Milton Friedman argued that flexible exchange rates would facilitate external adjustment. Recent studies find surprisingly little robust evidence that they do. We argue that this is because they use composite (or aggregate) exchange rate regime classifications, which often mask very heterogeneous bilateral relationships between countries. Constructing a novel dataset of bilateral exchange rate regimes that differentiates by the degree of exchange rate flexibility, as well as by direct and indirect exchange rate relationships, for 181 countries over 1980–2011, we find a significant and empirically robust relationship between exchange rate flexibility and the speed of external adjustment. Our results are supported by several “natural experiments” of exogenous changes in bilateral exchange rate regimes.
{"title":"Friedman Redux: External Adjustment and Exchange Rate Flexibility","authors":"A. Ghosh, M. Qureshi, Charalambos G. Tsangarides","doi":"10.1111/ECOJ.12579","DOIUrl":"https://doi.org/10.1111/ECOJ.12579","url":null,"abstract":"Milton Friedman argued that flexible exchange rates would facilitate external adjustment. Recent studies find surprisingly little robust evidence that they do. We argue that this is because they use composite (or aggregate) exchange rate regime classifications, which often mask very heterogeneous bilateral relationships between countries. Constructing a novel dataset of bilateral exchange rate regimes that differentiates by the degree of exchange rate flexibility, as well as by direct and indirect exchange rate relationships, for 181 countries over 1980–2011, we find a significant and empirically robust relationship between exchange rate flexibility and the speed of external adjustment. Our results are supported by several “natural experiments” of exogenous changes in bilateral exchange rate regimes.","PeriodicalId":126646,"journal":{"name":"PSN: Exchange Rates & Currency (International) (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129736408","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we develop an analytical general equilibrium framework to measure the foreign exchange premium and the premium for non-tradable outlays for a country. The framework allows us to capture in a consistent manner the impacts of the sourcing of funds and their expenditure on tradable and non-tradable goods and services of investment projects. An application of the model is carried out for 20 countries in Africa. The results show that the foreign exchange premiums range from 2.4% to 9.0% and the premium for non-tradable outlays from −0.7% to 2.9%. The empirical values depend on a number of factors, including the indirect taxes, production subsidies and international trade distortions of a country. These premiums should be incorporated into the economic evaluation of investment projects.
{"title":"Measuring the Foreign Exchange Premium and the Premium for Non-Tradable Outlays for Twenty Countries in Africa","authors":"G. Jenkins, Chun-Yan Kuo, S. Salci","doi":"10.1111/SAJE.12068","DOIUrl":"https://doi.org/10.1111/SAJE.12068","url":null,"abstract":"In this paper, we develop an analytical general equilibrium framework to measure the foreign exchange premium and the premium for non-tradable outlays for a country. The framework allows us to capture in a consistent manner the impacts of the sourcing of funds and their expenditure on tradable and non-tradable goods and services of investment projects. An application of the model is carried out for 20 countries in Africa. The results show that the foreign exchange premiums range from 2.4% to 9.0% and the premium for non-tradable outlays from −0.7% to 2.9%. The empirical values depend on a number of factors, including the indirect taxes, production subsidies and international trade distortions of a country. These premiums should be incorporated into the economic evaluation of investment projects.","PeriodicalId":126646,"journal":{"name":"PSN: Exchange Rates & Currency (International) (Topic)","volume":"136 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-07-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133751553","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We find an example where real exchange rate (RER) is stationary and the nominal exchange rate and the price levels are cointegrated but purchasing power parity (PPP) does not hold, which reveals a fault of the unit root and cointegration tests in this use. We argue that the distribution of an RER misalignment can be used in testing absolute PPP. Then we apply this new test and the coefficient restriction test to study the validity of absolute PPP in 40 main countries and areas (versus the US) in light of the Harrod-Balassa-Samuelson effect. The econometric proofs show that absolute PPP holds or closely holds in most countries when their averaged relative GDP per capita (GDPPs, against the US with the US = 1) are greater than 0.7. And it does not hold in almost all countries when their averaged GDPPs are smaller than 0.7. Thus, a rule of thumb for the theory to hold is that the GDPP should be above 0.7.
{"title":"Is There a Rule of Thumb for Absolute Purchasing Power Parity to Hold?","authors":"Zhibai Zhang","doi":"10.2139/ssrn.2425029","DOIUrl":"https://doi.org/10.2139/ssrn.2425029","url":null,"abstract":"We find an example where real exchange rate (RER) is stationary and the nominal exchange rate and the price levels are cointegrated but purchasing power parity (PPP) does not hold, which reveals a fault of the unit root and cointegration tests in this use. We argue that the distribution of an RER misalignment can be used in testing absolute PPP. Then we apply this new test and the coefficient restriction test to study the validity of absolute PPP in 40 main countries and areas (versus the US) in light of the Harrod-Balassa-Samuelson effect. The econometric proofs show that absolute PPP holds or closely holds in most countries when their averaged relative GDP per capita (GDPPs, against the US with the US = 1) are greater than 0.7. And it does not hold in almost all countries when their averaged GDPPs are smaller than 0.7. Thus, a rule of thumb for the theory to hold is that the GDPP should be above 0.7.","PeriodicalId":126646,"journal":{"name":"PSN: Exchange Rates & Currency (International) (Topic)","volume":"79 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-04-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133460018","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2014-04-01DOI: 10.5089/9781475543735.001.A001
Nicolás E. Magud, Esteban Vesperoni
We identify periods of capital inflows reversals—looking at both gross and net capital flows—and document the behavior of macro and credit variables in economies with different degrees of exchange rate flexibility. We find that more exchange rate flexibility moderates credit swings during capital flow cycles, mainly because it is associated with milder credit growth during the boom. Flexibility, however, cannot completely shield the economy from a credit reversal. We observe what we dub as a recovery puzzle: credit growth in economies with more flexible exchange rate regimes remains tepid well after the capital flow reversal takes place. This results stress potential complementarity of macro-prudential policies with the exchange rate regime. More flexible regimes could help smoothing the credit cycle through capital surcharges and dynamic provisioning that build buffers to counteract the credit recovery puzzle. In contrast, more rigid exchange rate regimes would benefit the most from measures to contain excessive credit growth during booms, such as reserve requirements, loan-to-income ratios, and debt-to-income and debt-service-to-income limits.
{"title":"Exchange Rate Flexibility and Credit During Capital Inflow Reversals: Purgatory…Not Paradise","authors":"Nicolás E. Magud, Esteban Vesperoni","doi":"10.5089/9781475543735.001.A001","DOIUrl":"https://doi.org/10.5089/9781475543735.001.A001","url":null,"abstract":"We identify periods of capital inflows reversals—looking at both gross and net capital flows—and document the behavior of macro and credit variables in economies with different degrees of exchange rate flexibility. We find that more exchange rate flexibility moderates credit swings during capital flow cycles, mainly because it is associated with milder credit growth during the boom. Flexibility, however, cannot completely shield the economy from a credit reversal. We observe what we dub as a recovery puzzle: credit growth in economies with more flexible exchange rate regimes remains tepid well after the capital flow reversal takes place. This results stress potential complementarity of macro-prudential policies with the exchange rate regime. More flexible regimes could help smoothing the credit cycle through capital surcharges and dynamic provisioning that build buffers to counteract the credit recovery puzzle. In contrast, more rigid exchange rate regimes would benefit the most from measures to contain excessive credit growth during booms, such as reserve requirements, loan-to-income ratios, and debt-to-income and debt-service-to-income limits.","PeriodicalId":126646,"journal":{"name":"PSN: Exchange Rates & Currency (International) (Topic)","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130837125","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we present a new model that takes an arbitrage approach to the valuation of catastrophic risk bonds (CAT bonds). The model considers the sponsor's exposure to currency exchange risk and the risk of catastrophic events. We use a jump-diffusion process for catastrophic events, a three-dimensional stochastic process for the exchange rate and domestic and foreign interest rates, and a hedging cost for the currency risk to derive a semi-closed-form formula for the CAT bond price. We also extend to three factors Joshi and Leung's (2007) Monte Carlo simulation approach to obtain numerical results showing the following: in addition to catastrophic risk, the CAT bond price is affected mainly by the volatility of the exchange rate and its correlations with domestic and foreign interest rates. The first two factors have a negative impact while the third has a positive impact.
{"title":"The Valuation of Catastrophe Bonds with Exposure to Currency Exchange Risk","authors":"Van Son Lai, Mathieu Parcollet, B. Lamond","doi":"10.2139/ssrn.2399966","DOIUrl":"https://doi.org/10.2139/ssrn.2399966","url":null,"abstract":"In this paper, we present a new model that takes an arbitrage approach to the valuation of catastrophic risk bonds (CAT bonds). The model considers the sponsor's exposure to currency exchange risk and the risk of catastrophic events. We use a jump-diffusion process for catastrophic events, a three-dimensional stochastic process for the exchange rate and domestic and foreign interest rates, and a hedging cost for the currency risk to derive a semi-closed-form formula for the CAT bond price. We also extend to three factors Joshi and Leung's (2007) Monte Carlo simulation approach to obtain numerical results showing the following: in addition to catastrophic risk, the CAT bond price is affected mainly by the volatility of the exchange rate and its correlations with domestic and foreign interest rates. The first two factors have a negative impact while the third has a positive impact.","PeriodicalId":126646,"journal":{"name":"PSN: Exchange Rates & Currency (International) (Topic)","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-02-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132328088","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The squeeze in United States dollar liquidity that emerged with the global financial crisis highlighted the risks inherent in the current global financial system. Asia was adversely affected by the crisis not only because of its dependence on trade, but also because of its heavy reliance on the US dollar for regional and international transactions. As Asia’s role in the global economy continues to expand, its dependence on the US dollar is bound to increase, raising further its vulnerability to future liquidity shocks. The use of regional currencies for bilateral trade settlement could reduce such vulnerability. As demonstrated by the renminbi trade settlement scheme piloted between the People’s Republic of China; Hong Kong, China; and Macao, China, the existence of appropriate financial infrastructure could reduce the relatively larger costs of bilateral currency transactions compared with triangular transactions through the United States dollar. As most central banks are securities depositories of government bonds, combining trade settlement with government bond securities settlement could also have large synergy effects without substantial extra costs. This proposal does not require full liberalization of the capital account or full deregulation of capital markets, and is more politically feasible in transition. As such, extending the trade settlement scheme to the rest of Asia and appending a government bond payment and securities settlement system could be a practical solution to international monetary system reform and the diversification of settlement currencies.
{"title":"Regional Settlement Infrastructure and Currency Internationalization: The Case of Asia and the Renminbi","authors":"C. Rhee, Lea R. Sumulong","doi":"10.2139/ssrn.2391112","DOIUrl":"https://doi.org/10.2139/ssrn.2391112","url":null,"abstract":"The squeeze in United States dollar liquidity that emerged with the global financial crisis highlighted the risks inherent in the current global financial system. Asia was adversely affected by the crisis not only because of its dependence on trade, but also because of its heavy reliance on the US dollar for regional and international transactions. As Asia’s role in the global economy continues to expand, its dependence on the US dollar is bound to increase, raising further its vulnerability to future liquidity shocks. The use of regional currencies for bilateral trade settlement could reduce such vulnerability. As demonstrated by the renminbi trade settlement scheme piloted between the People’s Republic of China; Hong Kong, China; and Macao, China, the existence of appropriate financial infrastructure could reduce the relatively larger costs of bilateral currency transactions compared with triangular transactions through the United States dollar. As most central banks are securities depositories of government bonds, combining trade settlement with government bond securities settlement could also have large synergy effects without substantial extra costs. This proposal does not require full liberalization of the capital account or full deregulation of capital markets, and is more politically feasible in transition. As such, extending the trade settlement scheme to the rest of Asia and appending a government bond payment and securities settlement system could be a practical solution to international monetary system reform and the diversification of settlement currencies.","PeriodicalId":126646,"journal":{"name":"PSN: Exchange Rates & Currency (International) (Topic)","volume":"46 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-02-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114505127","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper examines how exchange rate shocks affect intra-industry labor reallocation across firms. Using comprehensive Chinese firm-level data, we examine the employment response to exchange rates of firms that are heterogeneous along two dimensions: external orientation and trading partner distribution. Firm-specific effective exchange rates are constructed to accurately measure exchange rate shocks pertinent to individual firms. We find that exchange rate movements induce significant labor reallocation across firms with different degrees of external orientation and with different trading partners. Trading partner distribution is as important as external orientation in explaining firms' heterogeneous employment response to exchange rates. Compared with effective exchange rate measures at more aggregate levels, using firm-specific effective exchange rates generates estimation results more consistent with theory and substantially increases the estimated impact of exchange rates on intra-industry job reallocation.
{"title":"Firm-Specific Exchange Rate Exposure and Employment Adjustment: Evidence from China","authors":"Mi Dai, Jianwei Xu","doi":"10.2139/ssrn.2269576","DOIUrl":"https://doi.org/10.2139/ssrn.2269576","url":null,"abstract":"This paper examines how exchange rate shocks affect intra-industry labor reallocation across firms. Using comprehensive Chinese firm-level data, we examine the employment response to exchange rates of firms that are heterogeneous along two dimensions: external orientation and trading partner distribution. Firm-specific effective exchange rates are constructed to accurately measure exchange rate shocks pertinent to individual firms. We find that exchange rate movements induce significant labor reallocation across firms with different degrees of external orientation and with different trading partners. Trading partner distribution is as important as external orientation in explaining firms' heterogeneous employment response to exchange rates. Compared with effective exchange rate measures at more aggregate levels, using firm-specific effective exchange rates generates estimation results more consistent with theory and substantially increases the estimated impact of exchange rates on intra-industry job reallocation.","PeriodicalId":126646,"journal":{"name":"PSN: Exchange Rates & Currency (International) (Topic)","volume":"78 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-12-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131933182","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2013-11-01DOI: 10.5089/9781475513424.001.A001
D. Botman, Irineu de Carvalho Filho, W. Lam
During risk-off episodes, the yen is a safe haven currency and on average appreciates against the U.S. dollar. We investigate the proximate causes of yen risk-off appreciations. We find that neither capital inflows nor expectations of the future monetary policy stancecan explain the yen’s safe haven behavior. In contrast, we find evidence that changes in market participants’ risk perceptions trigger derivatives trading, which in turn lead to changes in the spot exchange rate without capital flows. Specifically, we find that risk-offepisodes coincide with forward hedging and reduced net short positions or a buildup of net long positions in yen. These empirical findings suggest that offshore and complex financial transactions should be part of spillover analyses and that the effectiveness of capital flow management measures or monetary policy coordination to address excessive exchange rate volatility might be limited in certain cases.
{"title":"The Curious Case of the Yen as a Safe Haven Currency: A Forensic Analysis","authors":"D. Botman, Irineu de Carvalho Filho, W. Lam","doi":"10.5089/9781475513424.001.A001","DOIUrl":"https://doi.org/10.5089/9781475513424.001.A001","url":null,"abstract":"During risk-off episodes, the yen is a safe haven currency and on average appreciates against the U.S. dollar. We investigate the proximate causes of yen risk-off appreciations. We find that neither capital inflows nor expectations of the future monetary policy stancecan explain the yen’s safe haven behavior. In contrast, we find evidence that changes in market participants’ risk perceptions trigger derivatives trading, which in turn lead to changes in the spot exchange rate without capital flows. Specifically, we find that risk-offepisodes coincide with forward hedging and reduced net short positions or a buildup of net long positions in yen. These empirical findings suggest that offshore and complex financial transactions should be part of spillover analyses and that the effectiveness of capital flow management measures or monetary policy coordination to address excessive exchange rate volatility might be limited in certain cases.","PeriodicalId":126646,"journal":{"name":"PSN: Exchange Rates & Currency (International) (Topic)","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115662053","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This study empirically examines the nature of the exchange rate-pass through (ERPT) into export and import prices in the case of a small open economy of Korea by using a bounds testing approach. The estimation results obtained from the unrestricted error correction model (UECM) using data on Korea and its major trading partners, Japan and the U.S., provide new evidences showing that statistical significances in the degree of pass-through vary with respect to industries. The study also reveals that there is heterogeneity across sectors in their reaction to exchange rate as well as its asymmetry and persistence. The evidence indicate that the raw materials sector has a difference in the ERPT between the short and the long run effects, suggesting that the incomplete exchange rate pass-through seems to be persistent within the sector. In particular, the evidence for agriculture does support the hypothesis of asymmetric response to the ERPT in the long run. This result supports that of previous findings, but also provides more insight for the exchange rate theory and trade policy.
{"title":"Exchange Rate Pass-Through into Export and Import Prices: A Bounds Testing Analysis on the Case of Korea","authors":"Jaehwa Lee","doi":"10.2139/ssrn.2345422","DOIUrl":"https://doi.org/10.2139/ssrn.2345422","url":null,"abstract":"This study empirically examines the nature of the exchange rate-pass through (ERPT) into export and import prices in the case of a small open economy of Korea by using a bounds testing approach. The estimation results obtained from the unrestricted error correction model (UECM) using data on Korea and its major trading partners, Japan and the U.S., provide new evidences showing that statistical significances in the degree of pass-through vary with respect to industries. The study also reveals that there is heterogeneity across sectors in their reaction to exchange rate as well as its asymmetry and persistence. The evidence indicate that the raw materials sector has a difference in the ERPT between the short and the long run effects, suggesting that the incomplete exchange rate pass-through seems to be persistent within the sector. In particular, the evidence for agriculture does support the hypothesis of asymmetric response to the ERPT in the long run. This result supports that of previous findings, but also provides more insight for the exchange rate theory and trade policy.","PeriodicalId":126646,"journal":{"name":"PSN: Exchange Rates & Currency (International) (Topic)","volume":"60 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-10-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134376420","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper study aims to investigate the relationship between call money rates, exchange rates and stock returns from the perspective of India. We use monthly data for the time span of April 1992 to March 2011. This provides sufficient data set for the empirical analysis. Result from Granger causality test evidences bidirectional relationship between call money rates and exchange rates. It is also identified that call money rates and exchange rates Granger cause stock returns and did not find reverse causality from stock returns to call money and exchange rates. To explore, lead-lag interaction among the variables studied we employed VAR models. Results suggest that there is substantial lead-lag relationship from call money rates to exchange rates and stock returns. Similar relationship also found from exchange rates to call money rates and stock returns. However, there is no evidence of lead-lag causation from stock returns to call money and exchange rates. Findings of this study are useful for the investors and policy makers. In investors’ standpoint, they can utilize this historical information of call money rates and exchange rates for predicting the movements of stock returns. Similarly, policy makers can stabilize the stock market fluctuations by adopting appropriate policies towards interest rates and exchange rates for time to time.
{"title":"An Empirical Relationship between Exchange Rates, Interest Rates and Stock Returns","authors":"Sudharshan Reddy Paramati, Rakesh Gupta","doi":"10.2139/ssrn.2336043","DOIUrl":"https://doi.org/10.2139/ssrn.2336043","url":null,"abstract":"In this paper study aims to investigate the relationship between call money rates, exchange rates and stock returns from the perspective of India. We use monthly data for the time span of April 1992 to March 2011. This provides sufficient data set for the empirical analysis. Result from Granger causality test evidences bidirectional relationship between call money rates and exchange rates. It is also identified that call money rates and exchange rates Granger cause stock returns and did not find reverse causality from stock returns to call money and exchange rates. To explore, lead-lag interaction among the variables studied we employed VAR models. Results suggest that there is substantial lead-lag relationship from call money rates to exchange rates and stock returns. Similar relationship also found from exchange rates to call money rates and stock returns. However, there is no evidence of lead-lag causation from stock returns to call money and exchange rates. Findings of this study are useful for the investors and policy makers. In investors’ standpoint, they can utilize this historical information of call money rates and exchange rates for predicting the movements of stock returns. Similarly, policy makers can stabilize the stock market fluctuations by adopting appropriate policies towards interest rates and exchange rates for time to time.","PeriodicalId":126646,"journal":{"name":"PSN: Exchange Rates & Currency (International) (Topic)","volume":"104 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-10-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116462698","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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