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on International Finance |
| By: | Fischer, Christoph; Porath, Daniel |
| Abstract: | Panel unit root tests of real exchange rates – as opposed to univariate tests – usually reject non-stationarity. These tests, however, could be biased if the real exchange rate contained MA roots. Indeed, two independent arguments claim that the real exchange rate, being a sum of a stationary and a non-stationary component, is possibly an ARIMA (1, 1, 1) process. Monte Carlo simulations show, how systematic changes in the parameters of the components, of the test equation and of the correlation matrix affect the size of first and second generation panel unit root tests. Two components of the real exchange rate, the real exchange rate of a single good and a weighted sum of relative prices, are constructed from the data for a panel of countries. Computation of the relevant parameters reveals that panel unit root tests of the real exchange rate are severely oversized, usually much more so than simple ADF tests. Thus, the evidence for PPP from panel unit root tests may be merely due to extreme size biases. |
| Keywords: | panel unit root test, purchasing power parity, real exchange rate, Monte Carlo simulation |
| JEL: | C33 F31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:4721&r=ifn |
| By: | Alexandra Lai; Oana Secrieru |
| Abstract: | The authors examine the impact of multinational enterprises (MNEs) on exchange rate pass-through in an environment where an MNE engages in Cournot (quantity) competition with domestic and foreign rivals. The MNE differs from its competitors because it has a lower marginal cost as a result of increased efficiency, and economies of scope as a result of operating in two markets. An MNE can also choose to locate its production for the foreign market domestically (in the location of the MNE's parent), or in the foreign country (the location of the subsidiary). When it locates all its production domestically, it engages in <em>intrafirm trade</em> (IT) in final goods. Otherwise, it is said to engage in <em>international production</em> (IP). Consistent with other studies on exchange rate pass-through under imperfect competition, the authors' analysis shows that exchange rate pass-through into domestic and foreign prices is incomplete. Moreover, the presence of an MNE increases the sensitivity of domestic market prices, and reduces the sensitivity of foreign market prices, to exchange rate movements, relative to arm's-length trade. Furthermore, IT domestic and foreign prices are more sensitive to exchange rate movements than their IP counterparts, and react in the opposite direction. The authors' results indicate that it is important to distinguish between the domestic and the foreign market when looking at the sensitivity of prices and their direction of change. This could potentially explain why some empirical studies find IT prices more sensitive to exchange rate movements and others find them less sensitive. |
| Keywords: | Economic models; Exchange rates; Market structure and pricing |
| JEL: | F23 L16 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:06-30&r=ifn |
| By: | Markku Lanne; Timo Vesalay |
| Abstract: | We argue that a transaction tax is likely to amplify, not dampen, volatility in the foreign exchange markets. Our argument stems from the decentralized trading practice and the presumable discrepancy between 'informed' and 'uninformed' traders' valuations. Since informed 'traders' valuations are likely to be less dispersed, a transaction tax penalizes informed trades disproportionately, leading to increased volatility. Empirical support for this prediction is found by investigating the effect of transaction costs on the volatility of DEM/USD and JPY/USD returns. High-frequency data are used and an increase in transaction costs is found to have a significant positive effect on volatility. |
| Keywords: | Transaction tax; exchange rates; volatility |
| JEL: | F31 F42 G15 G28 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2005/19&r=ifn |
| By: | Markku Lanne |
| Abstract: | Forecasts of the realized volatility of the exchange rate returns of the Euro against the U.S. Dollar obtained directly and through decomposition are compared. Decomposing the realized volatility into its continuous sample path and jump components and modeling and forecasting them separately instead of directly forecasting the realized volatility is shown to lead to improved out-of-sample forecasts. Moreover, gains in forecast accuracy are robust with respect to the details of the decomposition. |
| Keywords: | Mixture model, Jump, Realized volatility, Gamma distribution |
| JEL: | C22 C52 C53 G15 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2006/20&r=ifn |
| By: | Tood Keister (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM)) |
| Abstract: | This paper shows how expectations-driven contagion of currency crises can arise even if the currency market has a unique equilibrium when viewed in isolation. The model of Morris and Shin (1998) is extended to allow speculators to trade in a second currency market. If speculators believe that a devaluation of this other currency will make a domestic devaluation more likely, they will engage in trades that link the two markets. A sharp devaluation of the other currency will then be propagated to the domestic market and will increase the likelihood of a crisis there, fulfilling the original expectations. Even though this contagion is driven solely by expectations, the model places restrictions on observable variables, and these restrictions are broadly consistent with existing empirical evidence. |
| Date: | 2005–04–13 |
| URL: | http://d.repec.org/n?u=RePEc:cie:wpaper:0501&r=ifn |