nep-ifn New Economics Papers
on International Finance
Issue of 2010‒05‒22
nine papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Brazilian Strategy for Managing the Risk of Foreign Exchange Rate Exposure During a Crisis By Antonio Francisco A. Silva Jr.
  2. Intertemporal Risk-Return Trade-off in Foreign Exchange Rates By Charlotte Christiansen
  3. "Exchange Rate and Industrial Commodity Volatility Transmissions, Asymmetries and Hedging Strategies" By Shawkat M. Hammoudeh; Yuan Yuan; Michael McAleer
  4. Foreign Bond Markets and Financial Market Development: International Perspectives By Batten, Jonathan A.; Hogan, Warren P.; Szilagyi, Peter G.
  5. Do countries falsify economic data strategically? Some evidence that they do. By Gilles Stoltz; Tomasz Michalski
  6. Remittances, Inflation and Exchange Rate Regimes in Small Open Economies By Ball, Christopher; Lopez, Claude; Reyes, Javier; Cruz-Zuniga, Martha
  7. Lessons of the Crisis for Emerging Markets By Eichengreen, Barry
  8. Can the Australian exchange rate still be considered a commodity based currency? By Frost, Mark; Parton, Kevin
  9. Financial globalization and the Russian crisis of 1998 By Pinto, Brian; Ulatov, Sergei

  1. By: Antonio Francisco A. Silva Jr.
    Abstract: Even in a floating foreign exchange rate regime, monetary authorities sometimes intervene in the currency market due to liquidity demand and foreign exchange crises. Typically, central banks intervene using foreign currency trades and/or by changing domestic interest rates. We discuss this framework in the context of an optimal impulse stochastic control model. The control and performance equations include interventions with swap operations in the domestic market, since the Central Bank of Brazil also uses these operations. We evaluate risk management strategies for central bank interventions in case of crisis based on the model. We conclude that the Brazilian risk management strategy of increasing holdings of international reserves and decreasing short foreign exchange rate exposure in domestic public debt after 2004 gave the country more flexibility to manage foreign exchange rate risk in 2008 and to avoid higher interest rates to attract international capital as was necessary in previous crises.
    Date: 2010–04
  2. By: Charlotte Christiansen (CREATES, School of Economics and Management, Aarhus University)
    Abstract: We investigate the intertemporal risk-return trade-off of foreign ex- change (FX) rates for ten currencies quoted against the USD. For each currency, we use three risk measures simultaneously that pertain to that currency; its re- alized volatility, its realized skewness, and its value-at-risk. We apply monthly FX excess returns and monthly FX risk measures calculated from daily ob- servations. We find that there is a positive and signi?cant contemporaneous risk-return trade-off for most currencies. There is no evidence of noncontem- poraneous risk-return trade-off. The risk-return trade-off changes during the recent financial crisis in that it becomes nonexistent for several currencies and negative for others.
    Keywords: Foreign exchange rates, Risk-return trade-off, Realized volatility, Realized skewness, Value-at-risk, Financial crisis
    JEL: F31 G15
    Date: 2010–05–05
  3. By: Shawkat M. Hammoudeh (Lebow College of Business, Drexel University); Yuan Yuan (Lebow College of Business, Drexel University); Michael McAleer (Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute and Department of Economics and Finance, University of Canterbury)
    Abstract: This paper examines the inclusion of the dollar/euro exchange rate together with four important and highly traded commodities - aluminum, copper, gold and oil- in symmetric and asymmetric multivariate GARCH and DCC models. The inclusion of exchange rate increases the significant direct and indirect past shock and volatility effects on future volatility between the commodities in all the models. Model 2, which includes the business cycle industrial metal copper and not aluminum, displays more direct and indirect transmissions than does Model 3, which replaces the business cycle-sensitive copper with the highly energy-intensive aluminum. The asymmetric effects are the greatest in Model 3 because of the high interactions between oil and aluminum. Optimal portfolios should have more euro currency than commodities, and more copper and gold than oil.
    Date: 2010–05
  4. By: Batten, Jonathan A. (Asian Development Bank Institute); Hogan, Warren P. (Asian Development Bank Institute); Szilagyi, Peter G. (Asian Development Bank Institute)
    Abstract: The domestic bond markets of the Asia and Pacific region have grown considerably since the Asian financial crisis of 1997, although they remain undeveloped relative to the region's weight in the world economy. This paper proposes that in order to encourage further development of these markets, regulators should make them more accessible to foreign borrowers. <p>To that end we offer insights into the nature and mechanics of foreign bond issuance by investigating the key characteristics of 3,132 foreign bonds issued in 14 countries (other than the United States) between July 1928 and June 2009. We found that the foreign borrowers that tap domestic markets are overwhelmingly of high credit quality and comprise sovereigns, supranationals, and major financial institutions. There is a preference for simple fixed-rate payment structures, which can then be swapped into the currency and coupon type of choice using currency and interest rate derivatives. On the whole, the long-term viability of foreign bond markets appears linked to the presence of highly liquid foreign exchange and derivatives markets that facilitate risk management and transformation, enabling regulation that facilitates cooperation with market participants, the presence of benchmark issues, and competitive pricing between alternate market segments.
    Keywords: bond markets; financial market development; foreign bonds
    JEL: F34 G18 O57
    Date: 2009–12–08
  5. By: Gilles Stoltz (DMA - Département de Mathématiques et Applications - CNRS : UMR8553 - Ecole Normale Supérieure de Paris - ENS Paris, GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959); Tomasz Michalski (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959)
    Abstract: We find evidence supporting the hypothesis that countries at times misreport their economic data in a strategic manner. Among those suspected are countries with fixed exchange rate regimes, high negative net foreign asset positions or negative current account balances, which corroborates the intuition developed with a simple economic model. We also find that countries with bad institutional quality rankings and those in Africa, Middle East, Eastern Europe and Latin America release economic data of questionable veracity. Our evidence calls for models with public signals to consider strategic misinformation and for establishing independent statistical agencies to assure the delivery of high quality economic data.
    Keywords: capital flows; public information provision; misinformation; Benford's law; transparency
    Date: 2010–04–27
  6. By: Ball, Christopher; Lopez, Claude; Reyes, Javier; Cruz-Zuniga, Martha
    Abstract: Remittances are private monetary transfers. Yet the rapidly growing literature on the subject often ignores the role that exchange rate regimes play in determining the effect remittances have on a recipient economy. This paper uses a theoretical model and panel vector autoregression techniques to explore the role exchange rate regimes play in understanding the effect of remittances. The analysis considers yearly and quarterly data for seven Latin American countries. Our theoretical model predicts that remittances should temporarily increase inflation and generate an increase in the domestic money supply under a fixed regime, but temporarily decrease inflation and generate no change in the money supply under a flexible regime. These differences are borne out in the data. This adds to our understanding of the true effect of remittances on economies and suggests that other results in the literature that do not control for regimes may be biased.
    Keywords: Remittances; exchange rate regimes
    JEL: F22 F41
    Date: 2010–05
  7. By: Eichengreen, Barry (Asian Development Bank Institute)
    Abstract: This paper attempts to draw out the implication of the financial crisis for emerging markets. The most important implications will center on financial markets, where there will be less reliance on portfolio capital flows to finance investment and some deglobalization of banking so that the domain of bank operations more closely coincides with the domain of regulation. By contrast, the implications for other dimensions of globalization and for the structure of the international monetary system will be more limited.
    Keywords: global financial crisis; lessons; exchange rate policy; financial architecture
    JEL: F00 F30
    Date: 2009–12–15
  8. By: Frost, Mark; Parton, Kevin
    Abstract: The Australian dollar is considered a commodity-based currency, with the high level of primary commodity exports in Australiaâs trade balance given as an explanation. Key studies have concluded that Australiaâs terms of trade are a primary driver of the real exchange rate based on a comparative advantage trade model. These studies have been undertaken at an aggregate level where changes in the terms of trade have been assumed as a given. Since the Australian economy was deregulated in the early 1980s, there have been dramatic changes in the structure of the economy. Australiaâs trading activity has grown and now contributes more within the domestic economy. Similarly the structure and contribution of key imports and exports has also evolved. Furthermore the role of the traded goods and services balance and the income balance within the Australian current account balance has also changed, with a significant change occurring in 2003/04. The purpose of this paper is twofold. Firstly it establishes whether the relationship between the Australian exchange rate and terms of trade has changed in response to changes in the role of the traded goods and services sector within the Australian current account balance. Secondly the paper disaggregates the movements in the terms of trade to establish what role its various components have on the wider relationship between the Australian exchange rate and the terms of trade. The paper concludes that despite substantial changes in the structure and nature of the current account balance and the traded goods and services sector, the Australian exchange rate still responds to changes in the terms of trade as if it is still a commodity-based currency and economy.
    Keywords: Demand and Price Analysis, International Relations/Trade,
    Date: 2010
  9. By: Pinto, Brian; Ulatov, Sergei
    Abstract: Russia had more-or-less completed the privatization of its manufacturing and natural resource sectors by the end of 1997. And in February 1998, the annual inflation rate at last dipped into the single digits. Privatization should have helped with stronger micro-foundations for growth. The conquest of inflation should have cemented macroeconomic credibility, lowered real interest rates, and spurred investment. Instead, Russia suffered a massivepublic debt-exchange rate-banking crisis just six months later, in August 1998. In showing how this turn of events unfolded, the authors focus on the interaction among Russia's deteriorating fiscal fundamentals, its weak micro-foundations of growth and financial globalization. They argue that the expectation of a large official bailout in the final 10 weeks before the meltdown played an important role, with Russia's external debt increasing by $16 billion or 8 percent of post-crisis gross domestic product during this time. The lessons and insights extracted from the 1998 Russian crisis are of general applicability, oil and geopolitics notwithstanding. These include a discussion of when financial globalization might actually hurt and a cutoff in market access might actually help; circumstances in which an official bailout could backfire; and why financial engineering tends to fail when fiscal solvency problems are present.
    Keywords: Debt Markets,Emerging Markets,Banks&Banking Reform,Access to Finance,Currencies and Exchange Rates
    Date: 2010–05–01

This nep-ifn issue is ©2010 by Ajay Shah. 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.