Net Position Research Articles

U.S. Housing as a Global Safe Asset: Evidence from China Shocks

<ns2:p>This paper demonstrates that the measured stock of China's holding of U.S. assets could be much higher than indicated by the U.S. net international investment position data due to unrecorded historical Chinese in ows into an increasingly popular global safe haven asset: U.S. residential real estate. We first use aggregate capital ows data to show that the increase in unrecorded capital in ows in the U.S. balance of payment accounts over the past decade is mainly linked to in ows from China into U.S. housing markets. Then, using a unique web traffic dataset that provides a direct measure of Chinese demand for U.S. housing at the zip code level, we estimate via a difference-in-difference matching framework that house prices in major U.S. cities that are highly exposed to demand from China have on average grown 7 percentage points faster than similar neighborhoods with low exposure over the period 2010-2016. These average excess price growth gaps co-move closely with macro-level measures of U.S. capital in ows from China, and tend to widen following periods of economic stress in China, suggesting that Chinese households view U.S. housing as a safe haven asset.</ns2:p>

Disclosure versus recognition: the value relevance of pensions

AbstractThis paper compares how pension obligations impact the market value of United States corporations under two accounting regimes. Using a sample of firms that disclosed pension liabilities under Statement of Financial Accounting Standards (SFAS) No. 87 from 2001 to 2005 and recognized them under SFAS No. 158 from 2006 to 2014, I find that equity market participants take into account the net position of the pension fund only if it is recognized on the sponsor's balance sheet, thus mispricing the pension deficit/surplus under the disclosure regime. I also provide evidence suggesting that investors' perception of pension deficits/surpluses changed with the introduction of SFAS No. 158 in 2006.

Investor sentiment and market dynamics: Evidence from index futures markets

ABSTRACT This study presents an investor sentiment proxy with a greater explanatory power in determining price changes in the Korean futures market and examines the effect of investor sentiment on futures price changes. We also consider how investor-trading behaviour affects the association between investor sentiment and futures prices. Our empirical results demonstrate that the multiple-variable method is appropriate for examining the explanatory power of investor sentiment in the KOSPI200 index futures market. Investor sentiment significantly affects futures price changes, indicating its important role in futures price dynamics. Futures market sentiment has a greater effect on futures price changes during a positive net position state period. Furthermore, we find that foreign institutional investors’ trading behaviour is positively related to changes in futures prices.

Assessing the euro area current account

This paper assesses the determinants of the evolution of the euro area current account against the benchmark provided by the empirical model in the Coutinho et al. (2018). The paper analyses what part of the current account can be explained by fundamental drivers (current account norms) for the euro area aggregate and for the largest five euro area economies. In addition, it attempts to make a step forward compared with traditional empirical current account specifications in two respects. First, in light of the growing stock imbalances across the euro area embodied by the net international investment position (NIIP), a different specification of current account norms is proposed for their computation, where the part of the NIIP that is explained by fundamental drivers is taken into account. Second, alternative specifications of the empirical model are estimated to better capture the impact of financial centres and corporate net savings, which have been playing an increasingly relevant role in shaping current account outturns in a number of euro area countries in recent decades. Results indicate that while the euro area current account has been in line with fundamentals until the great financial crisis, its post-crisis widening partly reflects private and public deleveraging. Accounting for NIIPs and corporate net savings contributes to moderately reduce the gap between the euro area current account and the norm.

Cross-country variation in patience, persistent current account imbalances and the external wealth of nations

This paper is the first to utilize large-scale international surveys on economic preferences to examine the long-run relationships between patience, current accounts and external wealth. We find robust empirical evidence that countries with more patient individuals tend to run persistent current account surpluses, which in turn result in the accumulation of foreign assets. This theoretically plausible but empirically unexplored relationship holds true for euro area current account imbalances, global current account imbalances and net foreign asset positions worldwide. While the existing current account literature concentrates on proximate macroeconomic determinants, this paper’s extension of inferences from deep determinants (i.e., time preferences) to the distribution of external wealth of nations (i.e., net foreign asset positions) makes a unique contribution to the literature. Our finding showing that deep heterogeneities contribute to external imbalances suggests that the pattern of current account imbalances as well as the distribution of external wealth of nations might be very persistent.

Enhanced integration of flow-based market coupling in short-term adequacy assessment

The resource adequacy of the interconnected Central Western Europe (CWE) electricity system is assessed considering the cross-border exchange capacities defined through the Flow-Based (FB) domains. Integration of FB domains into adequacy assessments poses several challenges since the FB domains depend on factors which are not known over the horizon of adequacy study. Computing hourly FB domains for each generated scenario of adequacy study, firstly, requires adopting assumptions on those unknown parameters (that may not fully match with the reality). Secondly, it noticeably increases the computational complexity of the study. The above challenges can, however, be circumvented by the data-driven alternatives. This paper presents a novel clustering technique for FB domains, which is specifically tailored for adequacy assessments. In contrast to the classical approach employed by the CWE Transmission System Operators (TSOs), which clusters the FB domains based on their overall geometrical resemblance, the proposed technique relies on the maximum and minimum zonal balances allowed by the FB domains, which are decisive factors in the CWE resource adequacy assessments. Indeed, during scarcity moments, the zonal net positions (balances) tend to reach their extreme values to reduce the costs of energy not served. The proposed goal-oriented clustering technique is examined against the classical clustering methodology employed by the CWE TSOs. The conducted simulations demonstrate that the proposed technique considerably (by a factor of over 5.5) improves the accuracy of the CWE adequacy assessments while being scalable with the future evolution of the Flow-based Market Coupling (FBMC). As such, it has direct implications for the adequacy assessment considering the FB domains.

Investors’ Trading Activity and Information Asymmetry: Evidence from the Romanian Stock Market

This paper examines the problem of information asymmetry between foreign, local, institutional and individual investors on the Bucharest Stock Exchange (BVB) for the period 2004–2011. Using monthly returns for individual companies listed on BVB, stock market indices during the seven years period, as well as aggregate data on foreign and domestic investors (both institutional and individual) sales and purchases on the Romanian stock market, this research intends to provide an answer to the following question: Are foreign investors better informed than the domestic ones and continually achieve higher rates of return on the Romanian stock market? We compare the information advantage of the different investors’ categories by separating the stock in our data sample into two categories, namely blue-chips stocks (mostly stocks that are part of the BET index, and also containing one international stock, Erste Bank), and “regular” stocks. Subsequently, we study the explanatory power for stock returns of potential impact factors, which reflect the monthly net position of four groups of investors on the Romanian Stock market (Purchases-Sales) by employing multivariate regression models and a five variable VAR system. Ultimately, we are interested in whether investors in one particular category are consistently net buyers just before stock returns increase and are net sellers before stock returns decrease, thus suggesting they have an information advantage as compared to the domestic ones. Our aim is to provide robust empirical evidence on the nature of investors’ information asymmetry by utilising a unique data set and directly assessing relevant inter-relationships.

Finances of the Nation: Net Income Tax Rates and the Changing Progressivity of the Cash Tax/Transfer System

In this article, using new data released in 2019, Tahsin Mehdi and Brian Murphy examine changes in the progressivity of the federal and provincial income tax system, in conjunction with changes in the progressivity of federal and provincial cash transfers since 1992, by examining effective tax rates. Many of the major components of the system of income taxes and cash transfers have become somewhat more progressive collectively over time. This has resulted in an improved net tax position for lower-income taxfilers as well as the top third of taxfilers. On the other hand, taxfilers in the middle quintile have experienced a drop in their net tax position since 1992.

External adjustment with a common currency: the case of the euro area

This paper analyses the behaviour of the external adjustment path for the four main economies in the euro area. I find a structural break in the behaviour of the net external position at the time of the introduction of the euro for France, Italy and Spain, pointing out that the inception of the common currency changed their external adjustment process. Germany does not show this structural break, being its external position more affected by other events such as the country reunification in 1989. I also find that France and Italy will adjust the net external position mainly through the valuation component, while Germany and Spain will restore their external balance mostly through the trade component. The common currency area could have exacerbated Germany’s net creditor position as the evolution of the euro has reacted to the external adjustment needs of debtor countries such as Italy and Spain.

The risk premia of energy futures

This paper studies the energy futures risk premia that can be extracted through long-short portfolios that exploit heterogeneities across contracts as regards various characteristics or signals and integrations thereof. Investors can earn a sizeable premium of about 8% and 12% per annum by exploiting the energy futures contract risk associated with the hedgers' net positions and roll-yield characteristics, respectively, in line with predictions from the hedging pressure hypothesis and theory of storage. Simultaneously exploiting various signals towards style-integration with alternative weighting schemes further enhances the premium. In particular, the style-integrated portfolio that equally weights all signals stands out as the most effective. The findings are robust to transaction costs, data mining and sub-period analyses.

Effects of otter board and cable length on hydrodynamic performance of Antarctic krill trawl system

The net position and the spreading performance are crucial for hydrodynamic performances of Antarctic krill trawl, which determine its fishing efficiency. In this paper, the hydrodynamic performance of an Antarctic krill trawl system (including trawler, cable, otter board and trawl) was studied by means of numerical simulation combined with full-scale measurement at sea. The numerical model was established based on finite element method and the principle of minimum potential energy was employed to determine the equilibrium configuration of the trawl system in uniform current. The Newton–Raphson method was applied to solve the equilibrium equation. A multi-wing vertical cambered otter board was designed and a series of wind tunnel model tests were carried on in order to explore the hydrodynamic performance (drag coefficient, lift coefficient and lift-drag ratio) of the otter board. By comparing the simulated results and the simulated results after correction with the experimental results at sea, the modified Tauti's law and the accuracy of the numerical method were verified. The results showed that the fishing vessel, the trawl and the otter board matched well on hydrodynamics. The effects of the warp length, the leg length, the towing speed and the angle of attack of the otter board on the net position, the spread of otter board and the spreading performance of net opening were analyzed. Scientific suggestions on the setting of each component of the trawl system were given based on the numerical simulation study. This paper could be regarded as a scientific reference for Antarctic krill trawl fishing operation.

The nexus, downside risk and asset allocation between oil and Islamic stock markets: A cross-country analysis

This study performs empirical analyses on Islamic stock markets of 20 countries disaggregated into oil-importing, oil-exporting, and moderately oil-dependent countries. We investigate the asymmetric dynamic linkages between oil and Islamic stock prices for the period from May 2002 to February 2018 based on a nonlinear-Autoregressive Distributed Lag (ARDL) framework using both global and domestic oil prices. For comparison purposes, we also investigate conventional stock markets of the same countries and during the same sample period. Our results show five interesting findings. First, Islamic stock markets react to oil price shocks differently across time horizons and markets. Second, in the long run, our results support that a negative shock in oil prices significantly increases stock prices of all Islamic stock markets irrespective of the country's category (importing, exporting, or moderate oil dependency). Third, in the long run, a divergent reaction is established (regarding magnitude) across markets depending on their oil net position. Islamic stock markets in oil-exporting countries specifically exhibit a more aggressive reaction to negative oil price shocks (world and domestic) than their oil-importing and moderately oil-dependent counterparts. Finally, in the short run, we find that negative oil price changes have a more significant effect on Islamic indices than positive ones. For the conventional counterparts, findings indicate that the long-run effect of oil price changes is not significant for all countries. The short-run results show that, independently from the country's category, the effect of the negative oil price shocks seems to be more significant than oil price increases and that the reaction is similar between countries, in terms of influence. These findings are confirmed through an out-of-sample predictive accuracy test, highlighting that asymmetric specifications improve the predictability of the both Islamic and conventional stock prices of the studied markets. We also examine the implications for risk management in the presence of oil risk. We find evidence of diversification benefits and oil downside risk reduction in a two-assets, Oil-Islamic stocks, investment portfolio, being greater than for their conventional counterparts. The implications of this study will be of interest to Islamic portfolio managers and market regulators to better adopt proactive awareness regarding Islamic stock market behavior, as well as for international investors since it suggests Islamic stocks as an alternative to conventional stocks concerning Oil risk reduction.

Beyond income: US households’ financial position perceptions and their willingness to consume tourism

ABSTRACT People’s tourism demand decisions can be affected by perceived shifts in their finances. This study investigates how perceptions of financial positions can affect people’s decisions to consume tourism, using US households as a study case. The literature has given a prominent role to income as a determinant of tourism demand. However, the effect of income on tourism demand may be mitigated by people’s views about their finances. The study contributes to the literature, among others, by considering the possibility of nonlinear effects in the connection between households’ net financial position and their tourism demand. The methodology includes time-series data decomposition, stationarity, cointegration, and an application of the Limited Information Maximum Likelihood regression method. The results show that financial conditions matter for tourism demand and that tourists are heterogenous consumers that do not automatically react to stimuli such as income. The findings may help regional policymakers manage their destinations more effectively.

Impact of Flow Based Market Coupling on the European Electricity Markets

Flow Based Market Coupling is the target model for determining exchange capacities in the internal European Electricity Market. It has been in operation in Central Western Europe since 2015 and is scheduled to be extended to the wider Core region in the near future. Exchange capacities have a significant impact on market prices, exchanges and the energy mix, thus also determining the CO{}_{2} footprint of electricity generation in the system. Stakeholders therefore need to develop an understanding for the impact of Flow Based Market Coupling and the parameter choice, like the minimum exchange capacities introduced in 2020, on the market outcome. This article presents a framework to model Flow Based Market Coupling and analyse the impact of different levels of regulatory induced minimum trading capacities as well as the effect of the extension towards the Core region. Electricity prices, exchange positions and the number and nature of binding constraints in the market results under different market coupling scenarios are investigated. The results show that increased level of minimum trading capacities in CWE market coupling decrease the German net export position by up to 7 TW h or 23%, while French exports increase by up to 10 TW h or 9%. The different transfer capacity in the scenarios induce a price difference of up to 13%. Increased exchange capacities allow for more base load generation with the corresponding effects for the CO{}_{2} emissions of the system. The nature of coupling constraints is highly dynamic and dependent on the system state, which makes the suitability of static NTC values in energy system scenarios questionable.

External imbalances between China and the United States: A dynamic analysis with a life-cycle model

In this paper I use a life-cycle model to study the role of population aging and pension income as drivers of China's persistent trade surplus vis-à-vis the United States. China's rapid increase in life expectancy coupled with its relatively low pension expenditures may help to explain the country's high savings rate, persistent trade surpluses and accumulation of a sizable net foreign asset position. Although China's high productivity growth has a strong negative impact on its trade balance, the model predicts a positive net foreign asset position and trade balance for China for most years in the simulation period.

Prices of derivative warrants considering their market characteristics and short-selling costs of underlying assets

We theoretically explain the empirical findings for prices of derivative warrants (DWs). For this, we consider the short-selling costs of underlying assets and the different features of DW such as unavailability of net short positions and existence of a liquidity provider. Accordingly, we explain the similarities and differences between DWs and options. The similarities include that the relative bid–ask spreads increase when the short-selling costs increase or the moneyness becomes out of the money. The differences include that DW prices tend to be higher than option prices and that the bid–ask spreads of DWs can be narrower than those of options.

Business cycles in emerging markets: The role of liability dollarization and valuation effects

Understanding differences in business cycle phenomena between Emerging Market Economies (EMEs) and industrialized countries has been at the center of recent research on macroeconomic fluctuations. We investigate whether these are linked to credit market imperfections. To this end, we develop a small open economy Dynamic Stochastic General Equilibrium (DSGE) framework featuring both permanent and transitory productivity shocks, endogenous exchange rate movements, and liability dollarization and valuation affects, thereby accounting for the fact that emerging markets are facing difficulties in borrowing in domestic currency on international capital markets. We estimate our model using Bayesian techniques for several EMEs, thereby controlling for potential heterogeneity across countries. Our main findings regarding EMEs’ business cycles are (i) despite financial frictions, trend shocks are the main determinant of macroeconomic fluctuations, (ii) accounting for liability dollarization ameliorates the model fit, and (iii) valuation effects on average stabilize changes in the net foreign asset position.

Macroprudential Policy and Credit Risk in Dual Banking System

Issues related to financial stability are a very complex problem, especially the global crisis impact in 2008. Based on these conditions, the Basel Committee on Banking Supervision introduced a macroprudential policy to mitigate financial system risk systemically. The study aims to analyze the impact of macroprudential policy on the banks’ risk exposure by adopting credit risk as a risk proxy. By adopting a panel dynamic approach, credit risk is used to be a dependent variable while independent variables consist of the reserve requirement, capital buffer, and a net open position in either conventional and Islamic banks. The observation period starts from 2014 to 2019 with quarterly data, and it involves 22 banks in Indonesia. The study found that macroprudential policy has a long-run relationship to Islamic banks' credit risk but not to conventional banks. The result from Variance Decompositions (VDs) and Impulse Response Factors (IRFs) also showed that each independent variables have an impact to credit risk value in many different directions. According to that, this study suggests that Indonesian financial authority has to pay attention to the different effectiveness and impact of its macroprudential policy, which has to consider the specific characteristics of either conventional or Islamic banks..

Property rights and long‐run capital

AbstractProprietary capital falling into the public domain inefficiently decreases capital accumulation. As a consequence, the market steady state consumption underperforms the planner's by 4.6%–9.1% in a neoclassical infinitely‐lived agents economy with constant returns to scale and standard empirically supported parameters. The results extend robustly to an overlapping generations economy, for which the gap is 10.5% when similarly parametrized. A policy decentralizing, in the latter, the planner's steady state instead consists of (i) subsidizing the rental rate of private capital at its depreciation rate, and (ii) taxing households' negative net position between, on the one hand, firm and depreciated capital ownership, and on the other, borrowing. Under this policy, the necessary tax rate on households' negative net position is smaller the bigger the absolute value of the latter and, hence, the bigger the corresponding monetary real balances held by households.

Shock and volatility spillovers between oil and emerging seven stock markets

Purpose This study aims to examine the volatility spillover effects between oil and stock returns in the emerging seven economies. Design/methodology/approach In this study, the Granger causality test and vector autoregression-generalized autoregressive conditional heteroskedasticity approach to analyze the volatility spillover from 1995 to 2019 were used. The findings provide evidence of significant volatility spillover between oil and Brazil, China, India, Indonesia, Mexico, Russia and Turkey (E7) stock markets. Findings All emerging seven stock markets exhibit positive and low constant conditional correlations with oil assets. The magnitude of the correlation changes in respond to the country’s net position in the crude oil market. While a relatively high level of correlation exists between oil and the stock markets of net oil-exporting countries, a relatively low level of correlation exists between oil and the stock markets of net oil-importing countries. Originality/value The findings suggest that oil asset improves the risk-adjusted performance of a well-diversified portfolio of stocks. However, investors should invest a larger portion of their portfolios in E7 stock markets than in oil.