This paper introduces a new class of multivariate volatility models which is easy to estimate using covariance targeting, even with rich dynamics. We call them rotated ARCH (RARCH) models. The basic structure is to rotate the returns and then to fit them using a BEKK-type parameterization of the time-varying covariance whose long-run covariance is the identity matrix. This yields the rotated BEKK (RBEKK) model. The extension to DCC-type parameterizations is given, introducing the rotated DCC (RDCC) model. Inference for these models is computationally attractive, and the asymptotics are standard. The techniques are illustrated using data on the DJIA stocks.
{"title":"Multivariate Rotated ARCH Models","authors":"Diaa Noureldin, N. Shephard, Kevin Sheppard","doi":"10.2139/ssrn.2007484","DOIUrl":"https://doi.org/10.2139/ssrn.2007484","url":null,"abstract":"This paper introduces a new class of multivariate volatility models which is easy to estimate using covariance targeting, even with rich dynamics. We call them rotated ARCH (RARCH) models. The basic structure is to rotate the returns and then to fit them using a BEKK-type parameterization of the time-varying covariance whose long-run covariance is the identity matrix. This yields the rotated BEKK (RBEKK) model. The extension to DCC-type parameterizations is given, introducing the rotated DCC (RDCC) model. Inference for these models is computationally attractive, and the asymptotics are standard. The techniques are illustrated using data on the DJIA stocks.","PeriodicalId":355463,"journal":{"name":"ERN: Econometric Studies of Foreign Exchange Markets (Topic)","volume":"41 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-11-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127066405","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}
To estimate foreign exchange (FX) cash flow exposure, one may choose between direct and indirect regression approaches, where the direct approach uses accounting-based cash flow data and the indirect approach uses equity returns as a cash flow proxy. The indirect approach typically includes one or more additional independent variables to control for the impact of FX changes on the required rate of return. Frequently, the control variable is an equity index. We propose that using a bond return control variable instead of equity returns addresses several theoretical problems inherent in the indirect estimation approach. In our empirical analysis we find that using the bond-based control variable results in FX cash flow exposure estimates that are more highly correlated with direct measures than using an equity index as a control variable.
{"title":"Direct versus Indirect Regression Estimates of Foreign Exchange Cash Flow Exposure","authors":"Alain A. Krapl, Thomas J. O'Brien","doi":"10.2139/ssrn.2166503","DOIUrl":"https://doi.org/10.2139/ssrn.2166503","url":null,"abstract":"To estimate foreign exchange (FX) cash flow exposure, one may choose between direct and indirect regression approaches, where the direct approach uses accounting-based cash flow data and the indirect approach uses equity returns as a cash flow proxy. The indirect approach typically includes one or more additional independent variables to control for the impact of FX changes on the required rate of return. Frequently, the control variable is an equity index. We propose that using a bond return control variable instead of equity returns addresses several theoretical problems inherent in the indirect estimation approach. In our empirical analysis we find that using the bond-based control variable results in FX cash flow exposure estimates that are more highly correlated with direct measures than using an equity index as a control variable.","PeriodicalId":355463,"journal":{"name":"ERN: Econometric Studies of Foreign Exchange Markets (Topic)","volume":"31 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-09-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122230188","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}
Ryan Greenaway, Nelson C. Mark, Donggyu Sul, Jyh‐Lin Wu
Factor analysis performed on a panel of 23 nominal exchange rates from January 1999 to December 2010 yields three common factors. This paper identifies the euro/dollar, Swissfranc/dollar and yen/dollar exchange rates as empirical counterparts to these common factors. These empirical factors explain a large proportio no f exchange rate variation over time and have significant in-sample and out-of-sample predictive power.
{"title":"Exchange Rates as Exchange Rate Common Factors","authors":"Ryan Greenaway, Nelson C. Mark, Donggyu Sul, Jyh‐Lin Wu","doi":"10.2139/ssrn.2138713","DOIUrl":"https://doi.org/10.2139/ssrn.2138713","url":null,"abstract":"Factor analysis performed on a panel of 23 nominal exchange rates from January 1999 to December 2010 yields three common factors. This paper identifies the euro/dollar, Swissfranc/dollar and yen/dollar exchange rates as empirical counterparts to these common factors. These empirical factors explain a large proportio no f exchange rate variation over time and have significant in-sample and out-of-sample predictive power.","PeriodicalId":355463,"journal":{"name":"ERN: Econometric Studies of Foreign Exchange Markets (Topic)","volume":"29 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-08-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116472527","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}
Foreign currency loans given to the unhedged non-bank sector are remarkably prevalent in Europe. Especially Swiss franc denominated loans, which are widely popular in Eastern European countries, are believed to pose a significant exchange-rate-induced credit risk to the European banking sectors. A sudden depreciation of the domestic currencies in Eastern European countries could trigger simultaneous bank failures, if unhedged borrowers cannot service their foreign currency loans anymore. Therefore they pose a systemic risk from a “common market shock” view. This paper attempts to quantify the systemic risk arising from foreign currency loans in 17 European countries quarterly between 2007:Q1 and 2011:Q3. For that purpose, I use a novel dataset collected by the Swiss National Bank and I build on the method suggested in Ranciere, Tornell, and Vamvakidis (2010). In particular, I calculate to which extent the European banking sectors’ balance sheets would be affected if households and/or non-financial firms cannot pay back their foreign currency loans. I find that the systemic risk in Eastern Europe is substantial, while it is relatively low in the remaining European countries. However, CHF-denominated loans are not the main source behind the systemic risk in Eastern Europe, contrary to what the policymakers and the general public might perceive. I find that loans denominated in other foreign currencies (possibly in euros) contribute to the systemic risk in Eastern Europe significantly more than CHF loans do. Furthermore, systemic risk shows high persistence, and low volatility during the sample period. Last but not least, banks in Europe have been persistently holding more foreign currency denominated assets than liabilities, indicating that they are aware of the exchange-rate-induced credit risk they are facing.
{"title":"Systemic Risk in Europe Due to Foreign Currency Loans","authors":"Pınar Yeşin","doi":"10.2139/ssrn.2141228","DOIUrl":"https://doi.org/10.2139/ssrn.2141228","url":null,"abstract":"Foreign currency loans given to the unhedged non-bank sector are remarkably prevalent in Europe. Especially Swiss franc denominated loans, which are widely popular in Eastern European countries, are believed to pose a significant exchange-rate-induced credit risk to the European banking sectors. A sudden depreciation of the domestic currencies in Eastern European countries could trigger simultaneous bank failures, if unhedged borrowers cannot service their foreign currency loans anymore. Therefore they pose a systemic risk from a “common market shock” view. This paper attempts to quantify the systemic risk arising from foreign currency loans in 17 European countries quarterly between 2007:Q1 and 2011:Q3. For that purpose, I use a novel dataset collected by the Swiss National Bank and I build on the method suggested in Ranciere, Tornell, and Vamvakidis (2010). In particular, I calculate to which extent the European banking sectors’ balance sheets would be affected if households and/or non-financial firms cannot pay back their foreign currency loans. I find that the systemic risk in Eastern Europe is substantial, while it is relatively low in the remaining European countries. However, CHF-denominated loans are not the main source behind the systemic risk in Eastern Europe, contrary to what the policymakers and the general public might perceive. I find that loans denominated in other foreign currencies (possibly in euros) contribute to the systemic risk in Eastern Europe significantly more than CHF loans do. Furthermore, systemic risk shows high persistence, and low volatility during the sample period. Last but not least, banks in Europe have been persistently holding more foreign currency denominated assets than liabilities, indicating that they are aware of the exchange-rate-induced credit risk they are facing.","PeriodicalId":355463,"journal":{"name":"ERN: Econometric Studies of Foreign Exchange Markets (Topic)","volume":"26 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-07-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125924418","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}
From Olsen Financial Studies data on the Euro-Dollar currency pair (2008-2010), we conduct a time-series analysis to explain the role of trading volume on exchange rate volatility (Mixture Distribution Hypothesis), taking into account non-linearity. We find evidence that the MDH holds in turbulent periods, during which spreads and volume trading are high. When spreads and the volume are high, the relationship between trading volume and volatility tends to increase. Linking this result with the Tobin tax debate implies that a Tobin tax would be effective for curbing speculation and reducing exchange rate volatility, even in turbulent periods. This paper provides the first empirical corroboration of this proposition and seems to confirm some previous theoretical papers in the vein of Tobin. All in all, two main results emerged. First, the abundant literature on the MDH, but exclusively based on linear econometrics, should take into account non-linearities. Second, the effect of a Tobin tax on volatility would be slightly context-dependent and always negative. A Tobin tax would have been stabilizing and effective in the 2008 crisis when spreads, volume and volatility were very high.
{"title":"Tobin Tax and Exchange Rate Volatility: A Reassessment","authors":"O. Damette","doi":"10.2139/ssrn.2112203","DOIUrl":"https://doi.org/10.2139/ssrn.2112203","url":null,"abstract":"From Olsen Financial Studies data on the Euro-Dollar currency pair (2008-2010), we conduct a time-series analysis to explain the role of trading volume on exchange rate volatility (Mixture Distribution Hypothesis), taking into account non-linearity. We find evidence that the MDH holds in turbulent periods, during which spreads and volume trading are high. When spreads and the volume are high, the relationship between trading volume and volatility tends to increase. Linking this result with the Tobin tax debate implies that a Tobin tax would be effective for curbing speculation and reducing exchange rate volatility, even in turbulent periods. This paper provides the first empirical corroboration of this proposition and seems to confirm some previous theoretical papers in the vein of Tobin. All in all, two main results emerged. First, the abundant literature on the MDH, but exclusively based on linear econometrics, should take into account non-linearities. Second, the effect of a Tobin tax on volatility would be slightly context-dependent and always negative. A Tobin tax would have been stabilizing and effective in the 2008 crisis when spreads, volume and volatility were very high.","PeriodicalId":355463,"journal":{"name":"ERN: Econometric Studies of Foreign Exchange Markets (Topic)","volume":"74 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-07-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126276489","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 addresses the issue of the optimal stock of international reserves in terms of a statistical model in which reserves affect both the probability of a sudden stop –as well as associated output costs– by reducing the balance-sheet effects of liability dollarization. Observed reserves on the eve of the global financial crisis were–on average–not distant from optimal reserves
{"title":"Optimal Holdings of International Reserves: Self-Insurance Against Sudden Stop","authors":"G. Calvo, A. Izquierdo, Rudy Loo-Kung","doi":"10.3386/W18219","DOIUrl":"https://doi.org/10.3386/W18219","url":null,"abstract":"This paper addresses the issue of the optimal stock of international reserves in terms of a statistical model in which reserves affect both the probability of a sudden stop –as well as associated output costs– by reducing the balance-sheet effects of liability dollarization. Observed reserves on the eve of the global financial crisis were–on average–not distant from optimal reserves","PeriodicalId":355463,"journal":{"name":"ERN: Econometric Studies of Foreign Exchange Markets (Topic)","volume":"72 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121710620","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}
Among emerging market currencies, the RMB holds the most potential to become widely used internationally, due to China‘s large economic size, diversified trade structure and network, macroeconomic stability, and high growth rates - both current and expected. Yet, foreign access to RMB-denominated assets that could act as global stores of value remains limited due to extensive restrictions on capitals flows. At the same time, the rapid expansion of RMB trade settlement and issuance of RMB-denominated bonds by the Chinese government and corporates in Hong Kong, SAR have created some feedback channels across onshore (CNY) and offshore (CNH) RMB markets. We employed a bivariate GARCH model to understand the inter-linkages between onshore and offshore markets and found that, while developments in the onshore spot market exert an influence on the offshore spot market, offshore forward rates have a predictive impact on onshore forward rates. We also find evidence of volatility spillovers between two markets. Overtime, those spillover channels would be expected to grow as the offshore market further develops.
{"title":"RMB Internationalization: Onshore/Offshore Links","authors":"Samar Maziad, J. Kang","doi":"10.2139/ssrn.2127027","DOIUrl":"https://doi.org/10.2139/ssrn.2127027","url":null,"abstract":"Among emerging market currencies, the RMB holds the most potential to become widely used internationally, due to China‘s large economic size, diversified trade structure and network, macroeconomic stability, and high growth rates - both current and expected. Yet, foreign access to RMB-denominated assets that could act as global stores of value remains limited due to extensive restrictions on capitals flows. At the same time, the rapid expansion of RMB trade settlement and issuance of RMB-denominated bonds by the Chinese government and corporates in Hong Kong, SAR have created some feedback channels across onshore (CNY) and offshore (CNH) RMB markets. We employed a bivariate GARCH model to understand the inter-linkages between onshore and offshore markets and found that, while developments in the onshore spot market exert an influence on the offshore spot market, offshore forward rates have a predictive impact on onshore forward rates. We also find evidence of volatility spillovers between two markets. Overtime, those spillover channels would be expected to grow as the offshore market further develops.","PeriodicalId":355463,"journal":{"name":"ERN: Econometric Studies of Foreign Exchange Markets (Topic)","volume":"74 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2012-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132156504","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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