Analysis of Herding Behavior in Developing Countries

When faced with market uncertainty and high volatility in financial markets, the potential for herding behavior in the stock market is likely to increase. This will cause instability in the financial market and also the economy of a country. The purpose of this study is to analyze herding behavior in the stock markets of developing countries including China, the Philippines, India, Indonesia, Korea, Malaysia, Pakistan, Taiwan and Thailand. This type of research is quantitative research and the population in this study is stocks listed on the Stock Exchanges of all developing countries with a time period from January 2016 to December 2020. The sampling method used is purposive sampling. The data used are monthly stock index data, VIX, world oil prices and the fed funds rate. Data analysis was performed through panel data regression, which is a combination of cross section and time series using the Eviews program. The results showed that there was no herding behavior in developing countries. The result of this research is that the fed fund rate has a significant effect on herding behavior in developing countries, especially in Indonesia. Keywords: Herding, Market Volatility, Oil Price, Fed Fund Rate.

Analysis of Floating Rate Bonds and the Firm Characteristics

We examine the security and firm characteristics of a sample of 2,027 non-convertible investment grade floating rate securities (bonds) issued by the US based firms between 1980 and 2018. These bonds pay a coupon based on short term reference rate, such as fed funds rate, plus a fixed quoted margin. Considerable number (81.6%) of these issues are between 1992 and 2007 signifying floating rate as an effective mechanism to mitigate firm’s interest rate risk when the rates are high and expected to fall. A positive and significant abnormal return (CAR = 0.27%), in the event window surrounding issue date, provides strong evidence that the floating rate is viewed as a less restrictive provision as compared to the call option. Majority of the issues (89.3%) are non-callable since the floating rate mitigates interest rate risk for the issuing firm. Lack of put provision in these bonds (in only 7.35% of the sample issues) signifies no significant investor concerns of falling bond prices. Regression analysis reveals that firms with growth options and with higher leverage experience positive CAR due to the financial flexibility these bonds provide. Firms with higher level of information asymmetry benefits less from issuing these securities since most of these bonds (90.13%) are issued at par therefore, the price is not likely to carry information content that mitigates information asymmetry between the firms and the investors.

Monetary Policy Rules vs Discretion: Social Cost and Benefits

In this article it is discussed the new monetary policy, the new instruments (monetary policy tools) that the Fed introduced after 2008 and 2020, the different monetary policy rules, and the social cost and benefits of this policy is measured. The first major Fed’s changes were on 12/20/2008 by altering the fed funds market in a number of different ways: (1) Zero fed funds rate. (2) The Fed started paying interest on reserves held by the bank or on behalf of depository institutions at Reserve Banks, subject to regulations of the Board of Governors, effective October 1, 2011 and interest on the overnight reverse repurchase agreement in 2014. (3) The close to zero deposit rates. (4) The Fed abolished the required reserves by making them since March 26, 2020 zero. The social cost is very high with these “innovated” policies. This zero federal funds target rate monetary policy is against depositors (bail in cost) and taxpayers (bail out cost); it is an unfair public policy and an anti-social monetary policy; and at the same time it is a risky one because it has created enormous bubbles in the stock market and a creeping high inflation. The different monetary policy rules reveal the unjustifiable low policy target rates. The latest monetary policy combined with the loss of self-sufficiency, the outsourcing, the unfair international trade, the recent peculiar coronavirus pandemic, and the current divisions inside the country are generating many challenges and risks for the future, which will cause the social cost to exceed the social benefits. JEL classification numbers: E52, E58, E4, E44, E23, D6. Keywords: Monetary Policy, Central Banks and Their Policies, Money and Interest Rates, Financial Markets and the Macro-economy, Production, Social Welfare.

The federal funds rate effect on subprime mortgage crisis management: An ARDL approach

This research empirically investigated the effectiveness of the interest rate policy of the Federal Reserve (Fed) on managing the subprime mortgage crisis. The study employed the autoregressive distributed lag model (ARDL) to analyze the stability of the Fed’s monetary policy, thereby providing an alternative analysis tool. Correlation analysis results showed a strong positive and statistically significant relationship between Fed funds rate and the labor market, a strong negative and statistically significant relationship between Fed funds rate and the housing market, and a strong negative and statistically significant relationship between Fed funds rate and price stability. In contrast, results of the ARDL model bounds test for cointegration indicated that house price index (HPI), labor market, and price stability were cointegrated, hence exhibiting a long-run relationship with Fed funds rate. This research demonstrates that additional empirical studies using new techniques are required to reevaluate the Fisher effect and expand the understanding of the mechanism between interest rates and inflation. This issue is extremely important, particularly for countries such as the U.S., the UK adapting inflation targeting policy using interest rates as an operational target.

The Dynamics of Exchange Rate and Stock Return Before and After the Fed Policy Normalization: Evidence from Fragile Five Countries

This research aims to examine the correlation between exchange rate and stock price return in each fragile five countries; Indonesia, Brazil, India, Turkey and South Africa. Using daily data, we investigate and then divide it into two periods; before Fed funds rate normalization (2013-2015) and after normalization (2016-2018), to find out whether the Fed funds rate hike caused a difference in the correlation between the two variables in each fragile five country. The methods used for this analysis are granger causality test and Vector Autoregression (VAR) using Eviews 9 program. Further investigation by analyzing the Dynamic Conditional Correlation-Multivariate GARCH (DCC MGARCH) method using Stata 15 program, which aims to find out the dynamic correlation between stock markets and also between currencies in fragile five countries. Granger test results found a difference in the relationship between variable exchange rates and stock price returns in Indonesia, India, and Turkey after the Fed normalization. Additionally, we learn that exchange rate lead stock price return in these three countries. Furthermore, the results of the DCC MGARCH test show that there is a significant positive dynamic correlation on the stock price index returns between markets. Moreover, we found similar results in testing positive and significant dynamic correlations between the exchange rates of each country. Key words: fragile five, exchange rate, stock return, VAR, DCC MGARCH

How US wages effect post-socialist European stock markets: an empirical study

Following the famous tapering speech of Bernanke on 2013, US non-farm payroll data became the leading indicator for the monetary policy of Fed. After midst of 2014 Fed shifted its attention to average hourly wage increases which was regarded as the determinant of inflation. As inflation is closely linked with possible increments of Fed funds rate, investors began to follow US wages more closely. We investigate the impact of US wages especially through concentrating on some Post-Socialist European stock markets. As US wages are found to Granger cause these stock exchanges, interestingly with domestic wages, a similar causation relation could not be achieved. This brings out the question whether wages are indeed an indicator for stock markets or not.

Determinant of World Oil Price and Fed Funds Rate on Indonesia Inflation

The changing global economic cycle may affect the Indonesia inflation, such as world oil prices and Fed Funds Rate. This research aims at analyzing the direct or indirect effects that cause the changes in the world oil prices and the Fed Funds Rate to the volatility of inflation in Indonesia. The analytical tool used in this research is path analysis. The research results is a significant direct effect of the world oil price variable on the inflation, there is a significant direct effect of the Fed Funds Rate variable on the inflation, and there is a significant direct effect of the Bank Indonesia (BI) variable on the inflation. The variable of the amount of money in circulation has no significant direct effect on the Indonesia inflation, there is a significant direct effect of the variables of the world oil prices and the Fed Funds Rate on the money in circulation, and there is a significant direct effect of the Fed Funds Rate variable on the money in circulation. There is a significant direct effect of the world oil price variable on the BI rate, and there is significant direct effect of the Fed Funds Rate variable on the BI rate.

The Deposits Channel of Monetary Policy*

We present a new channel for the transmission of monetary policy, the deposits channel. We show that when the Fed funds rate rises, banks widen the spreads they charge on deposits, and deposits flow out of the banking system. We present a model where this is due to market power in deposit markets. Consistent with the market power mechanism, deposit spreads increase more and deposits flow out more in concentrated markets. This is true even when we control for lending opportunities by only comparing different branches of the same bank. Since deposits are the main source of liquid assets for households, the deposits channel can explain the observed strong relationship between the liquidity premium and the Fed funds rate. Since deposits are also a uniquely stable funding source for banks, the deposits channel impacts bank lending. When the Fed funds rate rises, banks that raise deposits in concentrated markets contract their lending by more than other banks. Our estimates imply that the deposits channel can account for the entire transmission of monetary policy through bank balance sheets.