nep-ifn New Economics Papers
on International Finance
Issue of 2009‒07‒17
seven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Exchange rates dependence: what drives it? By Sigridur Benediktsdottir; Chiara Scotti
  2. The impact of macroeconomic announcements on real time foreign exchange rates in emerging markets By Fang Cai; Hyunsoo Joo; Zhiwei Zhang
  4. Bivariate Causality between Exchange Rates and Stock Prices on Major Asian Countries By Hooi-Hooi Lean; Marwan Halim
  5. From turmoil to crisis: dislocations in the FX swap market before and after the failure of Lehman Brothers By Naohiko Baba; Frank Packer
  6. Liquidity, Risk Appetite and Exchange Rate Movements During the Financial Crisis of 2007-2009 By Cho-Hoi Hui; Hans Genberg; Tsz-Kin Chung
  7. Hong Kong's Financial Market Interactions with the US and Mainland China in Crisis and Tranquil Times By Dong He; Zhiwei Zhang; Honglin Wang

  1. By: Sigridur Benediktsdottir; Chiara Scotti
    Abstract: Exchange rate movements are difficult to predict but there appear to be discernible patterns in how currencies jointly appreciate or depreciate against the dollar. In this paper, we study the dependence structure of a number of exchange rate pairs against the dollar. We employ a conditional copula approach to recover the joint distributions for pairs of exchange rates and study both the correlation and the upper and lower tail dependence of these distributions. We analyze changes in dependence measures over time, and we investigate whether these measures are affected by the business cycle or interest rate differentials. Our results show that dependencies are indeed time-varying. We find that foreign and U.S. recessions affect the joint dependence structure and that currencies with higher interest rate differentials tend to move less closely together, not only on average (correlation), but also when extreme events occur (tails).
    Date: 2009
  2. By: Fang Cai; Hyunsoo Joo; Zhiwei Zhang
    Abstract: This paper utilizes a unique high-frequency database to measure how exchange rates in nine emerging markets react to macroeconomic news in the U.S. and domestic economies from 2000 to 2006. We find that major U.S. macroeconomic news have a strong impact on the returns and volatilities of emerging market exchange rates, but many domestic news do not. Emerging market currencies have become more sensitive to U.S. news in recent years. We also find that market sentiment could sway the impact of news on these currencies systematically, as good (bad) news seems to matter more when optimism (pessimism) prevails. Market uncertainty also interacts with macroeconomic news in a statistically significant way, but its role varies across currencies and news.
    Date: 2009
  3. By: Heng Chen; Dietrich K. Fausten; Wing-Keung Wong
    Abstract: One possible consequence of the establishment of the Euro is a challenge to the hegemony of the US dollar as the predominant international currency. No other currency has been able to rival the international role of the national currency of the US since World War II. The fact that the unipolar international monetary system can be unstable in the presence of large shocks opens a window of opportunity for the Euro to promote systemic stability. The present study pursues this conjecture by, first, exploring with cointegration and ECM techniques the interdependence between the dynamics of the Dollar/Euro exchange rate and economic fundamentals in the context of a monetary exchange rate model. Identification of the key determinants of the value of the Euro informs our analysis of the policy stance of the European Central Bank regarding the long-run global role of the Euro. Secondly, we explore whether the opportunity for a prominent systemic role of the Euro has been realized by examining the impact of the Euro on the global financial market.
    Keywords: Euro, Exchange rate, Monetary model, Cointegration
    JEL: F15 G14 P34
    Date: 2009–06
  4. By: Hooi-Hooi Lean; Marwan Halim
    Abstract: This paper studies the cointegration and the bivariate causality relationship between exchange rates and stock prices on the seven Asian countries badly hit by the Asian Financial Crisis. Our empirical results show that, before the 1997 Asian Financial Crisis, all countries, except the Philippines and Malaysia, experience no evidence of Granger causality between the exchange rates and the stock prices. However, the causality but not the cointegration between the capital and financial markets appear to become strong during the Asian Financial Crisis period. Surprisingly, after the 911-terrorist-attack, the causality relationship between the two markets returns to normal as in the pre-Asian-crisis period and the cointegration relationship weakens between exchange rates and stock prices. Thus, we conclude that (1) Asian Financial Crisis has a bigger and more direct impact on the causality relationship between stock prices and currency exchanges in Asian markets and the 911-terrorist-attack basically has no impact on the causality relationship between the two markets; and (2) the financial and capital markets have become more mature and efficient after the crisis.
    Keywords: Asian Financial Crisis, 911-Terrorist-Attack, Dynamic Linkages, Cointegration, Bivariate Causality
    JEL: G15
    Date: 2009–05
  5. By: Naohiko Baba; Frank Packer
    Abstract: This paper investigates dislocations in the foreign exchange (FX) swap market between the US dollar and three major European currencies. After the failure of Lehman Brothers in September 2008, deviations from covered interest parity (CIP) were negatively associated with the creditworthiness of US financial institutions (as well as that of European institutions), consistent with the deepening of a dollar liquidity problem into a global phenomenon. US dollar term funding auctions by the ECB, SNB, and BoE, as well as the US Federal Reserve commitment to provide unlimited dollar swap lines are found to have ameliorated the FX swap market dislocations.
    Keywords: FX swap, Covered interest parity, Financial market turmoil, Counterparty risk, US dollar swap lines, Term auction facility, Central bank cooperation, Lehman bankruptcy
    Date: 2009–07
  6. By: Cho-Hoi Hui (Research Department, Hong Kong Monetary Authority); Hans Genberg (Research Department, Hong Kong Monetary Authority); Tsz-Kin Chung (Research Department, Hong Kong Monetary Authority)
    Abstract: Given the deleveraging process in the banking sector, banks were reluctant to lend funds in the interbank market because of uncertainty about their own future need for funds during the financial crisis of 2007 - 2009. Aggregate liquidity then declined. This paper investigates the impact of the market-wide liquidity risk and carry-trade incentives on exchange rate movements. The results suggest that liquidity risk measured by the spread between LIBOR and the overnight index swap rate was a significant factor affecting the exchange-rate movements of the euro, British pound and Swiss franc, while carry trades were important for the Japanese yen, Australian dollar and New Zealand dollar.
    Keywords: Sub-prime crisis; carry trades; liquidity; leverage
    JEL: F31 F32 F33
    Date: 2009–06
  7. By: Dong He (Research Department, Hong Kong Monetary Authority); Zhiwei Zhang (Research Department, Hong Kong Monetary Authority); Honglin Wang (Research Department, Hong Kong Monetary Authority)
    Abstract: This paper studies how financial markets in the US and Mainland China affected equity, money and foreign exchange markets in Hong Kong on daily basis during the current financial crisis, and how these financial linkages have changed compared with the experience in 2001. In the equity markets, the influence of the Mainland on Hong Kong has increased substantially in the current financial crisis, but it is still less important than that of the US. In the money market, correlation between HIBOR and LIBOR has picked up from the low levels observed during the tranquil period before the crisis, to almost the same level of correlation as observed during the IT bubble burst. In the foreign exchange market, the daily movements of the Hong Kong dollar/US dollar exchange rate have been rather small and mainly influenced by the short-term interest rates. Fund flows in different directions might have neutralised the impact of other markets on the foreign exchange market. A broad interpretation of these findings is that Hong Kong financial markets appear to be more aligned with the US markets in turbulent times, but relatively more integrated with the Mainland markets during the tranquil periods.
    Keywords: Financial markets interactions, Financial crisis
    JEL: E44 F36 C22
    Date: 2009–06

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