ABSTRACT In statistics, samples are drawn from a population in a data‐generating process (DGP). Standard errors measure the uncertainty in estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence‐generating process (EGP). We claim that EGP variation across researchers adds uncertainty—nonstandard errors (NSEs). We study NSEs by letting 164 teams test the same hypotheses on the same data. NSEs turn out to be sizable, but smaller for more reproducible or higher rated research. Adding peer‐review stages reduces NSEs. We further find that this type of uncertainty is underestimated by participants.

The currency market is the world’s largest financial market by trading volume. We show that even in this highly liquid market, exposure to liquidity risk commands an economically significant risk premium of up to 3.6% per year. Liquidity risk is not subsumed by existing currency risk factors and successfully prices the cross section of currency excess returns. Moreover, we find that liquidity risk and carry trade premia are correlated, although this correlation is limited to static rather than dynamic carry trades. Building on this result, we propose a liquidity-based explanation for the carry trade, which adds significant explanatory power to existing theories. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.01031 .

We study the expectations of individual forecasters in the foreign exchange market. We find that the survey risk premium is less countercyclical than the rational risk premium, primarily because it is not related to the forward premium. We also find that forecasters learn from their own forecast errors (rather than from consensus forecast errors) and that they overreact when forming expectations (as indicated by their forecast revisions). Finally, while forecasters have worse forecasting performance relative to a simple benchmark, the forecasters who emphasize the real exchange rate and do not overreact have better out-of-sample forecasting performance. Overall, our results highlight the information contained in individual (rather than consensus) exchange rate forecasts.

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This paper studies the role of liquidity in the world’s largest over-the-counter market (OTC), the foreign exchange (FX) market. We are the first to systematically disentangle FX liquidity from volatility showing that both relate to FX premia in distinct ways. Our results are derived from a comprehensive trade and quotes dataset covering a broad crosssection of currency pairs. We provide compelling evidence that FX liquidity is only priced conditional on volatility being high and derive a new pricing factor. Incorporating this new pricing factor into a conditional asset pricing framework distinguishing between good and bad states of the world significantly improves the fit. Our findings are consistent with the sensitivity of OTC markets to volatility swings and market participants’ loss aversion.

We ask whether verbal interventions by the Swiss National Bank (SNB) affected market beliefs in the desired direction during the period from 2011 to 2015, when the SNB imposed a cap on the Swiss franc at 1.20 against the euro. A verbal intervention was a speech by a member of the SNB Governing Board containing the wording "utmost determination" and/or "unlimited quantities". We show that these verbal interventions lowered uncertainty regarding the future value of euro/Swiss franc exchange rate and steered market beliefs toward franc depreciation, therefore reinforcing the credibility of the Swiss franc cap. (C) 2018 Elsevier Ltd. All rights reserved.

We examine the daily activity and performance of a large panel of individual investors in Sweden's Premium Pension System. We find that active investors earn significantly higher returns and risk-adjusted returns than inactive investors. A performance decomposition analysis reveals that most of the outperformance of active investors is the result of these investors successfully timing mutual funds and asset classes. While activity is beneficial for some investors, extreme flows out of mutual funds affect funds' net asset values negatively for all investors. Financial advisors, by contributing to coordinate investments and redemptions, exacerbate these negative effects.

We provide a comprehensive study of the liquidity of spot foreign exchange (FX) rates over more than two decades and a large cross-section of currencies. First, we show that FX liquidity can be accurately measured with daily and readily-available data. Second, we demonstrate that FX liquidity declines with funding constraints and global risk, supporting theoretical models relating funding and market liquidity. In these distressed circumstances, liquidity tends to evaporate more for developed and riskier currencies. Finally, we show stronger comovements of FX liquidities in distressed markets, especially when funding is constrained, volatility is high, and FX speculators incur losses.

A GMM-based system for two different linear factor pricing models is used to test if the pricing errors are the same. Simulations demonstrate the small sample properties. As an illustration, the test is applied to the Fama-French (1996, 2015) models.

The Internet Appendix discusses details, additional results and robustness checks on the paper.The paper "Understanding FX Liquidity" to which these Appendices apply is available at the following URL: http://ssrn.com/abstract=2329738

We explain the currency carry trade performance using an asset pricing model in which factor loadings are regime-dependent rather than constant. Empirical results show that a typical carry trade strategy has much higher exposure to the stock market and is mean-reverting in regimes of high FX volatility. The findings are robust to various extensions. Our regime-dependent pricing model provides significantly smaller pricing errors than a traditional model. Thus, the carry trade performance is better explained by a time-varying systematic risk that increases in volatile markets, suggesting a partial resolution of the Uncovered Interest Rate parity puzzle.

The difference between nominal and real interest rates (break-even inflation) is often used to gauge the market's inflation expectations-and has become an important tool in monetary policy analysis. However, break-even inflation can move in response to shifts in inflation risk premia and liquidity premia as well as to changes in expected inflation. This paper sheds light on this issue by analyzing the evolution of U. S. break-even inflation from 1997 to mid-2008. Regression results show that survey data on inflation uncertainty and proxies for liquidity premia are important factors.

The forecasting performance of the Livingston survey and traditional prediction models of stock prices is analysed. The survey forecasts look similar to those from a 'too large' prediction model: poor out-of-sample performance and too sensitive to recent and irrelevant information.

We use a regime-switching approach to model the implementation of SNB monetary policy. The regime-switching technique is crucial for assessing the flexibility inherent in the SNB’s monetary policy strategy. The empirical findings support the idea that repo operations are instrumental in smoothing the implementation of monetary policy in normal times, while changes in the official operational target, accompanied by the accommodating use of repo operations, produce the intended effects in periods of distress. Another significant contribution also comes from some new measures designed to improve liquidity in the Swiss franc money market during the financial crisis of 2007–2008.

We study high-frequency exchange rates over the period 1993-2008. Based on the recent literature on volatility and liquidity risk premia, we use a factor model to capture linear and non-linear linkages between currencies, stock and bond markets as well as proxies for market volatility and liquidity. We document that the Swiss franc and Japanese yen appreciate against the US dollar when US stock prices decrease and US bond prices and FX volatility increase. These safe haven properties materialise over different time granularities (from a few hours to several days) and non-linearly with the volatility factor and during crises. The latter effects were particularly discernible for the yen during the recent financial crisis.

Survey and option data are used to take a fresh look at the equity premium puzzle. Survey data on equity returns (Livingston survey) shows much lower expected excess returns than ex post data. At the same time, option data suggests that investors tend to overestimate the volatility of equity returns. Both facts contribute towards solving the puzzle. However, data on beliefs about output volatility (Survey of Professional Forecasters) shows marked overconfidence. On balance, the equity premium is somewhat less of a puzzle than in ex post data.