Showing papers on "Foreign exchange market published in 1991"
Posted Content•
TL;DR: In this article, the authors present new evidence on the profitability and statistical significance of technical trading rules in the foreign exchange market using a new data base, currency futures contracts for the period 1976-1990, and implement a new testing procedure based on bootstrap methodology.
Abstract: In this paper, we present new evidence on the profitability and statistical significance of technical trading rules in the foreign exchange market. We utilize a new data base, currency futures contracts for the period 1976-1990, and we implement a new testing procedure based on bootstrap methodology. Using this approach, we generate thousands of new exchange rate series constructed by random reordering of each original series. We then measure the profitability of the technical rules for each new series. The significance of the profits in the original series is assessed by comparison to the empirical distribution of results derived from the thousands of randomly generated series. Overall, our results suggest that simple technical trading rules have very often led to profits that are highly unusual. Splitting the entire 15-year sample period into three 5-year periods reveals that on average the profitability of some trading rules declined in the 1986-1990 period although profits remained positive (on average) and significant in many cases.
491 citations
TL;DR: In this article, the authors examine the volatility implications of around-the-clock foreign exchange trading with transaction data on futures contracts from the Chicago Mercantile Exchange and the London International Financial Futures Exchange and conclude that the increased volatility is more likely driven by macroeconomic news announcements.
Abstract: We examine the volatility implications of around-the-clock foreign exchange trading with transaction data on futures contracts from the Chicago Mercantile Exchange and the London International Financial Futures Exchange. We find higher U.S.-European and U.S.-Japanese exchange-rate volatilities during U.S. trading hours and higher European cross-rate volatilities during European trading hours. While the diclosure of private information through trading may partly explain these volatility patterns, we conclude that the increased volatility is more likely driven by macroeconomic news announcements. An analysis of inter- and intraday data also reveals that volatility increases at times that coincide with the release of U.S. macroeconomic news. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
299 citations
01 Mar 1991
TL;DR: The empirical literature on survey-based exchange rate expectations is briefly surveyed in this article, and the literature in general supports the presence of a nonzero risk premium and rejects the hypothesis of rational expectations.
Abstract: The empirical literature on survey-based exchange rate expectations is briefly surveyed. The literature in general supports the presence of a nonzero risk premium and rejects the hypothesis of rational expectations. The crucial result is that, whereas short-run expectations tend to move away from some long-run "normal" values, long-run expectations tend to move back toward them. If this behavior of short-run expectations increases the volatility of exchange rate movements, there may be a basis for an official measure to minimize short-run exchange rate movements.
170 citations
TL;DR: In this article, an asymmetric information model of the bid-ask spread is developed for a foreign exchange market subject to occasional government interventions, and the null hypothesis that the forward rate is an unbiased predictor of the future spot rate is rejected.
Abstract: As asymmetric information model of the bid - ask spread is developed for a foreign exchange market subject to occasional government interventions. Traditional tests of the unbiasedness of the forward rate as a predictor of the future spot rate are shown to be inconsistent when the rates are measured as the average of their respective bid and ask quotes. Larger bid - ask spreads on Fridays are documented. Reliable evidence of asymmetric bid - ask spreads for all days of the week, albeit more pronounced on Fridays, are presented. The null hypothesis that the forward rate is an unbiased predictor of the future spot rate continues to be rejected. The regression slope coefficients increase toward unity, however, indicating a less variable risk premium.
116 citations
Journal Article•
TL;DR: In this article, a team of economists analyzes policies related to an open economy and offers advice of value to government officials and policymakers in the developing world, including expenditure-changing policies, such as fiscal and monetary policies, that directly affect the level of economic activity.
Abstract: High tariffs, quantitative restrictions, and controls on foreign exchange - these and other restrictive measures characterize a closed economy and tend to impede its growth. Opening up an economy allows domestic production to become competitive with the rest of the world and increases efficiency. But how does one open up an economy? To answer that question a team of economists analyzes policies related to an open economy and offers advice of value to government officials and policymakers in the developing world. The policy measures discussed include: expenditure-changing policies, such as fiscal and monetary policies, that directly affect the level of economic activity; expenditure-switching policies, such as trade and exchange rate policies, that change the composition of production, spending, and foreign exchange flows; and financial policies that concern capital flows, debt management, and the net foreign assets of a country. Five country studies review the policies actually followed - and their consequences - in Argentina, Brazil, Indonesia, the Republic of Korea, and Mexico. Four appendixes deal with the data sources and basic economic concepts.
94 citations
Posted Content•
TL;DR: In this paper, the authors examined the smae phenomenon in the forex market and found that the pattern of clustering in the final digit of bid/ask prices depends on the desired degree of price resolution.
Abstract: Following Lawrence Harris (1989b) study of price clustering in stock prices, we examine the smae phenomenon in the forex market. The pattern of clustering in the final digit of bid/ask prices depends on the desired degree of price resolution. The selection of spreads also involves clustering, but this is driven by a different behavioural pattern, consistent with the pure attraction hypothesis. The combination of the two patterns can explain the differing frequencies of final digits in the bids as compared with the asks.
77 citations
TL;DR: In this paper, the authors investigated the effects of foreign exchange restrictions on the black market premium for dollars in Chile over the period 1975-1984, and found that the real exchange rate, the official depreciation-adjusted interest rate differential, the dollar value of peso assets valued at the official exchange rate and foreign exchange restriction are important determinants of the black-market premium.
69 citations
TL;DR: In this paper, the intradaily operational efficiency of the US foreign exchange market by conducting computer simulation experiments with market structure (the numbers of market-makers, brokers and customers) was investigated and the results indicated significant operational inefficiencies which can be explained by temporary inventory imbalances inherent in a decentralized market.
61 citations
Posted Content•
TL;DR: This article examined the signalling role of intervention for the United States and West Germany between the 1985 Plaza Accord and the October 1987 stock market crash and found that intervention observed by the foreign exchange market did not precede changes in monetary policy in a proximate or consistent fashion.
Abstract: Recent experience with exchange rate management has rekindled interest in the efficacy of foreign exchange intervention. While there is broad evidence that sterilized intervention has no effect on the exchange rate through a portfolio balance channel, less evidence exists on the signalling role of intervention. This article considers the signalling role of intervention for the United States and West Germany between the 1985 Plaza Accord and the October 1987 stock market crash. ; An examination of the data shows that intervention observed by the foreign exchange market did not precede changes in monetary policy in a proximate or consistent fashion. Thus the study concludes that, after the fact, intervention was not a signal of subsequent monetary policy. The study also explores the possibility that during this period participants in the foreign exchange market viewed intervention as a signal. While the daily response of the change in the deutsche mark/dollar exchange rate showed a significant effect of intervention in the early part of this sample period, the effect eroded over time as monetary authorities failed to back up intervention with monetary policy.
57 citations
TL;DR: The authors survey the literature on the two main views of exchange rate determination that have evolved since the early 1970s: the monetary approach to the exchange rate (in flex-price, sticky-price and real interest differential formulations) and the portfolio balance approach.
Abstract: We survey the literature on the two main views of exchange rate determination that have evolved since the early 1970s: the monetary approach to the exchange rate (in flex-price, sticky-price and real interest differential formulations) and the portfolio balance approach. We then go on to discuss the extant empirical evidence on these models and conclude by discussing how the future research strategy in the area of exchange rate determination is likely to develop. We also discuss the literature on foreign exchange market efficiency, on exchange rates and ‘news’ and on international parity conditions.
TL;DR: In this paper, the black market foreign exchange premium is used as a tax on exports, creating a conflict between the financing of government spending and the allocative goal of stimulating exports, which is solved for in a model that includes private portfolio choice, dual exchange markets and money-financing of the fiscal deficit.
Journal Article•
TL;DR: In this paper, the rejection of the simple efficiency hypothesis "news" and the exchange rate international parity conditions was discussed, and the theory and evidence of the groundwork theories evidence new directions.
Abstract: Volume 1 Exchange rate determination - theory and evidence: groundwork theories evidence new directions. Volume 2 Foreign exchange market efficiency: expectations and market efficiency rationalizing the rejection of the simple efficiency hypothesis "news" and the exchange rate international parity conditions.
Book•
17 Dec 1991
TL;DR: In this paper, the authors compare the performances of technical trading strategies and the stability of speculative profits in a portfolio upgrade approach with the goal of comparing the theoretical and practical implications for financial economics implications for policymakers.
Abstract: Previous studies of technical analysis statistical tests of risk-adjusted profits from trading rules - the X-test selected trading rules equally-weighted portfolios of currencies, with rules tailored for each currency variably-weighted portfolios of currencies, with rules tailored for each currency speculating on indexes of currencies speculating with a portfolio upgrade approach comparing the performances of technical trading strategies the stability of speculative profits implications for the theory and practice of financial economics implications for policymakers.
TL;DR: A growing body of theoretical literature known as the study of securities market microstructure deals with the behavior of participants in securities markets and with the effects of information and institutional rules on the economic performance of those markets as mentioned in this paper.
Abstract: GROWING BODY OF theoretical literature, known as the study of securities market microstructure, deals with the behavior of participants in securities markets and with the effects of information and institutional rules on the economic performance of those markets. These institutional factors may arise from technology, tradition or regulation. Microstructure and its impact are important, because of the vast amounts of wealth which pass through securities markets — including the foreign exchange market — every day.
Posted Content•
TL;DR: In this article, the authors present an important component of open economy macroeconomic models, which is essential to distinguish among several categories of assets, both foreign and domestic, and specify the demands and supplies.
Abstract: Portfolio theory has been an important component of open economy macroeconomic models. In those models, it is essential to distinguish among several categories of assets, both foreign and domestic, and to specify the demands and supplies. This framework has become increasingly relevant. Movements of capital across regional and national boundaries, and across currencies, have exploded in volume, thanks to the dismantling of currency and exchange controls and other financial regulations and to revolutionary economies in technologies of communication and transactions. The globalization of financial markets was stimulated by the floating exchange rate regime established in 1973.
TL;DR: The need for reform of the international monetary system has been a recurring theme in the writings of Robert Triffin this article, and several proposals for reducing the volatility and/or misalignment of key-currency exchange rates have been examined.
Abstract: The need for reform of the international monetary system has been a recurring theme in the writings of Robert Triffin.2 In this paper, we follow Professor Triffin’s lead and analyse several proposals for reducing the volatility and/or misalignment of key-currency exchange rates. The proposals examined are a system of target zones, the imposition of controls or taxes on international capital flows, and a strengthening of international co-ordination over economic policies. Our purpose is not to endorse one proposal and to dismiss others. For one thing, some of the proposals have common elements. For another, some features of each of the proposals are already present in the existing exchange rate system. Instead, we see evaluation of these proposals as a useful vehicle for identifying issues that merit attention in any serious examination of how the functioning of the international monetary system might be improved.
TL;DR: In this paper, a model was presented to examine the behavioral relationship between the excess returns of foreign exchange and the variables that measure the risk factor and the test results of four major currencies support the hypothesis that the excess exchange returns are related to the relative risks of the two national equity markets.
TL;DR: In this article, the authors present an empirical analysis of official foreign exchange market intervention and domestic monetary control in Japan during the recent period of flexible exchange rates, showing that the authorities, a net purchaser of foreign exchange over this period, intervened decisively during 1978-1983 and 1985-1989; and they began to accomodate a greater portion of the resulting reserve inflows in 1985.
Posted Content•
TL;DR: The authors review the conduct and scale of official intervention by monetary authorities in the U.S.A., Japan, and West Germany since the Plaza Agreement and conclude that, relative to trading volume and the stock of internationally traded assets denominated in foreign currencies, intervention is small-scale and sporadic, hence at best limited to transitory effects.
Abstract: We review the conduct and scale of official intervention by monetary authorities in the U.S.A., Japan, and West Germany since the Plaza Agreement. Relative to trading volume and the stock of internatonally traded assets denominated in foreign currencies, intervention is small-scale and sporadic, hence at best limited to transitory effects. It does not appear to reduce volatility of daily exchange rates. Monetary authorities gamble that they will not suffer losses on their foreign currency holdings. Evidence in favor of sterilized foreign exchange market intervention as a way of conveying information to the private sector is far from convincing. Since changes in relative monetary growth rates are sufficient to alter bilateral exchange rates, monetary authorities can achieve their exchange rate preferences with domestic monetary policy, but at the cost of possible distortionary effects on monetary growth rates, domestic interest rates, and international capital flows.
TL;DR: In this article, an information externality exists in the foreign exchange market due to the fact that traders play two partially conflicting roles: each is a speculator and each is an information clearinghouse in that each intermediates own-customer orders which convey information.
Abstract: An information externality exists in the foreign exchange market due to the fact that traders play two partially conflicting roles: (i) each is a speculator and (ii) each is an information clearinghouse in that each intermediates own-customer orders which convey information. Profit maximization induces traders to underweight fundamental information in making their trades, reducing the degree to which prices reveal information at any given time. In the model, agents update diverse beliefs over time, with transactions-mediated tatonnement. The explicit role for transactions provides a framework for interpreting the relationship between the diversity of beliefs, trading volume, and price adjustment.
TL;DR: This article examined how exchange rate volatility affects exporter's pricing decisions in the presence of optimal forward covering, and derived an expression for the risk premium in the foreign exchange market, which is then estimated as a generalized ARCH model to obtain the time-dependent variance of the exchange rate.
Abstract: We examine how exchange rate volatility affects exporter's pricing decisions in the presence of optimal forward covering. By taking account of forward covering, we are able to derive an expression for the risk premium in the foreign exchange market, which is then estimated as a generalized ARCH model to obtain the time-dependent variance of the exchange rate. Our theory implies a connection between the estimated risk premium equation, and the influence of exchange rate volatility on export prices. In particular, we argue that if there is no risk premium, then exchange rate variance can only have a negative impact on export prices. In the presence of a risk premium, however, the effect of exchange rate variance on export prices is ambiguous, and may be statistically insignificant with aggregate data. These results are supported using data on aggregate U.S. imports and exchange rates of the dollar against the pound. yen and mark.
Posted Content•
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.
01 Mar 1991
TL;DR: In this paper, the authors analyze how changes in monetary policy instruments are transmitted to domestic aggregate demand in a financially repressed economy, and how the move to a more market-oriented system would affect the economy in the short run.
Abstract: In many developing countries the financial system is characterized by the absence of organized markets for securities and equities, by capital controls, and by legal ceilings on bank borrowing and lending rates--a situation that gives rise to parallel markets for foreign exchange and informal loan markets. This paper analyzes how changes in monetary policy instruments are transmitted to domestic aggregate demand in a financially repressed economy. Such an analysis is necessary to understand how the move to a more market-oriented system would affect the economy in the short run.
TL;DR: The authors developed and tested a monetary model of the parallel market for foreign exchange which incorporates forward-looking expectations and currency substitution features and found that changes in official exchange rates and monetary disequilibria are the major determinants of the behaviour of parallel exchange rates.
Abstract: Develops and tests a monetary model of the parallel market for foreign exchange which incorporates forward‐looking expectations and currency substitution features. Econometric results using quarterly data for a group of 12 developing countries show that changes in official exchange rates and monetary disequilibria are the major determinants of the behaviour of parallel exchange rates. Changes in expected rates of return on domestic and foreign currency play a significant role only in middle‐income economies.
Book•
01 Apr 1991
TL;DR: The theory of the Gold Standard: the "Redundancy of currency" stable and unstable monetary regimes stopping rule for gold movements Ricardo's method part 9 Ricardo and his time: gold as a commodity the theory of unilateral transfer market and money.
Abstract: Part 1 Ricardo's writings: gold, the exchnge rate and the quantity of money the "Essay" and the "Proposals" value and distribution in Parliament Part 2 Credit and currency: the English financial revolution the banking system currency circulation Part 3 The value of money: the measure of the value of money the invariable measure of value absolute value and relative value of gold Part 4 The quantity of money: alternative approaches cost of production and equilibrium quantity of gold the adjustment mechanisms of the quantity of money price stability under the Gold Standard Part 5 Trade and international finance: mercantile houses and merchant banks the bill of exchange subsidies loans Part 6 The gold market: international payments the London gold market the export and import of gold Part 7 The Foreign Exchange market: the price of gold the rate of exchange the exchange rate between London and Hamburg Part 8 The theory of the Gold Standard: the "Redundancy of Currency" stable and unstable monetary regimes stopping rule for gold movements Ricardo's method part 9 Ricardo and his time: gold as a commodity the theory of unilateral transfer market and money
01 Sep 1991
TL;DR: In this paper, the authors compared two dual exchange rate regimes, where the official market clears through changes in international reserves and the central bank implements a rationing scheme so as to keep international reserves constant.
Abstract: Two dual exchange rate regimes are compared. Under one, the official market clears through changes in international reserves. Under the other, the central bank implements a rationing scheme so as to keep international reserves constant. The paper discusses the effects on inflation, the balance of payments, the real exchange rate, and the spread between the free and the official exchange rate of various economic policies, including exchange rate policy, fiscal policy, and unification of the exchange markets. It concludes that the steady-state effects for most of those policies are qualitatively the same under both regimes.
Posted Content•
TL;DR: This paper examined how exchange rate volatility affects exporter's pricing decisions in the presence of optimal forward covering, and derived an expression for the risk premium in the foreign exchange market, which is then estimated as a generalized ARCH model to obtain the time-dependent variance of the exchange rate.
Abstract: We examine how exchange rate volatility affects exporter's pricing decisions in the presence of optimal forward covering. By taking account of forward covering, we are able to derive an expression for the risk premium in the foreign exchange market, which is then estimated as a generalized ARCH model to obtain the time-dependent variance of the exchange rate. Our theory implies a connection between the estimated risk premium equation, and the influence of exchange rate volatility on export prices. In particular, we argue that if there is no risk premium, then exchange rate variance can only have a negative impact on export prices. In the presence of a risk premium, however, the effect of exchange rate variance on export prices is ambiguous, and may be statistically insignificant with aggregate data. These results are supported using data on aggregate U.S. imports and exchange rates of the dollar against the pound. yen and mark.
Posted Content•
TL;DR: In this paper, the authors survey the development and operation of the parallel exchange market in Argentina during the 1980s, and evaluate its impact upon macroeconomic performance and policy, concluding that exchange controls were never effective enough in Argentina to allow the authorities to set the commercial exchange rate independently from the parallel market rate, leading to widespread evasion of exchange controls that undermined the government's international reserve position.
Abstract: This paper surveys the development and operation of the parallel exchange market in Argentina during the 1980s, and evaluates its impact upon macroeconomic performance and policy The historical evolution of Argentina's exchange market policies is reviewed in order to understand the government's motives for imposing exchange controls The parallel exchange market engendered by these controls is then analyzed, and econometric methods are used to evaluate the behavior of the parallel exchange rate and its impact upon the balance of payments ; The main conclusion of the paper is that exchange controls were never effective enough in Argentina to allow the authorities to set the commercial exchange rate independently of the parallel market rate Attempts to set the commercial exchange rate at too appreciated a level consistently prompted widespread evasion of exchange controls that undermined the government's international reserve position Econometric evidence supports the hypothesis that important components of the balance of payments were negatively correlated with the parallel market premium during the 1980s The evidence also confirms that the parallel market premium was influential in the determination of the commercial exchange rate