Topic
Currency
About: Currency is a research topic. Over the lifetime, 26697 publications have been published within this topic receiving 485370 citations. The topic is also known as: monetary unit & unit of money.
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TL;DR: In this paper, the authors present a simple model that can account for the main features of recent financial crises in emerging markets, where the international illiquidity of the domestic financial system is at the center of the problem.
Abstract: We present a simple model that can account for the main features of recent financial crises in emerging markets. The international illiquidity of the domestic financial system is at the center of the problem. Illiquid banks are a necessary and a sufficient condition for financial crises to occur. Domestic financial liberalization and capital flows from abroad (especially if short term) can aggravate the illiquidity of banks and increase their vulnerability to exogenous shocks and shifts in expectations. A bank collapse multiplies the harmful effects of an initial shock, as a credit squeeze and costly liquidation of investment projects cause real output drops and collapses in asset prices. Under fixed exchange rates, a run on banks becomes a run on the currency if the Central Bank attempts to act as a lender of last resort.
266 citations
TL;DR: A bona fide currency functions as a medium of exchange, a store of value, and a unit of account, but Bitcoin largely fails to satisfy these criteria as discussed by the authors, and has achieved only scant consumer transaction volume, with an average well below one daily transaction for the few merchants who accept it.
Abstract: A bona fide currency functions as a medium of exchange, a store of value, and a unit of account, but bitcoin largely fails to satisfy these criteria. Bitcoin has achieved only scant consumer transaction volume, with an average well below one daily transaction for the few merchants who accept it. Its volatility is greatly higher than the volatilities of widely used currencies, imposing large short-term risk upon users. Bitcoin’s daily exchange rates exhibit virtually zero correlation with widely used currencies and with gold, making bitcoin useless for risk management and exceedingly difficult for its owners to hedge. Bitcoin prices of consumer goods require many decimal places with leading zeros, which is disconcerting to retail market participants. Bitcoin faces daily hacking and theft risks, lacks access to a banking system with deposit insurance, and is not used to denominate consumer credit or loan contracts. Bitcoin appears to behave more like a speculative investment than a currency.
266 citations
TL;DR: In this article, the aggregate stock market impact of local currency and foreign currency sovereign rating changes was investigated and it was shown that only rating downgrades have a wealth impact on market returns.
Abstract: This study investigates the aggregate stock market impact of local currency and foreign currency sovereign rating changes. Consistent with evidence pertaining to company credit rating changes, we report that only rating downgrades have a wealth impact on market returns. Decreases in local currency ratings appear to impart no information to the market whereas foreign currency rating downgrades are associated with significant wealth effects. Interestingly, of the four credit rating agencies examined, only Standard & Poors and Fitch rating downgrades result in significant market falls. These results are robust to differences in the currency denomination or interval of returns. Finally, we can find no evidence that emerging markets are particularly sensitive to rating changes or that markets react more severely to multiple rating changes. These findings should be of great interest to all investor groups (including managed investment funds) since there are important implications here regarding international asset allocation.
266 citations
TL;DR: In this paper, the authors compute returns to crash-hedged portfolios and demonstrate that the high returns to carry trades are not due to peso problems, but due to violations of uncovered interest rate parity in G10 currencies.
Abstract: Currency carry trades exploiting violations of uncovered interest rate parity in G10 currencies deliver significant excess returns with annualized Sharpe equal to or greater than those of equity market factors (1990-2012). Using data on out-of-the-money foreign exchange options, I compute returns to crash-hedged portfolios and demonstrate that the high returns to carry trades are not due to peso problems. A comparison of the returns to hedged and unhedged trades indicates crash risk premia account for at most one-third of the excess return to currency carry trades.
266 citations
TL;DR: In this article, the authors build a model of currency crises where a single large investor and a continuum of small investors independently decide whether to attack a currency based on their private information about fundamentals.
Abstract: Do large investors increase the vulnerability of a country to speculative attacks in the foreign exchange markets? To address this issue, we build a model of currency crises where a single large investor and a continuum of small investors independently decide whether to attack a currency based on their private information about fundamentals. Even abstracting from signaling, the presence of the large investor does make all other traders more aggressive in their selling. Relative to the case in which there is no large investors, small investors attach the currency when fundamentals are stronger. Yet, the difference can be small, or null, depending on the relative precision of private information of the small and large investors. Adding signaling makes the influence of the large trader on small traders behaviour much stronger.
263 citations