This paper examines the relationship between UK equity returns and short-term interest rates using a two regime Markov-Switching EGARCH model. The results suggest one high-return, low variance regime within which the conditional variance of equity returns responds persistently but symmetrically to equity return innovations. In the other, low-mean, high variance, regime equity volatility responds asymmetrically and without persistence to shocks to equity returns. There is evidence of a regime dependent relationship between shorter maturity interest rate differentials and equity return volatility. Furthermore, there is evidence that events in the money markets influence the probability of transition across regimes.

We investigate cross-market trading dynamics in futures contracts written on seemingly unrelated commodities that are consumed by a common industry. On the Tokyo Commodity Exchange, we find such evidence in natural rubber (NR), palladium (PA) and gasoline (GA) futures markets. The automobile industry is responsible for more than 50% of global demand for each of these commodities. VAR estimation reveals short-run cross-market interaction between NR and GA, and from NR to PA. Cross-market influence exerted by PA is felt in longer dynamics, with PA volatility (volume) affecting NR (GA) volume (volatility). Our findings are robust to lag-specification, volatility measure, and consistent with full BEKK-GARCH estimation results. Further analysis, which benchmarks against silver futures market, TOCOM index and TOPIX transportation index, confirms that our results are driven by a common industry exposure, and not a commodity market factor. A simple trading rule that incorporates short-run GA and long-run PA dynamics to predict NR return yields positive economic profit. Our study offers new insights into how commodity and equity markets relate at an industry level, and implications for multi-commodity hedging.

A flexible approach to direct inflation targeting offers the European Union accession countries a viable monetary policy choice that is believed to facilitate both the economic transition and the monetary convergence to the eurozone. Following this assumption, a model investigating the nexus between inflation and selected monetary variables in three EU accession countries: the Czech Republic, Poland and Hungary is advanced. The empirical analysis is aimed at explaining the sensitivity of the CPI-based inflation path in these countries to backward- as well as forward-looking expectations, nominal exchange rate fluctuations, the eurozone inflation impulses, and output changes. The analysis implies that the monetary convergence begins with flexible inflation targeting and concludes with a full-fledged euroization.

We apply a structural topic model (STM) to analyze European Central Bank (ECB) communication regarding the monetary pillar of its monetary policy strategy. We do so by quantifying the transcripts of the ECB President’s introductory statements at the press conferences that accompany the regular meetings of the ECB Governing Council. Our evidence shows that, within its monetary pillar, the ECB has gradually shifted its focus away from a genuine monetary analysis towards monitoring the stability of the European financial system. We go on to augment a standard Taylor rule by quantitative indicators obtained from the STM to assess whether the monetary pillar in general, and the shift in focus in particular, has had a measurable impact on the ECB’s monetary policy stance. We find that the monetary analysis has had a bearing on the interest rate setting in the early years of the ECB’s existence, but this influence completely disappears in the latter years of the sample. Furthermore, we find no evidence that financial stability considerations in the ECB communication have influenced interest rate decisions either before or after the financial crisis.

Private credit expansions are an important predictor of subsequent banking crises. We revisit that result with a new dataset from developed and developing countries that decomposes private credit into household credit and enterprise credit. We argue that household credit growth raises debt levels without much effect on long-term income. Rapid household credit expansions generate vulnerabilities that can precipitate a banking crisis. Enterprise credit expansions can have the same effects but it is tempered by the associated increase in income. Our estimates show that household credit expansions have been a statistically and economically significant predictor of banking crises. Enterprise credit expansions are also associated with banking crises but their effect is weaker and less robust.

For valuing derivatives and other assets in securities and commodities markets, arbitrage pricing theory has been a major approach for decades. This paper derives fundamental arbitrage pricing results in finite dimensions in a simple unified framework using Tucker’s theorem of the alternative. Frictionless results, that is perfect market results, plus imperfect market results such as those with dividends, periodic interest payments, transaction costs, different interest rates for lending and borrowing, shorting costs and constrained short selling are presented. While the results are mostly known and appear in various places, our contribution is to present them in a coherent and comprehensive fashion with very simple proofs. The analysis yields a simple procedure to prove new results and some are presented for cases with imperfect market frictions.