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on International Finance |
| By: | Roman Frydman; Michael D. Goldberg; Søren Johansen; Katarina Juselius (School of Economics and Management, University of Aarhus, Denmark) |
| Abstract: | Asset prices undergo long swings that revolve around benchmark levels. In currency markets, fluctuations involve real exchange rates that are highly persistent and that move in near-parallel fashion with nominal rates. The inability to explain these two regularities with one model has been called the "purchasing power parity puzzle." In this paper, we trace the puzzle to exchange rate modelers' use of the "Rational Expectations Hypothesis." We show that once imperfect knowledge is recognized, a monetary model is able to account for the puzzle, as well as other salient features of the data, including the long-swings behavior of exchange rates. |
| Keywords: | PPP puzzle, long swings, imperfect knowledge, rational expectations hypothesis |
| JEL: | F31 F41 G15 |
| Date: | 2009–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:aah:create:2009-01&r=ifn |
| By: | Geir H. Bjønnes (Norwegian School of Management (BI),); Carol L. Osler (Brandeis International Business School); Dagfinn Rime (Norges Bank (Central Bank of Norway)and Norwegian University of Science and Technology (NTNU)) |
| Abstract: | This paper provides evidence of private information in the interdealer foreign exchange market. In so doing it provides support for the hypothesis that information is an important reason for the strong positive correlation between order flow and returns. It also provides evidence that information influences order-book structure. Our data comprise the complete record of interdealer trades at a good-sized Scandinavian bank during four weeks in 1998 and 1999, including bank identities. Our results indicate that larger banks have more information than smaller banks, that the relation between order flow and returns is stronger for larger banks than smaller banks, and that larger banks exploit their information advantage in limit-order placement. |
| Keywords: | Foreign exchange, microstructure, asymmetric information, liquidity premium |
| JEL: | G15 F31 F33 |
| Date: | 2009–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2008_25&r=ifn |
| By: | A. Carriero; G. Kapetanios; M. Marcellino |
| Abstract: | Models based on economic theory have serious problems at forecasting exchange rates better than simple univariate driftless random walk models, especially at short horizons. Multivariate time series models suffer from the same problem. In this paper, we propose to forecast exchange rates with a large Bayesian VAR (BVAR), using a panel of 33 exchange rates vis-a-vis the US Dollar. Since exchange rates tend to co-move, the use of a large set of them can contain useful information for forecasting. In addition, we adopt a driftless random walk prior, so that cross-dynamics matter for forecasting only if there is strong evidence of them in the data. We produce forecasts for all the 33 exchange rates in the panel, and show that our model produces systematically better forecasts than a random walk for most of the countries, and at any forecast horizon, including at 1-step ahead. |
| Keywords: | Exchange Rates, Forecasting, Bayesian VAR |
| JEL: | C53 C11 F31 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:eui:euiwps:eco2008/33&r=ifn |
| By: | Egon Franck (Institute for Strategy and Business Economics, University of Zurich); Erwin Verbeek (Institute for Strategy and Business Economics, University of Zurich); Stephan Nüesch (Institute for Strategy and Business Economics, University of Zurich) |
| Abstract: | There is a well-established literature on separately testing the prediction power of different betting market settings. This paper provides an inter-market comparison of the forecasting accuracy between bookmakers and a major betting exchange. Employing a dataset covering all football matches played in the major leagues of the “Big Five” (England, France, Germany, Italy, Spain) during three seasons (5478 games in total), we find evidence that the betting exchange provides more accurate predictions of the same underlying event than bookmakers. A simple betting strategy of selecting bets for which bookmakers offer lower probabilities(higher odds) than the bet exchange generates above average and, in some cases, even positive returns. |
| Keywords: | Nprediction accuracy, betting, bookmaker, betting exchange, probit regression |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:iso:wpaper:0096&r=ifn |
| By: | Michael D. Bordo; Ronald MacDonald; Michael J. Oliver |
| Abstract: | We provide the first econometric study of foreign exchange market intervention for the UK during the sterling crises from 1964–1967. We use daily data on spot and forward dollar/sterling exchange rates and reserve movements which allows a more precise description of the loss of credibility during four currency crises. Reserve losses are consistent with exchange rate crises. External assistance given to sterling throughout this period shored up the reserves and allowed the sterling peg to be maintained. |
| JEL: | N1 N14 N2 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14657&r=ifn |
| By: | Dimitris K. Christopoulos (Panteion University); Karine Gente (University of Aix-Marseilles); Miguel A. Leon-Ledesma (University of Kent) |
| Abstract: | Empirical evidence suggests that real exchange rates (RER) behave differently in developed and developing countries. We develop an exogenous 2-sector growth model in which RER determination depends on the country's capacity to borrow from international capital markets. The country faces a constraint on capital inflows. With high domestic savings, the country converges to the world per capita income and RER only depends on productivity spread between sectors (Balassa-Samuelson effect). If the constraint is too tight and/or domestic savings too low, RER depends on both net foreign assets (transfer effect) and productivity. We then analyze the empirical implications of the model and find that, in accordance with the theory, RER is mainly driven by productivity and net foreign assets in constrained countries and exclusively by productivity in unconstrained countries. |
| Keywords: | Real exchange rate; capital inflows constraint; overlapping generations |
| JEL: | E39 F32 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:swe:wpaper:2008-17&r=ifn |