nep-ifn New Economics Papers
on International Finance
Issue of 2008‒09‒13
nine papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Exchange Rate Exposure, Foreign Currency Debt and the Use of Derivatives: Evidence from Brazil By Júnior, José L. R.
  2. Fluctuations in the Foreign Exchange Market: How Important are Monetary Policy Shocks? By Hafedh Bouakez; Michel Normandin
  3. Crossing the Lines: The Conditional Relation between Exchange Rate Exposure and Stock Returns in Emerging and Developed Markets By Bartram, Söhnke M.; Bodnar, Gordon M.
  4. Does the US international debt affect the euro/dollar exchange rate? By Costas Karfakis
  5. Exchange Rate Dynamics and the Relationship between the Random Walk Hypothesis and Official Interventions By Eduardo José Araújo Lima; Benjamin Miranda Tabak
  6. Median-Unbiased Estimation in DF-GLS Regressions and the PPP Puzzle By Claude Lopez; Christian J. Murray; David H. Papell
  7. Real exchange rates, saving and growth : is there a link ? By Montiel, Peter J.; Serven, Luis
  8. Foreign Exchange Market Volatility Information: an investigation of real-dollar exchange rate By Frederico Pechir Gomes; Marcelo Yoshio Takami; Vinicius Ratton Brandi
  9. Currency undervaluation and sovereign wealth funds : a new role for the World Trade Organization By Mattoo, Aaditya; Subramanian, Arvind

  1. By: Júnior, José L. R.
    Date: 2008–10
  2. By: Hafedh Bouakez; Michel Normandin
    Abstract: We study the effects of U.S. monetary policy shocks on the bilateral exchange rate between the U.S. and each of the G7 countries. We also estimate deviations from uncovered interest rate parity and exchange rate pass-through conditional on these shocks. The analysis is based on a structural vector autoregression in which monetary policy shocks are identified through the conditional heteroscedasticity of the structural disturbances. Unlike earlier work in this area, our empirical methodology avoids making arbitrary assumptions about the relevant policy indicator or transmission mechanism in order to achieve identification. At the same time, it allows us to assess the implications of imposing invalid identifying restrictions. Our results indicate that the nominal exchange rate exhibits delayed overshooting in response to a monetary expansion, depreciating for roughly ten months before starting to appreciate. The shock also leads to large and persistent departures from uncovered interest rate parity, and to a prolonged period of incomplete pass-through. Variance-decomposition results indicate that monetary policy shocks account for a non-trivial proportion of exchange rate fluctuations.
    Keywords: Conditions heteroscedasticity, delayed overshooting, exchange rate pass-through, identification, structural vector autoregression, uncovered interest rate parity
    JEL: C32 E52 F31 F41
    Date: 2008
  3. By: Bartram, Söhnke M.; Bodnar, Gordon M.
    Abstract: This paper examines the importance of exchange rate risk in the return generating process for a large sample of non-financial firms from 37 countries. We argue that the effect of exchange rate exposure on the cost of capital should be conditional and show evidence of a significant return premium to firm-level currency exposures when conditioning on the exchange rate change. The return premium is directly related to the size and sign of the subsequent exchange rate change, suggesting fluctuations in exchange rates themselves as a source of time-variation in currency risk premia. For the entire sample the return premia ranges from 1.2 - 3.3% per unit of currency exposure. The premium is larger for firms in emerging markets, while in developed markets it is statistically significant only for local currency depreciations. Overall, the results indicate that exchange rate exposure plays an important role in generating cross-sectional return variation. Moreover, we show that the impact of exchange rate risk on stock returns is predominantly a cash flow effect as opposed to a discount rate effect.
    Keywords: Exchange rate exposure; exchange rate risk; return premia; international finance
    JEL: F4 F3 G3
    Date: 2006–06–22
  4. By: Costas Karfakis (Department of Economics, University of Macedonia)
    Abstract: The impact of the US international debt on the euro/dollar exchange rate is examined in the context of an Error Correction monetary model with rational expectations. Overall, the relative real income is the most economically significant determinant, whereas the debt is the most statistically significant determinant..
    Keywords: Monetary model, US international debt, co-integration analysis, error correction model
    JEL: F31
    Date: 2008–09
  5. By: Eduardo José Araújo Lima; Benjamin Miranda Tabak
    Abstract: This paper examines the empirical evidence that official interventions are associated with periods of high predictability in exchange rate markets. We employ a block bootstrap methodology to build critical values for the Variance Ratio statistics and test for predictability within moving windows of fixed length sizes for major developed countries currencies. Empirical results suggest that interventions are indeed associated to periods of increase in predictability and that time varying risk premium may, at least partially, explain such results.
    Date: 2008–08
  6. By: Claude Lopez; Christian J. Murray; David H. Papell
    Abstract: Using median-unbiased estimation, recent research has questioned the validity of Rogoff’s “remarkable consensus” of 3-5 year half-lives of deviations from PPP. These half-life estimates, however, are based on estimates from regressions where the resulting unit root test has low power. We extend median-unbiased estimation to the DF-GLS regression of Elliott, Rothenberg, and Stock (1996). We find that median-unbiased estimation based on this regression has the potential to tighten confidence intervals for half-lives. Using long horizon real exchange rate data, we find that the typical lower bound of the confidence intervals for median-unbiased half-lives is just under 3 years. Thus, while previous confidence intervals for half-lives are consistent with virtually anything, our tighter confidence intervals now rule out economic models with nominal rigidities as candidates for explaining the observed behavior of real exchange rates. Therefore, while we obtain more information using efficient unit root tests on longer term data, this information moves us away from solving the PPP puzzle.
    Date: 2008
  7. By: Montiel, Peter J.; Serven, Luis
    Abstract: The view that policies directed at the real exchange rate can have an important effect on economic growth has been gaining adherents in recent years. Unlike the traditional"misalignment"view that temporary departures of the real exchange rate from its equilibrium level harm growth by distorting a key relative price in the economy, the recent literature stresses the growth effects of the equilibrium real exchange rate itself, with the claim being that a depreciated equilibrium real exchange rate promotes economic growth. While there is no consensus on the precise channels through which this effect is generated, an increasingly common view in policy circles points to saving as the channel of transmission, with the claim that a depreciated real exchange rate raises the domestic saving rate -- which in turn stimulates growth by increasing the rate of capital accumulation. This paper offers a preliminary exploration of this claim. Drawing from standard analytical models, stylized facts on saving and real exchange rates, and existing empirical research on saving determinants, the paper assesses the link between the real exchange rate and saving. Overall, the conclusion is that saving is unlikely to provide the mechanism through which the real exchange rate affects growth.
    Keywords: Macroeconomic Management,Economic Stabilization,Debt Markets,Emerging Markets,Currencies and Exchange Rates
    Date: 2008–05–01
  8. By: Frederico Pechir Gomes; Marcelo Yoshio Takami; Vinicius Ratton Brandi
    Abstract: Price distributions estimation has become a relevant subject for risk and pricing literature. Special concern resides on tail probabilities, which usually presents more severe observations than those predicted by Normal distributions. This work aims to verify whether the volatility implied in dollar-real options contains useful information about unexpected large-magnitude returns. Implied volatility is also checked as a predictor for realized volatility. Our results indicate that implied volatilities indeed provide useful information on unusual returns and also work as a good predictor for observed volatility. Finally, we implement an early-warning system and implied volatilities seem to signalize large-magnitude returns.
    Date: 2008–08
  9. By: Mattoo, Aaditya; Subramanian, Arvind
    Abstract: Two aspects of global imbalances - undervalued exchange rates and sovereign wealth funds - require a multilateral response. For reasons of inadequate leverage and eroding legitimacy, the International Monetary Fund has not been effective in dealing with undervalued exchange rates. This paper proposes new rules in the World Trade Organization to discipline cases of significant undervaluation that are clearly attributable to government action. The rationale for WTO involvement is that there are large trade consequences of undervalued exchange rates, which act as both import tariffs and export subsidies, and that the WTO's enforcement mechanism is credible and effective. The World Trade Organization would not be involved in exchange rate management, and would not displace the International Monetary Fund. Rather, the authors suggest ways to harness the comparative advantage of the two institutions, with the International Monetary Fund providing the essential technical expertise in the World Trade Organization's enforcement process. There is a bargain to be struck between countries with sovereign wealth funds, which want secure and liberal access for their capital, and capital-importing countries, which have concerns about the objectives and operations of sovereign wealth funds. The World Trade Organization is the natural place to strike this bargain. Its General Agreement on Trade in Services, already covers investments by sovereign wealth funds, and other agreements offer a precedent for designing disciplines for these funds. Placing exchange rates and sovereign wealth funds on the trade negotiating agenda may help revive the Doha Round by rekindling the interest of a wide variety of groups.
    Keywords: Emerging Markets,Debt Markets,Economic Theory&Research,Trade Law,Currencies and Exchange Rates
    Date: 2008–07–01

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