Solved: CLAVIL WRAD Regression and Finance

0 Comments

The intention with this presentation is that you get familiarize with current international
economics issues, and help to the rest of the class to understand them. To do so, you need to
focus on explaining:

  1. What is the issue about?
  2. Why the issue is important?
  3. How could we potentially solve the issue?
    You will be guided in all three steps by both the assignment and the references you are
    given.
    Structure of the presentation:
  • Each presentation will last about 25 minutes.
  • All the group members need to present a similar portion of the work.
  • During the presentation, there will be only clarification questions.
  • After the presentation, there will be a 15 minutes for questions of the professor and
    classmates.
    1
    Topic 1: Currency trading strategies
    During the first modules, we start analyzing and building a theory of how nominal exchange
    rates are determined reaching to an equilibrium condition that we called as the uncovered
    interest rate parity. This condition implies that the net returns of investment [after
    account by risk] across different countries should be the same. However, when in inspect the
    data, we can observe that this condition does not hold, leading to arbitrage opportunities.
    The strategies that exploit this potential arbitrage are called as carry trade.
  1. First, to build understanding on carry trades, please read the following paper “Carry
    Trade and Momentum in Currency Markets”. The first three sections could be enough,
    but I recommend to read the whole paper.
  2. Use the dataset provided in the following link, and
  • Compute the monthly return of a long position as retF X,t = ln(st+1) − ln(ft)
  • Does the average return on being always long in any of the 18 currencies is
    significantly different from 0?
  • Compute the rate differential as: i
    US
    t − i
    f oreign
    t = ln(ft) − ln(st)
  • Make a scatterplot between the averages of retF X and i
    US − i
    f oreign, what does
    this scatterplot imply?
  1. What can explain this difference?
  • One possible explanation is the excess of volatility of certain currencies. As we
    know, people is usually risk adverse, which means that high-volatile currencies
    should have higher returns to compensate for this excess of risk. To see if this is
    the case, try the following:
    (i) Make an scatterplot between the average return avg(retF X) and its standard
    deviation σretFX
    (ii) Regress avg(retF X) on the averaga interest rate differential avg(i
    US − i
    f oreign)
    and σretFX , what do you find?
  1. Prepare the following for the presentation:
  • A summary of the whatg is carry trade and why it is a puzzle in the theory
  • Show the statistical analysis supporting or rejecting the carry trade
  • Use the paper results to summarize [and explain] the possible explanations of this
    puzzle.
    2
    Topic 2: Fixed exchange rate experiences
    There is a general consensus on the risks associated to an unwanted depreciations in countries
    with fixed exchange rates because their central banks runs out international reserves. However,
    what happens during an unwanted appreciation?. In risky periods, there is a rise in the
    demand of safe assets leading to an over appreaciation like in Switzerland during the Euro
    Area debt crisis. To avoid excess appreciation Swiss National Bank pegged its currency to
    euro in 2011, but later abandoned the policy in 2015, ostensibly because it had accumulated
    too much foreign assets. In this exercise you will compare experience of Switzerland with
    that of Mexico in the mid-1990s – a usual case of abandoning the peg.
  1. Read the following articles: (i) Why the Swiss unpegged the franc and (ii)The Mexican
    Peso Crisis
  2. To build understanding, do the following empirical analysis.
    a. Obtain the swiss franc to euro exchange rate and the official reserves of the Swiss
    central bank (from IMF) for January 2008 to June 2016
  • Both series can be found in IMF library.

Select Query.
In Time, select Timeline and choose the corresponding timespan
For exchange rates select the indicator: Exchange Rates, Domestic
Currency per Euro, End of Period, Rate, while for the reserves select
International Reserves and Liquidity, Liquidity, Total Reserves
excluding Gold, US Dollar

  • Plot these series together and discuss
    b. Similarly, obtain the exchange rate of Mexican pesos to USD and the foreign
    reserves of the Mexican Central Bank for January 1992 to June 2000
    c. Discuss the differences between these two graphs
  1. Prepare the following for the presentation:
  • Present how and why currency pegs usually fail
  • Analyze and contrast experiences of Mexico and Switzerland using the articles
    and your empirical findings.
  • Discuss the reasons why each of them abandoned currency pegging and its consequences.
    3
    Topic 3: Will the EUR overtake the USD as international currency?
    We saw that US dollars works as a vehicle currency giving a privilege to the United States.
    However, many expert wondered whether Euro would overtake the US dollar as the primary
    international currency. In this assignment you will develop some insights in this regards.
  1. Read and summary arguments for and against this possibility. You can use the following
    paper: Will the Euro Eventually Surpass the Dollar as Leading International Reserve
    Currency?
  2. Now, check how the composition of international reserves have changed since 1997.
    To do so, use the IMF’s Currency Composition of Official Foreign Exchange Reserves
    (COFER) database to obtain data on the international reserves in US dollars, Euro,
    British Pounds, and Japanese Yen as a share of total reserves. Here is the link. Look
    for the variables called “Shares of Allocated X currency” for the time period 2010-2019.
    You need to use the option Query
  • Plot the shares against time. What do you see? Is a single currency the clear
    dominant form of foreign exchange rate reserve? Have the composition of foreign
    exchange rate reserves changed over time?
  • Evaluate the arguments of the paper and your findings.
  • Has the prolonged economic turbulence in the Euro area post-2009 contributed to
    any change in the overall amount of Euros used as reserves?
  1. Read the following article The Dollar Dilemma. Does the article lead you to believe
    that there are clear reasons for or against the US dollar remaining as the dominant
    currency for foreign exchange reserves?
  2. Prepare the following for the presentation:
  • Explains the original arguments of why the Euro was seen as such a strong
    contender to the dollar in the arena of foreign exchange rate reserves
  • Show your empirical findings on whether or not the Euro was successful in establishing itself as a viable alternative to the USD
  • Summarize and explain the arguments in the Eichengreen piece. Contrast them
    with your findings and beliefs.
    4
    Topic 4: The Greek Debt Crisis
    During the 2010s the Eurozone witnessed several rounds of severe debt crises. Among the
    countries that were most heavily hit, Greece was hit the hardest. In 2012, Greece became
    the first OECD country ever to default on its sovereign debt. The European Central Bank
    (ECB) and the IMF issued several rounds of bailouts, but still the outcome was far below
    expectation. This assignment leads you to read several articles and to try understanding why
    Greek economy were hit so heavily, why it takes so long to recover and whether the bailouts
    and reforms suggested by ECB and IMF were appropriate.
  1. Read the following paper The Analytics of the Greek Crisis
  2. The following video summarizes this paper watch video
    c. Replicate the Figure 1, Table 2 and Figure 4 of the paper. You can use the following
    data source:
  • Figure 1, Table 2, and Figure 4
  1. How does the Greek crisis compare to a typical sudden stop crisis?
  2. How does the Greek crisis compare to a typical Trifecta crisis?
  3. In the paper, the authors compare the Greek crisis to crises of exchange rate peggers,
    de-peggers and floaters. Based on that reading, do you think that Greece would have
    been able to exit the crisis if it had adjust its exchange rate? Are there any trade-offs?
  4. Prepare the following for the presentation:
  • Summarize the paper and explain the figures and tables in part 3
  • Explain why even if Greece is able to adjust its exchange rate, it may not recover
    fast. Provide examples and counter-examples from your reading
  • Was/is fiscal consolidation optimal for Greece? Would a Grexit have been a good
    idea? Would it be good for the rest of the EMU? You can use the following link
    as reference (link)
    5
    Topic 5: Home Bias in Equities
    A general implication of theoretical models is that investor should opt for an international
    diversified portfolio. However, in the data, most countries seem to be heavily invested in
    domestic assets, something that has come to be known as the “home bias” puzzle.
  1. To start, read the following paper: Equity Home Bias: A Disappearing Phenomenon?
  2. Do the following analysis based on international portfolio holdings
    a. Your analysis will be based on data for the years 2000-2015 for the following OECD
    countries: Australia, Austria, Belgium, Canada, France, Germany, Italy, Japan,
    Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United
    Kingdom, United States
    b. Use “External Wealth of Nations” database to get data on Foreign Assets and
    Liabilities for each country. Here is the link. From there, get data on “Portfolio
    Equity Assets” and “Portfolio Equity Liabilities” for each of the aforementioned
    countries.
    c. Use the World Bank database “World Development Indicators” to get data on
    “Market capitalization of listed domestic companies (current US$). You can access
    it through BC libraries”
    d. Compute the domestic share of equity assets in each country’s portfolio for each
    year. You can do it by using the following formula
    shome =
    Domestic Equity Assets
    Total Portfolio
    where shome is the share in domestic portfolio,
    Domestic Equity Assets = Domestic Market Cap. − Portfolio Equity Liabilities,
    Total Portfolio = Domestic Equity Assets + Foreign Portfolio Equity Assets
    e. Is there evidence of home bias? Is there any trend?
    f. The paper suggests that the increase in the availability of information, due to the
    IT boom may have been related to a higher international diversification
  • Use the World Bank’s database, pull data on “Individuals using the internet
    (% of population)” and look at the trend over time and check if there is a
    trend over time (on average across countries for each year). Do your findings
    align with the paper’s argument?
  1. Prepare the following for the presentation:
    6
  • Summarizes the home bias puzzle, and explains what it is and why is it a puzzle
  • Mention the major potential explanations as described in the reference paper
  • Explain how the bias has been changing over time
  • Provide a short critical discussion on whether the increased availability of information through the IT boom could be related to the observed trend in domestic
    assets

Get Homework Help Now

Leave a Reply

Your email address will not be published. Required fields are marked *

Related Posts

Finance essay

0 Comments

Overview Financial risks are inherent to both individuals and businesses.…