We examine an unusual episode in the behavior of the euro, pound and yen exchange rate markets when the dollar appreciated (depreciated) against the three major currencies, in response to unfavorable (favorable) US growth news during the global financial crisis. Contrary to the previous findings, we show that, for each currency pair, only a small subset (about a third) of the most significant macro news effects reversed sign, primarily announcements regarding consumption, credit, labor and housing markets. Our results reveal that announcement chronology within a month matters, in that specifically the earliest releases within an indicator category exhibit sign asymmetry.
{"title":"The Sign Switch Effect of Macroeconomic News in Foreign Exchange Markets","authors":"Walid Ben Omrane, Tanseli Savaşer","doi":"10.2139/ssrn.2202911","DOIUrl":"https://doi.org/10.2139/ssrn.2202911","url":null,"abstract":"We examine an unusual episode in the behavior of the euro, pound and yen exchange rate markets when the dollar appreciated (depreciated) against the three major currencies, in response to unfavorable (favorable) US growth news during the global financial crisis. Contrary to the previous findings, we show that, for each currency pair, only a small subset (about a third) of the most significant macro news effects reversed sign, primarily announcements regarding consumption, credit, labor and housing markets. Our results reveal that announcement chronology within a month matters, in that specifically the earliest releases within an indicator category exhibit sign asymmetry.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"82 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-02-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131188508","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 : 2015-02-01DOI: 10.5089/9781498302760.001
Melesse M. Tashu
This paper tests the hypothesis of ‘commodity currency’ on the nuevo sol and, more generally, identifies the drivers of Peru’s equilibrium real exchange rate using a cointegration analysis. The results show that export commodity prices do not have a statistically significant impact on Peru’s real effective exchange rate, suggesting that the nuevo sol is not a commodity currency. The paper provides empirical evidence that large profit repatriation and foreign exchange intervention have effectivelly insulated Peru’s real exchange rate from the impact of commodity price shocks. Peru’s equilibrium real exchange rate is found to be driven mostly by productivity and government consumption.
{"title":"Drivers of Peru's Equilibrium Real Exchange Rate: Is the Nuevo Sol a Commodity Currency?","authors":"Melesse M. Tashu","doi":"10.5089/9781498302760.001","DOIUrl":"https://doi.org/10.5089/9781498302760.001","url":null,"abstract":"This paper tests the hypothesis of ‘commodity currency’ on the nuevo sol and, more generally, identifies the drivers of Peru’s equilibrium real exchange rate using a cointegration analysis. The results show that export commodity prices do not have a statistically significant impact on Peru’s real effective exchange rate, suggesting that the nuevo sol is not a commodity currency. The paper provides empirical evidence that large profit repatriation and foreign exchange intervention have effectivelly insulated Peru’s real exchange rate from the impact of commodity price shocks. Peru’s equilibrium real exchange rate is found to be driven mostly by productivity and government consumption.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132997743","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 the conditional time�?varying currency betas from five developed markets and four emerging markets. We employ a modified trivariate BEKK�?GARCH�?in�?mean model of Engle and Kroner (1995) to estimate the time�?varying conditional variance and covariance of returns of stock index, the world market portfolio and changes in bilateral exchange rate between the US dollar and the local currency. It is found that currency betas are more volatile than those of the world market betas. Currency betas in emerging markets are more volatile than those in the developed markets. Moreover, we find evidence of long�?memory in currency betas. The usefulness of time�?varying currency betas are illustrated by two applications.
{"title":"New Estimates of Time�?Varying Currency Betas: A Trivariate BEKK Approach","authors":"P. Jayasinghe, A. Tsui, Zhaoyong Zhang","doi":"10.2139/ssrn.2577690","DOIUrl":"https://doi.org/10.2139/ssrn.2577690","url":null,"abstract":"This paper examines the conditional time�?varying currency betas from five developed markets and four emerging markets. We employ a modified trivariate BEKK�?GARCH�?in�?mean model of Engle and Kroner (1995) to estimate the time�?varying conditional variance and covariance of returns of stock index, the world market portfolio and changes in bilateral exchange rate between the US dollar and the local currency. It is found that currency betas are more volatile than those of the world market betas. Currency betas in emerging markets are more volatile than those in the developed markets. Moreover, we find evidence of long�?memory in currency betas. The usefulness of time�?varying currency betas are illustrated by two applications.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121756665","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 international CAPM (ICAPM) extends the classical CAPM by adding exchange rate risks as priced factors. In the literature, both conditional and unconditional tests confirm the significance of exchange rate risk. However, typical conditional tests of the ICAPM include few instruments with mixed levels of return forecastability. In contrast, investors nowadays use complex trading models that incorporate many variables. Previous conditional tests of the ICAPM might underrepresent the investors' information sets, which could lead to inconclusive results about the model's rejectability. This paper takes a different approach by selecting a set of instruments that maximizes the predictability of asset returns in order to optimally represent investors' information. In contrast to past findings, I find that exchange rate risk is not priced when using the optimized set of instruments. Specifically, the use of instruments that maximize the predictive power of the second moments of asset returns decreases the significance of the exchange rate risk premium.
{"title":"A Test of the International CAPM Using Optimal Instruments","authors":"Matthijs Breugem","doi":"10.2139/ssrn.2231578","DOIUrl":"https://doi.org/10.2139/ssrn.2231578","url":null,"abstract":"The international CAPM (ICAPM) extends the classical CAPM by adding exchange rate risks as priced factors. In the literature, both conditional and unconditional tests confirm the significance of exchange rate risk. However, typical conditional tests of the ICAPM include few instruments with mixed levels of return forecastability. In contrast, investors nowadays use complex trading models that incorporate many variables. Previous conditional tests of the ICAPM might underrepresent the investors' information sets, which could lead to inconclusive results about the model's rejectability. This paper takes a different approach by selecting a set of instruments that maximizes the predictability of asset returns in order to optimally represent investors' information. In contrast to past findings, I find that exchange rate risk is not priced when using the optimized set of instruments. Specifically, the use of instruments that maximize the predictive power of the second moments of asset returns decreases the significance of the exchange rate risk premium.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"42 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-10-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116293843","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 analyzes by using a simple theoretical model and thereafter testing empirically the differences between Euro- and US-Dollar nominated sovereign bonds of euro-area countries during the euro-crisis and concludes that the probability of collapse of the Euro(-currency) has a significant impact on these differences. Moreover, the empirical analysis indicates that the new local currency that would be introduced in the case of a euro-collapse would maybe lead to a depreciation for weak countries like Italy, while it would lead for strong economies like Austria, Belgium, Finland and Germany to an appreciation. Further, this analysis is one of few showing evidence that the financial market takes into consideration the collapse of the Euro(-currency).
{"title":"Examining Sovereign Bonds Nominated in Euro and US-Dollar During the Euro-Crisis: Appreciation or Depreciation of the New Local Currencies Introduced Subsequent to Euro-Breakup?","authors":"Hasan Doluca","doi":"10.2139/ssrn.2521450","DOIUrl":"https://doi.org/10.2139/ssrn.2521450","url":null,"abstract":"This paper analyzes by using a simple theoretical model and thereafter testing empirically the differences between Euro- and US-Dollar nominated sovereign bonds of euro-area countries during the euro-crisis and concludes that the probability of collapse of the Euro(-currency) has a significant impact on these differences. Moreover, the empirical analysis indicates that the new local currency that would be introduced in the case of a euro-collapse would maybe lead to a depreciation for weak countries like Italy, while it would lead for strong economies like Austria, Belgium, Finland and Germany to an appreciation. Further, this analysis is one of few showing evidence that the financial market takes into consideration the collapse of the Euro(-currency).","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"170 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133580486","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 examine the impact of higher order moments of changes in the exchange rate on stock returns of U.S. large-cap companies in the S&P500. We find a robust negative effect of exchange rate volatility on S&P500 company returns. The consumer discretionary and the consumer staples sectors have significant negative exposure to exchange rate volatility suggesting that exchange rate volatility affects stock returns through the channel of international operations. In terms of industries, the household products and personal products industries have significant negative exposure as well. The impact in the financial sector suggests that derivatives and hedging activity can mitigate exposure to exchange rate volatility. We find weak evidence that exchange rate skewness has an effect on S&P500 stock returns, but, find evidence that exchange rate kurtosis affects returns of companies that are more exposed to exchange rate volatility.
{"title":"Higher Moment Exchange Rate Exposure of S&P500 Firms","authors":"Marcelo Bianconi, Zhenjun Cai","doi":"10.2139/ssrn.2481949","DOIUrl":"https://doi.org/10.2139/ssrn.2481949","url":null,"abstract":"We examine the impact of higher order moments of changes in the exchange rate on stock returns of U.S. large-cap companies in the S&P500. We find a robust negative effect of exchange rate volatility on S&P500 company returns. The consumer discretionary and the consumer staples sectors have significant negative exposure to exchange rate volatility suggesting that exchange rate volatility affects stock returns through the channel of international operations. In terms of industries, the household products and personal products industries have significant negative exposure as well. The impact in the financial sector suggests that derivatives and hedging activity can mitigate exposure to exchange rate volatility. We find weak evidence that exchange rate skewness has an effect on S&P500 stock returns, but, find evidence that exchange rate kurtosis affects returns of companies that are more exposed to exchange rate volatility.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"144 ","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-08-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"113996604","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 exchange rate exposure of country level stock returns in three emerging market economies: Korea, Taiwan and Thailand. The analysis is carried out at country level using stock indexes and trade-weighted exchange rates. Time-varying exchange rate exposure coefficients are obtained by estimating a Multivariate GARCH-M model with explicit focus on the non-orthogonality between exchange rate changes and market returns. Findings of the paper indicate that, although they are likely to vary over time, exchange rate exposure coefficients for Korea and Taiwan follow mean-reverting long-memory processes. However, the exposure coefficient for Thailand is found to be characterized by a non-stationary unit root process. The presence of mean-reverting exchange rate exposure coefficients has important implications for investment and hedging strategies.
{"title":"Time-Varying Exchange Rate Exposure: Evidence from Emerging Markets","authors":"P. Jayasinghe","doi":"10.2139/ssrn.2462756","DOIUrl":"https://doi.org/10.2139/ssrn.2462756","url":null,"abstract":"This paper examines exchange rate exposure of country level stock returns in three emerging market economies: Korea, Taiwan and Thailand. The analysis is carried out at country level using stock indexes and trade-weighted exchange rates. Time-varying exchange rate exposure coefficients are obtained by estimating a Multivariate GARCH-M model with explicit focus on the non-orthogonality between exchange rate changes and market returns. Findings of the paper indicate that, although they are likely to vary over time, exchange rate exposure coefficients for Korea and Taiwan follow mean-reverting long-memory processes. However, the exposure coefficient for Thailand is found to be characterized by a non-stationary unit root process. The presence of mean-reverting exchange rate exposure coefficients has important implications for investment and hedging strategies.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"45 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-07-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131897059","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}
Forward foreign exchange contracts embed not only expected depreciation but also a sizable premium, which complicates inferences about anticipated returns. This study derives arbitrage-free affine forward currency models (AFCMs) with closed-form expressions for both unobservable variables. Model calibration to forward term structures of eleven U.S.-dollar currency pairs from the mid-to-late 1990s through early 2014 fits the data closely and suggests that the premium is indeed nonzero and variable, but not to the degree implied by previous econometric studies.
{"title":"Arbitrage-Free Affine Models of the Forward Price of Foreign Currency","authors":"J. Durham","doi":"10.2139/ssrn.2403926","DOIUrl":"https://doi.org/10.2139/ssrn.2403926","url":null,"abstract":"Forward foreign exchange contracts embed not only expected depreciation but also a sizable premium, which complicates inferences about anticipated returns. This study derives arbitrage-free affine forward currency models (AFCMs) with closed-form expressions for both unobservable variables. Model calibration to forward term structures of eleven U.S.-dollar currency pairs from the mid-to-late 1990s through early 2014 fits the data closely and suggests that the premium is indeed nonzero and variable, but not to the degree implied by previous econometric studies.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-02-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124553808","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}
Este trabalho tem por objetivo comparar metodologias distintas para calculo de desalinhamento cambial alem de testar a hipotese se as taxas de câmbio dos diversos paises sofrem influencia apenas dos seus proprios fundamentos ou tambem da taxa de câmbio e dos fundamentos de outros paises. Estas hipoteses consistem, respectivamente, na ausencia ou na existencia de interdependencia entre os diversos paises. Para realizar tal tarefa utilizam-se duas estrategias empiricas. A primeira baseia-se em avaliar se um modelo multivariado de series de tempo usualmente utilizada na literatura de desalinhamento cambial com dados apenas do proprio pais em analise pode ser melhorado atraves da adicao de variaveis relacionadas a outros paises usando o algoritmo proposto por David Hendry e co-autores. A segunda estrategia consiste em estimar um panel longo com as variaveis utilizadas para estimar desalinhamento cambial e testar formalmente a hipotese de ausencia de interdependencias. Os resultados sugerem que em ambas estrategias existe evidencia de existencia de interdependencia. Esta ocorreria mais por conta de fatores ligados ao curto prazo, ou seja, o que explicaria o valor da taxa de câmbio de um pais no longo prazo seriam seus proprios fundamentos enquanto no curto prazo fatores externos poderiam causar desvios.
{"title":"Exchange Rate Misalignments, Interdependence, Crises, and Currency Wars: An Empirical Assessment","authors":"Emerson Fernandes Marçal","doi":"10.2139/ssrn.2343820","DOIUrl":"https://doi.org/10.2139/ssrn.2343820","url":null,"abstract":"Este trabalho tem por objetivo comparar metodologias distintas para calculo de desalinhamento cambial alem de testar a hipotese se as taxas de câmbio dos diversos paises sofrem influencia apenas dos seus proprios fundamentos ou tambem da taxa de câmbio e dos fundamentos de outros paises. Estas hipoteses consistem, respectivamente, na ausencia ou na existencia de interdependencia entre os diversos paises. Para realizar tal tarefa utilizam-se duas estrategias empiricas. A primeira baseia-se em avaliar se um modelo multivariado de series de tempo usualmente utilizada na literatura de desalinhamento cambial com dados apenas do proprio pais em analise pode ser melhorado atraves da adicao de variaveis relacionadas a outros paises usando o algoritmo proposto por David Hendry e co-autores. A segunda estrategia consiste em estimar um panel longo com as variaveis utilizadas para estimar desalinhamento cambial e testar formalmente a hipotese de ausencia de interdependencias. Os resultados sugerem que em ambas estrategias existe evidencia de existencia de interdependencia. Esta ocorreria mais por conta de fatores ligados ao curto prazo, ou seja, o que explicaria o valor da taxa de câmbio de um pais no longo prazo seriam seus proprios fundamentos enquanto no curto prazo fatores externos poderiam causar desvios.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"54 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2014-01-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132393215","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}
A bona fide currency functions as a medium of exchange, a store of value, and a unit of account, but bitcoin largely fails to satisfy these criteria. Bitcoin has achieved only scant consumer transaction volume, with an average well below one daily transaction for the few merchants who accept it. Its volatility is greatly higher than the volatilities of widely used currencies, imposing large short-term risk upon users. Bitcoin's daily exchange rates exhibit virtually zero correlation with widely used currencies and with gold, making bitcoin useless for risk management and exceedingly difficult for its owners to hedge. Bitcoin prices of consumer goods require many decimal places with leading zeros, which is disconcerting to retail market participants. Bitcoin faces daily hacking and theft risks, lacks access to a banking system with deposit insurance, and it is not used to denominate consumer credit or loan contracts. Bitcoin appears to behave more like a speculative investment than a currency.
{"title":"Is Bitcoin a Real Currency? An Economic Appraisal","authors":"D. Yermack","doi":"10.2139/ssrn.2361599","DOIUrl":"https://doi.org/10.2139/ssrn.2361599","url":null,"abstract":"A bona fide currency functions as a medium of exchange, a store of value, and a unit of account, but bitcoin largely fails to satisfy these criteria. Bitcoin has achieved only scant consumer transaction volume, with an average well below one daily transaction for the few merchants who accept it. Its volatility is greatly higher than the volatilities of widely used currencies, imposing large short-term risk upon users. Bitcoin's daily exchange rates exhibit virtually zero correlation with widely used currencies and with gold, making bitcoin useless for risk management and exceedingly difficult for its owners to hedge. Bitcoin prices of consumer goods require many decimal places with leading zeros, which is disconcerting to retail market participants. Bitcoin faces daily hacking and theft risks, lacks access to a banking system with deposit insurance, and it is not used to denominate consumer credit or loan contracts. Bitcoin appears to behave more like a speculative investment than a currency.","PeriodicalId":413816,"journal":{"name":"Econometric Modeling: International Financial Markets - Foreign Exchange eJournal","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133013324","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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