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on International Finance |
| By: | Pierre L. Siklos (Department of Economics and Viessmann Research Centre, Wilfrid Laurier University); Diana N. Weymark (Department of Economics, Vanderbilt University) |
| Abstract: | In this article, we introduce an index of ex ante exchange market pressure (EMP) that can be used as a benchmark against which to measure the effectiveness of sterilized intervention. Ex ante EMP is the change in the exchange rate that would have been observed if the policy authority had refrained from intervening and this policy decision had been correctly anticipated by rational agents. Ex post EMP measures the exchange market pressure under the policy actually implemented by the policy authority. We use a ratio of these two EMP measures to assess the effectiveness of sterilized intervention in Canada and Australia. |
| Keywords: | Exchange market pressure, exchange rate policy, foreign exchange intervention, Bank of Canada policy, Reserve Bank of Australia policy |
| JEL: | F31 |
| Date: | 2006–03 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0604&r=ifn |
| By: | Akram, Q. Farooq (The Central Bank of Norway); Rime, Dagfinn (The Central Bank of Norway); Sarno, Lucio (University of Warwick and CEPR) |
| Abstract: | This paper investigates the presence and characteristics of arbitrage opportunities in the foreign exchange market using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency, obtained from Reuters on special order. We provide evidence on the frequency, size and duration of round-trip and one-way arbitrage opportunities in real time. The analys is unveils the existence of numerous short-lived arbitrage opportunities, whose size is economically significant across exchange rates and comparable across different maturities of the instruments involved in arbitrage. The duration of arbitrage opportunities is, on average, high enough to allow agents to exploit deviations from the law of one price, but low enough to explain why such opportunities have gone undetected in much previous research using data at lower frequency. |
| Keywords: | Exchange rates; arbitrage; foreign exchange microstructure |
| JEL: | F31 F41 G14 G15 |
| Date: | 2006–02–15 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:sifrwp:0042&r=ifn |
| By: | Áron Gereben (Magyar Nemzeti Bank); Klára Pintér (Magyar Nemzeti Bank) |
| Abstract: | Market analysts and central banks often use the implied volatility of FX options as an indicator of expected exchange rate uncertainty. The aim of our study is to investigate the limits of this statistic. We present some key factors that may deviate the value of implied volatility from the exchange rate variability expected by the market. These biasing factors are linked to the simplifying assumptions of the Black-Scholes option pricing model. Our empirical results show that forint/euro implied volatilities carry useful information about future exchange rate uncertainty when the forecast horizon is shorter than one month. However, implied volatility provides a biased estimate, and does not encompass the information included in other (GARCH, ARMA) predictors of volatility calculated from historical exchange rate data. These results are in line with the findings of similar analyses of other currency pairs. |
| Keywords: | option, volatility, exchange rate. |
| JEL: | G13 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:opaper:2005/39&r=ifn |
| By: | Faik Koray; W. Douglas McMillin |
| Abstract: | This paper investigates empirically, using a VAR model, the response of the exchange rate and the current account to fiscal policy shocks for the U.S. economy during the period 1981:3-2005:3. The results indicate that positive shocks to real government purchases generate a persistent increase in the budget deficit, a transitory expansionary effect on output, and a long-lived positive effect on the price level, but reduce the real interest rate. Simultaneously, and consistent with interest parity, the real exchange rate depreciates, and the current account improves. Negative shocks to net taxes also generate a persistent increase in the budget deficit, and the effects on the model variables are generally in the same direction, but are almost never significant. Our results indicate it is inappropriate to attribute rising current account deficits to expansionary fiscal policy shocks, even though these shocks generate long-lived increases in the budget deficit. |
| URL: | http://d.repec.org/n?u=RePEc:lsu:lsuwpp:2006-02&r=ifn |
| By: | Amalia Morales Zumaquero (Universidad de Málaga); Simón Sosvilla Rivero (FEDEA, UCM) |
| Abstract: | This paper analyses the impact of the establishment of the European Monetary System (EMS) on a number of macroeconomic variables, such as exchange rates, money, interest rates and prices for member countries participating in the Exchange Rate Mechanism (ERM). We examine the instability in terms of multiple structural breaks in the variance of the series. To that end, we employ two procedures: the OLS-based tests to detect multiple structural breaks, proposed by Bai and Perron (1998, 2003) and several procedures based on Information Criterion joint with the so called sequential procedure suggested by Bai and Perron (2003). Results indicate that there is some evidence of structural breaks in volatility across investigated variables, playing the realignments in the ERM a significant role in the reduction of volatility in some countries and sub-periods. In this sense, the results tend to support the hypothesis that the EMS has contributed to reduce the macroeconomic volatility of the member countries. |
| Keywords: | European Monetary System, multiple structural breaks, volatility |
| JEL: | C12 C22 F31 F33 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:cea:doctra:e2006_06&r=ifn |
| By: | Luc, BAUWENS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)); Walid, BEN OMRANE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)); Erick, Rengifo |
| Abstract: | We design and implement optimal foreign exchange portfolio allocations. An optimal allocation maximizes the expected return subject to a Value-at-Risk (VaR) constraint. Based on intradaily data, the optimization procedure is carried out at regular time intervals. For the estimation of the conditional variance from which the VaR is computed, we use univariate and multivariate GARCH models. The result for each model is given by the best intradaily investment recommendations in terms of the optimal weights of the currencies in the risk portfolio. |
| Keywords: | Optimal portfolio selection; Value-at-risk; GARCH models; Foreign exchange markets |
| JEL: | C32 C53 G11 |
| Date: | 2006–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:ctl:louvec:2006005&r=ifn |
| By: | Alar Kein (Faculty of Economics and Business Administration, Tallinn University of Technology) |
| Abstract: | The paper examines the role of foreign stock markets’ price and volatility movements in the price and volatility movements in the Estonian stock market. Using daily log returns from July 8th, 1996 through December 31st, 2003 and applying a VAR-EGARCH framework, the author finds that there is a spillover of returns and volatility from foreign stock markets into the Estonian stock market. It is found that the stock prices in Estonia are influenced by the movement of prices on the markets of Denmark, Russia, Finland, the Czech Republic, Poland and the U.S.A. In general, the response to exogenous price movements is found to be contemporaneous, same-directional and symmetric, while the revealed impact of exogenous volatility-changes is rather market-specific and often asymmetric. The author also finds that the influence of the Finnish market on the Estonian market has significantly increased after the HEX-Group acquired the majority share in the Tallinn Stock Exchange and the integration of the Estonian stock market with the Finnish stock market began in April 2001. |
| Keywords: | stock returns, cross-border spillover of returns, cross-border spillover of volatility |
| JEL: | G12 G14 G15 G19 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:ttu:wpaper:120&r=ifn |
| By: | Uwe Böwer (University of Munich, Munich Graduate School of Economics, Kaulbachstr. 45, 80539 Munich, Germany.); Catherine Guillemineau (The Conference Board, 845 Third Avenue, New York, NY 10022-6679, USA) |
| Abstract: | We investigate the key factors underlying business cycle synchronisation in the euro area applying the extreme-bounds analysis. We examine both traditional determinants and new, EMU-specific policy and structural indicators over the past 25 years. Our evidence seems to support the endogeneity hypothesis of the optimum currency area criteria. The implementation of the single market intensified bilateral trade across euro area countries and contributed to higher business cycle symmetry. The introduction of the single currency led to an intensification of intra-industry trade which has become the main driving force ensuring the coherence of business cycles. In addition, the set of robust determinants of business cycle synchronisation has varied over time, depending on the difference phases of the European construction, with fiscal policy, in addition to industrial and financial structures, playing a greater role during the completion of the Single Market, while short-term interest rate differentials and cyclical services have become more determinant since Economic and Monetary Union. |
| Keywords: | business cycle synchronisation; extreme-bounds analysis; Economic and Monetary Union; trade. |
| JEL: | C21 E32 F15 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060587&r=ifn |