Financial issues » market

(In)Efﬁcient Markets

admin — Sat, 27 Jun 2009 13:02:35 +0000

As we know from earlier posts, economic theory approaches the issue of exchange rates by trying to ﬁnd a theoretical equilibrium level, against which one can measure over- or undervaluation relative to the actual exchange rate. Such theory relies on a number of important premises with regard to the information that might affect exchange rates:
Exchange rates reﬂect all available knowledge at any one time
There is perfect knowledge dispersal (such that no-one has an advantage)
While it is debatable whether or not these exist in other ﬁnancial markets, we do know that these are not the reality in the currency market. Many people think of the currency or FX market as the “perfect market”, being that in which knowledge dispersal is optimum and which responds with perfect efﬁciency to stimulus. This simply isn’t the case. Information is not perfect and some market participants can indeed gain a knowledge advantage over their counterparts. Why is this so?
The sheer weight of information affecting exchange rates at any one time is so huge that all currency market practitioners cannot possibly absorb all of it all of the time.
Knowledge dispersal is not perfect and some do have an advantage over others. Such advantages may include knowledge about speciﬁc ﬂows that may occur, a bank’s own “order book” and ﬁnally the ability to do larger currency market transactions than other market participants.
If knowledge is power, then such power in the currency market is not distributed equally. This is no accident. Indeed, it is the very intention of normal and healthy competition to try to gain advantage over other market participants. While news information has never been as freely available as now, at some point that very availability swamps the ability of the users of such information to absorb it all. To some, we appear closer to a state of perfect knowledge than we have ever been, yet I would liken this to the speed of transportation. In 1900, the average speed of the leading mode of transportation in the city of London (the horse) was 11 miles an hour. In 2000, the average speed of the now leading mode of transportation (the turbo fuel-injected car) was . . . 11 miles an hour. Progress begets more progress until you progress so far that you go nowhere. The more information that is available to us, the less we actually have the time (or the willingness) to read. If the good news is that we are closer to perfect knowledge than we have ever been, then the bad news is that we are never likely to get there!
Information costs money to deliver and therefore there is not “perfect” information delivery because not everyone gets it, either at all or at the same time. Even if it were free, “information overload” still means that not everyone reads and uses it at the same time. If you don’t believe me, just think of your e-mail inbox! In sum, there is neither perfect information nor perfect information dispersal — and there never will be. In response, an economist might argue that we have “good” information, if not perfect information. It would be tough to argue with this, but then “good” is not “perfect” and “perfect” is a necessary aspect of the equilibrium concept. Furthermore, this supposed equilibrium level is rarely ever reached. Real life is surely a constant state of ﬂux and imbalance, so why should ﬁnancial markets be any different? In turn, if one assumes that the economic fundamentals that can affect exchange rates are themselves in a constant state of ﬂux, one must equally assume that the equilibrium itself is in a constant state of ﬂux — which to an extent calls into question the idea of it being an “equilibrium” in the ﬁrst place. In truth, it is a signpost on a road. It points you in the right direction, but it gives you no idea of when you will get there or where you might have to turn off along the way.

Terms of Trade

admin — Thu, 25 Jun 2009 21:35:01 +0000

Another important aspect of the external balance approach to exchange rate determination is the so-called “terms of trade”, which is the relationship between a country’s export and import prices. A country’s terms of trade can be an important determinant of its long-term equilibrium real exchange rate. We ﬁnd this particularly the case for countries that are major commodity exporters and therefore whose economies are particularly sensitive to swings in commodity prices. An improvement in a country’s terms of trade, that is a rise in its export prices relative to import prices, should lead to a rise in the real exchange rate equilibrium value. Rising export prices should be reﬂective of rising global demand for that country’s exports, both on an absolute basis and relative to domestic demand levels. Consequently, one should assume that an improvement in the terms of trade should lead to an improvement in the current account balance, which in turn requires a real exchange rate appreciation to restore equilibrium. Equally, a deterioration in the terms of trade leads to a current account deterioration, which requires a real exchange rate depreciation to restore equilibrium. For the sake of clarity, we can express this transmission mechanism using the following simple diagram:
Change in terms of trade -> Change in current account balance -> Real exchange rate change to restore equilibrium
Taking oil as an example, the terms of trade concept is an important determinant of the long term real exchange rate equilibrium value for the countries of the Gulf, Mexico, Venezuela, Colombia, Nigeria, Indonesia, Russia, the UK and Norway. Note that these are just the exporters. The terms of trade concept also works for the importers as well, which is why when the international price of oil experiences a signiﬁcant uptrend, this causes a terms of trade deterioration for the major oil importers, leading to current account balance deterioration. All else being equal, this should require a real exchange rate depreciation to restore equilibrium.

Changing or Correcting a Will

admin — Sun, 12 Apr 2009 17:25:35 +0000

A supplement to a will, consisting of revisions, additions, or alterations made after the will has been made, is known as a codicil. The codicil must be executed (signed, witnessed, etc.) in the same manner as the will being amended. Corrections should not be made in a will by erasures, insertions, or cross-outs. All corrections or other changes should be made by codicil and in many cases it may be preferable to execute a new will.
If a new will is made, it should state that all prior wills are revoked. It may also be desirable to physically destroy a previous will to avoid any possible confusion later.