nep-ifn New Economics Papers
on International Finance
Issue of 2007‒10‒20
six papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. An Objective Function for Simulation Based Inference on Exchange Rate Data By Peter Winker; Manfred Gilli; Vahidin Jeleskovic
  2. Income Distribution, Dutch Disease and Real Exchange Rate movements By Zarzosa Valdivia F.E.
  3. Exchange rate volatility and investment: a panel data cointegration approach By Diallo, Ibrahima Amadou
  4. A Model of an Optimum Currency Area By Ricci, Luca Antonio
  5. Economic Integration and the Co-movement of Stock Returns By Morgado, Pedro; Tavares, José
  6. Agglomeration Economies and the Location of Foreign Direct Investment: Empirical Evidence from Romania By Hilber, Christian A. L.; Voicu, Ioan

  1. By: Peter Winker (Department of Economics, University of Giessen); Manfred Gilli (University of Geneva and Swiss Finance Institute); Vahidin Jeleskovic (Department of Economics, University of Giessen)
    Abstract: The assessment of models of financial market behavior requires evaluation tools. When complexity hinders a direct estimation approach, e.g., for agent basedmicrosimulationmodels or complex multifractal models, simulation based estimators might provide an alternative. In order to apply such techniques, an objective function is required, which should be based on robust statistics of the time series under consideration. Based on the identification of robust statistics of foreign exchange rate time series in previous research, an objective function is derived. This function takes into account stylized facts about the unconditional distribution of exchange rate returns and properties of the conditional distribution, in particular, autoregressive conditional heteroscedasticity and long memory. A bootstrap procedure is used to obtain an estimate of the variance-covariancematrix of the different moments included in the objective function, which is used as a base for the weighting matrix. Finally, the properties of the objective function are analyzed for two different agent based models of the foreign exchange market, a simple GARCH-model and a stochastic volatility model using the DM/US-$ exchange rate as a benchmark. It is also discussed how the results might be used for inference purposes.
    Keywords: Indirect estimation; simulation based estimation; exchange rate returns
    JEL: C14 C15 F31
    Date: 2007–02
  2. By: Zarzosa Valdivia F.E.
    Abstract: A theoretical intra-temporal model for an economy with three sectors (exportable, importable and non-tradable), two production factors (labour and capital) and Cobb Douglas (linear) technologies in the tradable (non-tradable) sectors is used to relate real exchange rate movements to factor productivities, factor endowments, terms of trade and debt shocks. We also determine whether exogenous shocks generate the Dutch disease or not. Up to now, theoretical models like this one have not taken into account the influence of the income distribution on the magnitude of the Dutch disease and real exchange rate response to exogenous shocks. However, our model does it. Furthermore, exogenous shocks do also impact on factor retributions and production levels. As a result, these shocks lead to distributional income effects. In our model, the real exchange rate response to exogenous shocks depends not only on preferences and technology structures but also on the initial economic structures of the countries under analysis. Such economic structures are measured through income distribution ratios and the ratio debt / GDP. Exogenous shocks change such economic structures through their distributional income effects. As a result, the real exchange rate response to exogenous shocks may be variable and different between countries.
    Date: 2006–12
  3. By: Diallo, Ibrahima Amadou
    Abstract: This paper examines the link between the real exchange rate volatility and domestic investment by using the panel data cointegration techniques. In the first part of the paper, we study the theoretical link between the exchange rate, its volatility and the investment in a small open economy. The model shows that the effects of exchange rate volatility on investment are nonlinear. In the second part, we examine the empirical link between the exchange rate volatility and the investment. The results illustrate that the exchange rate volatility has a strong negative impact on investment. This outcome is robust in low income and middle income countries, and by using an alternative measurement of exchange rate volatility
    Keywords: Exchange rate volatility; Investment; Appreciation; Depreciation; Panel data cointegration; Dynamic Optimization; Capital goods; Expectations
    JEL: O19 O57 O11 O16 O24
    Date: 2007–04
  4. By: Ricci, Luca Antonio
    Abstract: This paper develops a model of the circumstances under which it is beneficial to participate in a currency area. The proposed two-country monetary model of trade with nominal rigidities encompasses the real and monetary arguments suggested by the optimum currency area literature: correlation of real and monetary shocks, international factor mobility, fiscal adjustment, openness, difference in national inflationary biases, and transactions costs. The effect of openness on the net benefits is ambiguous, contrary to the usual argument that more open economies are better candidates for a currency area. Also, prospective member countries do not necessarily agree on whether a given currency union should be created.
    Keywords: Optimum currency areas, cost-benefit analysis, exchange rate regimes, currency union, monetary integration
    JEL: E42 E52 E61 F02 F31 F33 F36 F4 H77 J61
    Date: 2007
  5. By: Morgado, Pedro; Tavares, José
    Abstract: In this paper we analyze the determinants of co-movements in stock returns among 40 developed and emerging markets, from the 1970s to the 1990s. We provide empirical estimates of the impact of bilateral indicators of economic integration such as bilateral trade intensity, the dissimilarity of export structures, the asymmetry of output growth and bilateral real exchange rate volatility. We find that each indicator has the expected effect on the correlation of stock returns: trade intensity increases the correlation of stock returns, while real exchange rate volatility, the asymmetry of output growth and the degree of export dissimilarity decrease it. We also find that countries with more developed and more analogous institutions - in terms of either rule of law or civil liberties - display a higher correlation of stock returns.
    Keywords: Bilateral Trade Intensity; Co-movement of Stock Returns; Economic Integration; Real Exchange Rate Volatility
    JEL: E44 F15 F36 G15
    Date: 2007–10
  6. By: Hilber, Christian A. L.; Voicu, Ioan
    Abstract: Relatively little is known about the determinants of FDI location in transition economies. We exploit the large inflow of FDI into Romania, after the revolution in 1989, to study this question. Using a conditional logit setup, we find that external economies from service agglomeration are the main determinant of FDI-location. An increase in service employment density by 10 percent makes the average Romanian county 11.9 percent more likely to attract a foreign investor. Industry specific foreign and domestic agglomeration economies and labor conflicts also impact FDI-location. Our findings imply that results are sensitive to the inclusion of locational fixed effects.
    Keywords: Agglomeration economies; foreign direct investment; transition economies.
    JEL: R3 P33
    Date: 2007–09–30

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