Showing papers on "Foreign exchange market published in 1989"

Expectations, risk and uncertainty in the foreign exchange market: some results based on survey data *

Abstract: This paper utilizes monthly survey data on investment managers' exchange rate expectations in order to shed some light on the standard rejection of the joint null hypothesis of rational expectations and risk neutrality in foreign exchange markets. The results, in general, suggest that it is the failure of the assumption of risk neutrality which is primarily responsible. The paper also utilizes the survey data to test two recently advanced models of the risk premium--the ARCH and DYMIMIC models--and to examine the relationship between risk and uncertainty. Copyright 1989 by Blackwell Publishers Ltd and The Victoria University of Manchester

Monetary Policy Interactions under Managed Exchange Rates

Abstract: This paper studies a two-country monetary system where one country sets its money stock, but gives up control of the exchange rate, and the other country gives up control of its own money stock, but can set the exchange rate independently. Cournot-Nash equilibria under managed rates differ significantly from those under fixed or floating rates. The country that controls the exchange rate can effectively offset inflationary shocks by changing the exchange rate, at the expense of the foreign country, and, as a result, can be better off than the foreign country. This result provides an example of a successful disinflation through an exchange rate appreciation in a two-country world, and it indicates that managed exchange rate regimes tend to be "unstable," since both countries find it desirable to affect the exchange rate. Managed exchange rates, however, are a stable outcome when the "center" country is so much larger than its partner that changes in the real exchange rate do not affect its output and real income. Copyright 1989 by The London School of Economics and Political Science.

A reappraisal of the efficiency of financial markets

Abstract: The NATO Advanced Research Workshop on "A reappraisal of the efficiency of financial markets".- Section 1 Survey Papers.- What do we know about stock market "efficiency"?.- Stock price reversals and overreaction to new events: A survey of theory and evidence.- Comments.- Seasonal anomalies in financial markets: A survey.- Comments.- Section 2 Size and Earnings Anomalies.- Earnings yield and size effects: Unconditional and conditional estimates.- A look at the validity of the CAPM in the light of equity market anomalies: The case of Belgian common stocks.- Market size, PE ratios, dividend yield and share prices: The UK evidence.- Comments.- Section 3 Seasonal and Other Anomalies.- Canadian calendar anomalies and the capital asset pricing model.- Comments.- An investigation of daily seasonality in the Greek equity market.- Comments.- Random walks and anomalies on the Copenhagen stock exchange in the 1890's.- Comments.- January skewness, another enigma?.- Forecasting price trends at the Lisbon stock exchange.- Comments.- Section 4 Initial and Repurchase Stock Offers.- The market for initial public offerings: An analysis of the Amsterdam stock exchange (1982-7).- French new issues, underpricing and alternative methods of distribution.- Going public in the F.R.G..- Trading rules around repurchase tender offers.- Section 5 Excess Price Volatility.- Price-conditional vector autoregressions and theories of stock price determination.- Comments.- Is the UK equity market consistent with the "efficient markets" model?.- Comments.- Rational expectations and perfect foresight prices.- A re-examination of excess rational price approximations and excess volatility in the stock market.- Comments.- The Italian stock market: Efficiency and price formation.- Section 6 General Papers.- The impact of EMH logic in practice.- Comments.- The efficiency of the Chicago Board of Trade futures and futures options markets.- Section 7 Currency Markets.- The stability of speculative profits in the foreign exchanges.- Further evidence against the efficiency of futures markets.- Comments.- Analysts expectations and risk premia in the forward foreign exchange market: An empirical investigation.- Comments.- Section 8 Commodity Markets.- Monetary and economic influences in econometric models of international commodity price behaviour.- Comments.- Market efficiency and commodity prices: Forecasting soyabean prices on the Chicago market.- Purchasing maize futures under a deadline: Testing and risk-yield evaluation of a price-trend buying policy.- Comments.- A state-space approach to forecasting commodity prices.- Section 9 Options Markets.- An empirical test of the option pricing model based on EOE transactions data.- The pricing of Euromarket warrants on Japanese stocks: A preliminary study.- Comments.- Workshop participants.

The Risk Premium in the Foreign Exchange Market

Abstract: This paper presents a dynamic, optimizing model of the risk premium in the forward foreign exchange market. Agents face random endowments and money growth rates. Complete insurance markets do not exist and foreign exchange is held to hedge against risk. In some examples with log-linear preferences, the size of the risk premium in the forward market is related to the variability of output and money growth. An interesting conclusion of the model is that for plausible examples, the convexity component of the nominal risk premium (due to Siegel's paradox) may be quite large relative to the total risk premium. Copyright 1989 by Ohio State University Press.

RDP8906 A Random Walk Around the $A: Expectations, Risk, Interest Rates and Consequences for External Imbalance

Abstract: Given essentially perfect capital mobility, Australian interest rates and the expected exchange rate change should satisify international arbitrage conditions. We examine an arbitrage condition for a US investor, with a view to explaining the large short-term real interest differential between Australia and the US since late 1984. We have some evidence for a risk premium until late 1985. Since then, we explain the differential as a result of foreign exchange market inefficiency or as a consequence of the market having continually and rationally expected significant real devaluation of the $A. We provide evidence for both these explanations and draw implications for the current debate on Australia’s external imbalance.

Terms of Trade, Commercial Policy, and the Black Market for Foreign Exchange: An Empirical Model of Real Exchange RateDetermination

Abstract: Terms of Trade, Commercial Policy, and the Black Market for Foreign Exchange: An Empirical Model of Real Exchange Rate Determination A model of real exchange rate (RER) determination is presented. The model permits long run equilibrium movements in RER to be distinguished from its short run disequilibrium dynamics. An important aspect of the model is that it explicitly considers the black market premium as one of the fundamental determinants of RER. Especially in economies plagued with persistent excess aggregate demand, and rapidly depreciating domestic money under a regime characterized with currency inconvertibility and highly regulated current account transactions, the black market is usually a persistent and a growing part of the economy. The model is then applied to the case of the Sudan, a less developed country which approximates the economic environment described above. Ibrahim A. Elbadawi, Department of Economics, University of Gezira, Wad Madani, P.O. Box 20, SUDAN.

Equilibrium Exchange Rate Hedging

Abstract: In a one-period model where each investor consumes a single good, and where borrowing and lending are private and real, there is a universal constant that tells how much each investor hedges his foreign investments. The constant depends only on average risk tolerance across investors. The same constant applies to every real foreign investment held by every investor. Foreign investors are those with different consumption goods, not necessarily those who live in different countries. In equilibrium, the price of the world market portfolio will adjust so that the constant will be related to an average of world market risk premia, an average of world market volatilities, and an average of exchange rate volatilities, where we take the averages over all investors. The constant will not be related to exchange rate means or covariances. In the limiting case when exchange risk approaches zero, the constant will be equal to one minus the ratio of the variance of the world market return to its mean. Jensen's inequality, or "Siegel's paradox," makes investors want significant amounts of exchange rate risk in their portfolios. It also makes investors prefer a world with more exchange rate risk to a similar world with less exchange rate risk.

Charts, Noise and Fundamentals: A Study of the London Foreign Exchange Market

Abstract: Recent research in financial economics has concentrated on the role of non-economic, or non-fundamentalist, speculators in asset markets. This paper presents some empirical evidence concerning the nature and perceived importance of a major form of non-fundamentalist analysis, chartism, in the London foreign exchange market. It analyzes the results of a questionnaire survey on chartism conducted among chief foreign exchange dealers in the London market and data on a panel of chartists' one-week and four-week-ahead exchange rate predictions. The analysis suggests that a majority of chief dealers use at least some chartist input into their trading decisions, especially at the shorter time horizo.

Capital flows and exchange rate determination

Abstract: This paper attempts to examine the effects of increased capital mobility on exchange rate determination in Australia. In particular, it examines the issue of whether increased capital mobility has made the exchange rate so responsive to short-term financial market considerations that it no longer responds to longer-term fundamentals. The findings of the paper are consistent with the stylised facts of the international experience of floating exchange rates. The paper concludes that short-term capital flows are very interest sensitive but that the extent of this sensitivity is difficult to show empirically. Over the longer term, it appears that inflation differentials explain part of the movement of the nominal exchange rate. However, there have also been large movements of the real exchange rate. These fluctuations have been associated with shifts in Australia’s terms of trade and commodity prices. The paper finds that commodity price shocks also explain some of the short-run volatility of the exchange rate. This long-run and short-run link between the exchange rate and commodity prices is one of the distinguishing features of the Australian dollar. Finally, it was difficult to find and quantify any systematic link between the current account and the exchange rate. The paper concludes with a discussion of some of the policy implications of highly mobile capital. It is noted that in a country with a floating exchange rate and perfectly mobile capital, there is scope for a conflict between internal and external balance, particularly if there is high inflation and current account deficits. The paper notes that monetary policy should primarily be directed towards lowering the rate of inflation rather than achieving a particular exchange rate objective for current account purposes. This is particularly true when the currency is subject to export price shocks since exchange rate movements help to buffer the impact of those shocks.

Incentive policies and agricultural performance in sub-Saharan Africa

Abstract: Exports in general, and agricultural exports in particular, are more responsive to price incentives in Sub-Saharan Africa than in developing countries.. These are the results of an econometric investigation on the effects of real exchange rates on exports. It further appears that in Sub-Saharan Africa the impact of real exchange rates is greater on agricultural exports than on the exports of goods and services. Within Sub-Saharan Africa, market-oriented countries generally gained export market shares while interventionist countries lost shares. This occurred when market-oriented, not interventionist countries, maintained realistic exchange rates and did not bias incentives against exports. For example, Kenya and the Ivory Coast exemplify market-oriented, and Tanzania and Ghana interventionist, countries. Pairwise comparisons between the Ivory Coast and Ghana have indicated the superiority of the market-oriented approach in promoting exports and agricultural production.

Bank restructuring in Malaysia, 1985-88

Abstract: Between 1983 and 1986, Malaysia embarked on a structural adjustment program to control its fiscal and balance of payments deficits. In reaction to the shock of sharply declining commodity prices, the Malaysian government drastically cut back on public spending and allowed the exchange rate to depreciate freely. A sharp decline in export income, combined with rising costs and reduced public spending, caused severe disinflation. This culminated in the failure of 24 deposit-taking cooperatives in mid 1986 and required the central bank to inject substantial fresh capital to aid three commercial banks. Losses to ailing financial institutions between 1985 and 1986 amounted to as much as 4.7 percent of 1986's GNP. The Malaysian authorities adopted several rescue packages and bank restructuring exercises to protect depositors. Malaysia's experience shows that structural adjustment to shocks emanating from changes in the external environment have pervasive microeconomic effects, particularly in the financial sector. Effectively tackling financial distress requires both macroeconomic policy adjustments and timely changes in banking legislation to address the problems of fraud and poor bank management that typically emerge in times of financial distress.

Market Responses to Coordinated Central Bank Intervention

Abstract: The scale of unilateral and coordinated intervention in the foreign exchange market by the G-5 countries has become considerably larger over the last few years, following a period in which official U.S. policy was opposed to intervention. This paper examines market responses to official sterilized central bank intervention policy over the period 1985 through 1987. The efficacy of sterilized intervention is hypothesized to depend on the market's belief that central banks both have "inside" information about future monetary policy and the incentive to reveal that information truthfully through intervention signals. Central banks may agree to coordinate their intervention operations in order to influence the market's perception of the relative importance and credibility of own signals. Market responses to intervention over the period 1985 through 1987 are examined econometrically using heretofore unavailable daily data on G-3 unilateral and coordinated intervention operations. The empirical evidence indicates that: (1) even though daily intervention data are not published, market participants were generally able to comtemporaneously observe the source and magnitude of central bank intervention operations, (2) unilateral intervention significantly influenced market expectations in some periods, and (3) coordinated intervention had a significantly different and longer-term influence on market expectations than did unilateral intervention over the three year period examined.

International Monetary Instability Between the Wars: Structural Flaws or Misguided Policies?

Abstract: This paper examines the international monetary system between the Wars. It confirms the generality of several widely held interpretations of recent experience with floating exchange rates. There is a positive association between nominal exchange rate flexibility and nominal exchange rate variability, and between nominal and real exchange rate variability. But policies which reduce nominal exchange rate variability do not guarantee a proportionate reduction in nominal exchange rate risk or in real exchange rate variability and unpredictability without a credible commitment to a stable intervention rule.The paper then considers four potential explanations for the collapse of the fixed rate regime of 1926-3l: failure to play by the `rules of the game'; inadequate international economic leadership by the United States; inadequate cooperation among the leading Gold Standard countries; and structural features of a system in which reserves comprised both gold and foreign exchange. It concludes by assessing the role of the international monetary system in the Great Depression.

The foreign exchange market

Abstract: The flotation of exchange rates in the early 1970s saw a significant increase in the importance of foreign exchange markets and in the interest shown in them. Apart from the consequent institutional changes, this period also witnessed a revolution in macroeconomic analysis and finance theory based on the concept of rational expectations. This book provides an integrated approach to recent developments in the understanding of foreign exchange markets. It begins by charting the institutional background and looks at the recent history of movements in some of the major exchange rates. The theoretical sections focus on the economic and finance theory of the asset market approach, the macroeconomic models developed from this approach, and on interest rate parity theory. The empirical chapters draw on the authors' own research from a high quality set of exchange rate and interest rate data. The statistical properties of exchange rates are analysed; the relationship between spot and forward rates is examined; and the modelling and impact of new information on the forward and spot relationship is considered. The final chapter is devoted to the estimation and testing of exchange rate models.

Foreign Exchange Market Intervention and Domestic Monetary Control in Japan, 1973-89

Abstract: The paper presents an empirical analysis of official foreign exchange market intervention and domestic monetary control in Japan during 1973-89. It shows that: (1) the authorities, a net purchaser of foreign exchange over this period, began to intervene more decisively in 1978; and (2) they began to accommodate a greater portion of the resulting reserve inflows in 1985. This greater reserve accommodation, however, was not the principal cause of the recent surge in broad money growth. Rather, it was lower interest rates and financial market liberalization that precipitated the rapid monetary expansion, which in turn facilitated the greater accommodation of reserve inflows.

On the nature of risk in the foreign exchange markets: Evidence from the dollar- and the EMS-markets

Abstract: In this paper we analyze the behavior of the risk premia in exchange markets with very different exchange rate regimes: free floating (dollar markets), the low credibility EMS regime (e.g., Lira/DM and FF/DM) and the high credibility EMS regime (guilder/DM). We find that in the first and the third regime the risk premia behave in similar ways, i.e., they are negatively correlated with expected changes in exchange rates and vary more than expectations about future exchange rate movements. We interpret this evidence as being the result of the existence of a band of "agnosticism" within which movements of current exchange rates have little or no informational content about the market's expectations of future exchange rate movements.

The MTFS or the EMS: Which Way for Credible Monetary Policy?

Abstract: Since the latter part of 1988, the primary policy objective has been to head off a rise to double digit inflation. To this end, interest rates have been raised from 7112 per cent to 14per cent, while the public sector is running a large fiscal surplus. Despite this apparently very tight policy stance, policy is deficient in a crucial respect: it lacks credibility. The all too public divisions within government have weakened the efficacy of monetary policy, especially in financial markets. The ongoing uncertainty over who is in charge of the conduct of policy - No. 10 or No. 11 - further undermines confidence. The most urgent priority must be to reassert clear priorities and guidelines. In this Viewpoint, we consider how best to restore the credibility of monetary policy. There are two main possibilities: first, to reassert the Medium Term Financial Strategy (MTFS) in an appropriate form; or to join the (Exchange Rate Mechanism of the) European Monetary System (EMS). We argue that it will be very hard to derive credibility benefits from a reassertion of the MTFS: because of the inflation record of the past decade and the twists and turns of past versions of the MTFS, a mere restatement will not resolve the uncertainties that result from known differences within the government. In particular, any restatement will rely on discretion and judgement in its implementation and this will weaken its beneficial effects on expectations. Instead we argue that entry into the EMS offers a tougher and more credible commitment for monetary policy. The Chancellor has been pushed to rule out UK entry until the second half of 1990 at the earliest, but the government should make a virtue of this by announcing a firm dale for entry next year. In the interim, it should encourage a debate about the appropriate rate for entry, a debate which will increasingly guide the foreign exchange market. The government should make it clear that in choosing this rate it will do so with the commitment to low inflation very much in mind, favouring a high exchange rate. Once in the EMS, the government should rule out the possibility of devaluing the pound in an EMS realignment. This provides a firm non- discretionary anchor for both monetary policy and inflation expectations. With this commitment, the principal gain from EMS entry will be establishing a regime of low inflation for the next decade: in this, choice of the exchange rate will be less crucial than the fact of entry.

The economics of foreign exchange : a practical market approach

Abstract: Introduction Purchasing Power Parity Balance of Payments Approach Asset Market Approach to Exchange Rates The Monetary Approach Rational Expectations and the Forward Market The Advantages and Disadvantages of Fixed and Floating Exchange Rates The History of the Foreign Exchange Markets Since Bretton Woods The Foreign Exchange Market The Foreign Exchange as a Perfect Market The Forward Exchange Rate Market Is the Foreign Exchange Market Just a Game? New Instruments and Their Effects on the Foreign Exchange Markets Technical Analysis Economic Forecasting of Exchange Rates Appendixes Index

Role of Exchange-Rate Volatility in US Import Price Pass-Through Relationships

Abstract: Many authors have noted a recent breakdown in the historical long-run relationship between US non-oil import prices and the nominal exchange rate. Known as pass through, this phenomenon has been the subject of both empirical and theoretical inquiry. This literature is reviewed in Chapter One. The alternative approach presented here builds upon the theoretical body of literature. Pass through is explained within the context of profit-maximising exporting firms but with the additional feature of being tested empirically. Chapter Two presents models highlighting the differing effects of exchange-rate variance on exporters under a system of flexible exchange rates. A risk-averse profit-maximising exporter setting price in the currency of the importing country will raise price the higher is variance. The opposite is true for an exporter setting price in its own currency where a higher variance results in a lower price. However, a firm which sets price in the importing country's currency can cover in the foreign exchange market, which lessens the positive influence of variance. The extent to which it covers hinges on the difference between the forward price of the importing country's currency and its expected value.

Do trade deficits matter

Abstract: Some things matter whether or not they exist. The Loch Ness monster is one. National trade deficits are another. Trade deficits obviously matter to many people, because (whatever they are) they seem to have significant consequences. They cause problems or create undesirable constraints or compel government policy changes.

Risk Neutrality and the Two-Tier Foreign Exchange Market: Evidence from Belgium

Abstract: Most of the literature on two-tier exchange markets is built around models in which domestic policy can exert a powerful influence on the spread between the current account exchange rate and the capital account exchange rate. We show that if optimizing agents are risk neutral, domestic policy has no significant influence on the spread. Our work with Belgian data suggests that a nsk neutral specification for Belgian residents acting in the two-tier market is hard to reject, and we also find evidence that domestic variables do not affect the Belgian spread.