nep-ifn New Economics Papers
on International Finance
Issue of 2006‒11‒12
seven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Can the Law of One Price be tested? By Philip, Kostov
  2. Exchange Rate Pass-Through:Evidence Based on Vector Autoregression with Sign Restrictions By An, Lian
  3. Linearity and stationarity of South Asian real exchange rates By Liew, Venus Khim-Sen; Lee, Hock-Ann; Lim, Kian-Ping; Lee, Huay-Huay
  4. Stock prices, exchange rates and causality in Malaysia: a note By Azman-Saini, W.N.W.; Habibullah, M.S.; Law, Siong Hook; Dayang-Afizzah, A.M.
  5. Nonlinear Links between Stock Returns and Exchange Rate Movements By Hartmann, Daniel; Pierdzioch, Christian
  6. A complementary test for ADF test with an application to the exchange rates returns By Liew, Venus Khim-Sen; Lau, Sie-Hoe; Ling, Siew-Eng
  7. Hedge funds, exchange rates and causality: Evidence from Thailand and Malaysia By Azman-Saini, W.N.W.

  1. By: Philip, Kostov
    Abstract: A simple stylised model, that incorporates transaction costs, is developed. The Law of One Price (LOP) is assumed to hold with regard to a reference market that is not taken into account in the empirical testing of the Law. It is shown that under these assumptions the empirical tests of the LOP will fail.
    Keywords: Law of one price; purchasing power parity; transaction costs
    JEL: F14 F0
    Date: 2006–01–17
  2. By: An, Lian
    Abstract: Abstract: This paper provides cross-country and time-series evidence on the extent of exchange rate pass-through at different stages of distribution - import prices, producer prices and consumer prices - for eight major industrial countries: United States, Japan, Canada, Italy, UK, Finland, Sweden and Spain. The analysis is based on a vector autoregreesion (VAR) model that includes the distribution chain of pricing. Instead of the conventional choleski decomposition as used in the literature, I propose to identify the exchange rate shock by the more recent sign restriction approach. For the first time in the literature, estimates of pass-through based on the sign restriction procedure are provided. I find exchange rate pass-through incomplete in many horizons, though complete pass-through is observed occasionally. The degree of pass-through declines and time needed for complete pass-through lengthens along the distribution chain. Furthermore, I find that a greater pass-through coefficient is associated with an economy that is smaller in size with higher import shares, more persistent and less volatile exchange rates, more volatile monetary shocks, higher inflation rate, and less volatile GDP.
    Keywords: Keywords: pass-through; vector autoregression; sign restrictions; exchange rates
    JEL: F31 F41
    Date: 2006–10–24
  3. By: Liew, Venus Khim-Sen; Lee, Hock-Ann; Lim, Kian-Ping; Lee, Huay-Huay
    Abstract: The linearity and stationarity of the real exchange rates of India, Nepal, Pakistan and Sri Lanka are investigated using formal linearity and the recently developed nonlinear stationary test procedures. Results obtained show that these real exchange rates are stationary albeit the presence of nonlinearity.
    Keywords: Nonlinearity; Real exchange rates; South Asia; linearity test; nonlinear stationary test
    JEL: N15 F14 C51
    Date: 2006–02
  4. By: Azman-Saini, W.N.W.; Habibullah, M.S.; Law, Siong Hook; Dayang-Afizzah, A.M.
    Abstract: This article contributes to the debate on stock prices and exchange rates in Malaysia. It examines causal relations using a new Granger non-causality test proposed by Toda and Yamamoto (Journal of Econometrics, 66, 225-50, 1995). Among the findings of interest, there is a feedback interaction between exchange rates and stock prices for the pre-crisis period. The results also reveal that exchange rates lead stock prices for the crisis period. In a financially liberalized environment, exchange rates stability is important for stock market well-being.
    Keywords: Exchange rates; Stock prices; Causality; Malaysia
    JEL: G1 F31
    Date: 2006–10
  5. By: Hartmann, Daniel; Pierdzioch, Christian
    Abstract: Empirical evidence suggests that the link between exchange rate movements and stock returns may be nonlinear. This evidence could reflect fundamental economic effects like, for example, transaction costs in international goods market arbitrage. It could also reflect market inefficiencies if investors could exploit the nonlinearity to systematically improve the performance of simple trading rules. Using monthly data for major North-American and European industrial countries for the period 1973-2006, we found that it would have been difficult for an investor to use information on nonlinearities to improve the performance of a simple trading rule based on out-of-sample forecasts of stock returns.
    Keywords: Stock returns; exchange rate movements; nonlinearities
    JEL: C53 F37 E44
    Date: 2006–09
  6. By: Liew, Venus Khim-Sen; Lau, Sie-Hoe; Ling, Siew-Eng
    Abstract: This study shows that augmented Dickey-Fuller (ADF) test failed to detect covariance nonstationary series. Supportive of Ahamada (2004), this study finds that the cumulative sums of squares procedure in Inclán and Tiao (1994) is useful to complement the ADF test. As illustration, the ADF test indicates that there is no unit root in the returns of Japanese yen/US dollar, British pound/ US dollar and Swiss franc/US. However, the complementary test reveals that each of these returns contains heterogeneous variance. To sum, it can be concluded that these exchange rate returns are covariance nonstationary although there is no unit root.
    Keywords: cumulative sums of squares; covariance nonstationary; exchange rate returns
    JEL: C22 F31 C12
    Date: 2005
  7. By: Azman-Saini, W.N.W.
    Abstract: This article contributes to the debate on hedge funds and exchange rates in Thailand and Malaysia. It examines causal relations using a new Granger non-causality procedure proposed by Toda and Yamamoto (Journal of Econometrics, 66, 225-50, 1995). Monthly observations are utilized over a sample period from January, 1994 to April, 2002. The results show that the funds lead Thai baht for the crisis period. The results also reveal that the funds lead Malaysian ringgit for the pre-crisis period.
    Keywords: Hedge Funds; Exchange Rates; Granger Non-Causality; Thailand; Malaysia
    JEL: G2 F31
    Date: 2006–10

This nep-ifn issue is ©2006 by Yi-Nung Yang. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.