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Brian Graf

taking into account the weight and the magnitude of the price change variance of the subindices. Sampling Techniques 4.7 In survey sampling theory, 1 there is a distinction between the parameter and the estimator. In the context of a CPI, the parameter is the target price index number that is based on prices and quantities of the products that belong to the universe. The estimator is the price index that is actually compiled using the sampled data as input. The result of the estimator depends on the price index formula that may or may not use weights, and on

Mr. Michael G. Papaioannou and Tugrul Temel

), the SDR, and gold with ARCH(1,1) as well as for the U.S. dollar with ARCH(6,2). Only the BJ test for the average composite index with ARCH(1,1) is not statistically significant. I. Brief Literature Review The uncertainty of speculative prices has been observed to change through time ( Mandelbrot (1963) and Fama (1965) ). The tendency of large (small) price changes in high-frequency financial data to be followed by other large (small) price changes is often called “volatility clustering.” One specification that has emerged for characterizing such changing

Tugrul Temel and Mr. Michael G. Papaioannou
In managing their foreign exchange exposure, international investors, including central banks, often compare actual portfolios with hypothetical portfolios that have been calculated using certain assumptions regarding the statistical properties of interest rates and exchange rates. One of these assumptions is that the variability of returns on various currency assets is time invariant. This assumption is tested in this paper using autoregressive conditional heteroskedastic (ARCH) models. Using weekly aata for the period February 1982 to December 1991 for major reserve currencies, including the SDR, we find evidence that the variances of returns do vary over time (i.e., they do not exhibit stationarity) and that ARCH models that specify changing variances are superior to models that assume constant variance. By incorrectly assuming constant variability of returns, currency-asset allocations are not necessarily optimal and the measures of riskiness of a fixed-income portfolio may not be accurate. Furthermore, the error introduced by incorrectly assuming stationarity is smaller with the SDR than with any other national currency in the portfolio to be managed.
Tugrul Temel and Mr. Michael G. Papaioannou

) price changes in the high frequency financial data to be followed by other large (small) price changes is often called “volatility clustering.” One of the specifications that has emerged for characterizing such changing variances is the ARCH model ( Engle (1982) ) and its various extensions. In his seminal paper, Engle suggests that one possible parametrization for variances is to express them as a linear function of past-squared values of the errors of the model. With financial data, the ARCH model captures the tendency for volatility clustering, and numerous

International Monetary Fund

exchange rate risk and may thus expose investors to greater risk of loss than they are willing to accept. If estimates of changing variances can be made with reasonable accuracy, appropriate portfolio shifts can be made over time. Such a strategy can help central banks manage their foreign exchange reserves. The tests employ the autoregressive conditional heteroscedasticity (ARCH) methodology. The existence of heteroscedasticity makes it difficult to base inferences and predictions on least-squares estimation. When the conditional variances of returns are not constant

Tugrul Temel and Mr. Michael G. Papaioannou

estimates of changing variances can be made with reasonable accuracy, appropriate portfolio shifts can be made over time. Such a strategy can help central banks manage their foreign exchange reserves. The tests employ the autoregressive conditional heteroscedasticity (ARCH) methodology. The existence of heteroscedasticity makes it difficult to base inferences and predictions on least-squares estimation. When the conditional variances of returns are not constant through time, they can be calculated with the estimation procedure used in ARCH models. Estimation is possible

Mr. Peter Wickham and Ms. Carmen Reinhart
Primary commodities still account for the bulk of exports in many developing countries. However, real commodity prices have been declining almost continuously since the early 1980s and there is evidence of renewed weakness. The appropriate policy response to a terms of trade shock depends importantly on whether the shock is perceived to be temporary or permanent. Our results indicate that the recent weakness in commodity prices is mostly of a secular nature, stressing the need for commodity exporting countries to concentrate on export diversification and other structural policies. There is, however, scope for stabilization funds and the use of hedging strategies since the evidence also suggests commodity prices have become more volatile.
Mr. Hamid Faruqee
This paper estimates empirically the changing degree of capital mobility in several Pacific Basin countries that have pursued financial liberalization in recent years. Tracing the impact of the liberalization process on the capital account, the paper also examines the implications for monetary policy operating in this changing economic environment. Empirical estimates support an overall finding of increased capital mobility in the region over the past decade. However, country experiences, with the exception of Singapore, have been more episodic--oscillating between periods of high and low financial openness--rather than uniform in regards to changing capital mobility.
Mr. Noureddine Krichene
Following record low interest rates and fast depreciating U.S. dollar, crude oil prices became under rising pressure and seemed boundless. Oil price process parameters changed drastically in 2003M5-2007M10 toward consistently rising prices. Short-term forecasting would imply persistence of observed trends, as market fundamentals and underlying monetary policies were supportive of these trends. Market expectations derived from option prices anticipated further surge in oil prices and allowed significant probability for right tail events. Given explosive trends in other commodities prices, depreciating currencies, and weakening financial conditions, recent trends in oil prices might not persist further without triggering world economic recession, regressive oil supply, as oil producers became wary about inflation. Restoring stable oil markets, through restraining monetary policy, is essential for durable growth and price stability.