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Thomas Kostka

11 July 2012
WORKING PAPER SERIES - No. 1446
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Abstract
In this paper, we propose a framework to evaluate the subjective density forecasts of macroeconomists using micro data from the euro area Survey of Professional Forecasters (SPF). A key aspect of our analysis is the evaluation of the entire predictive densities, including an evaluation of the impact of density features such as location, spread, skew and tail risk on density forecast performance. Overall, we find considerable heterogeneity in the performance of the surveyed densities at the individual level. Relative to a set of simple benchmarks, this performance is somewhat better for GDP growth than for inflation, although in the former case it diminishes substantially with the forecast horizon. In addition, we report evidence of some improvement in the relative performance of expert densities during the recent period of macroeconomic volatility. However, our analysis also reveals clear evidence of overconfidence or neglected risks in expert probability assessments, as reflected in frequent occurrences of events which are assigned a zero probability. Moreover, higher moment features of expert densities, such as skew or the degree of probability mass in their tails, are shown not to contribute significantly to improvements in individual density forecast performance.
JEL Code
C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
10 August 2012
WORKING PAPER SERIES - No. 1456
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Abstract
We use changes in Brazil’s tax on capital inflows from 2006 to 2011 to test for direct portfolio effects and externalities from capital controls on investor portfolios. The analysis is structured based on information from investor interviews. We find that an increase in Brazil’s tax on foreign investment in bonds causes investors to significantly decrease their portfolio allocations to Brazil in both bonds and equities. Investors simultaneously increase allocations to other countries that have substantial exposure to China and decrease allocations to countries viewed as more likely to use capital controls. Much of the effect of capital controls on portfolio flows appears to occur through signalling —i.e. changes in investor expectations about future policies— rather than the direct cost of the controls. This evidence of significant externalities from capital controls suggests that any assessment of controls should consider their effects on portfolio flows to other countries.
JEL Code
F3 : International Economics→International Finance
F4 : International Economics→Macroeconomic Aspects of International Trade and Finance
F5 : International Economics→International Relations, National Security, and International Political Economy
G0 : Financial Economics→General
G1 : Financial Economics→General Financial Markets
26 April 2013
WORKING PAPER SERIES - No. 1540
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Abstract
We propose methods to evaluate the risk assessments collected as part of the ECB Survey of Professional Forecasters (SPF). Our approach focuses on direction-of-change predictions as well as the prediction of relatively more extreme macroeconomic outcomes located in the upper and lower regions of the predictive densities. For inflation and GDP growth, we find such surveyed densities are informative about future direction of change. Regarding more extreme high and low outcome events, the surveys are really only informative about GDP growth outcomes and at short-horizons. The upper and lower regions of the predictive densities for inflation are much less informative.
JEL Code
C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
23 May 2014
WORKING PAPER SERIES - No. 1679
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Abstract
In this paper, we exploit micro data from the ECB Survey of Professional Forecasters (SPF) to examine the link between the characteristics of macroeconomic density forecasts (such as their location, spread, skewness and tail risk) and density forecast performance. Controlling for the effects of common macroeconomic shocks, we apply cross-sectional and fixed effect panel regressions linking such density characteristics and density forecast performance. Our empirical results suggest that many macroeconomic experts could systematically improve their density performance by correcting a downward bias in their variances. Aside from this shortcoming in second moment characteristics of the individual densities, other higher moment features, such as skewness or variation in the degree of probability mass given to the tails of the predictive distributions tend - as a rule - not to contribute significantly to enhancing individual density forecast performance.
JEL Code
C22 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Time-Series Models, Dynamic Quantile Regressions, Dynamic Treatment Effect Models &bull Diffusion Processes
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
24 May 2017
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 1, 2017
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Abstract
This special feature analyses the recent decoupling between measures of financial conditions and economic policy uncertainty. In 2016, several risky asset prices surged and financial market volatility hovered at low levels while measures of economic policy uncertainty increased sharply, the latter partly triggered by the outcomes of the UK referendum on EU membership and the US presidential election. This special feature attempts to explain these diverging trends. It starts out by reviewing the existing academic literature on uncertainty and its implications for financial conditions. In the empirical part that follows, it provides model-based estimates of the drivers underlying the benign financial conditions prevailing in UK and US financial markets. The results suggest that the adverse impact of economic policy uncertainty on financial conditions in the United States was more than offset by a positive demand shock. In the case of the United Kingdom, however, it was the resolute accommodative monetary policy actions by the Bank of England that supported financial conditions after the referendum. Turning to the euro area, policy uncertainty increased in several countries in the first months of 2017. Looking ahead, further shocks stemming from the political sphere may, in the absence of offsetting factors, tighten domestic financial conditions, increase risk premia and potentially raise debt sustainability concerns.
JEL Code
G00 : Financial Economics→General→General
29 November 2017
FINANCIAL STABILITY REVIEW - ARTICLE
Financial Stability Review Issue 2, 2017
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Abstract
The reduction in asset price volatility in recent years has taken place in tandem with investors lowering the premia required for lower-rated assets. The current favourable market sentiment could however change abruptly if, for instance, investors were to reassess the outlook for growth or monetary policy. Potential surges in asset price volatility could be amplified by: (i) investors selling off assets perceived as overvalued; (ii) the high levels of corporate leverage; and/or (iii) a rapid unwinding of market positions that benefit from low volatility. Low volatility in financial markets is therefore being closely monitored by financial stability authorities, as it may mask an underpricing of risks and a build-up of financial imbalances.
JEL Code
G00 : Financial Economics→General→General
26 February 2018
WORKING PAPER SERIES - No. 2131
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Abstract
We assess the ability of yield curve factors to predict risk premia in short-term interest rates and exchange rates across a large sample of major advanced economies. We find that the same tick-shaped linear combination of (relative) bond yields predicts risk premia in both short-term interest rates and exchange rates at returnforecasting horizons of up to six months for all (but one) countries and currencies in our sample. Our single forecasting factor loads positively on the short and long end of the curve and negatively on the medium-term and is therefore inversely related to Nelson-Siegel’s curvature factor. In line with recent interpretations of the yield curve factors, our findings suggest that the hump of the yield curve bears important information about future short-term interest rates. A relatively high curvature predicts a surprise rise in short-term interest rates beyond expectations and, coincidentally, an appreciation of the home currency in line with uncovered interest rate parity.
JEL Code
C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
2 May 2018
WORKING PAPER SERIES - No. 2149
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Abstract
Traditional carry trade strategies are based on differences in short-term interest rates, neglecting any other information embedded in yield curves. We derive return distributions of carry trade portfolios among G10 currencies, where the signals to buy and sell currencies are based on summary measures of the yield curve, the Nelson-Siegel factors. We find that a strategy based on the relative curvature factor, the curvy trade, yields higher Sharpe ratios and a smaller return skewness than traditional carry trade strategies. Curvy trades build less upon the typical carry currencies, like the Japanese yen and the Swiss franc, and are hence less susceptible to crash risk. In line with that, standard pricing factors of traditional carry trade returns, such as exchange rate volatility, fail to explain curvy trade returns in a linear asset pricing framework. Our findings are in line with recent interpretations of the curvature factor. A relatively high curvature signals a relatively higher path of future short-term rates over the medium-term putting upward pressure on the currency.
JEL Code
C23 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Panel Data Models, Spatio-temporal Models
C53 : Mathematical and Quantitative Methods→Econometric Modeling→Forecasting and Prediction Methods, Simulation Methods
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
24 May 2018
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2018
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Abstract
Emerging market economies have experienced accelerated financial deepening since the onset of the financial crisis. Consequently, financial stability risks emanating from emerging markets may spill over more widely to the global financial system. A key focus in this regard has been China, not least given the sheer size of its banking sector and the country’s growing role in international finance. Against this background, this box investigates the risks related to the growing size and systemic importance of Chinese banks and their possible implications for euro area financial stability.
29 November 2018
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2018
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Abstract
This box describes a simple structural Bayesian vector autoregression (BVAR) model that uses sign restrictions to determine the relative importance of distinct economic and financial shocks in shaping the co-movement of key global financial variables. The model provides intuitive and economically plausible interpretations of gyrations in key US and global asset markets over the past six months. The model ascribes them to a multitude of factors, including strong nominal US demand, heightened investor risk aversion as well as the prospect of higher US inflation and tighter monetary conditions.
29 November 2018
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2018
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Abstract
Portfolio flows to EMEs have declined significantly in the course of 2018, largely as a result of increased investor sensitivity towards EME asset markets and rising protectionist pressures. After a spell of strong and stable foreign purchases of debt and equity instruments issued by sovereigns and corporates in EMEs throughout 2017, aggregate portfolio flows to EMEs have dipped notably since February 2018. Global investors started to reassess the potential negative effects of a tighter US monetary policy and a stronger dollar on financial conditions in EMEs and the downside risks to global growth stemming from mounting protectionist pressures. EMEs appear to be particularly exposed to these risks. Several EMEs borrow heavily in international markets and are affected by the tightening of US dollar funding conditions. Moreover, EMEs are generally more open to trade than advanced economies, relying on policies geared towards free trade to support economic growth. This box aims to disentangle the role of these global factors in driving the recent slowdown in portfolio flows to EMEs from country-specific vulnerabilities, which may have exacerbated the impact of global risks.
20 November 2019
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 2, 2019
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Abstract
Global equity and corporate bond prices have increased steadily since the end of the euro area sovereign debt crisis. Equity prices relative to earnings expectations are at the upper end of their historical distribution and corporate bond yields in the euro area are on aggregate at a historical low. During this time, euro area equity and corporate bond prices have been supported by the large decline in benchmark interest rates, which – in turn – reflects a decline in nominal economic growth rates, as well as accommodative monetary policies, including measures that brought down the short and the long end of the yield curve
3 March 2020
FINANCIAL INTEGRATION AND STRUCTURE ARTICLE
Financial Integration and Structure in the Euro Area 2020
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Abstract
This special feature discusses how a common sovereign safe asset in the euro area could benefit financial stability by fostering financial integration and development, and by changing the structure of asset markets. The discussion focuses on the potential benefits of a well-designed common safe asset that has certain desirable characteristics, while it does not provide an assessment of specific design options. This special feature should be viewed as part of a broader discussion on how to complete the banking union, which also includes considerations regarding a European deposit insurance scheme and changing the regulatory treatment of sovereign exposures.
25 May 2020
FINANCIAL STABILITY REVIEW - BOX
Financial Stability Review Issue 1, 2020
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Abstract
Low financial market volatility in the years prior to the coronavirus outbreak increased the popularity of investment strategies based on targeting volatility. Low volatility across major asset classes and regions had been a key feature of global asset price developments until recently. Investments following strategies which are reliant on low market volatility have grown over recent years, with varying estimates. Globally, there may be funds with assets under management worth up to USD 2 trillion invested in some form of volatility strategies , with USD 300 billion invested in some 300 risk parity funds, a well-known hedge fund strategy for multi-asset funds. Additional leverage deployed in these funds raises their market-moving capacity.