Stock Market Bubble Migration: From Shanghai to Hong Kong: Essays in Honor of Georges PratBook chapterEric Girardin, Roselyne Joyeux and Shuping Shi, In: Uncertainty, Expectations and Asset Price Dynamics, 2018-12, pp. 173-192, Springer International Publishing, 2018

The speculative nature of the stock market in Mainland China has attracted the attention of many observers. However while the degree of integration of the Hong Kong market with its Mainland counterpart has monopolized the interest of researchers, they have neglected the diffusion of bubbles from the latter to the former. We thus propose the first study of such bubble migration. Focusing on the period 2005–2017, we use the Phillips et al. (Int Econ Rev 56:1043–1078, 2015a; Int Econ Rev 52:201–226, 2015b) recursive explosive root test to detect and date speculative episodes in both markets. We then implement the Greenaway-McGrevy and Phillips (NZ Econ Pap 50:88–113, 2016) methodology to detect the presence of migration between the two markets. We detect significant, but dwindling, bubble migration from Shanghai to Hong Kong.

Global slack and open economy Phillips curves – A province-level view from ChinaJournal articleChangsheng Chen, Eric Girardin and Aaron Mehrotra, China Economic Review, Volume 42, Issue C, pp. 74-87, 2017

The “global slack hypothesis” implies that greater integration of the world economy, i.e. globalisation, should have made inflation more responsive to global than domestic economic slack. Many previous studies have accordingly estimated national inflation equations with measures of global output gaps. We use three and a half decades of subnational data from China's provinces to test the global slack hypothesis. Using tests for non-nested regressions, for many provinces we can reject a Phillips curve with a province-level measure of economic slack against a model with China's national output gap, which is consistent with the hypothesis. We also show that the real exchange rate matters for inflation dynamics in many Chinese provinces, in particular those most open to international trade. In addition to supporting the global slack hypothesis, our results emphasise the importance of cross-border factors for China's inflation developments.

Do as I Do, and Also as I Say: Monetary Policy Impact on Brazil’s Financial MarketsJournal articleAlicia García-Herrero, Eric Girardin and Enestor Dos Santos, Economía, Volume 17, Issue 2, pp. 65-92, 2017

We analyze how Brazilian financial markets, in particular interest rate futures, react to monetary policy in terms of both deeds (that is, changes in the policy rate) and words (that is, central bank communication). Using daily data from 2005 to 2014, we find that interest futures rates react in the expected direction to both the central bank’s actions and its words: futures rates rise (fall) after both an increase (decrease) in the reference interest rate and a hawkish (dovish) communication by the Central Bank of Brazil. We also find that the Central Bank’s words create noise, since they increase the volatility of futures rates. Our analysis further reveals that the effectiveness of monetary policy communication increased after the 2008 international crisis, as measured by its larger impact on future rates and reduced volatility. At the same time, deeds became less relevant: the effect of changes in the Central Bank’s policy rate on futures rates declined.

Analyzing the Impact of Monetary Policy on Financial Markets in ChileJournal articleAlicia García-Herrero, Eric Girardin and Hermann Gonzalez, Revista de análisis económico, Volume 32, Issue 1, pp. 3-21, 2017

During the past few years, monetary policy communication has become a hot topic in as far as it seems to have become a very relevant way for central banks to guide markets, beyond actual monetary policy decisions. This paper investigates this issue empirically for the case of Chile. More specifically, using data from 2005 to 2014 and a Component GARCH model, we assess whether changes in the communication of the Central Bank of Chile generates in particular a permanent or temporary change in the volatility of interest rates, after controlling for changes in monetary policy instruments. Our results show that the volatility in interest rate futures in Chile’s swap markets increases following the Central Bank’s communication. However, the impact tends to be temporary instead of permanent and only statistically significant in the pre-crisis period. All in all, our results indicate a reduced relevance of Central Bank’s communication for short term swap markets which may reflect that market participants have learned to anticipate changes in monetary policy communication, especially after the global financial crisis.

Did bubbles migrate from the stock to the housing market in China between 2005 and 2010?Journal articleYongheng Deng, Eric Girardin, Roselyne Joyeux and Shuping Shi, Pacific Economic Review, Volume 22, Issue 3, pp. 276-292, 2017

The speculative nature of both stock and housing markets in China has attracted the attention of observers. However, while stock market data are easily available, the low frequency and low quality of publicly available housing price data hampers the study of the relationship between the two markets. We use original hedonic weekly resale housing prices of a major Chinese housing market and study them in conjunction with Shanghai's stock market index in the second half of the 2000s. The use of the Phillips et al. (2015 a,b) recursive explosive-root test enables us to detect and date speculative episodes in both markets. We then implement the Greenaway-McGrevy and Phillips (2016) methodology to detect the presence of migration between the two types of bubbles. We detect significant migration from the stock to the housing market bubble in 2009 and a temporary spillover in 2007.

Comovement of Chinese provincial business cyclesJournal articleJamel Gatfaoui and Eric Girardin, Economic Modelling, Volume 44, Issue C, pp. 294-306, 2015

In this paper, we establish a turning point chronology for the Chinese provincial deviation cycles during the period 1989–2009. The existing work has exclusively focused on the national business cycle.

The Risk of Individual Stocks' Tail Dependence with the Market and Its Effect on Stock ReturnsJournal articleGuobin Fan, Eric Girardin, Wong K. Wong and Yong Zeng, Discrete Dynamics in Nature and Society, Volume 2015, pp. 1-17, 2015

Traditional beta is only a linear measure of overall market risk and places equal emphasis on upside and downside risks, but actually the latter is always much stronger probably due to the trading mechanism like short-sale constraints. Therefore, this paper employs the nonlinear measure, tail dependence, to measure the extreme downside risks that individual stocks crash together with the whole market and investigates whether such tail dependence risks will affect stock returns. Our empirical evidence based on Shanghai A shares confirms that most stocks display nonnegligible tail dependence with the whole market, and, more importantly, such tail dependence risks can indeed provide additional information beyond beta and other factors for asset pricing. In cross-sectional regression, it is proved that this tail dependence does help to explain monthly returns on Shanghai A shares, whereas the time-series regression further indicates that mimicking portfolio returns for tail dependence can capture strong common variation of Shanghai A stock returns.

Inflation and China's monetary policy reaction function: 2002-2013Book chapterEric Girardin, Sandrine Lunven and Guonan Ma, In: Globalisation, inflation and monetary policy in Asia and the Pacific, 2014, Volume 77, pp. 159-170, Bank for International Settlements, 2014

Our paper attempts to enhance the understanding of China’s monetary policy rule, which may help explain the country’s remarkable inflation performance over the past decade, in spite of the absence of explicit inflation targeting. In particular, we aim to shed light on the role of inflation in the conduct of monetary policy by the People’s Bank of China (PBC) in the New Millennium, when both the underlying economy and its monetary policy framework were transformed. We develop a new monetary policy index (MPI) in China by combining quantity, price and administrative instruments and estimate a hybrid (backward- and forward-looking), dynamic, discrete-choice model for the period 2002–13. Three main results arise from the paper. First, the Chinese monetary policy changes under PBC Governor Zhou from 2002 onwards have been relatively hawkish and smoothed. Second, the PBC appears to have built up a monetary policy framework similar to implicit flexible inflation targeting, with a hybrid reaction function, seemingly taking into account the forward-looking aspect of inflation. Third, the PBC’s behaviour post-2002 resembles that of the post-1979 anti-inflation policy of the G3 central banks, albeit with a high output weight typical of emerging economies.<br><small>(This abstract was borrowed from another version of this item.)</small>

The Chinese electricity industry: supply capacity and its determinants with reference to OECD countriesJournal articleGuy Liu, Liang Zhang and Eric Girardin, Journal of Chinese Economic and Business Studies, Volume 12, Issue 4, pp. 353-382, 2014

This paper takes a two-stage estimation approach to investigate the direct and indirect determinants of the capacity of power supply in China, with reference to the Organization for Economic Cooperation and Development countries. In the first stage we investigate the determinants of demand for electric consumption and in the second stage we test the impact of demand for consumption on capacity. Our study shows that the direct impact on capacity growth is mainly of GDP growth, which is a China-specific effect, and load factor, which is a non-China specific effect. Capacity investment is driven by the demand for power relative to the utilization of existing capacity. Furthermore, power prices and the industrial structure of an economy are the indirect determinants of capacity through their impacts on demand. The industrial structure has a strong influence on the power demand in China, since the country has accelerated its industrialization with more investment in heavy industry that further fuels the demand for power and therefore supply capacity.

An introduction: the challenges of the Chinese electricity industry and its reformJournal articleEric Girardin, Guy Liu and Jinghai Zheng, Journal of Chinese Economic and Business Studies, Volume 12, Issue 4, pp. 333-352, 2014

This introduction is to highlight comprehensively the Chinese electricity industry for issues related to the institutional reform, capacity growth, pricing regime, technology development, supply structure and new investment in upgrading electric power grids. Through reviews of statistics and documentaries, we provide a generally updated understanding of the current development and reform of China's electric power industry, which is one strategic focus of the Chinese Government for its further reform in the energy sector.