Papers by Giulio Cifarelli
RePEc: Research Papers in Economics, Dec 12, 2018
Focusing on the 2003-2019 period, our paper combines the LPPL methodology to test for the presenc... more Focusing on the 2003-2019 period, our paper combines the LPPL methodology to test for the presence of speculative bubbles with the Heterogeneous Agent Model approach to modelling oil prices. In particular, we focus on the bubble-like dynamics, which characterizes the 2007-2009 years according to a large body of recent literature. In view of this aim, our modelling choice may be justified as follows. Under normal conditions, chartists tend to destabilize the market, whereas fundamentalists and hedgers have the opposite effect. This reflects in the presence of constant oscillations in log-differenced prices typical of martingale processes. These oscillations are larger and more persistent if chartists prevail over fundamentalists and hedgers. On rare occasions, however, a different pattern may emerge, with prices moving along explosive trajectories. In our view, this can be related to incorrect interpretation of market signals (or to the inability of trading against the market), especially by fundamentalist speculators, combined with imitation across different categories of heterogeneous agents. When this occurs, positive feedback reactions emerge along with self-reinforced herding of the kind best detected by the LPPL methodology. Based on these considerations, our paper obtains two main results. First, between 2003 and 2019 we detect only one period consistent with the presence of a speculative bubble, between 2007 and 2008. Second, this bubble is set off by fundamentalist speculators who seem to lose confidence in market signals and in their ability to stop the bubble. This reaction reinforces the standard price destabilizing effect caused by chartists over the entire sample period, which hedgers are unable to offset. Our analysis, which controls also for exchange rate and equity market risk perception, confirms that speculation plays a clear-cut destabilizing role over the entire sample period, due to the joint reaction of chartists and fundamentalists. Our results are thus in line with Zhang et al. (2017) and Zhang and Wu (2019) among others.
RePEc: Research Papers in Economics, 2007
Emerging market economies have recently accumulated large stocks of foreign reserves. In this pap... more Emerging market economies have recently accumulated large stocks of foreign reserves. In this paper we address the question of what are the main factors accounting for reserve holdings in nine developing countries located in Asia and Latin America. Monthly data from January 1985 to May 2006 are used to estimate for each country the long run equilibrium reserve demand, based on the buffer stock model, the short run dynamics governing the process of reserve accumulation (decumulation) and the factors which may influence the speed of adjustment of actual to desired reserves. Cointegration analysis suggests that the buffer stock precautionary model accounts for the optimal reserve demand. The corresponding VECMs are further interpolated, using the permanent and transitory innovations decomposition procedure of Gonzalo and Ng (2001), in order to assess the relative impact of the time series on the convergence to equilibrium after a shock. Finally the (asymmetric) effect on the speed of convergence of positive/negative changes in signal variables-such as the excess reserves of the previous period, relative competitiveness and US monetary stance-is found to be significant, in line with mercantilistic and fear of floating motives for hoarding international reserves.
Giornale degli Economisti, 1998
... Author Info. Giulio Cifarelli () (University of Florence) Anna Calamia (University of Rome &q... more ... Author Info. Giulio Cifarelli () (University of Florence) Anna Calamia (University of Rome "La Sapienza") Additional ... time. The conventional regression based approach to estimate the optimal hedge could then be inappropriate. ...
Social Science Research Network, 2011
Journal of Applied Econometrics, Oct 1, 1988
Economia Internazionale / International Economics, 1992
ABSTRACT Exchange rate market efficiency tests have been strongly influenced by the finding that ... more ABSTRACT Exchange rate market efficiency tests have been strongly influenced by the finding that the exchange rate time series are mostly nonstationary. The early efficiency tests — which tended to support the hypothesis of interest — have been found to be incorrect and have been replaced by new tests which strongly reject the hypothesis that the forward exchange rate is an unbiased predictor of the future spot exchange rate. In this paper we suggest a possible interpretation of these findings with the help of cointegration analysis and show that the empirical evidence on the unbiased efficiency hypothesis is still controversial, since the theory of efficient markets does not accommodate well to the short run versus long run distinction.
Energy Economics, Jul 1, 2013
The interaction between rational hedgers and informed oil traders is parameterized and tested emp... more The interaction between rational hedgers and informed oil traders is parameterized and tested empirically with the help of a complex non linear smooth transition regime shift CCC-GARCH procedure. In spite of their gyrations, futures price changes are usually self-correcting. Well informed producers and consumers will ensure that crude oil pricesand thus the prices of the corresponding futures contracts-fluctuate within a long run equilibrium range determined by market fundamentals. During a steep price upswing, however, shifts in positions in the futures markets by well informed optimizing agents that usually dampen price changes, result in destabilizing positive feedback trading. Futures price changes that can be classified as speculative are due to destabilizing hedgers' reactions to movements in the variability of the return of their covered cash position. The paper provides in this way an innovative interpretation of the 2008 oil price bubble.
Social Science Research Network, 2013
The paper investigates the role of speculation in the Liverpool cotton futures market between 192... more The paper investigates the role of speculation in the Liverpool cotton futures market between 1921 and 1929. The analysis is based on historical descriptions of the working of speculation in commodity markets and is related to the tenets of behavioural finance. The model posits the existence of two categories of speculators, noise traders and fundamentalists, who react (differently) to deviations of market prices from their fundamental value. The empirical analysis is based on original data drawn from the online archives of The Times. The empirical findings allow us to conclude that whereas noise traders tend to herd, fundamentalists are more affected by risk aversion and react asymmetrically more to underpricing than to overpricing of the cotton contracts. As expected, the presence of fundamentalists stabilizes the market. Interestingly our results seem to be consistent with the observations of expert witnesses of those markets.
Cliometrica, Dec 13, 2014
In the 1920s and 1930s, empirical studies of cotton futures pricing tend to attribute market fluc... more In the 1920s and 1930s, empirical studies of cotton futures pricing tend to attribute market fluctuations to shifts in fundamentals. In this paper we qualify this view focusing on the role of speculation. Our research is based on a nonlinear heterogeneous agents model which posits the existence of two categories of speculators, feedback traders and fundamentalists, who react (differently) to deviations of market prices from their fundamental value. The analysis is based on original data drawn from the online archives of The Times and on an historical description of the working of a staple commodity market. The empirical findings allow us to conclude that whereas feedback traders tend to herd, fundamentalists are more affected by risk aversion and react but slowly to the underpricing/overpricing of the cotton contracts. As expected, the presence of fundamentalists stabilizes the market even if, at least in the time period under investigation, the behavior of feedback traders is the major driver of short-run price dynamics.
Social Science Research Network, 2017
Over the last 15 years, exchange rate movements were relatively smooth, despite sharp shifts in t... more Over the last 15 years, exchange rate movements were relatively smooth, despite sharp shifts in the fundamental variables. In the large literature dealing with the high frequency exchange rate dynamics, the model that assumes heterogeneous trading strategies, where 'fundamentalists' coexist with 'chartists', plays a relevant if puzzling role. We study the US dollar, the British pound and the Japanese yen vs the euro over the period 2002-2016 using weekly data and we find that both types of agents react to the same transition variable, viz. the absolute distance of the actual exchange rate to its relative PPP value. The spot foreign currency demand of fundamentalists is driven by the size of the misalignment both directly and through a transition function, which models the adoption of fundamental strategies by newcomers. The number of chartists also varies according to the absolute distance of the exchange rate change from its fundamental PPP value. Evidence supports the existence of stabilizing and destabilizing behaviour not only by chartists but also by fundamentalists.
Social Science Research Network, 2017
Our results show that over the two cycles that characterize the 2003-2016 period a significant ch... more Our results show that over the two cycles that characterize the 2003-2016 period a significant change in the working of oil markets occurs. Our pricing investigation, based on a three-agent model (hedgers, fundamentalist speculators and chartists), find that from 2009 onwards traditional analysis of supply and demand forecasts, loses its explanatory power and hence its credibility. The sharp and unexpected fluctuations in oil prices, compounded by unpredictable political factors and technological break-troughs (e.g. tight sands/shale oil) strongly raises uncertainty and reduces the effectiveness of customary forecasting techniques. The authors are thankful to Filippo Cesarano for his useful suggestions.
Open Economies Review, Jan 15, 2008
Emerging market economies have recently accumulated large stocks of foreign reserves. In this pap... more Emerging market economies have recently accumulated large stocks of foreign reserves. In this paper we address the question of what are the main factors accounting for reserve holdings in nine developing countries located in Asia and Latin America. Monthly data from January 1985 to May 2006 are used to estimate for each country the long run equilibrium reserve demand, based on the buffer stock model, the short run dynamics governing the process of reserve accumulation (decumulation) and the factors which may influence the speed of adjustment of actual to desired reserves. Cointegration analysis suggests that the buffer stock precautionary model accounts for the optimal reserve demand. The corresponding VECMs are further interpolated, using the permanent and transitory innovations decomposition procedure of Gonzalo and Ng (2001), in order to assess the relative impact of the time series on the convergence to equilibrium after a shock. Finally the (asymmetric) effect on the speed of convergence of positive/negative changes in signal variables-such as the excess reserves of the previous period, relative competitiveness and US monetary stance-is found to be significant, in line with mercantilistic and fear of floating motives for hoarding international reserves.
Social Science Research Network, 2008
This paper assesses empirically whether speculation affects oil price dynamics. The growing prese... more This paper assesses empirically whether speculation affects oil price dynamics. The growing presence of financial operators in the oil markets has led to the diffusion of trading techniques based on extrapolative expectations. Strategies of this kind foster feedback trading that may cause large departures of prices from their fundamental values. We investigate this hypothesis using a modified CAPM that follows Shiller (1984) and Sentana and Wadhwani (1992). At first, a univariate GARCH(1,1)-M is estimated assuming that the risk premium is a function of the conditional oil price volatility. The single factor model, however, is outperformed by the multifactor ICAPM (Merton, 1973) which takes into account a larger investment opportunity set. The analysis is then carried out using a trivariate CCC GARCH-M model with complex nonlinear conditional mean equations where oil price dynamics are associated with both stock market and exchange rate behavior. We find strong evidence that oil price shifts are negatively related to stock price and exchange rate changes and that a complex web of time varying first and second order conditional moment interactions affect both the CAPM and feedback trading components of the model. Despite the difficulties, we identify a significant role of speculation in the oil market which is consistent with the observed large daily upward and downward shifts in prices. A clear evidence that it is not a fundamentalsdriven market. Thus, from a policy point of view-given the impact of volatile oil prices on global inflation and growth-actions that monitor more effectively speculative activities on commodity markets are to be welcomed.
The Energy Journal, Sep 1, 2021
We analyze short-term futures oil pricing over the 2003-2016 time-period in order to analyze the ... more We analyze short-term futures oil pricing over the 2003-2016 time-period in order to analyze the bubble-like dynamics, which characterizes the 2007-2009 years according to a large body of recent literature. Our investigation, based on a flexible three-agent model (hedgers, fundamentalist speculators and chartists), confirms the presence of a bubble price pattern, which we attribute to the strong destabilizing behaviour of fundamentalist speculators (e.g. hedge funds). The inclusion of the 2009-2016 sub-period, in spite of sharp and unexpected fluctuations in oil prices and a significant increase in the influence of geopolitical factors, fails to invalidate our financial interpretation.
Open Economies Review, Sep 1, 2010
The three exchange rate regimes adopted by Italy from 1883 up to the eve of World War Ithe gold s... more The three exchange rate regimes adopted by Italy from 1883 up to the eve of World War Ithe gold standard (1883-1893), floating rates (1894-1902), and "gold shadowing" (1903-1911)-produced a puzzling result: formal adherence to the gold standard ended in failure while shadowing the gold standard proved very successful. This paper discusses the main policies underlying Italy's performance particularly focusing on the strategy of reserve accumulation. It presents a cointegration analysis identifying a distinct co-movement between exchange rate, reserves, and banknotes that holds over the three sub-periods of the sample. Given this long-run relationship, the different performance in each regime is explained by the diversity of policy measures, reflected in the different variables adjusting the system in the various regimes. Italy's variegated experience during the gold standard provides a valuable lesson about current developments in the international scenario, showing the central role of fundamentals and consistent policies.
Social Science Research Network, 2016
We investigate the time varying dynamics of the linkages between sovereign and bank default risks... more We investigate the time varying dynamics of the linkages between sovereign and bank default risks over the period 2006-2015, using the credit default swap (CDS) spreads of the bonds of major international banks and of sovereign issuers as indicators of risk within four major European countries. The nexus between bank risk in core countries and sovereign risk of peripheral countries is also analyzed, under the hypothesis that higher bond yields and preferential treatment of bond issued by euro sovereigns under Basle II may have favored the stocking of peripheral sovereign bonds in core bank portfolios. The use of a timevarying regime switching correlation analysis, the STCC-GARCH, allows to identify the economic variable behind the state shifts, the so-called "transition variable", and to date precisely the changes in the size of the correlations that are due to shocks (viz. the Lehman crisis, the evolution of the Greek crisis) or to unconventional monetary policies such as Quantitative Easing and TLTRO.
Social Science Research Network, 2012
An assessment of the theory of storage: has the relationship between commodity price volatility a... more An assessment of the theory of storage: has the relationship between commodity price volatility and market fundamentals changed over time?
Social Science Research Network, 2009
The three exchange rate regimes adopted by Italy from 1883 up to the eve of World War I-the gold ... more The three exchange rate regimes adopted by Italy from 1883 up to the eve of World War I-the gold standard (1883-1893), floating rates (1894-1902), and "gold shadowing" (1903-1911)-produced a puzzling result: formal adherence to the gold standard ended in failure while shadowing the gold standard proved very successful. This paper discusses the main policies underlying Italy's performance particularly focusing on the strategy of reserve accumulation. It presents a cointegration analysis identifying a distinct co-movement between exchange rate, reserves, and banknotes that holds over the three sub-periods of the sample. Given this long-run relationship, the different performance in each regime is explained by the diversity of policy measures, reflected in the different variables adjusting the system in the various regimes. Italy's variegated experience during the gold standard provides a valuable lesson about current developments in the international scenario, showing the central role of fundamentals and consistent policies.
RePEc: Research Papers in Economics, 2017
Our results show that over the two cycles that characterize the 2003-2016 period a significant ch... more Our results show that over the two cycles that characterize the 2003-2016 period a significant change in the working of oil markets occurs. Our pricing investigation, based on a three-agent model (hedgers, fundamentalist speculators and chartists), find that from 2009 onwards traditional analysis of supply and demand forecasts, loses its explanatory power and hence its credibility. The sharp and unexpected fluctuations in oil prices, compounded by unpredictable political factors and technological break-troughs (e.g. tight sands/shale oil) strongly raises uncertainty and reduces the effectiveness of customary forecasting techniques.
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Papers by Giulio Cifarelli