Showing papers on "Foreign exchange market published in 1995"

Overcoming the Liability of Foreignness

Abstract: This study addressed the question of whether firms in a competitive, globally integrated environment face a “liability of foreignness” and to what extent either importing home-country organizational capabilities or copying the practices of successful local firms can help them overcome this liability. Predictions were tested with a paired sample of 24 foreign exchange trading rooms of major Western and Japanese banks in New York and Tokyo. Results support the existence of a liability of foreignness and the role of a firm's administrative heritage in providing competitive advantage to its multinational subunits. They also highlight the difficulty firms face in copying organizational practices from other firms.

Predicting Volatility in the Foreign Exchange Market

Abstract: Measures of volatility implied in option prices are widely believed to be the best available volatility forecasts. In this article, we examine the information content and predictive power of implied standard deviations (ISDs) derived from Chicago Mercantile Exchange options on foreign currency futures. The article finds that statistical time-series models, even when given the advantage of "ex post" parameter estimates, are outperformed by ISDs. ISDs, however, also appear to be biased volatility forecasts. Using simulations to investigate the robustness of these results, the article finds that measurement errors and statistical problems can substantially distort inferences. Even accounting for these, however, ISDs appear to be too variable relative to future volatility. IT IS WIDELY BELIEVED that the volatility implied in option prices is the market's best estimate of future volatility. After all, if it were not, one could devise a trading strategy that could generate profits by identifying mispriced options. The purpose of this article is to investigate the information content and predictive power of volatility implied in options on foreign currencies. The paper focuses on options on currency futures, traded on the Chicago Mercantile Exchange (CME). Because of the depth and liquidity of CME futures and options, traded side-by-side in the same market, implied standard deviations (ISDs) allow for clean tests of the predictive power of implied volatilities. Early studies of the information content of ISDs have generally found that these contain substantial information for future volatility. Latane and Rendleman (1976), Chiras and Manaster (1978), and Beckers (1981), for example, regress future volatility on the weighted implied volatility across a broad sample of Chicago Board Options Exchange (CBOE) stocks, and find that options contain volatility forecasts that are more accurate than historical measures.1 These studies, performed shortly after the 1973 beginning of the CBOE option market, could only use a relatively short time span, and therefore focused on cross-sections rather than time-series predictions.

Market Integration and Investment Barriers in Emerging Equity Markets

Abstract: This article develops a return-based measure of market integration for nineteen emerging equity markets. It then examines the relation between that measure, other return characteristics, and broadly defined investment barriers. Although the analysis is exploratory, some clear conclusions emerge. First, global factors account for a small fraction of the time variation in expected returns in most markets, and global predictability has declined over time. Second, the emerging markets exhibit differing degrees of market integration with the US market, and the differences are not necessarily associated with direct barriers to investment. Third, the most important de facto barriers to global equity-market integration are poor credit ratings, high and variable inflation, exchange rate controls, the lack of a high-quality regulatory and accounting framework, the lack of sufficient country funds or cross-listed securities, and the limited size of some stock markets.

International Capital Markets: Developments, Prospects, and Policy Issues

Abstract: Introduction and summary global financial markets - moving up the learning curve survey of international capital markets surveillance over global financial markets - broadening current arrangements controlling settlement risk in the global foreign exchange market policy implications and conclusions.

Neural networks in the capital markets

Abstract: PART ONE: NEURAL NETWORKS: Introduction Design Considerations Methods for Optimal Network Design Data Modelling Considerations Testing Strategies and Metrics PART TWO: EQUITY APPLICATIONS: Modelling Stock Returns in the Framework of APT: A Comparative Study with Regression Models Testing the Efficient Markets Hypothesis with Gradient Descent Algorithms Neural Networks as an Alternative Market Model PART THREE: FOREIGN EXCHANGE APPLICATIONS: The Foreign Exchange Markets Nonlinear Modelling of the US$/DM Exchange Rate Managing Exchange Rate Trading Strategies Financial Market Applications of Learning from Hints Machine Learning for Foreign Exchange Trading Indicator Selection PART FOUR: BOND APPLICATIONS: Criteria for Performance in Gilt Futures Pricing Bond Rating with Neural Networks PART FIVE: MACRO-ECONOMIC FORECASTING APPLICATIONS: Bankruptcy Prediction: a Comparison of Discriminant Analysis with Neural Networks Predicting Corporate Mergers Using Backpropagation Networks Self-Organizing Neural Networks: the Financial State of Spanish Companies.

A Survey of Empirical Research on Nominal Exchange Rates

Abstract: We survey the empirical literature on floating nominal exchange rates over the past decade. Exchange rates are difficult to forecast at short- to medium-term horizons. There is a bit of explanatory power to monetary models such as the Dornbusch "overshooting" theory, in the form of reaction to "news" and in forecasts at long-run horizons. Nevertheless, at short horizons, a driftless random walk characterizes exchange rates better than standard models based on observable macroeconomic fundamentals. Unexplained large shocks to floating rates must then, logically, be due either to innovations in unobservable fundamentals, or to non-fundamental factors such as speculative bubbles. The observed difference in exchange rate and macroeconomic volatility under different nominal exchange rate regimes makes us skeptical of the first view. The theory and evidence on speculative bubbles, however, is not conclusive. We conclude with the hope that promising new studies of the microstructure of the foreign exchange market might eventually rise to insights into these phenomena.

Parallel exchange rates in developing countries

Abstract: Dual exchange rates and black markets for foreign exchange are common in developing countries, and a body of evidence is beginning to emerge on the effects that such parallel foreign exchange systems have on macroeconomic performance. This article presents a simple typology of parallel systems, discusses their emergence, and looks at why countries prefer these arrangements to the main alternatives. The article examines the ability of parallel markets to insulate international reserves and domestic prices from shocks to the balance of payments. Drawing on the findings from eight detailed case studies, the authors discuss the determination of the parallel premium in the short and long terms, the relationship between the premium and illegal transactions, and the fiscal effects of parallel rates. They compare the experiences of countries that have attempted to unify their foreign exchange markets and discuss the implications for policy alternatives.

Sand in the Wheels of Foreign Exchange Markets: A Sceptical Note

Abstract: During the early i99os, the foreign exchange markets were the scene of a number of acute speculative attacks directed against major currencies, leading to the departure of sterling and the lira from the ERM and a widening of the band for most of the remaining members, as well as the abandonment of the target zones formerly pursued by some of the Nordic countries. The severity of these attacks, coupled with the view that in some cases the attacks could not be fully justified by the state of the underlying economic fundamentals, has led some commentators to argue that the foreign exchange market is dominated by short-term speculators whose collective actions may generate unnecessary exchange rate volatility and move market exchange rates away from the levels which would be consistent with underlying economic equilibria. Given this, there have recently been calls in some quarters to impose tighter supervision and controls on short-term capital movements, with the ultimate aims of reducing both short-term exchange rate volatility (by reducing the volume of short-term transactions) and longer-term exchange rate misalignment (by encouraging greater focus by speculators on the longer-run economic fundamentals). In this connection, three main policy recommendations have been made for 'throwing sand in the wheels of finance': zero-interest margin deposits against net foreign exchange positions, a tax on gross foreign exchange transactions, and additional prudential bank capital requirements against foreign exchange positions.1 In this paper, our aim is not to analyse the desirability of such measures but rather their feasibility and likely effects. It is a well-known feature of financial markets that attempts to regulate them are frequently thwarted as market participants formulate sophisticated ways of avoiding the regulation. Thus, we investigate what would be the main effects on market participants of imposing such measures either unilaterally or in an internationally consistent fashion. To summarise our conclusions, the effectiveness of the three measures that we shall consider depends on their comprehensiveness across borders, institutions, and products. We presume that the measures are aimed at foreign exchange transactions and positions which are somehow identifiable as such and not at cross-border credit in general. Since foreign exchange transactions comprise

Foreign Exchange Intervention: Theory and Evidence

Abstract: Part 1 Introduction: introduction and outline the foreign exchange market central bank intervention. Part 2 Theories on the scope for foreign exchange intervention: introduction the flow approach to exchange rate determination the asset-market approach to exchange rate determination alternative approaches to the study of foreign exchange intervention conclusions. Part 3 Empirical investigations into the objectives and effectiveness of intervention - a survey: introduction objectives of intervention effectiveness of intervention conclusions. Part 4 Objectives of daily Bundesbank and Federal Reserve intervention in the DM/$ market - part 1: introduction stated objectives of intervention estimating the basic intervention reaction function of the Bundesbank and the Federal Reserve system the reaction towards anticipated exchange rate volatility the intervention reaction function estimated as a Tobit model conclusions appendix 4.1 - GARCH models and exchange rate policy appendix 4.2 - technical details of Tobit analysis. Part 5 Objectives of daily Bundesbank and Federal Reserve intervention in the DM/$ market - part 2: introduction the model the data estimation and results conclusions. Part 6 Effectiveness of daily Bundesbank and Federal Reserve intervention in the DM/$ market: introduction modelling the effectiveness of foreign exchange intervention the simultaneity problem testing for simultaneity between exchange rates and intervention estimating the effect of intervention on the level of the DM/$ rate conclusions. Part 7 A positive theory of central bank intervention: introduction central bank intervention as a deterministic game against nature central bank intervention as a stochastic game against nature intervention as a game against rational market participants extensions of the game against rational speculators conclusions appendix 7.1 - a standard static monetary policy game. Part 8 Summary and concluding remarks.

Seasonalities and intraday return patterns in the foreign currency futures market

Abstract: This study extends daily returns research in foreign currencies by focusing upon an intraday analysis of futures prices from the International Monetary Market (IMM). We find that insignificant daily returns are generally the result of significant negative returns overnight (when measured relative to the dollar) and significant positive returns during the trading day. The strengthening of foreign currencies intraday is concentrated during the opening hour, as well as during the last two hours of the U.S. trading day. Several other anomalies are found when hourly returns are examined. We propose a transactions hypothesis (reflective of relative country trading patterns) which is consistent with most of the return patterns uncovered.

Foreign exchange intervention

Abstract: Central bank intervention in foreign currency markets is widely regarded as ineffective by economists, policy makers and financiers, yet many central banks continue to enter the market in periods of turbulence. In Foreign Exchange Intervention, Geert Almekinders explains why central banks continue to carry out foreign exchange interventions despite their poor track record.

Disclosure environment and listing on foreign stock exchanges

Abstract: The benefits of listing a company's stock on a foreign exchange to achieve better global market integration have been quite extensively examined. What has been overlooked in the finance literature is an attempt to explain why the New York Stock Exchange (NYSE) tends to be bypassed in favor of the London market and other exchanges when firms select foreign exchanges for listing. This paper explains the behavior of firms in their selection of foreign stock markets for listing by using a signalling model. Another purpose of this study is to address the current dispute between the NYSE and the Securities and Exchange Commission (SEC) regarding the desire of the NYSE to relax its registration requirements in order to gain more listings by foreign companies.

Global Financial Management

Abstract: GLOBAL MARKETS. Exchange Rates and Global Financial Management. Exchange Rates, Goods Prices, and the Global Economy. Global Finance, Interest Rates, and Exchange Rates. Forward Exchange and Interest Rates. CORPORATE FINANCING IN THE GLOBAL MARKET. Global Debt Financing. Currency Swaps. Topics in Structured Global Financing and the Use of Options. CORPORATE EXPOSURE TO FOREIGN EXCHANGE RISK. Operating Exposure to Exchange Rate Risk. Capital Structure and Exposure to Foreign Exchange Risk. Accounting Issues in Corporate Exposure to Foreign Exchange Risk. GLOBAL CAPITAL BUDGETING AND OTHER TOPICS. Introduction to Capital Budgeting in Global Financial Management. Exchange Rate Forecasting and Global Capital Budgeting. Multicurrency Exposure Issues. Index.

Heterogeneous real-time trading strategies in the foreign exchange market

Abstract: The foreign exchange (FX) market is worldwide, but the dealers differ in their geographical locations (time zones), working hours, time horizons, home currencies, access to information,transaction costs, and other institutional constraints. The variety of time horizones is large: from intra-day dealers, who close their positions every evening, to long-term investors and central banks. Depending on the constraints, the different market participats need different strategies to reach their goal, which is usually maximizing the profit, or rather a utility function including risk. Different intra-day trading strategies can be studied only if high-density data are available. Oslen & Associates (O & A) has collected and analysed large amounts of FX quotes by market makers around the clock (up to 5000 non-equally spaced prices per day for the German mark against US$). Based on these data, a set of real-time intra-day trading models has been developed. These models give explicit trading recommendations under reali...

Foreign Exchange Hedging and the Interest Rate Defense

Abstract: In the endgame of a fixed exchange rate regime, increases in interest rates to defend the currency may lead to an apparently perverse market response: further downward pressure on the exchange rate. This may result if a large proportion of investors' foreign exchange exposure is dynamically hedged. This paper describes the trading operations involved in implementing dynamic hedges and the impact of these operations on central bank policy. The success of an interest rate defense hinges on the size and timing of the funding operations of those who are being squeezed relative to those engaged in dynamic hedging.

Currency risk and international property investments

Abstract: Incorporating exchange rate fluctuations into the analysis of an international investment substantially alters the expected risk and return characteristics of the investments. With fluctuating rates, the value of a successful investment property could be devastated when converted to the investor′s home currency. This risk should be recognized and incorporated into the investment decision but, as results show, the ultimate strategy may not be periodic adjustments which have been used by many researchers, nor trying to hedge fully as others have suggested, but rather to examine returns in home market currency and leave exchange rate exposure decisions to the currency portfolio managers. Explores the possibilities of mitigating currency risk through several hedging instruments – forward and futures contracts, options, back‐to‐back loans and currency swaps. Results from a survey of international investors are also summarized and comments provide substantial evidence that investors are unsophisticated in deali...

Exchange Market Pressure In Costa Rica, 1986–92: An Application of the Girton-Roper Model

Abstract: This paper applies the Girton-Roper (.1977) monetary model of exchange market pressure to the experience of Costa Rica in the period 1986-92. The results provide strong evidence of a negative relation between domestic credit creation and exchange market pressure and indicate that the Central Bank absorbed most of the exchange market pressure by adjustments in foreign reserves. [F51]

Foreign Currency Translation Reporting and the Exchange-Rate Exposure Effect

Abstract: This study further explores a structural break in the relation between stock returns of firms with foreign currency positions and lagged exchange rate changes (exchange rate exposure effect) documented in Bartov and Bodnar (1994). We examine whether changes in the financial accounting reporting of foreign currency positions from SFAS No. 52 might have improved investors' ability to characterize firms' economic exchange rate exposures, and thus the impact of exchange rate movements on firm value. Our findings indicate that only firms reporting using the dollar as the functional currency (i.e., those reporting as if they were still under SFAS No. 8) retain a significant relation between the lagged change in the dollar and firm value in the post-SFAS No. 52 period. For firms reporting using the foreign currency as the functional currency (i.e., those who switched to the new translation method) the significant lagged relation disappears. This is consistent with the use of a foreign currency as the functional currency under SFAS No. 52 facilitating valuation of U.S. firms with foreign operations.

Using forward contracts to hedge foreign investment in US real estate

Abstract: Recent studies on foreign investment in US real estate provide evidence that fluctuating exchange rates are likely to reduce the potential gains from international diversification by making these investments more risky. However, other research has suggested that forward currency contracts may provide an effective mechanism for offsetting exchange rate volatility and thus restore the diversification benefits. Examines the use of forward contracts as a means of hedging the currency risk associated with foreign investment in US real estate. Indicates that, although continuous hedging of US real estate with forward contracts allows foreign investors to eliminate most of the risk induced by currency instability, the improvements are insufficient to produce diversification gains for all foreign investors in the context of meanvariance portfolio performance.

Imperfect knowledge and behavior in the foreign exchange market

Abstract: This paper explores the consequences of imperfect knowledge for exchange rate dynamics within the monetary class of models. The authors' framework, which they call the theories consistent expectations framework, provides a particular formalization of a world in which agents use theories in order to look forward but in which these theories provide only qualitative knowledge rather than quantitative knowledge about the economy. The authors find that, as long as agents possess at least some degree of imperfect knowledge, the monetary models of the exchange rate generate dynamics consistent with the behavior observed in the literature. Copyright 1996 by Royal Economic Society.

Financial Management for International Business

Abstract: The International Monetary System. International Financial Markets. International Banking. The Foreign Exchange Market. Forecasting Exchange Rates. Measurement of Foreign Currency Exposure. Management of Foreign Currency Exposure. Swaps. Options and Futures. Management and Finance of Foreign Trade. International Investment Policy and Strategy. International Capital Investment. Political Risk. Global Transfer Pricing. Evaluation and Control of Global Operations. Short-term Influences on Multinational Companies. International Taxation.

The profitability of trading in the foreign exchange market: chartists, fundamentalists, and simpletons

Abstract: This paper examines the returns and ex post variability of returns associated with the investment strategies of three distinctive groups of hypothetical traders in the foreign exchange market: Chartists, Fundamentalists, and Simpletons. Each group consists of three heterogeneous traders and is distinguished by its use of a different information set for trading purposes. We compare the returns associated with these imperfect traders to those of a perfect trader. The analysis covers four bilateral dollar parities using quarterly data over the period 1974-94. We find that statistically speaking no particular group dominates the others in terms of profitability. With respect to variability, there are some statistically significant differences but no robust conclusions can be drawn. We also find that in terms of yield a random walk investment strategy is beaten for all four parities by a strategy that relies upon recent extrapolation. Copyright 1995 by Royal Economic Society.

Foreign Bank Operations in the United States: Cause for Concern?

Abstract: Publisher Summary This chapter discusses foreign bank operations in the United States. Concerns about the penetration of the U.S. banking market by foreign banks have been voiced recently, and come at a time when there is growing anxiety about the declining role of U.S. banks in the provision of financial services. The chapter presents previous research on the U.S. market share of foreign banks, extending the analysis through the beginning of 1993. Estimates are derived of offshore lending by U.S.-based foreign banks to U.S. firms, based on newly reported call report data. The chapter also presents an analysis of foreign banks ’ market share to an investigation of their performance in the U.S. market. New analyses of the profitability, efficiency, and credit quality of foreign banks is also presented in the chapter showing that U.S.-based foreign banks have on average performed poorly relative to U.S. - owned banks.

On the Presence of a Day-of-the-Week Effect in the Foreign Exchange Market

Abstract: University of LimburgAbstractThe purpose of this paper is to study the presence of the day-of-the-week effect in the foreign exchangemarket using an extensive data set of six exchange rates and employing two alternative types ofdistributional assumptions and also distribution-free tests. Our findings support the hypotheses ofhigher Wednesday returns prior to October 1, 1981, for the British pound, the Canadian dollar, theDeutsch mark, the French franc, the Swiss franc and the Japanese yen. Pursuant to the change in thesettlement procedures which took effect October 1, 1981, the differential Wednesday returns disappear.IntroductionThe presence of anomalous empirical regularities, also called market anomalies, has been documentedfor the last two decades in the financial markets. Despite efforts and time devoted by academics andprofessionals to their study, they remain a puzzle insofar as suggested explanations are not unanimousand do not explain, at least not completely, their existence. Generally speaking, these anomalies can beclassified into cross-sectional empirical regularities and seasonal regularities. The anomalous cross-sectional regularities, or anomalies related to some Firm or market attributes, are systematic andpersistent deviations from an equilibrium pricing model such as the Capital Asset Pricing Model(CAPM) for the equities. A well-known example of cross-sectional empirical regularity in the equitiesmarket is the size effect discovered by Banz (1981). According to which firms with a relatively lowermarket value of equity seem to achieve returns above those warranted by the CAPM. The existence ofsuch market anomaly can be interpreted as a misspecification of the pricing models.As to the seasonal empirical regularities, the most common ones are the January Effect and theWeekend or Monday Effect. The January effect as found by Rozeff and Kinney (1976) and Gultekinand Gultekin (1983) in equities markets indicate that the average monthly stock returns are larger inJanuary relatively to the other months of the year. The same January effect has also been documentedin the foreign exchange market over the period of 1980 to 1989 for the dollar. It appreciated against abasket of foreign currencies in every January except 1986 and 1987. It has also been observed that theJanuary performance of the dollar generally tended to predict its performance for the rest of the year.More specifically, if one boughtthe dollar index on the last day of the preceding year and sold it on thelast day of January, he would have made on average a profit of 3.2% in each year if the dollar wasappreciated in January (Tucker, Madura and Chiang (1991, p.52)) .The day-of-the-week effect in the financial markets which indicates that the average return on Mondayis significantly less than the average return over the other days of the week was first documented byCross (1973). Using the S&P composite index data for the 1953-1970 period, Cross found significantlynegative average returns for Mondays (Friday close to Monday close) and abnormally high returns forFridays. Essentially the same results were subsequently reported by French (1980), Gibbons and Hess(1981), Lakonishok and Levi, (1982), Keim and Stambaugh (1984), Rogalski (1984) and Smirlock andStarks (1986) among others.Even if a daily seasonality in the daily prices exists, can it be considered as an inefficiency? Anyseasonal regularity should, under the efficient market hypothesis, disappear rather quite quickly. Underthis hypothesis, the markets are supposed to reflect all available information. Therefore, as soon as aseasonality is detected, one could expect the investors to make profit of it by using appropriate tradingstrategies. This should compete away the seasonal regularity. The persistence of these seasonal patternsin the return distribution contradict the efficient market hypothesis insofar as they would permitinvestors systematically to obtain abnormal returns from trading strategies based on anomalous pricebehaviour. It has, however, often been argued that, due to the importance of the cost of transaction, adaily seasonality cannot easily be used in order to generate profit and therefore should not beconsidered as an inefficiency. It can nevertheless be considered as an indirect inefficiency insofar as aninvestor can postpone his selling to Friday and his buying to Monday.