nep-ifn New Economics Papers
on International Finance
Issue of 2008‒12‒14
six papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Nonlinear Exchange Rate Predictability By Carlos Felipe Lopez Suarez; Jose Antonio Rodriguez Lopez
  2. Defending against Speculative Attacks By Tijmen R. Daniels; Henk Jager; Franc Klaassen
  3. Interactions between monetary policy and exchange rate in inflation targeting emerging countries: the case of three East Asian countries By Sek, Siok Kun
  4. Interdependence Between Foreign Exchange Markets and Stock Markets in Selected European Countries By Mevlud Islami
  5. Thick breaks and trend stationarity : the case of euro-dollar exchange rate By Jean-François Goux
  6. Emerging Market Currency Excess Returns By Stephen Gilmore; Fumio Hayashi

  1. By: Carlos Felipe Lopez Suarez; Jose Antonio Rodriguez Lopez (Department of Economics, University of California-Irvine)
    Abstract: We study whether the nonlinear behavior of the real exchange rate can help us account for the lack of predictability of the nominal exchange rate. We construct a smooth nonlinear error-correction model that allows us to test the hypotheses of nonlinear predictability of the nominal exchange rate and nonlinear behavior on the real exchange rate in the context of a fully specified cointegrated system. Using a panel of 19 countries and three numeraires, we find strong evidence of nonlinear predictability of the nominal exchange rate and of nonlinear mean reversion of the real exchange rate. Out-of-sample Theil's U-statistics show a higher forecast precision of the nonlinear model than the one obtained with a random walk specification. The statistical significance of the out-of-sample results is higher for short-run horizons, specially for one-quarter-ahead forecasts.
    Keywords: Exchange rates; Predictability; Nonlinearities; Purchasing power parity
    JEL: C53 F31 F47
    Date: 2008–12
  2. By: Tijmen R. Daniels (Technische Universität Berlin); Henk Jager (University of Amsterdam); Franc Klaassen (University of Amsterdam)
    Abstract: While virtually all modern models of exchange rate crises recognise that the decision to abandon an exchange rate peg depends on how harshly policy makers are willing to defend the regime, they virtually never model how the exchange rate is defended. In this paper we incorporate both the mechanics of speculation and a defence policy against speculation in the well-known currency crisis model of Morris and Shin (American Economic Review 88 (1998) 587-97). After adding these natural elements, our model outperforms standard currency crisis models at explaining stylised features of speculative attacks. Moreover, our model connects the theoretical currency crisis literature to an empirical literature on exchange market pressure, by bringing together its building blocks: exchange rate changes plus counter-acting defence policies. We use this connection to confirm our model's predictions empirically.
    Keywords: Exchange Market Pressure; Currency Crisis; Global Game
    JEL: E58 F31 F33 G15
    Date: 2008–09–22
  3. By: Sek, Siok Kun
    Abstract: This paper investigates empirically how the reaction of monetary policy to exchange rate has changed after the adoption of inflation targeting regime in three East Asian countries. Using a structural VAR and single equation methods, this study shows that the reactions of monetary policy to exchange rate shocks as well as CPI (demand shocks) and output (supply shocks) have declined under the inflation targeting environment. The policy function reacts weakly to the exchange rate movements before and after the financial crisis of 1997 in two out of the three countries.
    Keywords: exchange rate; inflation targeting; policy reaction function
    JEL: E58 E52 F41
    Date: 2008
  4. By: Mevlud Islami (University of Wuppertal/European Institute for International Economic Relations (EIIW))
    Abstract: In this analysis the interdependence between foreign exchange markets and stock markets for selected accession and cohesion countries is discussed. This includes basic theoretical approaches. Monthly data for the nominal stock market indices and nominal exchange rates are used, where Ireland, Portugal, Spain, Greece, Poland, Czech Republic, Slovenia, and Hungary are included in the analysis. From the cointegration analysis and VAR analysis both long-term links and short-term links for Poland are identified. Conversely, for Slovenia, Hungary, Ireland, and Spain merely short-term links resulted. Surprisingly, the direction of causation is unambiguously from the stock market index to the exchange rate for all five countries considered.
    Keywords: Exchange Rate; Stock Markets; Cointegration; VAR; European Integration
    JEL: G15 F31 E44
    Date: 2008–12
  5. By: Jean-François Goux (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France)
    Abstract: The taking into account of a period of break (thick break) makes it possible to correctly analyze the time series of the euro-dollar exchange rate. By retaining the posterior period with the Louvre agreements, but by eliminating the first years from existence of the euro, and until today, one can affirm that this rate is stationary and after trend stationary and thus that there is a mechanism of return towards a level (a trend) of equilibrium. This point is shown using a new procedure of test based on the elimination of thick breaks. That makes it possible to propose a forecast based on this deterministic trend
    Keywords: euro-dollar exchange rate, stationarity, breaks, outliers
    JEL: C F F32
    Date: 2008
  6. By: Stephen Gilmore; Fumio Hayashi
    Abstract: We discuss the foreign currency forward premium puzzle in the context of 20 internationally tradable emerging market currencies. We find that since the late 1990s the broad basket of emerging market currencies has provided significant equity-like excess returns against a number of major market currencies, but with low volatility. We also find that the forward premium, or carry, is significant in explaining that excess return but that excess returns would still have existed even in the absence of positive carry. Our calculation shows that transactions cost due to bid/offer spreads is substantially lower than commonly supposed in the academic literature.
    JEL: F31 G11 G15
    Date: 2008–12

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