nep-ifn New Economics Papers
on International Finance
Issue of 2007‒07‒27
seven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Understanding the Forward Premium Puzzle: A Microstructure Approach By Burnside, A Craig; Eichenbaum, Martin; Rebelo, Sérgio
  2. Currency Preferences in a Tri-Polar Model of Foreign Exchange By Melecky, M
  3. The Economics of Uncovered Interest Parity Condition for Emerging Markets: A Survey By Alper, C. Emre; Ardic, Oya Pinar; Fendoglu, Salih
  4. Asian Currency Crises: Do Fundamentals still Matter? A Markov-Switching Approach to Causes and Timing By J L Ford; Bagus Santoso; N J Horsewood
  5. An Evaluation of Foreign Exchange Intervention and Monetary Aggregates in Nigeria (1986- 2003) By Adebiyi, Michael Adebayo
  6. Forecasting Exchange Rate Density using Parametric Models: The Case of Brazil By Marcos M. Abe; Eui J. Chang; Benjamin M. Tabak
  7. Determinants and Costs of Current Account Reversals under Heterogeneity and Serial Correlation By Aßmann, Christian

  1. By: Burnside, A Craig; Eichenbaum, Martin; Rebelo, Sérgio
    Abstract: High-interest-rate currencies tend to appreciate relative to low-interest-rate currencies. We argue that adverse-selection problems between participants in foreign exchange markets can account for this `forward premium puzzle.' The key feature of our model is that the adverse selection problem facing market makers is worse when, based on public information, a currency is expected to appreciate.
    Keywords: Exchange rates; microstructure; Uncovered interest parity
    JEL: F31
    Date: 2007–07
  2. By: Melecky, M
    Abstract: This paper reopens the subject of currency preferences while modeling the exchange rates among three major currencies - the US dollar, the euro and the Japanese yen. The exchange rate model presented in this paper includes not only traditional determinants of bilateral exchange rates but incorporates third-currency effects in addition. The obtained estimation results are interpreted from the perspective of possible currency substitution and complementarity relationships. We find evidence of currency complementarity between the yen and the euro, and currency substitution of the dollar for both the euro and the yen. The estimated third-currency effects are consistent with our findings on currency substitution and complementarity among the three major currencies.
    Keywords: Exchange Rate Modeling; Currency Substitution; Currency Complementarity; Third-Currency Effects
    JEL: F36 F42 F31
    Date: 2007–04
  3. By: Alper, C. Emre; Ardic, Oya Pinar; Fendoglu, Salih
    Abstract: Financial account liberalizations since the second half of the 1980s paved way for the burgeoning literature that investigates foreign exchange market efficiency in emerging markets via testing for the uncovered interest parity (UIP) condition. This paper provides a broad and critical survey on this recent literature as well as a general understanding on the topic through reviewing the related literature on developed economies where recent methodological advances in time series econometrics have provided favorable results, questioning the previously documented UIP puzzle. The literature on emerging markets suggests that these countries deserve a special treatment by taking into account the existence of additional types of risk premia, high inflation episodes, financial contagion, peso problem, simultaneity problem, asymmetricity, and the determination of de facto structural breaks.
    Keywords: Uncovered Interest Parity; Forward Premium Bias; Emerging Markets.
    JEL: F31
    Date: 2007–05–30
  4. By: J L Ford; Bagus Santoso; N J Horsewood
    Abstract: This paper examines the extent to which the Asian currency crises can be accounted for by the macroeconomic fundamentals suggested by first and second generation models, exclusive of the ideas of the third generation models. In doing so we extend the literature on the earlier models by using GARCH and Path Independent Markov-Switching GARCH models to explain the market pressure on the exchange rate, and the probability of the timing of a crisis. In addition, we account for appreciations of the exchange rate. Our empirical estimates for Indonesia, South Korea, Malaysia and Thailand confirm that macroeconomic variables can explain the crises and the probability of occurrence at any time, dominating the conventionally used logit model.
    Keywords: Currency crisis, macroeconomic fundamentals, Markov-switching, volatile sate, stable state, probability of a crisis, logit model
    JEL: F31 F40
    Date: 2007–07
  5. By: Adebiyi, Michael Adebayo
    Abstract: The paper investigates the impact of foreign exchange intervention in the Nigerian foreign exchange market using an Autoregressive Distributed Lag (ARDL) modeling approach. Quarterly time series data spanning 1986:1 to 2003:4 are used and a number of statistical tools are employed to verify this hypothesis. The study examines stochastic characteristics of each time series by testing their stationarity using Phillip Perron (PP) test. This is followed by performing cointegration test using Johansen technique. The existence of co-integration motivates us to estimate the error correction model for broad money, M2. The overall finding from all the techniques employed is that foreign exchange intervention in Nigeria is sterilized because the cumulative aid, which constitute part of foreign exchange inflows, and net foreign assets variables, which are proxies for intervention, are not significant. Thus, paper concludes by recommending, among others, that the use of stock of external reserves to support the exchange rate through increased funding of the foreign exchange market should be encouraged.
    Keywords: Nigeria; Foreign Exchange Intervention; Co-integration and Auto-regressive Distributed Lag
    JEL: E52 E5
    Date: 2007–07–04
  6. By: Marcos M. Abe; Eui J. Chang; Benjamin M. Tabak
    Abstract: This paper employs a recently developed parametric technique to obtain density forecasts for the Brazilian exchange rate, using the exchange rate options market. Empirical results suggest that the option market contains useful information about future exchange rate density. These results suggests that density forecasts using options markets may add value for portfolio and risk management, and may be useful for financial regulators to assess financial stability.
    Date: 2007–05
  7. By: Aßmann, Christian
    Abstract: Recent empirical evidence suggests that reversing current account balances imply costly adjustment processes leading to reduced economic growth. Using large panel data sets to analyze determinants and costs of reversals asks for controls of heterogeneity among countries. This paper contributes a Bayesian analysis, which allows a parsimonious yet flexible handling of country specific heterogeneity via random coeffcients. Furthermore, the analysis allows for serially correlated errors in order to capture persistence within the employed macroeconomic data. Bayesian specification tests provide evidence in favor of models incorporating heterogeneity and serial correlation. The results suggest that consideration of serial correlation and heterogeneity is necessary to assess correctly the determinants and costs of reversals. Results are checked for robustness against the underlying reversal definition.
    Keywords: Current account reversals, Bayesian Analysis, Panel Probit Model, Panel Treatment Model, Random Parameters, Serial Correlation
    JEL: C30 C33 C35 F32 F43
    Date: 2007

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