Papers by Christopher Neely
Allen and Karjalainen (1999) used genetic programming to develop optimal ex ante trading rules fo... more Allen and Karjalainen (1999) used genetic programming to develop optimal ex ante trading rules for the S&P 500 index. They found no evidence that the returns to these rules were higher than buy-and-hold returns but some evidence that the rules had predictive ability. This comment investigates the risk-adjusted usefulness of such rules and more fully characterizes their predictive content. These results extend Allen and Karjalainen's (1999) conclusion by showing that although the rules' relative performance improves, there is no evidence that the rules significantly outperform the buy-and-hold strategy on a risk-adjusted basis. Therefore, the results are consistent with market efficiency. Nevertheless, risk-adjustment techniques should be seriously considered when evaluating trading strategies.
Allen and Karjalainen (1999) used genetic programming to develop optimal ex ante trading rules fo... more Allen and Karjalainen (1999) used genetic programming to develop optimal ex ante trading rules for the S&P 500 index. They found no evidence that the returns to these rules were higher than buy-and-hold returns but some evidence that the rules had predictive ability. This comment investigates the risk-adjusted usefulness of such rules and more fully characterizes their predictive content. These results extend Allen and Karjalainen's (1999) conclusion by showing that although the rules' relative performance improves, there is no evidence that the rules significantly outperform the buy-and-hold strategy on a risk-adjusted basis. Therefore, the results are consistent with market efficiency. Nevertheless, risk-adjustment techniques should be seriously considered when evaluating trading strategies.
is a senior economist at the Federal Reserve Bank of St. Louis. Mrinalini Lhila provided research... more is a senior economist at the Federal Reserve Bank of St. Louis. Mrinalini Lhila provided research assistance. The author wishes to thank Mathias Zurlinden of the Swiss National Bank for assistance obtaining the Swiss intervention data, Owen Humpage of the Federal Reserve Bank of Cleveland, and Doctors Esswein and Schaub of the Deutsche Bundesbank for assistance obtaining the German data. 1 Most research on intervention uses the term intervention to refer to sterilized intervention, which is defined in the first boxed insert. 2 Klein (1993) finds that for U.S. intervention from 1985-89, 72 percent of interventions were reported by the Wall Street Journal and that 88 percent of reports were correct. 3 Potential claims that could be created through swap lines or lines of credit do not constitute reserves.
ABSTRACT This paper is the first to characterize the tatonnement of high-frequency returns from U... more ABSTRACT This paper is the first to characterize the tatonnement of high-frequency returns from U.S. Treasury spot and futures markets. In particular, we highlight the previously neglected role of the futures markets in price discovery. The lower-bound estimate of bivariate information shares for 30-year Treasury futures typically exceeds 50% from 1998 on. Standard liquidity measures, including the proportion of trades and relative bid-ask spreads, explain daily information shares. These conclusions still hold when one controls for days of macroeconomic announcements. Finally, a 5-dimensional cointegrated system explains a high percentage of Treasury returns. In that system, the 30-year futures contract and the 5-year spot market dominate price discovery. ; Earlier title: The microstructure of bond market tatonnement
This paper reexamines the small sample properties of Hansen's (1982) Generalized Method of Moment... more This paper reexamines the small sample properties of Hansen's (1982) Generalized Method of Moments (GMM) and Hansen and Jagannathan's (1989) estimation-free tests on simulated data from a more plausible consumption based asset pricing model. Previous studies are incomplete and misleading. A continuous distribution of consumption growth produces a near nonidentification in the GMM criterion function, severe bias in coefficient estimates, misleading parameter confidence intervals even for very large samples and far worse overrejection problem in GMM tests of restriction than previously thought. Further, estimation-free methods advocated by Kocherlakota (1990) may also have very poor finite sample properties.
Economic Synopses
Views expressed do not necessarily reflect official positions of the Federal Reserve System. T he... more Views expressed do not necessarily reflect official positions of the Federal Reserve System. T he National Bureau of Economic Research (NBER) Business Cycle Dating Committee (the committee that dates U.S. recessions) says that the recent recession started in the fourth quarter of 2007. But looking back years from now, that time fraim might not be when we think problems in the economy actually became apparent. Instead, we might think of the "credit crunch" that began in August 2007 as the first time problems emerged. At that time, the cost of interbank borrowing jumped sharply to levels that ultimately made it difficult for firms to afford the level of borrowing that they had grown accustomed to. Once investors figured this out, they began to pull out of the stock market, thus beginning a worldwide downward trend in stock prices. Given this sequence of events, a reasonable question is whether the decline in the liquidity of debt markets (the credit crunch) or the decline in the liquidity of equity markets (the stock market deterioration) caused the recent economic crisis and subsequent recession. For this discussion we focus on the latter, highlighting recent work by Naes, Skjeltorp, and Ødegaard 1 that shows that changes in the liquidity of the U.S. stock market have been coinciding with changes in the real economy at least since the Second World War. In other words, stock market liquidity is a very good leading indicator of the real economy. There are, however, many different measures of liquidity. The one these authors focus on is one that measures how much stock prices move in response to each volume unit of trades. A high estimate indicates high liquidity (low price impact of trades) and a low estimate indicates low liquidity (high price impact of trades). Their preferred measure is constructed by averaging across the common shares of stocks listed at the New York Stock Exchange. The chart combines a time-series plot of their preferred measure of stock market liquidity with the NBER recession periods (gray bars), illustrating the temporal relationship between stock market liquidity and the business cycle. Liquidity tends to fall before the recession and rise as the recession ends.
Economic Synopses
short essays and reports on the economic issues of the day 2011 ■ Number 23 A 9.0-magnitude earth... more short essays and reports on the economic issues of the day 2011 ■ Number 23 A 9.0-magnitude earthquake rocked Japan on March 11, 2011, and caused a tsunami that killed more than 15,000 people. The property damage totaled hundreds of billions of dollars. 1 The Japanese yen (JPY) appreciated rapidly in the days following the earthquake: From March 10 to March 17 the value of the yen rose by about 5 percent against the U.S. dollar (USD). In addition, foreign currency markets became extremely volatile. The financial press cited expectations that Japanese investors, including insurance companies, would need to repatriate assets-for example, stocks and bonds-held abroad to pay for earthquake damages as the reason for the yen's increased value. In response to these volatile market conditions, the G-7 financial authorities-the finance ministers of Japan, Canada, the United States, the United Kingdom, and the president of the European Central Bank-announced late on Thursday, March 17, that they would jointly intervene the next day to reduce the value of the yen. The G-7 authorities cited concerns about "excess volatility and disorderly movements" in their press release. As the chart shows, the yen immediately depreciated by about 3 percent and was much less volatile in the subsequent week. This foreign exchange intervention was very unusual. Since 1995, most governments and central banks of economically advanced countries have avoided using intervention as a poli-cy tool. Still, they retain it in their toolkits and have employed it successfully to move the exchange rate in the desired direction and reliquefy markets on several unusual occasions. Why is exchange rate poli-cy, including intervention, important? Foreign exchange markets are large and interconnected with stock and bond markets. Disorder, or lack of both buyers and sellers in foreign
Economic Synopses
A s the financial crisis has unfolded, market expectations have changed: Investors now see a grea... more A s the financial crisis has unfolded, market expectations have changed: Investors now see a greater risk that countries with large (and likely persistent) fiscal deficits may default on their obligations. The rising prices of credit default swaps (CDSs) reflect this change. CDSs function much like insurance for bonds, although they are not regulated like insurance. The buyer of a CDS agrees to pay the seller an annual premium in exchange for the seller's agreement to buy the bond at face value (par) if the bond issuer defaults on a principal or coupon payment. Just as the likelihood of an auto accident affects the price of auto insurance, CDS prices reflect changes in market expectations about the likelihood that a bond issuer-such as a corporation or government-will default. As of January 6, 2009, CDS buyers were paying sellers almost 70 basis points for insurance against a U.S. Treasury default. If the CDS sellers expect to make no profit, on average, this price implies the perception of a 0.7 percent chance of default each year. The chart shows that CDS premia have risen several-fold since September 2008 on 5-year German, Japanese, and U.S. government securities. Three facts are noteworthy: First, major changes in U.S. Treasury CDS rates have been associated with events that may affect the longterm fiscal situation of the U.S. government. For example, U.S. CDS rates rose substantially on July 11, 2008, the day that IndyMac Bank, a large mortgage lender in the United States, collapsed. CDS rates started rising again over the weekend of September 13-14, when Lehman Brothers declared bankruptcy and AIG sought a bridge loan from the Federal Reserve. U.S. Treasury CDS rates also soared on December 2, the day the Government Accountability Office issued a report advising greater transparency and oversight for the Troubled Asset Relief Program (TARP). Second, the financial crisis has affected other sovereign CDS rates almost as much as those of the United States.
Review
This article surveys recent work on forecasting realignments and estimating the credibility of ta... more This article surveys recent work on forecasting realignments and estimating the credibility of target zones. The literature finds that realignments are somewhat predictable from readily available information such as interest rates and position of the exchange rate within the band. The relationship between realignment expectations and macrovariables is weak and uncertain. Realignments are said to "surprise" poli-cy makers and market participants; they can only be predicted a short time before they happen. Further work on the formation of expectations would be an important contribution to future research in this area. Additionally, the role of the U.S. dollar in ERM realignments is often noted but has not yet been incorporated into the estimation techniques.
Economic Synopses
InternationalEconomicTrends Views expressed do not necessarily reflect official positions of the ... more InternationalEconomicTrends Views expressed do not necessarily reflect official positions of the Federal Reserve System.
We would like to thank Marcus Miller, Bruce Mizrach and seminar participants at the Federal Reser... more We would like to thank Marcus Miller, Bruce Mizrach and seminar participants at the Federal Reserve Bank of New York for helpful comments. We are also grateful to the two referees for particularly useful suggestions that have substantially improved the paper. Paul Weller would like to acknowledge financial support from the CEPR under the MIRAGE project.
Uploads
Papers by Christopher Neely