Unexpected Component Research Articles

REIT Investments and Hedging Against Inflation

Executive Summary. This paper investigates the relationship between equity and mortgage real estate investment trust (REIT) returns and inflation. The objective is to establish whether securitized real estate investments provide a reliable inflation hedge. Regression results show that real REIT returns are negatively correlated with the unexpected component of inflation. Therefore, equity and mortgage REIT investments may not offer a safe haven during inflationary periods. Chow tests confirm that there is evidence of a decoupling of REITs from the general stock market for more recent intervals. Fama's proxy hypothesis is also tested: the negative relationship between REITs and inflation is symptomatic of a positive relationship between REITs and real economic activity. However, no support is found for this hypothesis.

The High-Frequency Effects of U.S. Macroeconomic Data Releases on Prices and Trading Activity in the Global Interdealer Foreign Exchange Market

We introduce a new high-frequency foreign exchange dataset from EBS (Electronic Broking Service) that includes trading volume in the global interdealer spot market, data not previously available to researchers. The data also gives live transactable quotes, rather than the indicative quotes that have been used in most previous high frequency foreign exchange analysis. We describe intraday volume and volatility patterns in euro-dollar and dollar-yen trading. We study the effects of scheduled U.S. macroeconomic data releases, first confirming the finding of recent literature that the conditional mean of the exchange rate responds very quickly to the unexpected component of data releases. We next study the effects of data releases on trading volumes. News releases cause volume to rise, and to remain elevated for a longer period. However, in contrast to the result for the level of the exchange rate, even if the data release is entirely in line with expectations, we find that there is still typically a large pickup in trading volume.

Implied Volatility Asymmetries in Kospi 200 Option Markets

This paper examines implied volatility asymmetries in KOSPI200 option markets. The empirical results show that the unexpected negative return has a more remarkable effect on implied volatility than the unexpected positive one in the early stages of markets. In the recent stages, markets do not show implied volatility asymmetries. These results give and interesting implication to option market participants. In addition, this paper examines whether trading activity in option markets has an effect on implied volatility. The paper finds that in the second stages of markets trading activity has a negative effect on implied volatility while trading activity do not have effect on implied volatility in the early stages of markets. When trading activity is partitioned into expected and unexpected components, the empirical result shows that all trading activities have a significant negative effect on the implied volatility of option markets.

The Impact of Trading Volumes by Trader Types in the KOSPI200 Futures Market

In this study we examine the relationships between trader-type-specific trading volumes and the price volatility of the KOSPI200 stock index futures over the period of July 1997 through December 2001. The principal findings of this study are that the changes in trading volumes by foreign investors are positively associated with the return and the volatility of the index futures market. When trading volumes are decomposed into expected and unexpected components, unexpected shocks have more persistent effect on the volatility of the market than expected component. Meanwhile, individuals and domestic commercial investor seem to follow the lead made by foreign investors.

On the rationality of the post-announcement drift

This paper demonstrates that a post-announcement earnings drift, which is often advanced as an example of market irrationality, can arise even if traders act rationally on their information. Specifically, we show that in the presence of share supply variations which are unrelated to information, there is a positive correlation between the unexpected component of current public signals and future price changes. Such a correlation arises from the fact that while prices reveal private information that cannot be found in public signals, non-information based trading distorts the information content of prices relative to the implications of both private and public information. Under these circumstances, markets may appear semi-strong inefficient and slow to respond to earnings announcements even though information is processed in a timely and efficient manner. Our findings correspond well with previously documented empirical evidence and suggest that the robustness of earnings-based "anomalies" may be rational outcomes of varying uncertain share supply.

Cartography of the Ronda peridotite (Spain) by hyperspectral remote sensing

Abstract The Ronda Peridotite, south of Andalusia (Spain), was imaged by AVIRIS in 1991 and partially sampled by us in the field with a GER 3700 spectrometer in 1997 in order to get experience in processing hyperpectral images of planetary surfaces with probes such as ISM Phobos (1989), OMEGA Mars Express (2003) and VIMS Cassini (2004). The high spectral resolution of the images (224 channels from 400 to 2455 nm) is necessary to conduct geological analysis with remote petrological determinations of rock types. On Earth, it is also necessary to determine species of vegetation because of their strong influence in mapping lithology, even in dry areas like the Ronda peridotite. The Ronda AVIRIS image was first processed to infer geological features using photo-interpretation of colour composite images extracted from 150 useful channels compared to geological maps and checked on the field during the campaign of July 97. This allows us to distinguish easily the peridotite massif from its surrounding rocks and its own serpentine zoning. Since this work followed the work of Chabrillat et al. [2000] we chose to explore the AVIRIS data with other techniques. We chose to remove the contribution of the atmosphere with spectra collected in the field on a white target at various altitudes and to remove the main vegetation with spectra of the most characteristic vegetation of the peridotite. In both cases we first estimated the amount of atmosphere and vegetation with band ratios and remove them with two similar empiric corrections of the reflectance. From the spectroscopy data, after removal of the atmosphere and some vegetation signal, we were able to clearly distinguish the crustal rocks from the mantle ones, as well as compositional variations due to pyroxene and mostly serpentine abundance within the peridotites. Hyperspectral infrared spectrometry will provide good geological mapping of the main rocks on planetary surfaces, if images can also be calibrated with in situ field measurements which will not miss any unexpected component. However, some ambiguities remain between certain types of rock which have close mineralogical composition (e.g. harzburgite compared to lherzolite) or which have resulting spectra very similar to each other (plagioclase and lizardite in peridotites). Some other ambiguities between spectra are also introduced by techniques of analysis based on relative reflectance. By not taking into account absolute intensity of the reflectance, because of roughness and topographic shading effects, small mineral variations are not always visible.

The effect of net positions by type of trader on volatility in foreign currency futures markets

AbstractWe investigate the effect of net positions by type of trader on return volatility in six foreign currency futures markets using the weekly Commitments of Traders (COT) data. When net positions are decomposed into expected and unexpected components, we find that expected net positions by type of trader generally do not co‐vary with volatility. However, volatility is positively associated with shocks (in either direction) in net positions of speculators and small traders, and negatively related to shocks (in either direction) in net positions of hedgers. This evidence suggests that changes in speculative positions destabilize the market. Consistent with dispersion of beliefs models and noise trading theories, hedgers appear to possess private information, whereas speculators and small traders are less informed in these markets. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:427–450, 2002

Is the European Central Bank (and the United States Federal Reserve) Predictable?

The objective of this paper is to examine the predictability of the monetary policy decisions of the Governing Council of the ECB and the transmission of the unexpected component of the monetary policy decisions to the yield curve. We find, using new methodologies, that markets do not fully predict the ECB decisions but the lack of perfect predictability is comparable with the results found for the United States Federal Reserve. We also find that the impact of monetary policy shocks on bond yields declines with the maturity of the bonds, and that this impact is significantly lower when the shock stems from a monetary policy meeting of the ECB. Using implicit rates instead of bond yields, we find evidence that the market views the ECB as credible.

Detecting implied scenarios in message sequence chart specifications

Scenario-based specifications such as Message Sequence Charts (MSCs) are becoming increasingly popular as part of a requirements specification. Scenario describe how system components, the environment and users work concurrently and interact in order to provide system level functionality. Each scenario is a partial story which, when combined with other scenarios, should conform to provide a complete system description. However, although it is possible to build a set of components such that each component behaves in accordance with the set of scenarios, their composition may not provide the required system behaviour. Implied scenarios may appear as a result of unexpected component interaction. In this paper, we present an algorithm that builds a labelled transition system (LTS) behaviour model that describes the closest possible implementation for a specification based on basic and high-level MSCs. We also present a technique for detecting and providing feedback on the existence of implied scenarios. We have integrated these procedures into the Labelled Transition System Analyser (LTSA), which allows for model checking and animation of the behaviour model.

Precursor behaviour of the ferroelastic phase transition in K2ZnCl4

Linear birefringence and optical activity behaviours of K2ZnCl4 were studied between 100 K and 300 K. Birefringence deviation from linear thermo-optic behaviour and existence of unexpected optical gyration component were observed between 145 and 225 K, where a dielectric anomaly was also reported in the previous study. These phenomena can be ascribed to the precursor behaviour of the ferroelastic phase transition, that is, formation of ferroelastic nanodomains in the ferroelectric phase observed by previous x-ray scattering study.

Index option market activity and cash market volatility under different market conditions: an empirical study from Sweden

This study investigates the relationship between option market activity and cash market volatility on the OMX index. Option market activity is defined as trading volume divided by open interest and is assumed to reflect the specific impact of speculation. The study contributes by investigating empirical evidence relating to two periods with different market conditions. The findings show that for the complete sample period there is unidirectional causality from cash market volatility to option market activity for calls and puts jointly, as well as for calls and puts respectively. While unidirectional causality from cash market volatility to call option market activity is documented for both the subperiods, bilateral causality between put option market activity and cash market volatility was found for one of the subperiods. Finally, to further investigate the potential impact of index options on the volatility of the underlying cash market the expected and unexpected components of option market activity, trading volume, and open interest were also investigated.

A Non-Parametric Prepayment Model and Valuation of Mortgage-Backed Securities

A non-parametric technique called generalized additive model (GAM) estimation is particularly useful in high-dimension non-parametric estimations and in situations that involved mixed parametric and non-parametric specifications. The relationship between prepayment rates, and variables such as the age of the mortgage, the ratio of the mortgage coupon rate and prevailing interest rates, and expected and unexpected burnouts is highly non-linear, and it is difficult to capture these relations with parametric functions. Decomposition of pool burnouts into expected and unexpected components improves the model fit and has important pricing implications. The prepayment model estimated here fits the data significantly better than other models in use, and illustrates the factors that affect prepayments and the prices of mortgage-backed securities.

Government Intervention and Adverse Selection Costs in Foreign Exchange Markets

An important group of traders in the foreign exchange market is governments who often adhere to a foreign exchange rate policy of occasional interventions with otherwise floating rates. In this article we provide a theoretical model and empirical evidence that government foreign exchange interventions create significant adverse selection problems for dealers. In particular, our model shows that the adverse selection component of the foreign exchange spread is positively related to the variance of unexpected intervention and that expected intervention has no impact on the spread. After controlling for inventory and order processing costs, we find that bid-ask spreads increase with U.S. dollar and German deutsche mark foreign exchange rate intervention during the period 1976-94. Furthermore, when the intervention is decomposed into expected and unexpected components, we find a statistically and economically significant increase in spreads with the variance of unexpected intervention, while expected intervention has no significant impact on spreads. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Market volatility and the demand for hedging in stock index futures

This study examines the relation between stock market volatility and the demand for hedging in S&P 500 stock index futures contracts. Open interest is used as a proxy for hedging demand. The analysis employs unique data that identify separately the open interest of large hedgers, large speculators, and smaller traders. Volatility estimates are decomposed into expected and unexpected components, to assess whether traders’ reactions to volatility depend upon its predictability. Results indicate that daily open interest for hedgers increases when unexpected volatility increases. Increases in unexpected volatility may cause hedgers to raise their estimates of future expected volatility, and hence increase their demand for hedging. Open interest of speculators is not related to expected volatility, and is only weakly related to unexpected volatility. The increase in the participation of hedgers in periods of higher volatility is significantly larger than the increase in the participation of speculators. The results suggest that increases in stock market volatility increase the demand for hedging. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20: 105–125, 2000

Insider trading and the early adoption of SFAS 96: A test of the signaling hypothesis

This paper examines the insider trades of officers and directors of firms that adopted Statement of Financial Accounting Standards No. 96, “Accounting for Income Taxes” (SFAS 96) to test whether managers' expectations are consistent with signaling theory. One theory of signaling suggests that high quality firms may signal their quality by using the “best” accounting policies advocated by the accounting profession. A second theory suggests that a one time earnings management opportunity may be used to smooth a transitory increase or decrease in earnings as “an effective way for a firm to provide the stock market with information as to the degree of future persistence in the unexpected component of current earnings.” Our results show that in the six-month interval preceding SFAS 96 adoption, managers of firms that increase net income by more than 20 percent from the adoption nearly doubled their normal number of purchases relative to other intervals examined, and made significantly more purchases of their firms' stock than did a control sample of nonadopters. This result is consistent with the theory that managers may have used the positive income effects from SFAS 96 adoption to signal their positive long-term expectations. However, when all adopting firms are pooled together regardless of the magnitude or direction of the income effect from SFAS 96 adoption, our results suggest that managers of adopting firms may have had an unfavorable outlook. Insiders of firms that adopted in 1987 engaged in significantly more selling in the last six months of 1987 than did a control sample of firms that did not adopt SFAS 96. Of the four time periods examined, this was the only one in which selling was significantly different for adopting firms. Insiders of firms adopting in 1988 also engaged in significantly more selling, and in significantly less buying in the last six months of 1988 than nonadopters. These results suggest that managers of adopting firms may have had an unfavorable outlook, and, as such, are not consistent with the theory that firms choose accounting methods as a way to signal higher quality.

The Electoral Impact of Unexpected Inflation and Economic Growth

This article supports two theoretical changes to models of comparative economic voting. The first is that the distinction between expected and unexpected components of inflation and economic growth is important. We posit that voters are primarily concerned with unexpected inflation and unexpected growth since these changes have real income effects and serve as better indicators of government competence. Empirical analyses of data from nineteen industrialized nations in 1970–94 reveal stronger electoral effects for the unexpected components of inflation and growth than for their overall levels. The second innovation is the relaxation of the assumption of homoscedasticity, which led to the finding that the relationship between economic factors and incumbent vote has become more volatile over time and is less volatile when policy-making responsibility is more obscured.

GPS selective availability error contains a small component with a period of 3 seconds: Influence on the phase measurement noise

It is commonly assumed that the GPS ranging degradation called Selective Availability contains only low frequency components, with a correlation time on the order of several minutes. It will be shown here that, on top of this well known behavior, SA contains a small high frequency component centered around 1/3 Hz (period 3 s), with an amplitude on the order of the millimeter. This unexpected component will be studied and characterized. It will be shown that it causes the noise on the phase measurement to be non‐white, and that it is responsible for errors when decimating GPS data.

Consumption Smoothing among Working-Class American Families before Social Insurance

This paper examines whether the saving decisions of a large sample of working-class American families around the turn of the twentieth century are consistent with consumption smoothing tendencies in the spirit of the permanent income hypothesis. We develop two econometric models to decompose reported annual incomes from micro-data into expected and unexpected components, then we estimate marginal propensities to save out of each component of income. The two methodologies deliver similar regression estimates and reveal empirical patterns consistent with those reported in other recent research based on quite different contemporary household data. Marginal propensities to save out of unexpected income shocks are large relative to propensities based on expected income movements, though the former lie much below one and the latter much above zero. While these data reject strict parameterizations of the permanent income hypothesis, we nonetheless conclude that families' saving decisions in the historical period look quite "modern."

Structural Unemployment, Cyclical Unemployment, and Income Inequality

This is the first study that decomposes unemployment into its structural and cyclical components and investigates their impact on income distribution, controlling for the influence of inflation. Increases in structural unemployment have a substantial aggravating impact on income inequality. Inflation has a progressive impact, which is due to the unexpected component. The study demonstrates that previous work failed to take into account the stochastic trend behavior of the variables. Consequently, specifications used by previous research cannot predict the behavior of income shares after 1983, whereas the specification used by this paper generates accurate forecasts. The results also indicate that a sustained GNP growth is not necessarily associated with an improvement in income inequality, because sustained GNP growth can coexist with increased structural unemployment.

Consumption Smoothing Among Working-Class American Families Before Social Insurance

This paper examines whether the saving decisions among a large, unique sample of working-class American families around the turn of the twentieth century are consistent with consumption smoothing tendencies in the spirit of the permanent income hypothesis. We develop an econometric model to decompose each family's reported income realization into an expected and an unexpected components, then we estimate marginal propensities to save for each income component. The estimated regression coefficients are remarkably similar to point estimates available from other recent research based on quite different contemporary household data. Marginal propensities to save out of unexpected income shocks are large relative to propensities based on expected income movements, though the former lie much below one and the latter much above zero. Thus, while these data readily reject strict parameterizations of the permanent income hypothesis, we nonetheless conclude that families's saving decisions look quite modern.