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Showing papers on "Foreign exchange market published in 1990"


ReportDOI
TL;DR: In this paper, the authors examine the impact of news in one market on the time path of per-hour volatility in other markets using a volatility type of vector autoregression and find that the empirical evidence is generally against the null hypothesis of the heat wave.
Abstract: This paper seeks to explain the causes of volatility clustering in exchange rates. Careful examination of intra-daily exchange rates provides a test of two hypotheses-heat waves and meteor showers. The heat wave hypothesis is that the volatility has only country-specific autocorrelation. Alternatively, the meteor shower is a phenomenon of intra-daily volatility spillovers from one market to the next. Using the GARCH model to specify the heteroskedasticity across intra-daily market segments, we find that the empirical evidence is generally against the null hypothesis of the heat wave. Using a volatility type of vector autoregression we examine the impact of news in one market on the time path of per-hour volatility in other markets.

825 citations


Posted Content
TL;DR: The overshooting theory of exchange rates was designed to explain some important aspects of the movement of the dollar in recent years as discussed by the authors, and it was the higher rates of return that made U.S. assets more attractive to international investors and caused the dollar to appreciate.
Abstract: The overshooting theory of exchange rates seems ideally designed to explain some important aspects of the movement of the dollar in recent years. Over the period 1981-84, for example, when real interest rates in the United States rose above those of its trading partners (presumably due to shifts in the monetary/fiscal policy mix), the dollar appreciated strongly. It was the higher rates of return that made U.S. assets more attractive to international investors and caused the dollar to appreciate. The overshooting theory would say that, as of 1984 for example, the value of the dollar was so far above its long-run equilibrium that expectations of future deprecation were sufficient to offset the higher nominal interest rate in the minds of international investors. Figure 1 shows the correlation of the real interest differential with the real value of the dollar, since exchange rates began to float in 1973.

541 citations


Posted Content
TL;DR: In this paper, the overshooting theory of exchange rates seems ideal for explaining some important aspects of the movement of the dollar in recent years, and it has been suggested that the unexplained short-term changes are rational revisions in the market's perception of the long run equilibrium exchange rate, even if the shifts are not observable to macroeconomists as standard measurable fundamentals.
Abstract: Annual Research Conference--II: Chartists, Fundamentalists, and Trading in the Foreign Exchange Market The overshooting theory of exchange rates seems ideal for explaining some important aspects of the movement of the dollar in recent years. From 1981-4, for example, when real interest rates in the United States rose above those of her trading partners (presumably because of shifts in the monetary/fiscal policy mix), the dollar appreciated strongly. This episode supported the overshooting theory: the higher rates of return had made U.S. assets more attractive to international investors, which is what caused the dollar to appreciate; the appreciation continued until the dollar's value was so far above long-run equilibrium that expectations of future depreciation were enough to offset the higher nominal interest rate in the minds of international investors. (Figure 1 shows the correlation of the real interest differential with the real value of the dollar, since exchange rates began to float in 1973.) Bubble Episodes At times, however, the path of the dollar has departed from what would be expected on the basis of macro-economic fundamentals. The most dramatic example was the period from June 1984 to February 1985. The dollar appreciated 20 percent over this interval, even though the real interest differential already had begun to fall. The other observable factors that are suggested in standard macroeconomic models--money growth rates, real growth rates, the trade deficit--also were moving in the wrong direction to explain the dollar's rise at this time. Of course, standard observable macroeconomic variables cannot explain, much less predict, most short-term changes in the exchange rate. But what does this mean? It may be that the unexplained short-term changes are rational revisions in the market's perception of the long-run equilibrium exchange rate. These revisions are caused by shifts in "tastes and technologies," even if the shifts are not observable to macroeconomists as standard measurable fundamentals. A major difficulty with this interpretation, though, is that it is hard to believe that the world demand for U.S. goods (or U.S. productivity) could have risen enough to increase the equilibrium real exchange rate by more than 20 percent over a nine-month period, let alone that such a shift then would be reversed over an equally short period. The second view is that the appreciation may have been an example of a speculative bubble: that it was unrelated to fundamentals, but rather was the outcome of self-confirming market expectations. In other words, the dollar "overshot the overshooting equilibrium." This also may have been the nature of the dollar appreciation of 1988-9. Ken Froot and I have suggested that such episodes may be examples of speculative bubbles, and that they may be described best by models in which market participants are not necessarily assumed to agree on the correct way to forecast the exchange rate.(1) Trading Volume in the Foreign Exchange Market Supporting the idea that market participants differ widely in their forecasts is the tremendous volume of foreign exchange trading. If participants all agree on their forecasts, why do they trade so much? In April 1989, foreign exchange trading (adjusted for double-counting) in the United States totaled $128.9 billion a day, an increase of 120 percent from March 1986. Simultaneous counts in London and Tokyo reported $187 billion and $115 billion a day, respectively. Thus the worldwide total is over $430 billion of foreign exchange trading a day. Interestingly, the banks in the New York Fed Census reported that only 4.9 percent of their trading was with a nonfinancial firm; for the nonbanks, only 4.4 percent of their trading was with a nonfinancial firm. In other words, 95 percent of trading takes place among banks and other financial firms, rather than with customers (importers and exporters). …

439 citations


Journal ArticleDOI
TL;DR: In this article, the authors present some empirical evidence on the prevalence, perceived importance and nature of chartist or technical analysis in the London foreign exchange market and present empirical evidence that chart analysis is used by noise traders.
Abstract: This paper presents some empirical evidence on the prevalence, perceived importance and nature of 'chartist' or 'technical' analysis in the London foreign exchange market. If 'noise traders' (see e.g. de Long et al., I987) are defined as those speculators who do not base their trading strategies on a consideration of market fundamentals, then it clearly encompasses those traders who employ chart analysis i.e. those who base their strategies on the analysis and extrapolation of past price movements alone.

407 citations


Journal ArticleDOI
TL;DR: The authors showed that even after-the-fact forecasts that use actual values (instead of forecasted values) of the explanatory variables cannot explain major currency movements over the post-Bretton Woods era.
Abstract: The international monetary landscape that has emerged since the felling of Bretton Woods is characterized by a hybrid exchange rate system that lies somewhere between the textbook polar cases of a gold standard and a pure float. This system has relatively flexible exchange rates between major countries, active central bank intervention in the market for the major currencies, and predominantly fixed exchange rates (relative to the dollar or to some basket of currencies) for less developed countries and newly industrializing nations. The majority of research on currency markets since the early 1970s has focused on the characteristics of flexible exchange rates under this hybrid regime. My thesis is that this research has been unsuccessful. The proportion of (monthly or quarterly) exchange rate changes that current models can explain is essentially zero. Even after-the-fact forecasts that use actual values (instead of forecasted values) of the explanatory variables cannot explain major currency movements over the post-Bretton Woods era. This result is quite surprising, since exchange rate changes would be entirely unpredictable only in very special cases of the theoretical models discussed. As the discussion below will argue, it is not a general implication of market efficiency that exchange rates follow a random walk process.1

304 citations


Book
26 Oct 1990
TL;DR: In this paper, the forward rate is used as a predictor of the future spot rate and the theory of efficient markets is used to predict the future exchange rate in the UK market.
Abstract: 1. Historical development and institutions 2. The theory of efficient markets 3. Models of exchange rate behaviour 4. Econometric methodology 5. Expectation models 6. Statistical properties of exchange rate series 7. The forward rate as a predictor of the future spot rate 8. Purchasing power and interest rate parity theories: empirical evidence 9. Exchange rate forecasting and conclusions.

219 citations


ReportDOI
TL;DR: In this article, the authors present new empirical results that elucidate the dynamics of the foreign exchange market, including the bias observed in the forward discount as a predictor of the future spot rate is not attributable to an exchange risk premium.
Abstract: The paper presents new empirical results that elucidate the dynamics of the foreign exchange market. The first half of the paper is an updated study of the exchange rate expectations held by market participants, as reflected in responses to surveys, and contains the following conclusions. First, the bias observed in the forward discount as a predictor of the future spot rate is not attributable to an exchange risk premium, as is conventionally believed. Second, at short horizons forecasters tend to extrapolate recent trends, while at long horizons they tend to forecast a reversal. Third, the bias in expectations is robust in the samples, based on eight years of data across five currencies. The second half of the paper abandons the framework in which all market participants share the same forecast, to focus on the importance of heterogeneous expectations. Tests suggest that dispersion of opinion, as reflected in the standard deviation across respondents in the survey, affects the volume of trading in the market, and, in turn, the degree of volatility of the exchange rate. An example of how conflicting forecasts can lead to swings in the exchange rate is the model of "chartists and fundamentalists." The market weights assigned to the two models fluctuate over time in response to recent developments, leading to fluctuations in the demand for foreign currency. The paper ends with one piece of evidence to support the model: the fraction of foreign exchange forecasting services that use "technical analysis" did indeed increase sharply during 1983-85, but declined subsequently.

132 citations



Journal ArticleDOI
TL;DR: This article examined market responses to official sterilized central bank intervention policy over the period 1985 through 1987 and found that market participants were generally able to comtemporaneously observe the source and magnitude of intervention operations, and that unilateral intervention significantly influenced market expectations in some periods, and coordinated intervention had a significantly different and longer-term influence on market expectations than did unilateral intervention over the three year period examined.

119 citations


Posted Content
TL;DR: In this article, the authors provide an integrated approach to recent developments in the understanding of foreign exchange markets by charting the institutional background and looking at the recent history of movements in some of the major exchange rates.
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.

85 citations


Book ChapterDOI
01 Jan 1990
TL;DR: The difficulties encountered in analysing the likely supply/demand balance for commodities and currencies cannot be over-emphasised and it is undoubtedly for this reason, as much as any, that techical analysis has long been popular in the commodity markets and has now become an essential tool in the FOREX markets too.
Abstract: The difficulties encountered — in the near term in particular — in analysing the likely supply/demand balance for commodities and currencies cannot be over-emphasised and it is undoubtedly for this reason, as much as any, that techical analysis has long been popular in the commodity markets and has now become an essential tool in the FOREX markets too. A recent Bank of England survey found that by far the vast majority of chief dealers in banks use at least some chartist input. They also found, perhaps to their surprise, that technical analysis was being used as a complementary tool to fundamental analysis; when considered logically this should without doubt be the case since each form of analysis effectively represents one side of the coin. Fundamental analysis is undertaken in an attempt to establish ‘value’, whilst technical analysis rests on the examination of price alone; anyone who has been in the markets for any length of time will recognise that the two are frequently not the same.

Journal ArticleDOI
Mark Coleman1
TL;DR: In this paper, the existence of Granger-causal orderings among cointegrated series is shown to imply that asset prices determined in a weakly efficient market cannot be co-integrated.


ReportDOI
TL;DR: In this paper, the authors show that the existence of the wedge helps account both for the failure of market efficiency tests and the difficulties in finding an empirically successful model of the risk premium.
Abstract: Small transaction costs and uncertainty imply that optimal cross-currency interest rate speculation is marked by a first-order hysteresis band. Consequently uncovered interest parity does not hold and market efficiency tests based on it are misspecified. Indeed measured prediction errors are a combination of true prediction errors and a wedge that consists of the "option value" of being in foreign currency and either plus or minus the transaction cost. Due to the nature of this wedge, we should expect measured prediction errors to be serially correlated, correlated with the current forward rate and perhaps have a non-zero mean, if the interest differential itself is serially correlated. The existence of the wedge helps account both for the failure of market efficiency tests and the difficulties in finding an empirically successful model of the risk premium.

Journal ArticleDOI
TL;DR: In this paper, a number of rationality tests are implemented using survey data on exchange rate expectations for four currencies (dollar-sterling, deutsche mark-dollar, yen-dollar and Swiss franc-dollar).
Abstract: In this paper, a number of rationality tests are implemented using survey data on exchange rate expectations for four currencies (dollar-sterling, deutsche mark-dollar, yen-dollar, and Swiss franc-dollar). It is demonstrated, inter alia, that the survey expectations are biased, orthogonal to an information set consisting of lagged survey forecast errors, but not orthogonal to an information set consisting of lagged forward premiums. Copyright 1990 by Blackwell Publishers Ltd and The Victoria University of Manchester

Journal ArticleDOI
TL;DR: In this paper, the authors developed and tested a model of a developing economy that incorporates trade and capital restrictions, illegal transactions, a parallel foreign exchange market, currency substitution features, and forward-looking rational expectations.
Abstract: The paper develops and tests a model of a developing economy that incorporates trade and capital restrictions, illegal transactions, a parallel foreign exchange market, currency substitution features, and forward-looking rational expectations. Temporary expansionary demand policies are associated with an increase in output and prices, a fall in the stock of net foreign assets, and a depreciation of the parallel exchange rate. The speed of adjustment is inversely related to the degree of rationing in the official foreign currency market. A once-for–all devaluation of the official exchange rate has no long-term effect on the premium.

Journal ArticleDOI
Vittorio Grilli1
TL;DR: In this paper, the authors investigated the effectiveness of the monetary authority's borrowing policies in resolving exchange rate cises and showed that obtaining loans or lines of credit in foreign currency may avoid, at least temporarily, the devaluation of a fixed rate, and discussed the problem of the optimal size of the loan and/or the line of credit.

Journal ArticleDOI
TL;DR: In this article, the performance of the Girton and Roper (1977) two-country monetary model of exchange-market pressure (EMP) for Canada is evaluated for an extended specification that allows for unrestricted dynamics.
Abstract: In re-evaluating the performance of the Girton and Roper (1977) two-country monetary model of exchange-market pressure (EMP) for Canada, estimates are provided for an extended specification that allows for unrestricted dynamics Results show the hypothesized negative effect of domestic credit growth on EMP to be supported throughout The relevance both of the dynamics and of the hypothesized unitary tradeoff between exchange rate and international reserve movements for Bank of Canada policy is demonstrated for the sequence of fixed and floating exchange rate regimes contained in the 1963:1-1988:1 sample

Journal ArticleDOI
TL;DR: In this paper, a Brown and Warner [1980] event study methodology is applied to the foreign exchange area and compared with four abnormal return models with simulations under different experimental conditions, such as choice of foreign currency or numeraire, level of abnormal shock, sample size, length of estimation period, market return proxy, and time period examined.
Abstract: A Brown and Warner [1980, 1985] event study methodology is applied to the foreign exchange area. Comparisons of the performance of four abnormal return models are examined with simulations under different experimental conditions, such as choice of foreign currency or numeraire, level of abnormal shock, sample size, length of estimation period, market return proxy, and time period examined. The results provide practical suggestions on the selection of an event study methodology and demonstrate that some of the findings of Brown and Warner are not generalizable to the foreign exchange area.


Journal ArticleDOI
David G. Tarr1
TL;DR: In this article, the effects of different policies on welfare under different foreign exchange elasticities, export and import subsidies, official exchange rates, and policies on exporter retention of foreign exchange earnings were investigated.
Abstract: Poland, like many developing countries, has required its exports to surrender a share of their foreign exchange earnings to the government at an overvalued exchange rate. During the late 1980s, it progressively increased the share which exporters were allowed to retain (the retention ratio), but other distortions to the trade regime remained. A model developed here estimates the effects of these policies on welfare under different foreign exchange elasticities, export and import subsidies, official exchange rates, and policies on exporter retention of foreign exchange earnings. The retention ratios in effect in early 1989 were equivalent to a 51 percent tax on exports or an import tariff of 130 percent. As economic theory would suggest, maximum social benefit would derive from removal of the full range of distortions. Full retention of foreign exchange by exporters in the absence of other distortions would provide social benefits equivalent to 8 percent of gross domestic product. But the net effect of the other policies together is a bias toward tradables, so that a policy of somewhat less than full retention of foreign exchange is optimal in this second-best world.

Journal ArticleDOI
TL;DR: The authors show that marking-to-market does not appear to have a significant effect on currency futures prices, and that correcting for these problems does not affect the overall conclusions of the CR study.
Abstract: CORNELL AND REINGANUM (1981), hereafter CR, report that price differentials for future contracts and forward contracts are statistically insignificant in foreign exchange markets. Based on this finding, CR conclude that marking-to-market is insignificant in the formulation of currency futures prices. This note identifies two potential concerns with the CR tests. One problem relates to the timing of delivery dates for "matched" contracts. A second problem relates to the time period for the CR study. We show that correcting for these problems does not affect the overall conclusions of the CR study; marking-to-market does not appear to have a significant effect on currency futures prices.

ReportDOI
TL;DR: This paper showed that the defence of the target zone in the presence of bubbles is viable if the Central Bank accommodates speculative attacks when the latter are consistent with the survival of a target zone itself and expectations are self-fulfilling.
Abstract: The recent theory of exchange rate dynamics within a target zone holds that exchange rates under a currency band are less responsive to fundamental shocks than exchange rates under a free float, provided that the intervention rules of the Central Bank(s) are common knowledge. These results are derived after having assumed a priori that excess volatility due to rational bubbles does not occur in the foreign exchange market. In this paper we consider instead a set-up in which the existence of speculative behaviour is a datum with which the central bank has to deal. We show that the defence of the target zone in the presence of bubbles is viable if the Central Bank accommodates speculative attacks when the latter are consistent with the survival of the target zone itself and expectations are self-fulfilling. We show that the instantaneous volatility of exchange rates within a bank is not necessarily less than the volatility under free float. There need not be a constant tradeoff between the volatility of the change in the exchange rate and the volatility of the change in the interest rate differential. Fundamental-dependent bubbles can account for the excess response of the exchange rate to the fundamental. The relationship between the exchange rate and the interest differential need not be negative, even if the target zone is fully credible.

Posted Content
TL;DR: In this article, an annotated bibliography of recent research on foreign exchange market intervention is presented, which is devoted to empirical studies of the effectiveness of intervention, focusing on two principal channels through which sterilized intervention has its effects: portfolio balance channel and the expectations or signalling channel.
Abstract: This paper is an annotated bibliography of recent research on foreign exchange market intervention. Most of the paper is devoted to empirical studies of the effectiveness of intervention. ; The paper describes the analytical framework within which most of this research has been conducted. Researchers have identified two principal channels through which sterilized intervention has its effects: the portfolio balance channel and the expectations or signalling channel. The great bulk of formal statistical tests of the effectiveness of sterilized intervention operating through the portfolio balance channel (influencing the relative supplies of bonds denominated in different currencies) have not found a quantitatively significant effect for sterilized intervention. In all of the much smaller number of studies of the expectations channel (influencing the expected future exchange rate), intervention has been found to have at least some statistically significant effect; most of these studies do not assess the quantitative significance of the effects that researchers found.

Posted Content
TL;DR: In this paper, the authors present a non-linear, deterministic model, incorporating concepts from chaos theory, which is capable of producing unpredictable exchange rate movements without ''news''.
Abstract: Linear models in which exchange rates are driven by stochastic `news' are subject to a number of failings. In this paper we present a non-linear, deterministic model, incorporating concepts from chaos theory, which is capable of producing unpredictable exchange rate movements without `news'. Two non-linearities arise from a J-curve effect in the trade balance and the modelling of both `chartist' and `fundamental' influences in expectations formation. The model displays extreme sensitivity to only small changes in its initial conditions and its parameter values - one of the requirements for a model to generate chaotic behaviour. Only a few periods after such changes, the time path of the exchange rate appears to have been generated from a totally different model. This implies that forecasts based on exchange rate models are effectively impossible, because the tiniest errors generate totally different paths for the exchange rate. The results warn against excessive reliance on `news' to explain exchange rate movements.

Journal ArticleDOI
TL;DR: In this article, the authors analyze the effect of rational bubbles in the foreign exchange market, taking account of the interdependence between bubble paths and economic fundamentals, and the risk of the bubble ending, modeled as a Poisson process, adds an insurance premium to the interest differential governing currency arbitrage.
Abstract: The authors analyze the effect of rational bubbles in the foreign exchange market, taking account of the interdependence between bubble paths and economic fundamentals. The risk of the bubble ending, modeled as a Poisson process, adds an insurance premium to the interest differential governing currency arbitrage. Qualitative solutions are obtained for the exchange rate when fundamentals evolve deterministically and also when "white noise" errors are introduced. Copyright 1990 by Royal Economic Society.


Book
01 Jan 1990
TL;DR: Banks deposit-taking companies and the capital market are the stock exchange futures, gold, investment management and regulation the foreign exchange rate, monetary and fiscal policy as mentioned in this paper, which is the main sources of revenue for banks.
Abstract: Banks deposit-taking companies and the capital market the stock exchange futures, gold, investment management and regulation the foreign exchange rate, monetary and fiscal policy.

01 Jan 1990
TL;DR: In this article, the major industrial countries decided to move to a system of managed flexible exchange rates following the collapse of the Bretton Woods system, and many observers thought that this would reduce, if not eliminate, the need for official foreign exchange market intervention.
Abstract: When the major industrial countries decided to move to a system of managed flexible exchange rates following the collapse of the Bretton Woods system, many observers thought that this would reduce, if not eliminate, the need for official foreign exchange market intervention. During the past fifteen years, however, intervention in most countries, including Canada, has […]

Journal ArticleDOI
TL;DR: In this article, the ARCH-in-mean model and the DYMIMIC (kalman filter) model were fitted to the reichsmark and the results were not otherwise supportive of either model.
Abstract: There is now evidence to reject the speculative efficiency hypothesis for the 1920s float. This paper investigates whether the rejection may be due to risk aversion. Two models of the risk premium are fitted: the ARCH-in-mean model and the DYMIMIC (kalman filter) model. Some support is found for the reichsmark, but the results are not otherwise supportive of either model. Copyright 1990 by Scottish Economic Society.