New Economics Papers
on Market Microstructure
Issue of 2012‒09‒09
two papers chosen by
Thanos Verousis

  1. Carry Trade and Liquidity Risk: Evidence from Forward and Cross-Currency Swap Markets By Erik Schlogl; Yang Chang
  2. Now-casting and the real-time data flow By Banbura, Marta; Giannone, Domenico; Modugno, Michele; Reichlin, Lucrezia

  1. By: Erik Schlogl (Finance Discipline Group, UTS Business School, University of Technology, Sydney); Yang Chang (Finance Discipline Group, UTS Business School, University of Technology, Sydney)
    Abstract: This study empirically examines the effect of foreign exchange (FX) market liquidity risk and volatility on the excess returns of currency carry trades. In contrast to the existent literature, we construct an alternative proxy of liquidity risk - violations of no arbitrage bounds in the forward and currency swap markets. We also use volatility smile data to capture FX-market specific volatility. The sample data cover periods both before and after the Global Financial Crisis (GFC). Both proxies are significant in explaining the abnormal returns of carry trades, particularly after the GFC. Our findings provide substantial evidence that uncovered interest parity (UIP) puzzle can be resolved after controlling for liquidity risk and market volatility.
    Keywords: uncovered interest rate parity; carry trade; liquidity risk; no-arbitrage bound; volatility
    JEL: F31 G15
    Date: 2012–08–01
  2. By: Banbura, Marta; Giannone, Domenico; Modugno, Michele; Reichlin, Lucrezia
    Abstract: The term now-casting is a contraction for now and forecasting and has been used for a long-time in meteorology and recently also in economics In this paper we survey recent developments on economic now-casting with special focus on those models that formalize key features of how market participants and policy makers read macroeconomic data releases in real time, which involves: monitoring many data, forming expectations about them and revising the assessment on the state of the economy whenever realizations diverge sizeably from those expectations. (Prepared for G. Elliott and A. Timmermann, eds., Handbook of Economic Forecasting, Volume 2, Elsevier-North Holland).
    Keywords: Dynamic factor model; High-Dimensional Data; Macroeconomic forecasting; Macroeconomic News; Mixed-Frequency; Real-Time Data; State-Space Models
    JEL: C01 C33 C53 E32 E37
    Date: 2012–09

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