Financial markets

• October 18, 2005

  What Drives Movements in Exchange Rates?

  Bank of Canada Review - Autumn 2005 Jeannine Bailliu, Michael R. King

  Understanding what causes the exchange rate to move has been on ongoing challenge for economists. Despite extensive research, traditional macro models of exchange rate determination—with the exception of the Bank of Canada's exchange rate equation—have typically not fared well, motivating economists to explore new ways to model exchange rate movements that incorporate more complex and realistic settings. Within the context of the sharp appreciation of the Canadian dollar in 2003 and 2004, Bailliu and King review the macroeconomic models of exchange rates, as well as the micro-structure studies that highlight the importance of trading mechanisms, information asymmetry, and investor heterogeneity for explaining short-term dynamics in exchange rates. In addition to summarizing the current state of knowledge, they highlight recent advances and identify promising alternative approaches.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Economic models, Exchange rates, Financial markets

• Uninsured Idiosyncratic Production Risk with Borrowing Constraints

  Staff Working Paper 2005-26 Francisco Covas

  The author analyzes a general-equilibrium model of a heterogeneous agents economy in which the agents are subject to borrowing constraints and uninsurable idiosyncratic production risk.

  Content Type(s): Staff research, Staff working papers Topic(s): Economic models, Financial institutions, Financial markets JEL Code(s): E, E2, E22, G, G1, G11, M, M1, M13

• A Search Model of Venture Capital, Entrepreneurship, and Unemployment

  Staff Working Paper 2005-24 Robin Boadway, Oana Secrieru, Marianne Vigneault

  The authors develop a search model of venture capital in which the number of successful matches of entrepreneurs and venture capitalists (VCs) at any moment in time is a function of the number of entrepreneurs searching for funds, the number of VCs searching for entrepreneurs, and the number of vacancies posted by each VC.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, Fiscal policy, Labour markets JEL Code(s): D, D8, D82, G, G1, G18, G2, G24, H, H2, H21, J, J6, J64

• The Effectiveness of Official Foreign Exchange Intervention in a Small Open Economy: The Case of the Canadian Dollar

  Staff Working Paper 2005-21 Rasmus Fatum, Michael R. King

  The Bank of Canada is one of very few central banks that has made records of the intraday timing of its intervention operations available to researchers.

  Content Type(s): Staff research, Staff working papers Topic(s): Exchange rates, Financial markets JEL Code(s): E, E5, E58, F, F3, F31, G, G1, G14, G15
• June 22, 2005

  Estimating the Impact of Monetary Policy Surprises on Fixed-Income Markets

  Bank of Canada Review - Summer 2005 Jason Andreou

  In the interest of better understanding the impact of the Bank of Canada's policy actions on bond and bill yields, Andreou assesses the impact of policy-rate announcements on short and long bonds over the period 1996 to 2004. To aid the analysis, policy actions are decomposed into expected and surprise components. He also examines whether the introduction of fixed announcement dates (FADs) has affected these results, including markets' perceptions. The main finding is that unexpected policy actions by the Bank have a significant effect on market rates at the shorter end of the yield curve, with the effect dissipating as the maturity increases. A second finding, that the impact on longer-term interest rates of a surprise action by the Bank has diminished since the introduction of the FADs, suggests that the Bank's long-term policy goals are well understood and credible.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Credibility, Financial markets, Monetary policy and uncertainty

• Risk Perceptions and Attitudes

  Staff Working Paper 2005-17 Miroslav Misina

  Changes in risk perception have been used in various contexts to explain shorter-term developments in financial markets, as part of a mechanism that amplifies fluctuations in financial markets, as well as in accounts of "irrational exuberance."

  Content Type(s): Staff research, Staff working papers Topic(s): Economic models, Financial markets JEL Code(s): D, D8, D81, D84, G, G1, G12

• State Dependence in Fundamentals and Preferences Explains Risk-Aversion Puzzle

  Staff Working Paper 2005-9 Fousseni Chabi-Yo, René Garcia, Eric Renault

  The authors examine the ability of economic models with regime shifts to rationalize and explain the risk-aversion and pricing-kernel puzzles put forward in Jackwerth (2000).

  Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, Market structure and pricing JEL Code(s): G, G1, G12, G13

• Pre-Bid Run-Ups Ahead of Canadian Takeovers: How Big Is the Problem?

  Staff Working Paper 2005-3 Michael R. King, Maksym Padalko

  The authors study the price - volume dynamics ahead of the first public announcement of a takeover for 420 Canadian firms from 1985 to 2002.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial markets JEL Code(s): G, G1, G14, G18, G3, G34

• The Stochastic Discount Factor: Extending the Volatility Bound and a New Approach to Portfolio Selection with Higher-Order Moments

  Staff Working Paper 2005-2 Fousseni Chabi-Yo, René Garcia, Eric Renault

  The authors extend the well-known Hansen and Jagannathan (HJ) volatility bound. HJ characterize the lower bound on the volatility of any admissible stochastic discount factor (SDF) that prices correctly a set of primitive asset returns.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, Market structure and pricing JEL Code(s): C, C6, C61, G, G1, G11, G12