International Finance: Theory And Policy 10th Edition Krugman, Paul R.; Melitz, Marc J.; Obstfeld, Maurice - Solutions

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Now, write a function that requires three inputs, namely,y (a T vector), X(a (T × K) matrix), and ’lambda‘ and then returns the Lasso estimator (a K vector) for a given penalization parameter λ. Recall that the intercept should not be penalized. Therefore, your function should indicate
Compute the L2 norm (β′β) for the regression coefficients based on the predictive regression from the previous exercise for a range of λ’s and illustrate the effect of penalization in a suitable figure.
Write a function that requires three inputs, namely, y (a T vector), X (a(T × K) matrix), and lambda and then returns the Ridge estimator (a K vector) for a given penalization parameter λ. Recall that the intercept should not be penalized. Therefore, your function should indicate whether X
Based on the exercise on ratings in Chapter 4, include ratings as a control variable in the analysis above. Do the results change?
The 46th President of theUS rejoined the Paris Agreementin February 2021.Repeat the difference in differences analysis for the day of his election victory. Note that you will also have to download new TRACE data. How did polluters’ yields react to this action?
Following Peters and Taylor (2017), compute Tobin’s q as the market value of outstanding equity mktcap plus the book value of debt (dltt + dlc) minus the current assets atc and everything divided by the book value of property, plant and equipment ppegt. What is the correlation between the
Estimate the two-way fixed effects model with two-way clustered standard errors using quarterly Compustat data from WRDS. Note that you can access quarterly data via tbl(wrds, in_schema("comp", "fundq")).
Implement a rolling-window regression for the time-series estimation of the factor exposure. Skip one month after each rolling period before including the exposures in the cross-sectional regression to avoid a lookahead bias. Then, adapt the cross-sectional regression and compute the average risk
Use individual stocks with weighted-least squares based on a firm’s size as suggested by Hou et al. (2020). Then, repeat the Fama-MacBeth regressions without the weighting scheme adjustment but drop the smallest 20 percent of firms each month. Compare the results of the three approaches.
Download a sample of test assets from Kenneth French’s homepage and reevaluate the risk premiums for industry portfolios instead of individual stocks.
On his homepage, Kenneth French1 provides instructions on how to construct the most common variables used for portfolio sorts. Pick one of them, e.g. OP (operating profitability) and try to replicate the portfolio sort return time series provided on his homepage.
Fama and French (1993) claim that their sample excludes firms until they have appeared in Compustat for two years. Implement this additional filter and compare the improvements of your replication effort.
As for the size premium, also the value premium constructed here does not follow Fama and French (1993). Implement a p-hacking setup as in Chapter 8 to find a premium that comes closest to their HML premium.
When we investigate the portfolios, we focus on the returns exclusively.However, it is also of interest to understand the characteristics of the portfolios. Write a function to compute the average characteristics for size and book-to-market across the 25 independently and dependently sorted
In Chapter 8, we examine the distribution of market equity. Repeat this analysis for book equity and the book-to-market ratio (alongside a plot of the breakpoints, i.e., deciles).
We computed several size premiums, but they do not follow the definition of Fama and French (1993). Which of our approaches comes closest to their SMB premium?
While you saw the spread in returns from the p-hacking exercise, we did not show which choices led to the largest effects. Find a way to investigate which choice variable has the largest impact on the estimated size premium.
The returns that we analyse above do not account for differences in the exposure to market risk, i.e., the CAPM beta. Change the function compute_portfolio_returns() to output the CAPM alpha or beta instead of the average excess return.
We compute breakpoints but do not take a look at them in the exposition above. This might cover potential data errors. Plot the breakpoints for Distribution of size premiums for different sorting choices ten size portfolios over time. Then, take the difference between the two extreme portfolios and
We gained several insights on the size distribution above. However, we did not analyze the average size across listing exchanges and industries.Which listing exchanges/industries have the largest firms? Plot the average firm size for the three listing exchanges over time. What do you conclude?
Given the results in this chapter, can you define a long-short strategy that yields positive abnormal returns (i.e., alphas)? Plot the cumulative excess return of your strategy and the market excess return for comparison.
The analysis here is based on betas from monthly returns. However, we also computed betas from daily returns. Re-run the analysis and point out differences in the results.
We plotted the alphas of the ten beta portfolios above.Write a function that tests these estimates for significance. Which portfolios have significant alphas?
Take the two long-short beta strategies based on different numbers of portfolios and compare the returns. Is there a significant difference in returns? How do the Sharpe ratios compare between the strategies? Find one additional portfolio evaluation statistic and compute it.
Compute beta estimates for multi-factor models such as the Fama-French 3 factor model. For that purpose, you extend your regression to ri,t − rf,t = αi +X kj=1βi,k(rj,t − rf,t) + εi,t where rj,t are the k factor returns. Thus, you estimate 4 parameters (αi and the slope coefficients).
Filter out the stocks with negative betas. Do these stocks frequently exhibit negative betas, or do they resemble estimation errors?
Instead of using future_map(), perform the beta estimation in a loop (using either monthly or daily data) for a subset of 100 permnos of your choice.Verify that you get the same results as with the parallelized code from above.
Compute beta estimates based on monthly data using 5 years of data and impose different numbers of minimum observations. How does the share of permno-month observations with successful beta estimates vary across the different requirements? Do you find a high correlation across the estimated betas?
Compute beta estimates based on monthly data using 1, 3, and 5 years of data and impose a minimum number of observations of 10, 28, and 48 months with return data, respectively. How strongly correlated are the estimated betas?
Simfin15 provides excellent data coverage. Use their API to find out if the information Simfin provides overlaps with the CRSP/Compustat dataset in the tidy_finance.sqlite database introduced in Chapters 2–4
Generate summary statistics of the data you retrieved and provide some useful visualization. The possibilities are endless: Maybe there is some interesting economic event you want to analyze, such as stock market responses to Twitter activity.
Select one of the data sources in the table above and retrieve some data:Browse the homepage of the data provider or the package documentation to find inspiration on which type of data is available to you and how to download the data into your R session.
Download the TRACE data until the end of September 2021. Hint: you want to download the data completely new, rather than adding the new information. Can you find a reason why?
WRDS provides more information from Mergent FISD. In particular, they also provide rating information in fisd_ratings. Download the ratings for the bond sample. Then, plot the distribution of ratings in a histogram.
Compute the number of days each bond is traded (accounting for the bonds’ maturities and issuances). Start by looking at the number of bonds traded each day in a graph similar to the one above. How many bonds trade on more than 75% of trading days?
Summarize the amount outstanding of all bonds over time and describe the resulting graph.
Repeat the analysis of market capitalization for book equity, which we computed from the Compustat data.Then, use the matched sample to plot book equity against market capitalization. How are these two variables related?
Go back to the original Compustat data in funda_db and extract rows where the same firm has multiple rows for the same fiscal year.What is the reason for these observations?
datadate refers to the date to which the fiscal year of a corresponding firm refers to. Count the number of observations in Compustat by month of this date variable. What do you find? What does the finding suggest about pooling observations with the same fiscal year?
In the main part, we look at the distribution of market capitalization across exchanges and industries. Now, plot the average market capitalization of firms for each exchange and industry. What do you find?
Compute mkt_cap_lag using lag(mktcap) rather than joins as above. Filter out all the rows where the lag-based market capitalization measure is different from the one we computed above. Why are they different?
Check out the structure of the WRDS database by sending queries in the spirit of “Querying WRDS Data using R”8 and verify the output with dbListObjects(). How many tables are associated with CRSP? Can you identify what is stored within msp500?
Download the Fama-French 5 factors using the frenchdata package. Use get_french_data_list() to find the corresponding table name. After the successful download and conversion to the column format that we used above, compare the resulting rf, mkt_excess, smb, and hml columns to factors_ff_monthly.
Download the monthly Fama-French factors manually from Ken French’s data library15 and read them in via read_csv(). Validate that you get the same data as via the frenchdata package.
The efficient frontier characterizes the portfolios with the highest expected return for different levels of risk, i.e., standard deviation. Identify the portfolio with the highest expected return per standard deviation. Hint:the ratio of expected return to standard deviation is an important
In the portfolio choice analysis, we restricted our sample to all assets trading every day since 2000. How is such a decision a problem when you want to infer future expected portfolio performance from the results?
Computemonthly returns from the downloaded stockmarket prices. Compute the vector of historical average returns and the sample variancecovariance matrix. Compute the minimum variance portfolio weights and the portfolio volatility and average returns. Visualize the mean-variance efficient frontier.
Consider the research question: Are days with high aggregate trading volume often also days with large absolute price changes? Find an appropriate visualization to analyze the question.
Take your code from before and generalize it such that you can perform all the computations for an arbitrary vector of tickers (e.g., ticker
Compute daily net returns for the asset and visualize the distribution of daily returns in a histogram. Also, use geom_vline() to add a dashed red line that indicates the 5 percent quantile of the daily returns within the histogram. Compute summary statistics (mean, standard deviation, minimum and
Download daily prices for another stock market ticker of your choice from Yahoo!Finance with tq_get() from the tidyquant package. Plot two time series of the ticker’s un-adjusted and adjusted closing prices. Explain the differences.
Collect the per capita GDP data from the World Bank Database for 7 ASEAN countries—Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, and Vietnam. Take the data for the year 1990 and 2012. Find out whether the convergence principle is satisfied in these countries (Hint: by comparing
Can a country with high international currency reserves protect its currency from depreciation in the international market? Justify.
Suppose all foreign debts of Argentina are fixed at a nominal interest rate and loans repayments are in Peso. What affect would increased domestic inflation have on the real burden of debt payment in Argentina? Does the real burden change if the repayments to the external loans were in US dollars
Suppose the average current account deficit (CAD) of a country is 4 percent.The gap is filled through foreign borrowing. The social and political instability stopped borrowing from foreign sources. How should the government adjust its savings and investments to keep the CAD at zero? What would
To curb fiscal deficit, what measures can be taken towards tax rate and government expenditure? What effect does this have on aggregate demand in the economy? Why don’t countries, operating with EMU, increase their exports and current account surpluses through devaluation?
Suppose the ASEAN countries adopt one currency system and fixed exchange rate to achieve greater economic unity. Singapore—part of ASEAN—faced an increased export demand. Will it still be profitable for Singapore to continue with the earlier agreement? Explain using the GG-LL Schedules. Suppose
Elaborate the main reason for the EU to allow fixed exchange rate system. The text argues that the prospects of successful fixed exchange rate areas in Europe seemed bleak when the inflation rate between member countries varied widely. Justify the effect of a widening inflation range on the
Define the relationship between bond prices and interest rate. If South Korea issued bonds priced at $2000 with an annual interest of 10 percent, what would happen to the interest rate, if the bond’s price falls by $400?
If you return to Figure 9-4, you will notice that London Eurodollar interest rates tend to exceed U.S. certificate of deposit rates after the global financial crisis, but not before. Why do you think this is the case? (Be sure to return to this question after you read the next chapter!)
Define bank failure. Many countries adopt different measures to safeguard against bank failure. Would increased reserve requirements prevent one? How is a bank’s money creation affected if the central bank increases the reserve requirements?
The Australian Bureau of Statistics shows that between June 1999 and June 2009, Australia’s debt to the rest of the world increased sharply. In the meantime the exchange rate of Australian dollar changed in the international market. Do you think that there is a link between the exchange rate and
Define moral hazards in a banking system. How would increased moral hazards affect an economy’s financial health?
After the developing-country debt crisis began in 1982 (see Chapter 11), U.S.bank regulators imposed tighter supervisory restrictions on the lending policies of American banks and their subsidiaries. Over the 1980s, the share of U.S. banks in London banking activity declined. Can you suggest a
Consider having a total of $2000 to buy assets from two countries—India and China. Suppose, the annual rate of return from Chinese and Indian assets is 10 percent and 5 percent respectively—this rate may reverse at any time during the year. Where will you invest your money if you are averse to
Under the Bretton Woods Agreement, why is the fiscal policy alone insufficient to maintain internal and external balance? Suppose country ‘X’—operating under the agreement—has a lower par exchange rate against the dollar than the market clearing exchange rate. How does the exchange rate
Assume that Japan and China decide to float their currency in the international market, ceteris paribus. Also, if the People’s Bank of China (central bank) declines the interest rate relative to the Japanese rate, what will happen to the exchange rate between the two currencies? What impact does
The Case Study starting on page 275 discussed the big global imbalances of the 2000s and suggested that one can analyze factors determining world real interest rates in terms of the balance between the world demand for savings (in order to finance investment) and the world supply of savings (just
Suppose in an open economy, two countries—Brazil and Argentina—have a fixed exchange rate (under Bretton Woods Agreement). If the inflation rate in Brazil is higher than Argentina’s, what is the likely impact of the higher inflation on the trade balance between two countries?
How can one country maintain the balance of output and employment under the flexible exchange rate system? If an economy’s currency appreciated in the international market and the domestic spending reduced, what will happen to the employment and the current account balance? What would you suggest
Is it possible for an indebted country to continue borrowing, if the capital inflow of a country is not sufficient to cover the current account deficit? What impact does this current account deficit put on its domestic currency?
Recall our discussion of the Swiss franc’s currency floor in the box on pp. 211–212.Also, recall the last chapter’s discussion of the liquidity trap. Because Switzerland has been in a liquidity trap all the time it has defended its currency floor, does our discussion of liquidity trap theory
Analyze the result of a permanent devaluation by an economy caught in a liquidity trap of the sort described in Chapter 6.
In the Case Study on international reserves (pages 245–248), we asserted that except in the case of a reserve currency system, an attempt by all central banks simultaneously to raise their international reserve holdings through open-market sales of domestic assets could have a contractionary
Suppose that under the postwar “dollar standard” system, foreign central banks had held dollar reserves in the form of green dollar bills hidden in their vaults rather than in the form of U.S. Treasury bills. Would the international monetary adjustment mechanism have been symmetric or
Explain why a devaluation improves the current account in this chapter’s model.(Hint: Consider the XX curve developed in the last chapter.)
In an open economy, imagine there is no change in the monetary policy, and the government makes a temporary fiscal expansion through increased government purchases. What will be the immediate impact of fiscal expansion on the domestic currency value and the level of output? Suppose there is a
Explain why the expansionary monetary policy becomes ineffective during a liquidity trap? Suppose the government undertakes an expansionary fiscal policy by increasing its expenditure on military equipment. Here, would an expansionary fiscal policy be more effective than expansionary monetary
See if you can retrace the steps in the five-step argument on page 174 to show that a permanent fiscal expansion cannot cause output to fall.
Other things being equal, suppose the inflation level in the South African economy increased from 7 percent in 2013 to 12 percent in 2014. What will happen to the asset market schedule for this high inflation level?
Suppose the Indian rupee depreciated in the international market. What will be the impact of rupee depreciation on the current account balance of India, if the import demand condition is elastic? If personal disposable income rises, along with the rupee deprecation, will the current account balance
Consider the following two independent cases for an economy, which is facing a prolonged recession. In the first case, the government decides to increase its purchases by increasing its expenditure on infrastructure development. How does this increased expenditure affect the economy’s aggregate
If the home currency depreciates in real terms, what will happen to the aggregate demand schedule?
Discuss the following statement: “When a change in a country’s nominal interest rate is caused by a rise in the expected real interest rate, the domestic currency appreciates.When the change is caused by a rise in expected inflation, the currency depreciates.” (It may help to refer back to
Suppose in 2013 the UK pound and Argentine peso interest rate is 7 percent and 5 percent respectively. A year later, if the expected rate of real peso depreciation against pound is 1.2, and the expected inflation rate in UK is 3 percent, calculate Argentina’s expected inflation level.
Suppose the Samsung smartphone is sold at $100 in the US and 250 real in Brazil.The market exchange rate is 2.4 real/$ and there is a $5 shipping cost from the US to Brazil. Is it profitable for buyers to import from US to Brazil? If the expected exchange rate of the real (real/$) declines by 10
Given the government price level statistics, would an absolute or relative PPP be more effective while evaluating the PPP between two countries? Explain.
With reference to the PPP rationale, explain the relationship between values of currencies in countries with high inflation.
In the late 1970s, Britain seemed to have struck it rich. Having developed its North Sea oil-producing fields in earlier years, Britain suddenly found its real income higher as a result of a dramatic increase in world oil prices in 1979–1980. In the early 1980s, however, oil prices receded as the
Consider the following two cases and explain the validity of the theory of purchasing power parity based on these situations. In the first case, suppose there are trade barriers and an imperfectly competitive market structure in an economy for a product. Explain whether the law of one price holds
Suppose in the year 2010 (where price level is 100), the Japanese yen and Indian rupee exchange rate (¥/rupee) is 0.54. If the price level in 2013 stands at ¥105 and 110 rupees in Japan and India respectively, what will be the exchange rate in 2013, based on the PPP?
Do you think changes in interest rates affect the total money supply in an economy?Suppose a market is initially at a higher interest rate. Explain, using the demand and supply mechanism, how interest rates tend to settle at the equilibrium?
In 1984 and 1985, the small Latin American country of Bolivia experienced hyperinflation.Below are some key macroeconomic data from those years:Macroeconomic Data for Bolivia, April 1984–October 1985 Month Money Supply (Billions of Pesos)Price Level (Relative to 1982 Average = 1 Exchange Rate
During the year 2013, the Indian rupee depreciated sharply against the dollar. To check any further depreciation in the rupee, the Central Bank of India (Reserve Bank of India or RBI) increased the interest rate in the economy in the short run. How will the increased rate help in controlling the
As an investor you want to choose between two countries—Japan and South Korea. Suppose Japan’s nominal interest rate is 12 percent and inflation rate is 7 percent, while South Korea’s is 7 percent and 3 percent respectively. Where would you invest and why?
Do you agree with the view that inflation and interest rate are positively correlated?How would a fall in the interest rate on money demand affect inflation rate in the economy? Would a rise in the country’s interest rate adversely affect the economy’s GNP? Explain.
Suppose the exchange rate of the Indian rupee depreciated against the dollar. What will be the likely impact of the rupee depreciation on India’s exports and imports?How will the GDP and inflation behave when rupee depreciates?
The current interest rate on one year’s Indian rupee deposit is 5 percent and yen(¥) deposit is 12 percent. The current ¥>rupee exchange rate is 2 and after a year, it is expected to exceed 2.4. In this case, which currency would you choose for a higher expected rate of return a year later?
If hypothetically, the Japanese yen gives 15 percent interest rate against 10 percent interest rate of Euro deposits—and the expected rate of depreciation of the yen is 10 percent—what will happen to the euro deposits in the foreign exchange market?By how much shall the yen depreciate to bring
In 2014, Germany’s Volkswagen (VW) makes a contract with Malaysia to supply 100 cars in 2015. €700,000 is to be paid on the date of supply. Suppose today’s rate is Malaysian ringgit (MYR) 3>€ and the expected exchange rate for next year is MYR 3.15>€. Suppose after the deal, the rate

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International Finance: Theory And Policy 10th Edition Krugman, Paul R.; Melitz, Marc J.; Obstfeld, Maurice - Solutions

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