http://repub.eur.nl/res/aut/5192/ List of Publications en http://repub.eur.nl/static-eur/img/logo.png http://repub.eur.nl http://repub.eur.nl/res/pub/31266/ 2010-03-01T00:00:00Z This study provides European evidence on the ability of static and dynamic specifications of the Fama-French (1993) three-factor model to price 25 size-B/M portfolios. In contrast to US evidence, we detect a small-growth premium and find that the size effect is still present in Europe. Furthermore, we document strong time variation in factor risk loadings. Incorporating these risk fluctuations in conditional specifications of the three-factor model clearly improves its ability to explain time variation in expected returns. However, the model still fails to completely capture cross-sectional variation in returns as it is unable to explain the momentum effect. © 2008 The Authors Journal compilation http://repub.eur.nl/res/pub/16943/ 2002-11-01T00:00:00Z This paper analyzes to what extent international and domestic asset pricing models lead to a different estimate of the cost of capital for an individual firm under the maintained assumption of perfect international financial integration. We distinguish between (i) the multifactor Solnik–Sercu ICAPM including both the global market portfolio and exchange rate risk premia, and (ii) the single factor domestic CAPM. We use a sample of 3,293 stocks from nine countries in the period 1980–1999. The domestic CAPM yields a significantly different estimate of the cost of capital from the multifactor ICAPM for only five percent of the firms in our sample. We attribute the close correspondence between local and global pricing to strong country factors in individual stock returns, which are probably due to lack of real integration. Our results reinforce the home bias puzzle. http://repub.eur.nl/res/pub/7724/ 1999-05-24T00:00:00Z This paper uses Reuters exchange rate data to investigate the contributions to the price discovery process by individual banks in the foreign exchange market. We propose multivariate time series models as well as models in tick time to study the dynamic relations between the quotes of individual banks. We investigate the hypothesis that German banks are price leaders in the deutschmark/dollar market. Our empirical results suggest an important but not exclusive role for German banks in the price discovery process. There is also a group of banks, German and non-German, that lags behind the market and does not contribute to the price discovery process. In contrast to Peiers~(1997) we do not find evidence for stronger price leadership of Deutsche bank on days with suspected Bundesbank interventions in the foreign exchange market. http://repub.eur.nl/res/pub/16768/ 1998-01-01T00:00:00Z This paper studies the empirical performance of stochastic volatility models for twenty years of weekly exchange rate data for four major currencies. We concentrate on the effects of the distribution of the exchange rate innovations for both parameter estimates and for estimates of the latent volatility series. The density of the log of squared exchange rate innovations is modelled as a flexible mixture of normals. We use three different estimation techniques: quasi-maximum likelihood, simulated EM, and a Bayesian procedure. The estimated models are applied for pricing currency options. The major findings of the paper are that: (1) explicitly incorporating fat-tailed innovations increases the estimates of the persistence of volatility dynamics; (2) the estimation error of the volatility time series is very large; (3) this in turn causes standard errors on calculated option prices to be so large that these prices are rarely significantly different from a model with constant volatility. http://repub.eur.nl/res/pub/16944/ 1998-01-01T00:00:00Z In this paper we investigate purchasing power parity (PPP) in a panel with 17 countries for the period 1972 through 1996. The novel feature of our panel methodology is that results are invariant to the choice of a benchmark on numeraire currency. In the panel we allow individual country effects in the relation between prices and exchange rates. In this way we can identify the currency pairs for which PPP holds or does not hold. We conclude that there is substantive evidence for PPP, although not to the same extent for every currency. Evidence in favor of PPP is strongest for many exchange rates relative to the Dmark, and weakest for the Japanese yen. For this currency a trend-like variable, like productivity growth, is missing. http://repub.eur.nl/res/pub/17280/ 1998-01-01T00:00:00Z http://repub.eur.nl/res/pub/12476/ 1997-08-16T00:00:00Z Univariate time series regressions of the forex return on the forward premium generate mostly negative slope coefficients. Simple and refined panel estimation techniques yield slope estimates that are much closer to unity. We explain the two apparently opposing results by allowing for both additive and multiplicative news. No arbitrage arguments imply that the multiplicative news component must be identical across all exchange rates at a given point in time. Cross section estimates reveal that the movements in the multiplicative news component are so large that a negative slope coefficient for the post Bretton Woods time series regressions is not inprobable. http://repub.eur.nl/res/pub/11240/ 1991-01-01T00:00:00Z We propose a posterior odds analysis of the hypothesis of a unit root in real exchange rates. From a Bayesian viewpoint the random walk hypothesis for real exchange rates is a posteriori as probable as a stationary AR(1) process for four out of eight time series investigated. The French franc/German mark is clearly stationary, while the Japanese yen/US dollar is most likely a random walk. In contrast, classical tests are unable to reject the unit root for any of these series. http://repub.eur.nl/res/pub/11243/ 1991-01-01T00:00:00Z This paper is a comment on P. C. B. Phillips, `To criticise the critics: an objective Bayesian analysis of stochastic trends' [Phillips, (1991)]. Departing from the likelihood of an univariate autoregressive model different routes that lead to a posterior odds analysis of the unit root hypothesis are explored, where the differences in routes are due to the different choices of the prior. Improper priors like the uniform and the Jeffreys prior are less suited for Bayesian inference on a sharp null hypothesis as the unit root. A proper normal prior on the mean of the process is analysed and empirical results using extended Nelson-Plosser data are presented.