nep-ifn New Economics Papers
on International Finance
Issue of 2014‒05‒09
two papers chosen by
Vimal Balasubramaniam
University of Oxford

  1. Model-Free Evaluation of Directional Predictability in Foreign Exchange Markets By Jaehun Chung; Yongmiao Hong
  2. Capital account liberalization and exchange rate flexibility: Scenarios for the Moroccan case By Ezzahid, Elhadj; Maouhoub, Brahim

  1. By: Jaehun Chung; Yongmiao Hong
    Abstract: We examine directional predictability in foreign exchange markets using a model-free statistical evaluation procedure. Based on a sample of foreign exchange spot rates and futures prices in six major currencies, we document strong evidence that the directions of foreign exchange returns are predictable not only by the past history of foreign exchange returns, but also the past history of interest rate differentials, suggesting that the latter can be a useful predictor of the directions of future foreign exchange rates. This evidence becomes stronger when the direction of larger changes is considered. We further document that despite the weak conditional mean dynamics of foreign exchange returns, directional predictability can be explained by strong dependence derived from higher-order conditional moments such as the volatility, skewness and kurtosis of past foreign exchange returns. Moreover, the conditional mean dynamics of interest rate differentials contributes significantly to directional predictability. We also examine the co-movements between two foreign exchange rates, particularly the co-movements of joint large changes. There exists strong evidence that the directions of joint changes are predictable using past foreign exchange returns and interest rate differentials. Furthermore, both individual currency returns and interest rate differentials are also useful in predicting the directions of joint changes. Several sources can explain this directional predictability of joint changes, including the level and volatility of underlying currency returns.
    Date: 2013–10–14
  2. By: Ezzahid, Elhadj; Maouhoub, Brahim
    Abstract: This paper explores the links between gradual capital account liberalization and the exchange rate regime in Morocco where the process of economic and financial openness is relatively advanced. Using a game theory model with two economic agents, that are monetary authorities and domestic firms, we explore the best choice concerning the exchange rate regime for Morocco in a context characterised by increasing openness especially of capital account. The results show that welfare under a flexible exchange rate regime is higher compared to welfare under a fixed exchange rate regime. The analysis also shows that the flexible exchange rate will improve competitiveness. However, flexibility will undermine price stability. --
    Keywords: capital account liberalization,exchange rate regime,competitiveness,inflation,Morocco
    JEL: F31 F32
    Date: 2014

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