nep-ifn New Economics Papers
on International Finance
Issue of 2007‒09‒24
eight papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. The dynamics of ex-ante risk premia in the foreign exchange market: evidence from the yen/usd exchange rate using survey data By Georges Prat; Remzi Uctum
  2. Investor sentiment in the US-dollar: longer-term, nonlinear orientation on PPP By Menkhoff, Lukas; Rebitzky, Rafael
  3. Financial Exchange Rates and International Currency Exposures By Philip R. Lane; Jay C. Shambaugh
  4. Uncovered interest oparity at distant horizons - evidence on emerging economies & nonlinearities. By Arnaud Mehl; Lorenzo Cappiello
  5. Currency Crisis Theories – Some Explanations for the Russian Case By Komulainen, Tuomas
  7. An Intertemporal Benchmark Model for Turkey’s Current Account By Ayla Ogus; Niloufer Sohrabji
  8. Europe and Global Imbalances By Philip R. Lane; Gian Maria Milesi-Ferretti

  1. By: Georges Prat (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre]); Remzi Uctum (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre])
    Abstract: Using financial experts’ Yen/USD exchange rate expectations provided by Consensus Forecasts surveys, this paper aims to model the 3 and 12-month ahead ex-ante risk premia, measured as the difference between the expected and forward exchange rates. The condition of predictability of returns implies that the variance of the rate of change in exchange rate is horizon-dependent and this is a sufficient condition for agents not to require at any time a risk premium but a set of premia scaled by the time horizon of the investment. Moreover, using a two-step portfolio decision making process framework, we show that each premium depends on the net market position related to the maturity of the asset considered. Since the time-varying real net market positions are unobservable, they have been estimated through a state space model using the Kalman filter methodology. We find that a two-country portfolio asset pricing model explains satisfactorily both the common and the specific time-patterns of the 3- and 12-month ex-ante premia.
    Keywords: Risk premium; foreign exchange market
    Date: 2007–09–18
  2. By: Menkhoff, Lukas; Rebitzky, Rafael
    Abstract: How is it possible that exchange rates move in the long run towards fundamentals, while professionals form consistently irrational exchange rate expectations? We look at this puzzle from a different perspective by analyzing investor sentiment in the US-dollar market. First, long-horizon regressions show that investor sentiment is connected with exchange rate returns at longer horizons, i.e. more than two years. Second, sentiment is cointegrated with fundamentals, whereas third, this relation becomes stronger, the larger exchange rate's misalignment from long-run PPP. In sum, investor sentiment's behavior in the US-dollar market closely matches with established facts of empirical exchange rate research.
    Keywords: Exchange rates, investor sentiment, long-horizon regression, threshold VECM
    JEL: F31 G14
    Date: 2007–09
  3. By: Philip R. Lane; Jay C. Shambaugh
    Abstract: Our goal in this project is to gain a better empirical understanding of the international financial implications of currency movements. To this end, we construct a database of international currency exposures for a large panel of countries over 1990-2004. We show that trade-weighted exchange rate indices are insufficient to understand the financial impact of currency movements. Further, we demonstrate that many developing countries hold short foreign-currency positions, leaving them open to negative valuation effects when the domestic currency depreciates. However, we also show that many of these countries have substantially reduced their foreign currency exposure over the last decade. Last, we show that our currency measure has high explanatory power for the valuation term in net foreign asset dynamics: exchange rate valuation shocks are sizable, not quickly reversed and may entail substantial wealth shocks.
    Keywords: Financial integration, capital flows, external assets and liabilities
    Date: 2007–09–12
  4. By: Arnaud Mehl (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.); Lorenzo Cappiello (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.)
    Abstract: This paper tests for uncovered interest parity (UIP) at distant horizons for the US and its main trading partners, including both mature and emerging market economies, also exploring the existence of nonlinearities. At long and medium horizons, it finds support in favour of the standard, linear, specification of UIP for dollar rates vis-à-vis major floating currencies, but not vis-à-vis emerging market currencies. Moreover, the paper finds evidence that, not only yield differentials widen, but that US bond yields do react in anticipation of exchange rate movements, notably when these take place vis-à-vis major floating currencies. Last, the paper detects signs of nonlinearities in UIP at the medium term horizon for dollar rates vis-à-vis some of the major floating currencies, albeit surrounded by some uncertainty. JEL Classification: E43, F31, F41.
    Keywords: Uncovered interest parity, distant horizon, emerging economies, nonlinearities.
    Date: 2007–08
  5. By: Komulainen, Tuomas (BOFIT)
    Abstract: The paper examines currency crisis theories and applies them in searching for the main causes of the Russian crisis. We first study the determination of the exchange rate and then the first and second generation theories on currency crisis and finally the recent theoretical discussions of the Asian crisis. The main reason for the Russian crisis was the long-standing federal budget deficit. During the last years the deficits were financed mainly via short-term domestic debt. This created expectations of government insolvency and central bank financing. Moreover, the Russian economy has its own basic weaknesses, which render the country incapable of growth and prone to crisis. The Asian crisis was a trigger for the Russian crisis. Lower prices for Russian export products, inadequate financial regulations and lack of information in emerging markets in general are factors explaining this contagion effect. But the main mistakes that led to the crisis were those of the Russians themselves - the federal budget deficits. Thus the repair work should also start from there.
    Keywords: currency crisis; Russia; budget; contagion
    Date: 2007–09–14
  6. By: Steven Pennings; Rod Tyers
    Abstract: The 1990s appreciation of the US$ has been blamed on the “irrational exuberance” of investors in the US IT boom. A core of these investors appeared to believe that technology-related productivity growth (due, in part, to knowledge spill-over externalities) would raise the relative US rate of return over a sustained period. This paper introduces a two country, dynamic general equilibrium model with international financial capital mobility and trade to investigate the conditions under which a single technology shock could cause such a sustained change in capital flows. We find that a once-off productivity shock, whether in the presence of (small-medium) externalities or not, leads to capital inflow and a real appreciation in the short term but is followed in the long term by a stabilisation of the capital account and a net depreciation of the real exchange rate. For a single shock to trigger long-term growth in relative capital returns appears to require unrealistically large externalities. The presence of adaptive expectations can lead to persistence and cyclical behaviour in the real exchange rate and current account.
    JEL: F21 F31 F32 F41 F43
    Date: 2007–09
  7. By: Ayla Ogus (Department of Economics, Izmir University of Economics); Niloufer Sohrabji (Department of Economics, Simmons College)
    Abstract: In this paper, we analyze the Turkish current account between 1992 and 2004 within an intertemporal benchmark model. Increasingly larger current account deficits in the Turkish economy have caused a great level of discussion of the current account but it has mainly focused on the real exchange rate and short-term international competitiveness. However, changes in the fundamentals of the Turkish economy warrant a longer term approach in the analysis. This paper computes the optimal consumption smoothing current account using the intertemporal benchmark model (IBM) and tests for intertemporal solvency of the current account. We find consumption tilting dynamics are in effect. As expected of borrowing developing countries, Turkey tilts consumption to the present. We find support for one of the implications of the IBM, that the current account Granger-causes future changes in national cash flow as implied by the intertemporal benchmark model. However, we also find that the actual consumption smoothing current account is considerably more volatile than the optimal consumption smoothing current account suggesting that speculative forces have driven capital movements during the sample period. From the trends in data and the model and testable implications we believe that although Turkey breached the intertemporal solvency condition in the 1990s, this is not true for Turkey in the period following the 2001 crisis. Therefore, we conclude that changed fundamentals in Turkey have made the high current account deficits sustainable.
    Keywords: Current account sustainability, intertemporal benchmark model, Turkey
    JEL: F32 F37 F41
    Date: 2007–08
  8. By: Philip R. Lane; Gian Maria Milesi-Ferretti
    Abstract: Although Europe in the aggregate is a not a major contributor to global current account imbalances, its trade and financial linkages with the rest of the world mean that it will still be affected by a shift in the current configuration of external deficits and surpluses. We assess the macroeconomic impact on Europe of global current account adjustment under alternative scenarios, emphasizing both trade and financial channels. Finally, we consider heterogeneous exposure across individual European economies to external adjustment shocks.
    Keywords: Financial integration, capital flows, external assets and liabilities
    Date: 2007–06–30

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