Showing papers on "Foreign exchange market published in 1987"

The Empirical Evidence on the Efficiency of Forward and Futures Foreign Exchange Markets

Abstract: Robert Hodrick provides a foundation for developing quantitive measures of risk and expected return in international finance.

The Alchemy of Finance: Reading the Mind of the Market

Abstract: THEORY. The Theory of Reflexivity. Reflexivity in the Stock Market. Reflexivity in the Currency Market. The Credit and Regulatory Cycle. HISTORICAL PERSPECTIVE. The International Debt Problem. The Collective System of Lending. Reagan's Imperial Circle. Evolution of the Banking System. The "Oligopolarization" of America. THE REAL--TIME EXPERIMENT. The Starting Point: August 1985. Phase 1: August 1985--December 1985. Control Period: January 1986--July 1986. Phase 2: July 1986--November 1986. The Conclusion: November 1986. EVALUATION. The Scope for Financial Alchemy: An Evaluation of the Experiment. The Quandary of the Social Sciences. PRESCRIPTION. Free Markets Versus Regulation. Toward an International Central Bank. The Paradox of Systemic Reform. The Crash of '87. Epilogue. Notes.

Consolidation, Fragmentation, and Market Performance

Abstract: This paper studies the impact of market consolidation or fragmentation on its performance, examining four alternative models of exchange: a consolidated clearing house, fragmented clearing houses, a monopoly dealer market, and an interdealer market. The effects of the market mechanism on the expected quantity traded, the price variance faced by individual traders, the quality of market price signals, the expected gains from trade, and the exchange implementation costs are studied.

The London and New York stock exchanges, 1850-1914

Abstract: Part 1: London 1. The London Stock Exchange and the British Securities Market 2. The London Stock Exchange and the International Securities Market I 3. The London Stock Exchange and the International Securities Market II 4. The London Stock Exchange and the Capital Market 5. The London Stock Exchange and the Money Market Part 2: New York 6. The New York Stock Exchange and the Securities Market I 7. The New York Stock Exchange and the Securities Market II 8. The New York Stock Exchange and the US Economy

The Flexible Exchange Rate System: Experience and Alternatives

Abstract: We review ten aspects of how floating exchange rates have worked in practice, contrasted with ten characteristics that the system was supposed to have in theory. We conclude that the foreign exchange market is characterized by high transactions-volume, short-term horizons, and an absence of stabilizing speculation. As a result, the exchange rate at times strays from the equilibrium level dictated by fundamentals, contrary to theory. We then look at ten proposed alternatives to the current system. Four entail decentralized policy rules: new classical macroeconomics, a gold standard, monetarism, and nominal income targeting. Four foresee enhanced international coordination: G-7 "objective indicators," Williamson target zones, McKinnon "world monetarism," and a "Hosomi Fund." Two propose enhanced independence: a "Tobin tax" on transactions, and a dual exchange rate. We conclude that one might build a case for intervention from the observed failure of international financial markets to behave as in the theoretical ideal, but that government intervention in practice is just as likely to fall short of the theoretical ideal

Forward Foreign Exchange Rates, Expected Spot Rates, and Premia: A Signal-Extraction Approach

Abstract: In this paper, we implement a methodology to identify and measure premia in the pricing of forward foreign exchange that involves application of signal-extraction techniques from the engineering literature. Diagnostic tests indicate that these methods are quite successful in capturing the essence of the time-series properties of premium terms. The estimated premium models indicate that premia show a certain degree of persistence over time and that more than half the variance in the forecast error that results from the use of current forward rates as predictors of future spot rates is accounted for by variation in premium terms. The methodology can be applied straightforwardly to the measurement of unobservables in other financial markets. THERE EXISTS A GROWING body of empirical research on premia in the pricing of forward foreign exchange. Conditional on the hypothesis that the foreign exchange market is efficient or rational, the existence of time-varying premia has been documented in the literature by Fama [6], Hansen and Hodrick [10, 11], Hodrick and Srivastava [15, 16], Hsieh [171, and Korajczyk [20]. Frankel [9] fails to identify such premia, and Domowitz and Hakkio [51 obtain different results for different currencies.

The Distribution of Foreign Exchange Price Changes: Trading Day Effects and Risk Measurement-A Comment

Abstract: IN THEIR 1982 STUDY, MCFARLAND, Pettit, and Sung [16] (MPS) found that consecutive daily foreign exchange rates conform to neither a normal nor a nonnormal stable process and that day-of-the-week data could be adequately described by a series of different stable distributions.' The authors have also documented a "weekday effect" in the foreign exchange market; Mondays and Wednesdays offered higher average price changes than did Thursdays and Fridays. In a more recent study, Jaffe and Westerfield [9] documented negative Monday returns for the currencies of the U.K., Canada, and Australia. In estimating the parameters of the distribution, MPS have utilized the Fama and Roll [5, 6] method, which assumes a symmetric distribution. Jaffe and Westerfield [9] report only estimates of the sample moments. The sample moments reported in MPS's Table II (part of which is reproduced in Table I here) reveal that most currencies, especially the minor currencies (the Australian dollar, the Spanish peseta, and the Swedish krona), have significant skewness. The results indicate that the asymmetric stable Paretian distribution may be more appropriate for the overall daily returns. This hypothesis is consistent with

Trigger Strategies and Price Dynamics in Equity and Foreign Exchange Markets

Abstract: Trigger strategist-s may be defined as act-ors in asset markets who buy or sell when the price reaches a predetermined level ; t-hey include participants in portfolio insurance schemes in equity markets and central banks who intervene to defend an exchange rate target zone. This paper presents an approach to modeling the effects of trigger strategists, with emphasis on how target zones affect market expectations. It is shown that a commitment to defend a target zone will generate stabilizing expectations within the band, which may generate a "target zone honeymoon" . an extended period in which the announcement of a target. zone stabilizes exchange rates without any need for action on the part of authorities. However, an imperfectly credible target zone is vulnerable to crises in which the market tests the authorities' resolve.

Offshore Commodity Hedging under Floating Exchange Rates

Abstract: Exchange rate uncertainty can have significant effects on the optimal hedging behavior of offshore commodity traders. In this paper, the standard commodity hedging framework is extended first to incorporate exchange rate uncertainty and second, to forward cover transactions in the foreign exchange market. The implications of exchange rate movements and forward cover decisions for offshore commodity hedgers are illustrated using data relevant to hedging Australian export wheat on the Chicago Board of Trade.

Hedging Foreign Exchange Risk Using Forward Foreign Exchange Markets: An Extension

Abstract: This study investigates minimum risk-hedging ratios and the hedging effectiveness of forward foreign exchange markets for the British pound and the German mark during the period January 4, 1982—April 30, 1984. These currencies are selected because of their importance in foreign exchange markets and their use as international currencies. Evidence is strong that the presence of autocorrelation not only overstates optimal hedge ratios but also overstates hedging effectiveness for these two currencies. The lower optimal hedging ratios found in this study than in earlier works is thus largely attributed to the adjustment for autocorrelation.

Exchange Rate Policy Reconsidered

Abstract: The Bretton Woods Conference of 1944 which fixed exchange rates for over twenty-five years is often cited as a model of economic cooperation among countries. Yet over fifteen years have elapsed since the breakdown of the Bretton Woods System without any serious efforts to restore fixed exchange rates among the currencies of the major industrial countries. This paper considers why governments may have refrained from "reforming" the exchange rate system. The first section of the paper examines the principal problem which exchange rate policy is designed to address, exchange rate variability. The paper distinguishes between the short run volatility of exchange rates, which firms can hedge against in the financial markets, and longer term swings in real exchange rates, which can lead to costly resource reallocation. The paper reviews evidence concerning the effectiveness of exchange market intervention, evidence which suggests that intervention may not be effective unless it is monetized. The paper goes on to analyze arguments concerning fixed exchange rates, and to assess the experience of two fixed rate systems, Bretton Woods and the European Monetary System. Finally, the paper examines the target zone system which has been proposed as an alternative to freely floating and fixed exchange rates.

Options on Foreign Exchange and Exchange Rate Expectations

Abstract: This paper tests alternative assumptions concerning the time series behavior of foreign exchange rates. Data for about 20,000 individual trades on foreign exchange options for dollar exchange rates against six major currencies carried out from February 1983 to June 1985 are analyzed. The tests carried out suggest that, judging from the predictions of a model of options prices based on the assumption that exchange rates follow a diffusion process, market participants paid too high a price for call options that would have been profitable only if the dollar depreciated substantially within a short time period. An alternative model which allows for discrete jumps in exchange rates is found to be more consistent with the data.

Principles of International Finance

Abstract: Principles of International Finance, first published in 1988, provides a comprehensive introduction to international finance which is rapidly becoming an increasingly important branch of international economics The book is structured so that it can easily be adopted as a complete one-semester course in international finance and is divided into the four major divisions of international finance: The Foreign Exchange Market and the Balance of Payments; Exchange Rate Systems; Equilibrium and the Adjustment Process and The Post-War International Financial System This book is designed for economics and business undergraduates studying international finance for the first time It is non-mathematical and presumes no more than a general background in macroeconomics

Risk, Uncertainty and Exchange Rates

Abstract: This paper explores a new direction for empirical models of exchange rate determination. The motivation arises from two well documented facts, the failure of log-linear empirical exchange rate models of the 1970's and the variability of risk premiums in the forward market. Rational maximizing models of economic behavior imply that changes in the conditional variances of exogenous processes, such as future monetary policies, future government spending, and future rates of income growth, can have a significant effect on risk premiums in the foreign exchange market and can induce conditional volatility of spot exchange rates. I examine theoretically how changes in these exogenous conditional variances affect the level of the current exchange rate, and I attempt to quantify the extent that this channel explains exchange rate volatility using autoregressive conditional heteroscedastic models.

The Performance of Exchange Rate Forecasts

Abstract: Since the floating of the Australian dollar the forecasting of exchange rate movements has become more difficult and received much more attention. As a result, some participants in the foreign exchange market have, on a number of occasions, come under criticism for their inability to predict exchange rate movements. This article seeks to evaluate these criticisms through an examination of exchange rate forecasts made by market participants (as published in the Australian Financial Review from March 1985 to December 1985). The accuracy of the $A/US$ forecasts is compared with that of forecasts generated from a number of simple forecasting rules as well as forecasts of the US$/Yen exchange rate. In general, the simple forecasting rules provide superior forecasts to those provided by the individual market participants. However, under some criteria, the mean of the individual participants' forecasts may be preferred to these simple forecasting rules. Further, the comparison of the US$/Yen forecasts with the $A/US$ forecasts shows the former to be generally more accurate.

Do the New Exchange Rate Indexes Offer Better Answers to Old Questions

Abstract: HE persistent U.S. trade and current account deficits appear somewhat paradoxical in light of the dramatic decline of the dollar’s foreign exchange value against the currencies of industrialized countries since early 1985. Some analysts have argued that the dollar’s decline has been overstated. The traditional dollar exchange rate indexes, which include primarily industrial countries’ currencies, have been criticized as too narrow to reflect the movement of the dollar accurately. In response to this argument, new, more inclusive aggregate exchange rate measures have been developed.’ The new broader indexes are alleged to be better measures of the dollar’s foreign exchange value and hence, they should better explain U.S. trade flows.

Fixed Versus Flexible Exchange Rates

Abstract: The problem of the best exchange-rate regime (fixed or flexible exchange rates) was the subject of a heated debate in the fifties and sixties, which — among other things — also produced a series of proposals for intermediate or limited-flexibility regimes. It was a debate based mainly on theoretical arguments, because — as the prevailing regime at that time was the Bretton Woods adjustable peg (see Sect. 10.5) — the effects of a generalized system of flexible exchange rates could not be observed. Nor was the empirical evidence drawn from other historical periods of much help, given the profound economic changes occurring in those years.

Exchange controls and exchange rate policy in the South African economy

Abstract: Because South Africa's balance of payments are vulnerable to changes in the gold price and to political crises, foreign exchange control and exchange rate policy is of crucial importance. The first section of this paper analyses the structure of the balance ofpayments and outlines the adjustments that are required to overcome shocks to both the current and capital accounts. The second section analyses recent exchange rate policy and argues that the policy preference for undervalued exchange rates has the effect of benejitting profits at the expense of wages. The third section looks at exchange control policy and the liberalisation of capital flows in the 1980s. Declining rates of profit and political uncertainty made it increasingly attractive for South African companies and individuals to invest abroad resulting in pressure for exchange control relaxation. Because access to international financial markets is uncertain, liberalisation does not appear to be appropriate for a country subject to volatile fli...

Peso Problems, Bubbles, and Risk in the Empirical Assessment of Exchange-Rate Behavior

Abstract: One of the most puzzling aspects of the post-1973 floating exchange rate system has been the apparently inefficient predictive performance of forward exchange rates. This paper explores some aspects of each of three leading explanations of forward-rate behavior. The paper first develops a simple rational-expectations model of the "peso problem" that generates some key empirical regularities of the foreign exchange market: seemingly predictable and conditionally heteroskedastic forward forecast errors, along with possible directional misprediction by the forward premium. The implications of bubbles for tests of forward-rate predictive efficiency are discussed next. It is argued that the existence of bubbles is extremely difficult (if not impossible) to establish empirically. Even though some types of bubble would distort standard tests on the relation between spot and forward exchange rates, it seems unlikely that there bubbles have been an important factor. Finally, the paper examines foreign-exchange asset pricing under risk aversion and suggests that a convincing account of forward-rate behavior should also help explain the results found in testing other asset-pricing theories, such as the expectations theory of the interest-rate term structure.

Central Bank Exchange Rate Policy

Abstract: Interest in central bank exchange rate policy has been stimulated by two questions which have arisen in the context of experience with managed or floating exchange rates since the end of the international fixed parity system in the spring of 1973. The first and broader question is what determines exchange rates when they are managed or floating, including the role of central banks and monetary policy in such determination. The second, narrower, question is: To what extent discretionary exchange rate policy gives national monetary authorities a policy instrument additional to the instruments employed in implementing control over domestic interest rates or money stocks. This second issue involves the distinction between sterilised and non-sterilised exchange market intervention and the effectiveness of each in influencing exchange rates. Central banks and finance ministries have recently completed a co-operative investigation of this second issue and have published their findings in a ‘Report of the Working Group on Exchange Market Intervention’ (March 1983).1

The Singapore dollar: tests of the efficient markets hypothesis and the role of ‘news’

Abstract: In this paper the efficient markets hypothesis (EMH) is tested for the Singapore dollar over the period from January 1978 to March 1983. The tests are conducted using the relationship between the spot foreign exchange rate and the corresponding lagged forward foreign exchange rate. The tests consist of an unbiasedness test, an error orthogonality test and a test of the impact of ‘news’ in the Singapore foreign exchange market. The results indicate a certain degree of independence in the implementation of monetary policy for the Singapore monetary authority.