nep-ifn New Economics Papers
on International Finance
Issue of 2008‒11‒18
six papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Productivity, Preferences and UIP deviations in an Open Economy Business Cycle Model By Arnab Bhattacharjee; Jagjit S. Chadha; Qi Sun
  2. What Lessons have been learnt since the East Asian Crisis in 1997/98? CIBS, Capital Flows, and Exchange Rates By Pircher, Marion
  3. Structural Breaks in the Real Exchange Rate and Real Interest Rate Relationship By Joseph P. Byrne; Jun Nagayasu
  4. Common and idiosyncratic factors of the exchange risk premium in emerging European markets By Joseph P. Byrne; Jun Nagayasu
  5. Price discovery from cross-currency and FX swaps: a structural analysis By Naohiko Baba; Sahminan Yasuaki Amatatsu
  6. Leveraged Carry Trade Portfolios By Zsolt Darvas

  1. By: Arnab Bhattacharjee; Jagjit S. Chadha; Qi Sun
    Abstract: We show that a ‡ex-price two-sector open economy DSGE model can explain the poor degree of international risk sharing and exchange rate disconnect. We use a suite of model evaluation measures and examine the role of (i) traded and non-traded sectors; (ii) financial market incompleteness; (iii) preference shocks; (iv) deviations from UIP condition for the exchange rates; and (v) creditor status in net foreign assets. We find that there is a good case for both traded and non-traded productivity shocks as well as UIP deviations in explaining the puzzles.
    Keywords: Current account dynamics, real exchange rates, incomplete markets, financial frictions.
    JEL: E32 F32 F41
    Date: 2008–11
  2. By: Pircher, Marion
    Abstract: This paper discusses the movement of capital flows -Date and Date the exchange rate regimes and monetary policies of China, India, Brazil, and South Africa (CIBS). Furthermore, we compare the level of financial stability, and the composition and duration of capital flows of the countries on a policy level according -Date the ? ?third generation? crisis models?; following which the East Asian Crisis of 1997/98 linkages between the corporate and financial sec-Daters, and foreign short-term debt are given further attention. The paper concludes by comparing all four countries and analysing possible risks in CIBS financial systems.
    Keywords: international financial markets, financial stability, capital flows, exchange rates, China, India, Brazil, South Africa
    Date: 2008
  3. By: Joseph P. Byrne; Jun Nagayasu
    Abstract: In this paper we empirically examine the relationship between the real exchange rate and real interest rate differentials using recent econometric methods robust to potential structural breaks. Generally, our study provides evidence of this relationship in the long-run context. More specifically, we first focus on the UK-US relationship, and interestingly find limited evidence of this long-run relationship using traditional methods. But when an approach robust to endogenously determined structural breaks is employed, we find evidence that the real interest rate differential is an important determinant of the real exchange rate. Secondly, in order to investigate the relevance of structural shifts in a more global context, we carry out multiple country analysis. While providing evidence of this long-run relationship, European data suggest that the presence of structural breaks is not very common across countries and is indeed country-specific.
    Keywords: Real exchange rate; real interest rate differential; nonstationarity; endogenously determined structural breaks; trace tests
    JEL: F31
    Date: 2008–10
  4. By: Joseph P. Byrne; Jun Nagayasu
    Abstract: Existing empirical evidence suggests that the Uncovered Interest Rate Parity (UIRP) condition may not hold due to an exchange risk premium. For a panel data set of eleven emerging European economies we decompose this exchange risk premium into an idiosyncratic (country-specific) elements and a common factor using a principal components approach. We present evidence of a stationary idiosyncratic component and nonstationary common factor. This result leads to the conclusion of a nonstationary risk premium for these countries and a violation of the UIRP in the long-run, which is in contrast to previous studies often documenting a stationary premium in developed countries. Furthermore, we report that the variation in the premium is largely attributable to a common factor influenced by economic developments in the United States.
    Keywords: Uncovered Interest Rate Parity, Emerging Economies, Exchange Risk Premiums, Common Factors
    JEL: F41
    Date: 2008–09
  5. By: Naohiko Baba; Sahminan Yasuaki Amatatsu
    Abstract: This paper investigates the relative role of price discovery between two long-term swap contracts that exchange U.S. dollars for Japanese yen - the cross-currency basis swap and the foreign exchange (FX) swap - using structural state space models. Our main findings are that: (i) the currency swap market plays a much more dominant role in price discovery than the FX swap market; and (ii) FX swap prices tend to under react to changes in the efficient price, while cross-currency swap prices react almost entirely to them.
    Keywords: Currency Swap, FX Swap, Price Discovery, State Space Model, Efficient Price
    Date: 2008–11
  6. By: Zsolt Darvas (Institute of Economics, Hungarian Academy of Sciences)
    Abstract: Studying all possible pairs of eleven major currencies and eleven portfolios in 1976-2008 we show that, when there is no leverage, carry trade is significantly profitable for most currency pairs and portfolios. Positive returns do not diminish in time providing a strong case against the hypothesis of uncovered interest rate parity. We explain these findings with the leveraged nature of carry trade: leverage may increase profitability but it materially increases downside risk. We argue that market inefficiency is related to the level of leverage.
    Keywords: Bootstrap, Currency market, Diversification, Leverage, Uncovered interest rate parity
    JEL: C32 F31 G11 G15
    Date: 2008–10

This nep-ifn issue is ©2008 by Yi-Nung Yang. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.