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Session VII-1 Exchange Rates (18/12/2009 à 13h30)

B. Dumas

International Competition and Exchange Rate Shocks in Small Export-Oriented Economies: A Cross-Country Industry Analysis of Stock Returns in Finland and Sweden

Auteurs : Anand Bir Singh Gulati (Hanken School of Economics); Johan Knif (Hanken School of Economics); James W. Kolari (Texas A&M University)

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Intervenants : Anand Bir Singh Gulati (Hanken School of Economics)

Rapporteurs : Mara Madaleno

This study empirically examines the impact of exchange rate shocks and industrial competitiveness on equity returns for sectors and industries in Finland. The test of the competitive hypothesis is based on cross-country sector and industry analysis of Finland and Sweden. The results show a statistically significant exchange rate exposure in the post-euro period for almost all the Finnish sector and industry portfolios. On the other hand, in the pre-euro period there is little empirical evidence of excess exchange rate risk exposure associated with Finnish Markka (FIM)/Swedish krona (SEK) exchange rate shocks. This indicates that the Finnish equity market was to a high degree homogeneous with respect to exchange rate shocks in the pre-euro period. For the post-euro period the exposure is more sector and industry dependant. The results clearly indicate a positive correlation between excess industry returns across border, and even more so in the post-euro period. Hence, the competitive hypothesis finds no support. This is interpreted as a sign of market integration, rather than competitiveness, among the sectors and industries of these two countries. Finally, asymmetric and time-varying excess exposure is to a high degree sector and industry dependant.

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Asset Prices and Real Exchange Rates with Deep Habits

Auteurs : Christian Heyerdahl-Larsen (SIFR – Institute for Financial Research)

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Intervenants : Christian Heyerdahl-Larsen (SIFR – Institute for Financial Research)

Rapporteurs : Bernard Dumas

I study a two country - two good pure exchange economy with deep habits that jointly explains the volatility of the real exchange rate, equity premiums, levels of risk free rates and that reproduces the uncovered interest rate (UIP) puzzle. While both the volatility of the real exchange rate and the equity premium depend on the habit formation, the magnitudes are governed by different parameters. The equity premium depends mainly on the risk aversion while the real exchange rate depends on the elasticity of substitution between the home good and the foreign good. In an extension of the model I allow for preference heterogeneity of the home and the foreign representative agents. I solve for optimal portfolios and show that consumption home bias leads to portfolio home bias.

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Time frequency effects on market indices: world commovements

Auteurs : Carlos Pinho (Economics, Management and Industrial Engineering department, University of Aveiro); Mara Madaleno (Economics, Management and Industrial Engineering department, University of Aveiro)

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Intervenants : Mara Madaleno (Economics, Management and Industrial Engineering department, University of Aveiro)

Rapporteurs : Anand Bir Singh Gulati

The international comovement of stock market indices is reviewed. The most powerful argument for cross-border investing is the risk reduction due to low correlation of world's stock markets. Diversifying risk has become even more important as financial markets globalize, helped by advanced information technology which lowers the transaction costs. Systematic risk is lowered through international diversification in markets with low correlation with domestic markets. Investors must be willing to take advantage of these correlations to reduce volatility in their portfolios. As such, we show the usefulness of wavelet analysis for financial relations. The current work tries to analyze the relationship among eleven stock indices using wavelet theory, applying the MODWT, cross-Wavelets techniques, and regression analysis for different time scales. The findings suggest that there is strong to moderate cointegration among many stock markets, and as such there is evidence of intra-continental relationships. We were thus able to disentangle different short, medium and long-run relations. The importance of historical transmissions is low for the period under analysis.

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