A benchmark menu cost model that is calibrated to the data can replicate the documented decrease in price stickiness. We also estimate ERPT of RMB appreciation into U.S. import prices between ...
Working Paper
Cointegration test with stationary covariates and the CDS-bond basis during the financial crisis
This paper proposes a residual based cointegration test with improved power. Based on the idea of Hansen (1995) and Elliott & Jansson (2003) in the unit root testing case, stationary covariates are used to improve the power of the residual based Augmented Dickey Fuller (ADF) test. The asymptotic null distribution contains difficult to estimate nuisance parameters for which there is no obvious method of estimation, therefore we propose a bootstrap methodology to obtain test critical values. Local-to-unity asymptotics and Monte Carlo simulations are used to evaluate the power of the test in ...
Working Paper
Dynamic factor value-at-risk for large, heteroskedastic portfolios
Trading portfolios at Financial institutions are typically driven by a large number of financial variables. These variables are often correlated with each other and exhibit by time-varying volatilities. We propose a computationally efficient Value-at-Risk (VaR) methodology based on Dynamic Factor Models (DFM) that can be applied to portfolios with time-varying weights, and that, unlike the popular Historical Simulation (HS) and Filtered Historical Simulation (FHS) methodologies, can handle time-varying volatilities and correlations for a large set of financial variables. We test the DFM-VaR ...
Working Paper
Monetary Policy Uncertainty and Monetary Policy Surprises
Monetary policy uncertainty affects the transmission of monetary policy shocks to longer-term nominal and real yields. For a given monetary policy shock, the reaction of yields is more pronounced when the level of monetary policy uncertainty is low. Primary dealers and other investors adjust their interest rate positions more when monetary policy uncertainty is low than when uncertainty is high. These portfolio adjustments likely explain the larger pass-through of a monetary policy shock to bond yields when uncertainty is low. These findings shed new light on the role that monetary policy ...
Discussion Paper
Trading Activities at Systemically Important Banks, Part 1 : Recent Trends in Trading Performance
Using a confidential data set collected daily by onsite supervisors, this note provides a comprehensive look at the performance of systemically important banks’ trading and market-making activities since the financial crisis.
Discussion Paper
Trading Activities at Systemically Important Banks, Part 3 : What Drives Trading Performance?
It is well known by now that before the financial crisis, systemically important banks and nonbank broker-dealers maintained large proprietary trading operations and had relied on those operations as a key source of trading revenue, in addition to revenue generated by facilitating clients' trading needs. This note aims to identify the key drivers of the trading performance of systemically important banks in the post-crisis period.
Discussion Paper
Trading Activities at Systemically Important Banks, Part 2 : What Happened during Recent Risk Events?
As documented in the FEDS Notes article "Trading Activities at Systemically Important Banks, Part 1: Recent Trends in Trading Performance," trading performance at systemically important banks, measured by trading revenue per dollar of value-at-risk (VaR) committed, has trended up over the past few years.
Discussion Paper
Monetary Policy Surprises and Monetary Policy Uncertainty
In this note we find that after a given monetary policy surprise, primary dealers--key intermediaries in interest rate markets--tend to adjust their positions in the U.S. Treasury market and their exposures to interest rates more when the prevailing level of policy uncertainty is low than when it is high.