nep-ifn New Economics Papers
on International Finance
Issue of 2010‒03‒20
eight papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Recovering Risk-Neutral Densities from Exchange Rate Options: Evidence in Turkey (Kur Opsiyonlarindan Riske Duyarsiz Yogunluk Fonksiyonu Cikarimi: Turkiye Ornegi) By Halil Ýbrahim Aydin; Ahmet Degerli; Pinar Ozlu
  2. Risk-Premia, Carry-Trade Dynamics, and Economic Value of Currency Speculation By Wagner, Christian
  3. Aggregation, Heterogeneous Autoregression and Volatility of Daily International Tourist Arrivals and Exchange Rates By Chang, C-L.; McAleer, M.J.
  4. Robust International Portfolio Management By Raquel J. Fonseca; Wolfram Wiesemann; Berc Rustem
  5. Currency crises: The case of Hungary (2008-2009) By Dimitrios Dapontas
  6. Bond currency denomination and the yen carry trade By Christopher A. Candelaria; Jose A. Lopez; Mark M. Spiegel
  7. Sovereign Credit Ratings, Transparency and International Portfolio Flows By Gande, Amar; Parsley, David
  8. Estimated Macroeconomic Effects of a Chinese Yuan Appreciation By Ray C. Fair

  1. By: Halil Ýbrahim Aydin; Ahmet Degerli; Pinar Ozlu
    Date: 2010
  2. By: Wagner, Christian
    Abstract: In this paper, we derive the dynamics and assess the economic value of currency speculation by formalizing the concept of a trader inaction range. We show that exchange rate returns comprise a time-varying risk-premium and that uncovered interest parity (UIP) holds in a speculative sense. The often-cited `forward bias puzzle' originates from the omission of the risk-premium in standard UIP tests. Consistent with its popularity among market professionals, the carry-trade strategy can be rationalized as it systematically collects risk-premia and generates economic value when applied in multi-currency portfolios.
    Keywords: Exchange rates; Uncovered interest parity; Risk-premia; Carry-trade; Economic value
    JEL: F31
    Date: 2009–08
  3. By: Chang, C-L.; McAleer, M.J. (Erasmus Econometric Institute)
    Abstract: Tourism is a major source of service receipts for many countries, including Taiwan. The two leading tourism countries for Taiwan, comprising a high proportion of world tourist arrivals to Taiwan, are Japan and USA, which are sources of short and long haul tourism, respectively. As it is well known that a strong domestic currency can have adverse effects on international tourist arrivals, daily data from 1 January 1990 to 31 December 2008 are used to model the world price and US$ / New Taiwan $ and Yen/ New Taiwan $ exchange rates, and tourist arrivals from the world, USA and Japan to Taiwan, as well as their associated volatility. The sample period includes the Asian economic and financial crises in 1997, and part of the global financial crisis of 2008-09. Inclusion of the exchange rate allows approximate daily price effects on world, US and Japanese tourist arrivals to Taiwan to be captured. The Heterogeneous Autoregressive (HAR) model does not reproduce the theoretical hyperbolic decay rates associated with fractionally integrated (or long memory) time series models, but it can nevertheless approximate quite accurately and parsimoniously the slowly decaying correlations associated with such models. The HAR model is used to approximate long memory properties in daily exchange rates and international tourist arrivals, to test whether alternative short and long run estimates of conditional volatility are sensitive to the approximate long memory in the conditional mean, to examine asymmetry and leverage in volatility, and to examine the effects of temporal and spatial aggregation. The empirical results show that the conditional volatility estimates are not sensitive to the approximate long memory nature of the conditional mean specifications. The QMLE for the GARCH(1,1), GJR(1,1) and EGARCH(1,1) models for world, US and Japanese tourist arrivals to Taiwan, and the world price and US$ / New Taiwan $ and Yen/ New Taiwan $ exchange rates, are statistically adequate and have sensible interpretations. Asymmetry (though not leverage) is found for several alternative HAR models for the world, US and Japanese tourist arrivals to Taiwan. For policy purposes, these empirical results suggest that an arbitrary choice of data frequency or spatial aggregation will not lead to robust findings as they are generally not independent of the level of aggregation used.
    Keywords: international tourist arrivals;exchange rates;global financial crisis;GARCH;GJR;EGARCH;HAR;approximate long memory;temporal aggregation;spatial aggregation;daily effects;weekly effects;asymmetry, leverage;G32
    Date: 2010–03–02
  4. By: Raquel J. Fonseca; Wolfram Wiesemann; Berc Rustem
    Abstract: We present an international portfolio optimization model where we take into account the two different sources of return of an international asset: the local returns denominated in the local currency, and the returns on the foreign exchange rates. The explicit consideration of the returns on exchange rates introduces non-linearities in the model, both in the objective function (return maximization) and in the triangulation requirement of the foreign exchange rates. The uncertainty associated with both types of returns is incorporated directly in the model by the use of robust optimization techniques. We show that, by using appropriate assumptions regarding the formulation of the uncertainty sets, the proposed model has a semidefinite programming formulation and can be solved efficiently. While robust optimization provides a guaranteed minimum return inside the uncertainty set considered, we also discuss an extension of our formulation with additional guarantees through trading in quanto options for the foreign assets and in equity options for the domestic assets.
    Keywords: robust optimization, international portfolio optimization, quanto options, semidefinite programming
    Date: 2010–02–09
  5. By: Dimitrios Dapontas
    Abstract: This work is explaining the currency crisis in Hungary lasted from October 2008 to March 2009.The Forward spread of the country’s currency (Forint) is selected as a dependent variable along with a set of independent macroeconomic and social variables.
    Keywords: currency crisis, developing economies, structural reforms.
    Date: 2010
  6. By: Christopher A. Candelaria; Jose A. Lopez; Mark M. Spiegel
    Abstract: We examine the determinants of issuance of yen-denominated international bonds over the period from 1990 through 2010. This period was marked by low Japanese interest rates that led some investors to pursue "carry trades," which consisted of funding investments in higher interest rate currencies with low interest rate, yen-denominated obligations. In principle, bond issuers that have exibility in their funding currency could also conduct a carry-trade strategy by funding in yen during this low interest rate period. We examine the characteristics of firms who appeared to have adopted this strategy using a data set containing almost 80,000 international bond issues. Our results suggest that there was a movement towards issuing in yen in the international bond markets starting in 2003, but this appears to have ended with the outbreak of the global financial crisis in 2007. Furthermore, the breakdown of carry-trade conditions in 2007 corresponds to a resurgence in the ability of economic fundamentals, such as the volume of trade with Japan, to explain the decision to issue international bonds denominated in yen.
    Keywords: Bond market ; Yen, Japanese
    Date: 2010
  7. By: Gande, Amar; Parsley, David
    Abstract: We examine the response of equity mutual fund flows to sovereign rating changes in a wide sample of countries during the crisis prone years from 1996-2002. We find that Sovereign downgrades are strongly associated with outflows of capital from the downgraded country while improvements in a country’s sovereign rating are not associated with discernable changes in equity flows. Transparency, as proxied by the level of corruption matters: more transparent (i.e., less corrupt) countries experience smaller outflows around downgrades. Moreover, abnormal flows around downgrades are consistent with a ‘flight to quality’ phenomenon. That is, less corrupt non-event countries are net recipients of capital inflows, and these inflows increase with the severity of the cumulative downgrade abroad. The results remain after controlling for country size, legal traditions, market liquidity, crisis versus non-crisis periods. Taken together, the results suggest that increasing transparency could mitigate some of the perceived negative effects often associated with global capital flows.
    Keywords: Asymmetric effects; portfolio flows; sovereign rating agencies
    JEL: G14 G15 F36
    Date: 2010–02
  8. By: Ray C. Fair (Cowles Foundation, Yale University)
    Abstract: This paper uses a multicountry macroeconometric model to estimate the macroeconomic effects of a Chinese yuan appreciation. The estimated effects on U.S. output and employment are modest. Positive effects on U.S. output from a decrease in imports from China are offset by negative effects on U.S. output from increased inflation and from a decrease in U.S. exports to China because of a Chinese contraction.
    Keywords: Yuan appreciation
    JEL: E17
    Date: 2010–03

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