4Non-technical summary 5 1 Introduction 72 Some institutional features of ECB monetary policy announcements and communication 103 Extracting news from the money market yield curve 11 Principal components 12 Recursive regressions 133.3 Separate decision and communication windows 13 Jobless claims 144 Evolution of monetary policy news over time 14 Main results 14 Interpreting specific events 155 Impact of monetary policy news on longer-term yields 17 Conclusions 18References 19 26European Central Bank Working Paper Series 34 Appendix Figures and tables AbstractWe analyse high-frequency changes in the euro area money market yield curve on dates when the ECB regularly sets and communicates decisions on policy interest rates to construct different indicators of monetary policy news relating to policy decisions and to central bank communication. The indicators show that ECB communication during the press conference may result in significant changes in market expectations of the path of monetary policy. Furthermore, our results suggest that these changes have a significant and sizeable impact on medium to long-term interest rates. Keywords Non-technical summaryTo underpin their commitment to low and stable inflation, central banks have sought to improve the transparency of their monetary policy strategies through -among other important elements -appropriate communication with financial markets and the public. Central bank communication has thus become a key element in contributing to stabilise expectations as to how the central bank responds to changes in the state of the economy.We construct multi-dimensional indicators of monetary policy news which capture information relating to monetary policy decisions and communication at different maturity horizons. In particular, we analyse high-frequency changes in money market rates during days when the Governing Council of the European Central Bank (ECB) decides on policy interest rates and -in the context of its regular press conference taking place shortly afterwards -explains this decision to the public. The indicators that we construct relate not only to the extent to which current policy decisions have been anticipated, but also to the extent to which expectations of the path of monetary policy have been revised as a result of communication that accompanies the decision. Having constructed several multidimensional indicators of monetary policy news we use them to analyse the impact of policy action and communication on expectations of the level of interest rates at various time horizons. Measuring the impact of monetary policy news on the nominal yield curve is useful in assessing the success of a central bank in managing expectations about future policy rates and in analysing the financial market participant's understanding of the central bank's intentions.Our study adds to the empirical literature on central bank communication in two important ways: First, the use of intraday data together with the institutional feature that the ECB announces and explains po...

Rapach et al. (2013) have recently shown that U.S. equity market returns carry valuable information to improve return forecasts in a large cross-section of international equity markets. In this study, we extend the work of Rapach et al. (2013) and examine if U.S. based equity market information can be used to improve realized volatility forecasts in international equity markets. For that purpose, we obtain volatility data for the U.S. and 17 international equity markets from the Oxford Man Institute's realized library and augment for each foreign equity market the benchmark HAR model with lagged U.S. equity market volatility information. In-sample as well as out-of-sample evaluation results suggest a strong role for U.S. based volatility information. More specifically, apart from standard in-sample tests, which find U.S. volatility information to be highly significant, we show that this information can be used to substantially improve out-of-sample forecasts of realized volatility. Using large out-of-sample evaluation periods containing at least 2500 observations, we find that forecast improvements, as measured by the out-of-sample R 2 (relative to a model that does not include U.S. based volatility information), can be as high as 12.83, 10.43 and 9.41 percent for the All Ordinaries, the Euro STOXX 50 and the CAC 40 at the one-step-ahead horizon. Moreover, forecast improvements are highly significant at the one-step-ahead horizon for all 17 equity markets that we consider, yielding Clark-West adjusted t statistics of over 7. We show further that the improvements from including U.S. based volatility information are consistently experienced over the entire out-of-sample period that we consider, and hold for forecast horizons of up to 22 days ahead.

We use data from the London Metal Exchange (LME) to forecast monthly copper returns using the recently proposed dynamic model averaging and selection (DMA/DMS) framework, which incorporates time varying parameters as well as model averaging and selection into one unifying framework. Using a total of 18 predictor variables that include traditional fundamental indicators such as excess demand, inventories and the convenience yield, as well as indicators related to global risk appetite, momentum, the term spread, and various other financial series, we show that there exists a considerable predictive component in copper returns. Covering an out-of-sample period from May 2002 to June 2014 and employing standard statistical evaluation criteria we show that the out-of-sample R 2 (relative to a random walk benchmark) can be as high as 18.5 percent for the DMA framework. Time series plots of the cumulative mean squared forecast errors and time varying coefficients show further that firstly, a large part of the improvement in the forecasts is realised during the peak of the financial crisis period at the end of 2008, and secondly that the importance of the most relevant predictor variables has changed substantially over the out-of-sample period. The coefficients of the SP500, the VIX, the yield spread, the TED spread, industrial production and the convenience yield predictors are most heavily affected, with the TED spread and yield spread coefficients even changing signs over this period. Our predictability results remain valid for forecast horizons up to 6 months ahead, but are weaker and smaller than at the one month horizon.

Highlights:• we build an empirical heterogeneous agent model for 6 currencies • individual agent forecasts are constructed from DMA framework • our daily out-of-sample R2 relative to RW can be as high as 1.41% and highly significant • our model forecasts yield annualized Sharpe ratios of up to 1.1 and performance fees above 400 basis points • our predictability results break down after February 2009, are strongest after Lehman Brothers collapse  We are grateful to Andrea Vedolin (LSE) for providing the yield curve factor loadings for Japan and Switzerland. We would like to thank AbstractWe construct an empirical heterogeneous agent model which optimally combines forecasts from fundamentalist and chartist agents and evaluates its out-of-sample forecast performance using daily data covering an overall period from January 1999 to June 2014 for six of the most widely traded currencies. We use daily financial data such as level, slope and curvature yield curve factors, equity prices, as well as risk aversion and global trade activity measures in the fundamentalist agent's predictor set to obtain a proxy for the market's view on the state of the macroeconomy. Chartist agents rely upon standard momentum, moving average and relative strength index technical indicators in their predictor set. Individual agent specific forecasts are constructed using a flexible dynamic model averaging framework and are then aggregated into a model combined forecast using a forecast combination regression. We show that our empirical heterogeneous agent model produces statistically significant and sizable forecast improvements over a random walk benchmark, reaching out-of-sample R 2 values of 1.41, 1.07, 0.99 and 0.74 percent at the daily one-step ahead horizon for 4 out of the 6 currencies that we consider. Forecast gains remain significant for horizons up to three-days ahead. The forecast improvements are largely realised before and around the time of the Lehman Brothers collapse. We show further that our model combined forecasts produce economic value to a mean variance investor, yielding annualized Sharpe ratios of around 1.1 and annualized performance fees in excess of 400 basis points.

Drawing on the lessons from the global financial crisis and especially from its impact on the banking systems of Eastern Europe, the paper proposes a new practical approach to macroprudential stress testing. The proposed approach incorporates: (i) macroeconomic stress scenarios generated from both a country specific statistical model and historical cross-country crises experience; (ii) indirect credit risk due to foreign currency exposures of unhedged borrowers; (iii) varying underwriting practices across banks and their asset classes based on their relative aggressiveness of lending; (iv) higher correlations between the probability of default and the loss given default during stress periods; (v) a negative effect of lending concentration and residual loan maturity on unexpected losses; and (vi) the use of an economic risk weighted capital adequacy ratio as the relevant outcome indicator to measure the resilience of banks to materialising credit risk. We apply the proposed approach to a set of Eastern European banks and discuss the results. Keywords Executive SummaryThe financial crisis has revealed the need for better macroprudential oversight and a more appropriate and timely policy response. Regular stress testing of the financial system is the main tool of macroprudential monitoring. Despite the widely recognized importance of conducting stress tests, there appears to be a consensus among macroprudential practitioners that stress tests were not informative enough and did not enforce an adequate policy response prior to the global financial crisis (Galati and Moessner, 2011;Haldane, 2009;Turner, 2009; de Larosiere, 2009; Cihak, 2007;Sorge, 2004). This partial failure of stress tests has lead to the development of a new generation of stress testing models (Foglia, 2009;Breuer et al., 2009;Swinburne, 2007).Our proposed methodology described in detail in this paper improves on the existing stress tests by integrating into one coherent framework the following attributes:• An explicit and robust link of systemic credit risk to macroeconomic conditions based on cross-country experience that can be further tailored to country specific conditions, and that allows for the credit risk sensitivity to changing macroeconomic conditions to increase during crisis times.• A bank-specific, idiosyncratic component of credit risk based on the different underwriting standards across individual banks and their aggressiveness in lending, including the assumption of indirect credit risk from foreign currency lending to unhedged borrowers.• The correlation between the probability of default and the loss given default is allowed to increase in times of stress following Moody's (2010).• A bank's lending concentration within individual asset classes and the extent of the performed maturity transformation are allowed to play an important role in bank specific capital charge calculations, eliminating some of the drawbacks of the capital charge calculation based on Basel II methodology.• The attributes are prudently combined to p...