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on International Finance |
| By: | Robert J. Sonora (Department of Economics, School of Business Administration, Fort Lewis College); Josip Tica (Faculty of Economics and Business, University of Zagreb) |
| Abstract: | In this paper we investigate purchasing power parity in the CEE and post-War former-Yugoslav states during EU integration process 1994-2006. This work stems from longer term tests of real exchange rate convergence in the former Yugoslavia. This period is of interest on two fronts: First, it investigates real exchange dynamics in the aftermath of war financed in part through seignorage; and second, we investigate the level of economic integration with the European Union following the break up of the former Yugoslavia. Given the short run nature of the available data we use panel unit root tests with and without structural breaks. Preliminary results suggest that real exchange rates between the former Yugoslav states and Germany are stationary when breaks are accounted for. Given the size of nominal shocks in the region, particularly in the early 1990s, preliminary results indicate that convergence to the long run equilibrium is relatively quick. |
| Keywords: | purchasing power parity, Economic Integration, panel unit root tests |
| JEL: | E31 F22 |
| Date: | 2008–06–05 |
| URL: | http://d.repec.org/n?u=RePEc:zag:wpaper:0804&r=ifn |
| By: | Eswar S. Prasad; Raghuram Rajan |
| Abstract: | Cross-country regressions suggest little connection from foreign capital inflows to more rapid economic growth for developing countries and emerging markets. This suggests that the lack of domestic savings is not the primary constraint on growth in these economies, as implicitly assumed in the benchmark neoclassical framework. We explore emerging new theories on both the costs and benefits of capital account liberalization, and suggest how one might adopt a pragmatic approach to the process. |
| JEL: | F21 F31 F36 F43 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14051&r=ifn |
| By: | Juan Piñeiro Chousa,; Artur Tamazian,; Davit N. Melikyan, |
| Abstract: | In this paper we propose an empirical model that considers theoretical facts on the relationship between real exchange rates and the net exports of the economy to supplement the interaction of a number of financial and economic factors with the stock market. We discuss the impact of exchange rate fluctuations on market risk in terms of Value at Risk (VaR). Our empirical findings show that common currency introduction produced increments in VaR whereas European stock returns are more sensitive to changes in competitiveness regarding the EMU rather than national exports. Finally, we show that the synchronisation of variation in competitiveness through the introduction of a single currency has made these changes more decisive in explaining financial market fluctuations. |
| Keywords: | Euro, Competitiveness, Market Risk, Net Export, Value-at-Risk, Volatility |
| JEL: | F33 G24 G28 O24 |
| Date: | 2008–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2008-916&r=ifn |
| By: | A. Craig Burnside; Martin S. Eichenbaum; Isaac Kleshchelski; Sergio Rebelo |
| Abstract: | Currencies that are at a forward premium tend to depreciate. This 'forward- premium puzzle' is an egregious deviation from uncovered interest parity. We document the properties of the carry trade, a currency speculation strategy that exploits this anomaly. This strategy consists of borrowing low-interest-rate currencies and lending high-interest-rate currencies. We first show that the carry trade yields a high Sharpe ratio that is not a compensation for risk. We then consider a hedged version of the carry trade which protects the investor against large, adverse currency movements. This strategy, implemented with currency options, yields average payoffs that are statistically indistinguishable from the average payoffs to the standard carry trade. We argue that this finding implies that the peso problem cannot be a major determinant of the payoff to the carry trade. |
| JEL: | F31 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14054&r=ifn |
| By: | Chit, Myint Moe; Rizov, Marian; Willenbockel, Dirk |
| Abstract: | This paper examines the impact of bilateral real exchange rate volatility on real exports of five emerging East Asian countries among themselves as well as to thirteen industrialised countries. We explicitly recognize the specificity of the exports between the emerging East Asian and industrialised countries and employ a generalized gravity model that combines a traditional long-run export demand model with gravity type variables. In the empirical analysis we use a panel comprising 25 years of quarterly data and perform unit-root and cointegration tests to verify the long-run relationship among the regression variables. The results provide strong evidence that exchange rate volatility has a negative impact on the exports of emerging East Asian countries. These results are robust across different estimation techniques and do not depend on the variable chosen to proxy exchange rate uncertainty. |
| Keywords: | Trade; uncertainty; exchange rate fluctuations; East Asia; |
| JEL: | O53 O24 F14 F31 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9014&r=ifn |
| By: | Abullah M. Noman and Minhaz U. Ahmed (, American International University-Bangladesh (AIUB); Southeast University, Bangladesh) |
| Abstract: | This paper examines the weak form efficiency of the foreign exchange markets in seven SAARC countries using monthly return series for each of these markets over a period of 21 years (1985-2005). We applied a battery of unit root tests and variance ratio tests (individual and multiple) to see whether the return series (and also, the raw data) follow random walk process. Our results suggest that the increments of the return series are not serially correlated. Therefore, we conclude that foreign exchange markets in SAARC countries are weak form efficient. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:aiu:abewps:62&r=ifn |
| By: | Chan, Tze-Haw; Chong, Lee Lee; Khong, Wye Leong Roy |
| Abstract: | Using monthly frequency data from 1981 to 2005, we test for the potential mean reversion of Japan-US real exchange rates using newly improved unit root tests allowing for endogenous (unknown) break(s) in the linear as well as non-linear manner. Both countries have contributed vital proportion in global trading on top of being the major trading partner to each other since 1960s. We identify structural breaks in 1985 and 1994 respectively via the Lumsdaine and Papell (1997)’s linear test, but the results were against the PPP hypothesis. The Saikkonen and LÄutkepohl, (2002)’s test, however, provides sufficient supports for non-linear adjustment of real exchange towards long run PPP. In addition, stronger evidence for PPP is found in the post-1994 period, in conjunction with the small persistence of real exchange deviations (half-life less than a year). Also, the exchange rate misalignment is less evident after the Plaza Accord 1985. In brief, our findings reveal that the Japanese authority has shown some form of PPP-oriented rule as a basis for their exchange rate policies, in the presence of structural break(s) and non-linearity. |
| Keywords: | Real Exchange Rates; Endogenous Breaks; Non-linearity; Half-life |
| JEL: | C52 C12 N15 F31 |
| Date: | 2008–04–28 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:3406&r=ifn |
| By: | Irene Andreou; Gilles Dufrenot; Alain Sand-Zantman; Aleksandra Zdzienicka-Durand |
| Abstract: | We propose a measure of the probability of crises associated with an aggregate indicator, where the percentage of false alarms and the proportion of missed signals can be combined to give an appreciation of the vulnerability of an economy. In this perspective, the important issue is not only to determine whether a system produces true predictions of a crisis, but also whether there are forewarning signs of a forthcoming crisis prior to its actual occurrence. To this end, we adopt the approach initiated by Kaminsky, Lizondo and Reinhart (1998), analyzing each indicator and calculating each threshold separately. We depart from this approach in that each country is also analyzed separately, permitting the creation of a more “custom-made” early warning system for each one. |
| Keywords: | Currency Crisis, Early Warning System, Composite Indicator, Eastern Europe. |
| JEL: | F31 F47 |
| Date: | 2007–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2008-901&r=ifn |