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on International Finance |
| By: | Al-Zoubi, Haitham A. (Hashemite University); Daal, Elton (University of New Orleans) |
| Abstract: | This study examines whether small sample bias affects the standard inference about the foreign exchange market efficiency hypothesis. Our findings indicate that the bias is large enough to result in rejection of the efficient market hypothesis even when it is true. We use bootstrapping to adjust for the bias and find that the hypothesis cannot be rejected for the Swiss franc and French franc. We also find that the bias plays a significant role in the inference that expectation error causes inefficiency in the foreign exchange markets. After bias adjustment, the rational expectation hypothesis holds even at one month-horizon. |
| Keywords: | Market Efficiency Hypothesis, Rational Expectation Hypothesis, Risk Premium, Small Sample Bias, Bootstrapping |
| JEL: | G14 C12 C22 |
| Date: | 2005–08–27 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2005-06&r=ifn |
| By: | Claudia Kwapil (Oesterreichische Nationalbank, Economic Analysis Division); Johann Scharler (Oesterreichische Nationalbank, Economic Analysis Division) |
| Abstract: | In this paper we analyze equilibrium determinacy in a sticky price model in which the pass-through from policy rates to retail interest rates is sluggish and potentially incomplete. In addition, we empirically characterize and compare the interest rate pass-through process in the euro area and the U.S. We find that if the pass-through is incomplete in the long run, the standard Taylor principle is insufficient to guarantee equilibrium determinacy. Our empirical analysis indicates that this result might be particularly relevant for bank-based financial systems as for instance that in the euro area. |
| Keywords: | Interest Rate Pass-Through, Interest Rate Rules, Equilibrium Determinacy, Stability |
| JEL: | E32 E52 E58 |
| Date: | 2006–03–20 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:118&r=ifn |
| By: | Eduardo Levy Yeyati; Sergio Luis Schmukler; Neeltje Van Horen |
| Abstract: | This paper argues that the cross-market premium (the ratio between the domestic and the international market price of cross-listed stocks) provides a valuable measure of international financial integration, reflecting accurately the factors that segment markets and inhibit price arbitrage. Applying to equity markets recent methodological developments in the purchasing power parity (PPP) literature, we show that non-linear Threshold Autoregressive (TAR) models properly capture the behavior of the crossmarket premium. The estimates reveal the presence of narrow non-arbitrage bands and indicate that price differences outside these bands are rapidly arbitraged away, much faster than what has been documented for good markets. Moreover, we find that financial integration increases with market liquidity. Capital controls, when binding, contribute to segment financial markets by widening the non-arbitrage bands and making price disparities more persistent. Crisis episodes are associated with higher volatility, rather than by more persistent deviations from the law of one price. |
| Keywords: | capital market integration, market segmentation, TAR, PPP, capital controls, crisis |
| JEL: | F30 F36 G15 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:udt:wpbsdt:2006-01&r=ifn |
| By: | Daal, Elton (University of New Orleans); Naka, Atsuyuki (University of New Orleans); Yu, Jung-Suk (University of New Orleans) |
| Abstract: | This paper proposes asymmetric GARCH-Jump models that synthesize autoregressive jump intensities and volatility feedback in the jump component. Our results indicate that these models provide a better fit for the dynamics of the equity returns in the US and emerging Asian markets, irrespective whether the volatility feedback is generated through a common GARCH multiplier or a separate measure of volatility in the jump intensity function. We also find that they can capture several distinguishing features of the return dynamics in emerging markets, such as, more volatility persistence, less leverage effects, fatter tails, and greater contribution and variability of the jump component. |
| Keywords: | Volatility feedback, Time-varying jump intensity, Volatility clustering, Leverage effect, Leptokurtosis |
| JEL: | C22 F31 G15 |
| Date: | 2006–01–20 |
| URL: | http://d.repec.org/n?u=RePEc:uno:wpaper:2005-03&r=ifn |
| By: | Áron Gereben (Magyar Nemzeti Bank); György Gyomai (Magyar Nemzeti Bank (at the time of writing this study)); Norbert Kiss M. (Magyar Nemzeti Bank) |
| Abstract: | The application of the market microstructure theory to foreign exchange markets in the last few years has introduced a new approach to the analysis of exchange rates. The most important variable of the microstructure analysis, the so-called order flow has proven to be suitable for explaining a significant part of exchange rate changes, not only for high frequency data, but also at longer time horizons that are relevant for macro-economic analysis. Microstructure theory is thus extremely successful from an empirical point of view, especially when compared to traditional exchange rate models. The aim of our study is to provide an introduction to the microstructure-based analysis of exchange rates, emphasising those aspects which may be the most relevant for central banks. In addition to an introduction to the theoretical background of the microstructure approach and the presentation of the key empirical results, we also intend to cast light upon the questions which are important for central banks and which can be tackled successfully using this framework. On the basis of the literature's findings, we present the answers given by the microstructure approach to, among others, questions concerning the efficiency of central bank intervention, the effects of economic news on exchange rates, and the role of different currency market participants in exchange rate developments. |
| Keywords: | exchange rate, order flow, microstructure. |
| JEL: | F31 G15 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:opaper:2005/42&r=ifn |
| By: | Robert Dekle; Hyeok Jeong; Heajin Ryoo |
| Abstract: | The empirical literature examining aggregate data has generally found small or insignificant effects of exchange rate fluctuations on export volumes. This lack of association between real quantities, such as export volumes and the exchange rate is the so-called “exchange rate disconnect puzzle.” Using firm level data, however, the relationship between export volumes and exchange rates turns to significantly negative. This paper attempts to reconcile these aggregate and firm level findings, using firm level data from Japan. We estimate a simple microeconomic model of exports to show that an appreciation of the exchange rate reduces export volumes at the firm level. After consistent aggregation, the relationship still remains significant at aggregate levels. However, we show that the omission of some key productivity variables, or ignoring the distributions of heterogeneous firm level characteristics biases the elasticity of exports to exchange rates toward zero. |
| URL: | http://d.repec.org/n?u=RePEc:scp:wpaper:06-46&r=ifn |
| By: | Campa, José Manuel; Goldberg, Linda S |
| Abstract: | Border prices of traded goods are highly sensitive to exchange rates, but the CPI, and the retail prices of these goods, are more stable. Our paper decomposes the sources of this stability for twenty-one OECD countries, focusing on the important roles of distribution margins and imported inputs in transmitting exchange rate fluctuations into consumption prices. We provide rich cross-country and cross-industry details on distribution margins and their sensitivity to exchange rates, imported inputs used in different categories of consumption goods, and weights in consumption of nontradables, home tradables and imported goods. While distribution margins damp the sensitivity of consumption prices of tradable goods to exchange rates, they also lead to enhanced pass through when nontraded goods prices are sensitive to exchange rates. Such price sensitivity arises because imported inputs are used in production of home nontradables. Calibration exercises show that, at under 5 percent, the United States has the lowest expected CPI sensitivity to exchange rates of all countries examined. On average, calibrated exchange rate pass through into CPIs is expected to be closer to 15 percent. |
| Keywords: | distribution margins; exchange rate; import prices; pass through |
| JEL: | F3 F4 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5650&r=ifn |
| By: | Marcelo Sánchez (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper compares the link between exchange rates and interest rates under full information and two alternative asymmetric information approaches. It also distinguishes between cases of expansionary and contractionary depreciations. Full information results are not robust to the presence of informational frictions. For economies exhibiting expansionary or strongly contractionary depreciations, such frictions lead to two optimal deviations from full information outcomes: i) under asymmetric information with signal extraction, the realisation of a relatively less frequent shock leads the central bank to behave as if a more likely disturbance had instead taken place; and ii) under asymmetric information without signal extraction, the monetary authority does not react on impact to shocks. Finally, in the case of mildly contractionary depreciations, both asymmetric information models predict a lack of response of the central bank to aggregate demand shocks, as opposed to an offsetting movement in interest rates under full information. |
| Keywords: | Transmission mechanism, Emerging market economies, Exchange rate, Monetary policy, Imperfect information. |
| JEL: | E52 E58 F31 F41 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060608&r=ifn |