We use a relatively general intertemporal asset pricing model where housing services and consumption are non-separable to measure overvaluation of housing in relation to rents in Spain, the UK and the US. Part of the increase in real house prices during the late nineties can be seen as a return to equilibrium following some undershooting after previous price peaks. However, marked increases in house prices led to price-torent ratios above equilibrium by mid-2003 (around 30% above equilibrium in the UK, 20% in Spain and 10% in the US). Part of that overvaluation -particularly in Spain and the UK -may be attributable to the sluggishness of supply in the presence of large demand shocks in this market and/or the slow adjustment of observed rents.
We model the two types of tenders used by the European Central Bank in its open market operations. We assume that the ECB minimises a loss function that depends on the difference between the interbank rate and a target rate that characterises the stance of monetary policy. When the loss function penalises interbank rates below the target more heavily, fixed rate tenders have a unique equilibrium with high overbidding, while variable rate tenders have multiple equilibria with moderate overbidding. Our empirical analysis is consistent with the predictions of the model and supports the hypothesis of an asymmetric loss function.* We are very grateful to , and three anonymous referees for their comments and suggestions. We also thank seminar participants at Oxford, Rotterdam, University College London, the Banco de Españ na, the Bank of England, the Federal Reserve Board and the IMF. The views expressed in this paper are those of its authors and do not necessarily reflect the position of the Banco de Españ na.1 Strictly speaking we should refer to the monetary policy of the Eurosystem, which comprises the ECB and the national central banks of the countries that have adopted the euro. However since the Eurosystem has no legal personality and is governed by the decision-making bodies of the ECB, with a slight abuse of terminology, in this paper we will simply use the latter term.2 In its meeting of 23 January 2003, the Governing Council of the ECB decided to reduce the maturity of the main refinancing operations to one week as from the beginning of 2004.
This paper analyses whether there has been an increase in the degree of financial market integration during the nineties. To do this, we focus on stock markets and compute, first, a number of standard measures of co-movements that sometimes are interpreted as measures of financial integration. In our view, they only measure financial market linkages. In any case, this analysis allows us to make a more formal assessment of the actual increase in linkages and, at the same time, highlights the shortcomings of these measures of financial market integration. In the second part of the paper we compute two alternative measures of market integration based on a refinement of the approach suggested by Chen and Knez (1995). The main advantage of this approach is that it relies on the condition of absence of arbitrage opportunities-which is directly related to the idea that more integration means less barriers to trade across markets-and does not depend on any particular asset pricing model. The evidence found suggests that during the nineties there has been an increase of the degree of market integration between stock markets. * Paper prepared for the Autumn Central Bank Economist's Meeting held at the BIS on the 25 and 26 October 1999. We wish to thank Francisco Alonso for outstanding research assistance, and Enrique Alberola, José Luis Escrivá, Jorge Martínez and participants in the BIS' Meeting and in the internal seminar at the Banco de España for very helpful comments and suggestions. Perhaps the simplest approach in the literature to analyse the degree of market integration is that based on the computation of the correlation between returns on those markets that are thought to be more integrated than previously 1. This approach is based on rather simple intuition: the more integrated markets are, the higher the co-movement between their prices. In this respect, Table 1 shows the correlation between weekly returns on seven selected stock exchanges-New York, London, Paris, Madrid, Frankfurt, Milan and Tokyo 2during the 1990-1994 and the 1995-1999 periods. In 15 out of the 21 possible combinations, correlation has increased in the second half of the nineties, with the Japanese stock exchange accounting for the remaining 6 cases. On average, the correlation between the returns on these stock exchanges increased from .
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