Showing papers on "Foreign exchange market published in 1988"
Posted Content•
TL;DR: In this paper, the authors define and test a form of market efficiency called market dexterity which requires that asset prices adjust instantaneously and completely in response to new information, and examine the impact of news in one market on the time path of volatility in other markets.
Abstract: This paper defines and tests a form of market efficiency called market dexterity which requires that asset prices adjust instantaneously and completely in response to new information. Examining the behavior of the yen/dollar exchange rate while each of the major markets are open it is possible to test for informational effects from one market to the next. Assuming that news has only country specific autocorrelation such as a heat wave. any intra-daily volatility spillovers (meteor showers) become evidence against market dexterity. ARCII models are employed to model heteroskedasticity across intra-daily market segments. Statistical tests lead to the rejection of the heat wave and therefore the market dexterity hypothesis. Using a volatility type of vector autoregression we examine the impact of news in one market on the time path of volatility in other markets.
811 citations
TL;DR: In this article, the empirical distribution of returns in the stock market and in the foreign exchange market is compared. And the results are much more significant in theforeign exchange market than in the US stock market, which suggests differences in the structure of these markets.
Abstract: exchange rates exhibit systematic discontinuities, even after allowingfor conditional heteroskedasticity in the diffusion process. The results are much more significant in theforeign exchange market than in the stock market, which suggests differences in the structure of these markets. Finally, this jump component is shown to explain some of the empirically observed mispricings in the currency options market. The objective of this article is to analyze and compare the empirical distribution of returns in the stock market and in the foreign exchange market. There are a number of reasons why a better understanding of the stochastic processes driving prices in these markets would be useful. Many financial models rely heavily on the assumption of a particular stochastic process, while relatively little attention is paid to the empirical fit of the postulated distribution. As a result, models like option pricing models are applied indiscriminately to various markets such as the stock market and the foreign exchange market when the underlying processes may be fundamentally different. The foreign exchange market, for instance, is characterized by active exchange rate man
685 citations
TL;DR: In this article, the authors investigate pricing to market when the exchange rate changes in cases where firms' future demands depend on their current market shares and show that profit maximizing foreign firms may either raise or lower their domestic currency export prices when the domestic exchange rate appreciates temporarily.
Abstract: We investigate pricing to market when the exchange rate changes in cases where firms' future demands depend on their current market shares. We show that i) profit maximizing foreign firms may either raise or lower their domestic currency export prices when the domestic exchange rate appreciates temporarily (i.e. the "pass-through" from exchange rate changes to import prices may be perverse); ii) current import prices may be more sensitive to the expected future exchange rate than to the current exchange rate; iii) current import prices fall in response to an increase in uncertainty about the future exchange rate. We present evidence that suggests the behavior of expected future exchange rates may provide a clue to the puzzling behavior of U.S. import prices during the 1980s.
620 citations
TL;DR: This paper explored some anomalies in the foreign exchange market and found that longer-term speculation based on fundamentals is strictly limited, and survey data and other evidence suggest that expectations and speculation are based on a variety of models.
Abstract: This paper explores some anomalies in the foreign exchange market. It is hard to find evidence of either short-term overshooting or of longer-term reversion to an equilibrium. The forward exchange rate contains virtually no information on future spot rates. Discussions with practitioners indicate that longer-term speculation based on fundamentals is strictly limited, and survey data and other evidence suggest that expectations and speculation are based on a variety of models. The interplay between speculation based on fundamentals, and on a random walk, or Chartist, approach, influences the outcome. This endorses the prior model of J. A. Frankel and K. A. Froot. Copyright 1988 by The London School of Economics and Political Science.
302 citations
TL;DR: In agriculture, Japan and European countries are determined to insulate their domestic prices of farm products from unsettling international influences, including volatile fluctuations in the yen/dollar or mark/dollar exchange rates as mentioned in this paper.
Abstract: W v ithout a common monetary standard, the remarkable integration of Western European, North American, and the industrialized Asian economies in both commodity trade and financial flows is less efficient, and becoming untenable. Dissatisfaction with wildly fluctuating relative currency values, euphemistically called " floating" or " flexible" exchange rates, is a prime cause of the resurgence in protectionism. In 1986-87, the overvalued yen forced Japanese industrialists to close factories, retire workers, and write off once valuable investments in plant and equipment. This parallels what their American counterparts were forced to do between 1981 and 1985, when the dollar suddenly became overvalued. Similarly, the paring down of the British manufacturing base was precipitated when the pound unexpectedly became a strong petrocurrency in 1979-81. In agriculture, Japan and European countries are determined to insulate their domestic prices of farm products from unsettling international influences, including volatile fluctuations in the yen/dollar or mark/dollar exchange rates. Thus, unless exchange stability is first achieved, the American government's attempt to broaden the General Agreement on Tariffs and Trade to encompass agriculture and services is likely to fail. But what keeps the three major industrial blocs from developing a common monetary standard to prevent exchange-rate fluctuations? Although many people
152 citations
TL;DR: In this paper, the single-beta capital asset pricing model for the pricing of forward foreign exchange contracts from the point of view of a U.S. investor is proposed, and the results show significant time variation for the betas and tests of the over-identifying restrictions are generally favorable to the model.
149 citations
Book•
01 Apr 1988
TL;DR: The case for floating exchange rates was discussed in this paper, where some basic concepts and stylised facts and the case for (and against) floating exchange rate were discussed. But the case was not supported by empirical evidence.
Abstract: 1. Introduction: Some Basic Concepts and Stylised facts and the Case For (and Against) Floating Exchange Rates 2. Purchasing Power Parity and the PPP Puzzle 3. The Economics of the PPP Puzzle 4. The Flexible Price Monetary Model 5. The Sticky Price Monetary Model 6. Empirical Evidence on the Monetary Exchange Rate Model 7. Currency Substitution and Portfolio Balance Models 8. Real Exchange Rate Determination: Theory and Evidence 9. Equilibrium Exchange Rates: Measurement and Misalignment 10. The New Open Economy Macroeconomics and Exchange Rate Behaviour 11. The New Open Economy Macroeconomics: Pricing to Market and Exchange Rate Volatility Redux 12. The Economics of Fixed Exchange Rates, Part 1: Target Zone Models 13. The Economics of Fixed Exchange Rates, Part 2: Speculative Attack Models and Contagion 14. The Market Microstructure Approach to the Foreign Exchange Market 15. Spot and Forward Exchange Rates and the Forward Premium Puzzle
148 citations
Book•
01 Apr 1988
TL;DR: The case for floating exchange rates was discussed in this paper, where some basic concepts and stylised facts and the case for (and against) floating exchange rate were discussed. But the case was not supported by empirical evidence.
Abstract: 1. Introduction: Some Basic Concepts and Stylised facts and the Case For (and Against) Floating Exchange Rates 2. Purchasing Power Parity and the PPP Puzzle 3. The Economics of the PPP Puzzle 4. The Flexible Price Monetary Model 5. The Sticky Price Monetary Model 6. Empirical Evidence on the Monetary Exchange Rate Model 7. Currency Substitution and Portfolio Balance Models 8. Real Exchange Rate Determination: Theory and Evidence 9. Equilibrium Exchange Rates: Measurement and Misalignment 10. The New Open Economy Macroeconomics and Exchange Rate Behaviour 11. The New Open Economy Macroeconomics: Pricing to Market and Exchange Rate Volatility Redux 12. The Economics of Fixed Exchange Rates, Part 1: Target Zone Models 13. The Economics of Fixed Exchange Rates, Part 2: Speculative Attack Models and Contagion 14. The Market Microstructure Approach to the Foreign Exchange Market 15. Spot and Forward Exchange Rates and the Forward Premium Puzzle
115 citations
Book•
01 Jan 1988TL;DR: The authors showed that when multiple rates are a means of taxation, the widened deficit from unification increases inflation and used the experience of Ghana, Nigeria, and Sierra Leone to illustrate the tradeoff between the benefits of unification for resource allocation and its cost for inflation.
Abstract: World Bank and International Monetary Fund (IMF) programs favor unification of official and black market exchange rates on the argument that multiple exchange rates misallocate resources. This article shows that such policy advice sometimes overlooks an important consideration : when multiple rates are a means of taxation, the widened deficit from unification increases inflation. This article uses the experience of Ghana, Nigeria, and Sierra Leone to illustrate the tradeoff between the benefits of unification for resource allocation and its cost for inflation.
106 citations
TL;DR: In this article, the authors take a fresh look at the effectiveness of sterilized intervention in the light of recent experience and conclude that sterilized interventions have played an unimportant role in promoting exchange-rate realignment.
Abstract: Since the September 1985 Plaza Hotel announcement by the Group of Five industrial countries, a substantial realignment of exchange rates has been achieved. At the same time, foreign exchange market intervention, much of it concerted and much of it sterilized, has been undertaken on a scale not seen since the early 1970s This paper takes a fresh look at the effectiveness of sterilized intervention in the light of recent experience. The paper concludes that sterilized intervention, in itself, has played an unimportant role in promoting exchange-rate realignment. Instead, clear shifts in patterns of monetary and fiscal policy appear to have been the main medium-term policy factors determining currency values. Over certain shorter time periods, intervention has influenced exchange markets through a signalling channel; but this signalling effect has been operative only as a result of authorities' frequent readiness to adjust monetary policies promptly to counteract unwelcome exchange-market pressures. The paper makes some progress in formalizing reasons why intervention might enhance the credibility of messages that governments could convey as well through simple verbal announcements.
99 citations
Posted Content•
TL;DR: This article examined whether short-term exchange rate expectations move "too much" by comparing them with long-term expectations and developed a set of nonlinear restrictions linking expectations at different forecast horizons.
Abstract: This paper examines whether short-term exchange rate expectations move "too much" by comparing them with long-term expectations. We develop a set of nonlinear restrictions linking expectations at different forecast horizons. The restrictions impose consistency, a property weaker than rationality. We use ex- change rate survey data to measure expectations and then test whether consistency holds. The data show that a current, positive exchange rate shock leads agents to expect a higher long-run future spot rate when iterating forward their short-term expectations than when thinking directly about the long run. In this sense short-horizon expectations may overreact to current exchange rate changes.
Posted Content•
TL;DR: In this paper, the authors define and test a form of market efficiency called market dexterity which requires that asset prices adjust instantaneously and completely in response to new information, and examine the impact of news in one market on the time path of volatility in other markets.
Abstract: This paper defines and tests a form of market efficiency called market dexterity which requires that asset prices adjust instantaneously and completely in response to new information. Examining the behavior of the yen/dollar exchange rate while each of the major markets are open it is possible to test for informational effects from one market to the next. Assuming that news has only country specific autocorrelation such as a heat wave. any intra-daily volatility spillovers (meteor showers) become evidence against market dexterity. ARCII models are employed to model heteroskedasticity across intra-daily market segments. Statistical tests lead to the rejection of the heat wave and therefore the market dexterity hypothesis. Using a volatility type of vector autoregression we examine the impact of news in one market on the time path of volatility in other markets.
TL;DR: In this paper, the authors show that a portfolio of currency options can be constructed which hedges economic exposure, when the firm has ex post production flexibility, but more elaborate options than those currently available are required to hedge economic risk completely.
Posted Content•
TL;DR: In this paper, the authors take a fresh look at the effectiveness of sterilized intervention in the light of recent experience and conclude that sterilized interventions have played an unimportant role in promoting exchange-rate realignment.
Abstract: Since the September 1985 Plaza Hotel announcement by the Group of Five industrial countries, a substantial realignment of exchange rates has been achieved. At the same time, foreign exchange market intervention, much of it concerted and much of it sterilized, has been undertaken on a scale not seen since the early 1970s This paper takes a fresh look at the effectiveness of sterilized intervention in the light of recent experience. The paper concludes that sterilized intervention, in itself, has played an unimportant role in promoting exchange-rate realignment. Instead, clear shifts in patterns of monetary and fiscal policy appear to have been the main medium-term policy factors determining currency values. Over certain shorter time periods, intervention has influenced exchange markets through a signalling channel; but this signalling effect has been operative only as a result of authorities' frequent readiness to adjust monetary policies promptly to counteract unwelcome exchange-market pressures. The paper makes some progress in formalizing reasons why intervention might enhance the credibility of messages that governments could convey as well through simple verbal announcements.
TL;DR: In this article, a vector autoregression model (VAR) is proposed in order to test uncovered interest parity (UIP) in the foreign exchange market, and the results are compared to the efficiency test with a single equation using the Hansen-Hodrick procedure for the same data set.
Abstract: In this paper, a vector autoregression model (VAR) is proposed in order to test uncovered interest parity (UIP) in the foreign exchange market. Consider a VAR system of the spot exchange rate (yen/dollar), the domestic (US) interest rate and the foreign (Japanese) interest rate, describing the interdependence of the domestic and international financia lmarkets. Uncovered interest parity is stated as a null hypothesis that the current difference between the two interest rates is equal to the difference between the expected future (log of) exchange rate and the (log of) current spot exchange rate. Note that the VAR system will yield the expected future spot exchange rate as a k-step ahead unconditional prediction. Hence, the null hypothesis is stated as nonlinear cross-equational restrictions for the three-equation VAR system. Then UIP is tested by the Wald test between the unrestricted and restricted systems. A test of UIP with a maintained hypothesis of covered interest parity, becomes a hypothesis test of efficiency without risk premium, that is,the forward exchange rate isthe unbiased predictor of the future spot exchange rate, and information is efficiently used in its prediction. Our results are compared to the efficiency test with a single equation using the Hansen-Hodrick procedure for the same data set.
TL;DR: In this article, the authors carried out quantitative tests of the accuracy of a number of UK-based exchange-rate forecasts and concluded that the forward rate tends to outperform the forecast services as far as quantitative accuracy is concerned.
Book•
17 Nov 1988
TL;DR: The evolution of multinational banking the international capital market multinational banking and the foreign exchange market the banking system and industrial development the debt bomb - defused or detonated? the changing nature of corporate banking the return to favour of retail banking the delivery system revolution the impact of regulation and deregulation implications for economic management as mentioned in this paper.
Abstract: The evolution of multinational banking the international capital market multinational banking and the foreign exchange market the banking system and industrial development the debt bomb - defused or detonated? the changing nature of corporate banking the return to favour of retail banking the delivery system revolution the impact of regulation and deregulation implications for economic management.
TL;DR: A general equilibrium approach to international finance and macroeconomics has been developed as mentioned in this paper, which provides useful tools for interpreting evidence and evaluating alternative policy options, including the choice of an exchange rate system, the high variability of exchange rates, the effects of budget deficits, sterilized foreign exchange market intervention, and monetary and fiscal policies.
Abstract: A general equilibrium approach to international finance and macroeconomics has been developed. Recent work associated with this development provides useful tools for interpreting evidence and evaluating alternative policy options. Important issues to which these advances have been applied include the choice of an exchange rate system; the high variability of exchange rates; the effects of budget deficits, sterilized foreign exchange market intervention, and monetary and fiscal policies; the causes and consequences of large and variable current account deficits or surpluses and their connections with exchange rates; and the development of more open and sophisticated international financial markets. Copyright 1988 by Ohio State University Press.
TL;DR: In this paper, the Dornbusch et al. model for the determination of the black market foreign exchange premium is modified and then estimated for 19 countries for various periods during 1970-1979 in which they identified the existence of a black market for foreign exchange.
TL;DR: In this article, the speculative efficiency hypothesis holds in the foreign exchange market since the floating of the Australian dollar in December 1983, but not in the 15-day or 90-day markets.
Abstract: This paper considers whether the speculative efficiency hypothesis holds in the foreign exchange market since the floating of the Australian dollar in December 1983. For the post-float period as a whole, the speculative efficiency hypothesis can be rejected in the 30-day market but not in the 15-day or 90-day markets. Evidence of a structural change in the market in February 1985—the time of the first major depreciation - was also found.
TL;DR: In this article, empirical tests of the ability of foreign exchange market participants to forecast the future value of the Australian dollar for one-and four-week horizons were carried out.
Abstract: This paper undertakes empirical tests of the ability of foreign exchange market participants to forecast the future value of the Australian dollar for one- and four-week horizons. A new set of survey data published in The Australian newspaper is used for this purpose. The accuracy of the forecasts is compared with that of the forecasts given by the random walk model which corresponds to no-change extrapolation. In general, the results indicate that no-change extrapolation is almost as good as the survey forecasts.
TL;DR: In this article, the static mean-variance model can predict movements in risk premia of the same order of magnitude as in the empirical data, but the derivation in this paper contains an error which falsifies our claim.
TL;DR: This paper developed a model in which wage indexation and foreign exchange market intervention can be used simultaneously for policy purposes, and showed that there is a clear separation of function between the two instruments.
Abstract: This paper develops a model in which wage indexation and foreign exchange market intervention can be used simultaneously for policy purposes. With the type of wage indexation used, there is shown to be a clear separation of function between the two instruments. Intervention should be used only to offset demand-side disturbances, while indexation should depend upon both demand and supply disturbances. Copyright 1988 by Ohio State University Press.
TL;DR: The role of exchange rate policy in the conduct of monetary policy in open economies has been discussed in this article and two lessons of general interest may be derived from the monetary policy experiences of Singapore and Hong Kong since the early 1970s.
Abstract: Two lessons of general interest may be derived from the monetary policy experiences of Singapore and Hong Kong since the early 1970s. The first concerns the role of exchange rate policy in the conduct of monetary policy in open economies. The second has to do with the interactions between monetary policy on the one hand and other economic policies (fiscal, incomes, etc.) and economic structures (e.g., the government role in the economy) on the other hand.
01 Sep 1988
TL;DR: In this article, the authors review contemporary practices in commodity, currency and corporate stock trading in the light of Islamic economic framework and suggest bare outlines of the Islamic alternatives in these areas. But they do not discuss the impact of these practices on the real economy.
Abstract: IntroductionThe main objective of this paper is to review contemporary practicesin commodity, currency and corporate stock trading in the light of Islamiceconomic framework and to suggest bare outlines of the Islamic alternativesin these areas. Trade in commodities, currencies and stocks involves forwardand htures contracts. Arbitrage, hedging and speculation are also essentialelements of these markets. We shall try to examine these practices to determinetheir compatibility with the Islamic law. We shall also try to find out theexact point where they deviate from the Islamic framework and suggest somemechanism to perform the same economic function in the Islamic economy.Our main conclusions are summarized below:First, by and large the trade in spot and forward markets iscovered by the Islamic law.Second, futures trading is alien to the Islamic law as it involvestrading without actual transfer of the commodity or stock to thebuyer which is explicitly prohibited by the Prophet (SAAS).Third, speculation by itself is not unlawful in Islam but theIslamic economic framework does not allow professional speculatorsto thrive.Fourth, the Islamic condition of transfer of the commoditystock to the buyer is a mechanism to boost the real sector.Fifth, stability in the foreign exchange market can be achievedby cooperation of the international community. It would necessitateabolition of al riba and scrapping of trade restrictions over bordersbesides accepting money as a medium of exchange only, ratherthan a commodity.Sixth, to discourage negative effects of speculation, informationregarding commodities and corporations needs to be widely andfreely disseminated. No amount of restrictive regulations can ...
01 Jan 1988
TL;DR: In this article, the authors examined the relationship between purchasing power parity, interest rate parity, and the forward exchange rate for predicting the future spot exchange rate in Ireland and the UK.
Abstract: Purchasing power parity, interest rate parity and the question of whether the forward exchange rate is an unbiased predictor of the future spot exchange rate are all important relationships underlying exchange rate theory. The objective of this paper is to empirically evaluate the usefulness of these relationships in forecasting Ireland's sterling exchange rate and in doing so, to discuss certain issues relating to the EMS entry decision. The results suggest a breakdown of the long standing price and interest parity relationship between Ireland and the UK following EMS entry. The results also indicate that Ireland's sterling spot market does follow a random walk process and that the three month for ward exchange rate is an unbiased predictor of the future spot exchange rate. A risk premium was also found to be important in forward contracts. I INTRODUCTION P urchasing power parity, interest rate parity and the question of whether the forward exchange rate is an unbiased predictor of the future spot exchange rate, are all important relationships underlying exchange rate theory. Under certain conditions, the various relationships are mutually dependent. For example, purchasing power parity can, in its own right, be interpreted as a theory of exchange rates. However, prices also influence nominal interest rates via the Fisher relationship. In turn, nominal interest rates, via interest parity theory, affects the forward exchange rate. Completing the circle, the forward exchange rate can be used to forecast the future spot exchange rate. The objective of this paper is to examine these key theoretical relationships,
Posted Content•
TL;DR: This article showed that if domestic agents are risk neutral, then no domestic policy variables are predicted to influence the spread of BLEU spread, and they found that if agents were risk neutral then no policy variables were predicted to significantly explain the BSE spread.
Abstract: The literature on two-tier foreign exchange markets has concentrated on relating various shocks to the spread between the exchange rates relevant to the two tiers of the exchange market. In some earlier work we found that none of the typical predictions of theory held up empirically as BLEU spread explanations. In particular we could not find any domestic policy variables that significantly explained the BLEU spread. Our finding led us to reformulate two-tier market theory. We find that if domestic agents are risk neutral then no domestic policy variables are predicted to influence the spread.