Showing papers on "Foreign exchange market published in 2005"
TL;DR: In this article, the authors assess the effect of privatization on performance in a panel of Nigerian banks for the period 1990-2001 and find evidence of performance improvement in nine banks that were privatized, which is remarkable given the inhospitable environment for true financial intermediation.
Abstract: The authors assess the effect of privatization on performance in a panel of Nigerian banks for the period 1990-2001. They find evidence of performance improvement in nine banks that were privatized, which is remarkable given the inhospitable environment for true financial intermediation. Their results also suggest negative effects of the continuing minority government ownership on the performance of many Nigerian banks. The authors' results complement aggregate indications of decreasing financial intermediation over the 1990s. Banks that focused on investment in government bonds and non-lending activities enjoyed a relatively higher performance.
241 citations
TL;DR: In this article, the impact of nine categories of scheduled and unscheduled news announcements on the euro/dollar return volatility was studied and the authors highlighted and analyzed the pre-announcement, contemporaneous and post-announcedment reactions.
233 citations
TL;DR: In this paper, the authors present evidence that non-financial customers are the main liquidity providers in the overnight foreign exchange market using a unique daily data set covering almost all transactions in the SEK/EUR market over almost 10 years.
204 citations
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TL;DR: In this article, the authors measure the size of a possible misalignment in the Chinese real exchange rate by two ways: 1) the issue of the Balassa effect, by which real exchange rates of a catching-up country should appreciate, and 2) the effect of a "normal" "Balassa Effect".
Abstract: In this paper, we try to measure the size of a possible misalignment in the Chinese real exchange rate by two ways On one hand, we address the issue of the “Balassa effect”, by which the real exchange rate of a catching-up country should appreciate We compare China with other emerging countries, in order to assess the size of a “normal” “Balassa effect” On the other hand, we follow the FEER (Fundamental Equilibrium Exchange Rate) approach We use the NIGEM model for representing the foreign trade of China, the United States, the Euro area, South Korea and Japan We calculate the real effective exchange rate that is consistent with sustainable current accounts Both methods yield an undervaluation of the renminbi JEL Classification: JEL: F31, F33
146 citations
TL;DR: The authors found that the number of domestic firms with significant foreign exchange exposure increases with the estimation horizon used to measure exposure and the level of domestic firm exposure is related negatively to firm size, positively to the market-to-book ratio, and to a lesser extent, negatively to financial leverage, negative to asset turnover, and negatively to industry concentration.
Abstract: Unlike prior studies that have focused on multinational companies, this paper documents that domestic companies face significant foreign exchange exposures. Indeed, on average domestic firm foreign exchange exposure is not significantly different from the exposures faced by firms that are directly involved in international activity. Furthermore, we find that the number of domestic firms with significant foreign exchange exposure increases with the estimation horizon used to measure exposure and the level of domestic firm exposure is related negatively to firm size, positively to the market-to-book ratio, and to a lesser extent, positively to financial leverage, negatively to asset turnover, and negatively to industry concentration. These results are robust to alternative procedures to estimate foreign exchange exposure and have significant implications for managers and accounting standard setters.
121 citations
TL;DR: In this paper, the authors study a model where strategic complementarities exist, not only within a group of creditors, but also between the two groups, and show that the additional type of strategic complementarity generates a vicious cycle between banking crises and currency crises.
Abstract: The economic literature has emphasized the role of strategic complementarities in generating banking crises and currency crises. Motivated by evidence from recent financial crises, we study a model, where strategic complementarities exist, not only within a group of creditors or within a group of currency speculators, but also between the two groups. The additional type of strategic complementarities generates a vicious cycle between banking crises and currency crises. This vicious cycle magnifies the correlation between the two crises and destabilizes the economy. We discuss some empirical implications and policy implications, and, in particular, show that due to the interaction between the banking sector and the currency market, a Lender of Last Resort might not be able to prevent bank runs.
114 citations
TL;DR: This article found that central bank intervention had no statistically significant systematic impact on the mean or higher moments of the exchange rate during 1993-2000 and that Japanese authorities appeared to intervene mainly in response to deviations from some implicit target levels and to a rise in market uncertainty.
112 citations
TL;DR: In 1998, the staff of the Federal Reserve Board introduced a new set of indexes of the foreign exchange value of the US dollar as discussed by the authors, which had been used since the late 1970s.
Abstract: At the end of 1998, the staff of the Federal Reserve Board introduced a new set of indexes of the foreign exchange value of the US dollar The staff made the changeover, from indexes that had been used since the late 1970s, for two reasons First, five of the ten currencies in the staff's previous main index of the dollar's exchange value were about to be replaced by a single new currency, the euro Second, developments in international trade since the late 1970s called for a broadening of the scope of the staff's dollar indexes and a closer alignment of the currency weights with US trade patterns ; The author discusses several practical aspects of the design and implementation of the exchange rate indexes--the choice of index formula, the design of currency weights, and the selection of currencies The author also reviews the performance of the indexes over the past twenty-five years and discusses three minor methodological changes that the staff has applied to the indexes since their introduction
100 citations
TL;DR: In this paper, the authors provide evidence that currency stop-loss orders contribute to rapid, self-reinforcing price movements, which they call "price cascades," which are sometimes triggered in waves, contributing to price cascades.
98 citations
TL;DR: This paper found a positive link between the interventions of the Bank of Japan and the volatility of the yen/U.S. dollar exchange rate, and also found that those BoJ interventions that were not reported in the financial press were positively correlated with exchange rate volatility.
93 citations
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TL;DR: In this paper, the authors studied the intraday market quality for currency pairs with very different trading characteristics, such as the Euro-U.S. dollar and the Canadian dollar, and found that the Euro market quality is highest during European trading and lowest during Asian trading.
Abstract: This paper studies intraday market quality for currency pairs with very different trading characteristics, the Euro-U.S. dollar and the Canadian dollar-U.S. dollar. Two sets of tests - the first based on the ratio of long term to short term variances, and the second based on information spillovers - provide consistent conclusions regarding market quality. The variance ratio analysis shows that market quality is highest for the Euro during European trading and lowest during Asian trading. For the Canadian dollar, market quality is highest during North American trading and lowest during Asian trading. Analysis of information spillovers shows that innovations in returns and volatility for the more heavily-traded Euro predict returns and volatility for the Canadian dollar during Asian and European trading, but innovations for the dollar have predictive power for the Euro during North American trading. Our results suggest that foreign exchange market quality is high, not always when quoting and trading activity are heavy but rather, and somewhat unexpectedly, when activity is not only high, but also geographically focused and concentrated among a limited number of major dealers.
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TL;DR: In this paper, the effects of intervention on the level and volatility of the exchange rate in Mexico and Turkey, two emerging countries that have floating exchange rate regimes, were analyzed and mixed evidence on the effectiveness of intervention was found.
Abstract: This paper analyzes the effects of intervention on the level and volatility of the exchange rate in Mexico and Turkey, two emerging countries that have floating exchange rate regimes. The paper finds mixed evidence on the effectiveness of intervention. In Mexico, foreign exchange sales have a small impact on the exchange rate level and raise short-term volatility, while in Turkey, intervention does not appear to affect the exchange rate level but reduces its shortterm volatility. In both cases, the findings are consistent with officially stated policy objectives, which aim to minimize the effect of intervention on the exchange rate, but cast doubt on claims that intervention is a useful tool for smoothing volatility. Although these findings cannot be generalized to other emerging markets, intervention's apparently limited effectiveness highlights the need for central banks to use their scarce foreign reserves selectively and parsimoniously.
Journal Article•
TL;DR: The authors discusses the divergent theoretical and empirical paradigms used today for setting and predicting exchange rates; the chapters reflect current debates in the field and point the way to a new consensus about how to predict and explain exchange rate movements.
Abstract: Recent theoretical developments in exchange rate economics have led to important new insights into the functioning of the foreign exchange market. The simple models of the 1970s, which could not withstand empirical evaluation, have been succeeded by more complex models that draw on theoretical work in such areas as the microstructure of financial markets and open economy macroeconomics. Additionally, new and powerful econometric techniques allow researchers to subject exchange rates to stronger empirical analysis.This book discusses the divergent theoretical and empirical paradigms used today for setting and predicting exchange rates; the chapters reflect current debates in the field. Some chapters base their analyses on the theoretical framework of representative and fully informed rational agents; others are grounded in the hetereogeneity of agents who use different and incomplete sets of information. Still other chapters analyze empirical data to uncover the fundamental characteristics of exchange rates. Taken together, these competing analyses document the current state of exchange rate economics and point the way to a new consensus about how to predict and explain exchange rate movements.
TL;DR: This paper showed that exchange rates respond to only the surprise component of an actual US monetary policy change and that failure to disentangle the surprise components from the actual monetary policy changes can lead to an underestimation of the impact of monetary policy, or even to a false acceptance of the hypothesis that monetary policy has no impact on exchange rates.
Abstract: This paper shows that exchange rates respond to only the surprise component of an actual US monetary policy change and that failure to disentangle the surprise component from the actual monetary policy change can lead to an underestimation of the impact of monetary policy, or even to a false acceptance of the hypothesis that monetary policy has no impact on exchange rates. This finding implies that there is a need for reexamining the empirical analyses of asset price responses to macro news that do not isolate the unexpected component of news from the expected element. In addition, we add to the debate on how quickly exchange rates respond to news by showing that the exchange rates under study absorb monetary policy surprises within the same day as the news are announced.
TL;DR: In this article, the effects of macroeconomic announcements on foreign exchange rates and forward premium were evaluated, and the PPP hypothesis was rejected in favor of portfolio balance effects in determining exchange rates.
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TL;DR: Renminbi trading rose particularly strongly. as discussed by the authors showed that the Renminbi was joining the dollar/yen spot rate in exerting an influence on Asian foreign exchange markets.
Abstract: Foreign exchange turnover in Asian currencies grew faster than the global total between 2001 and 2004. Renminbi trading rose particularly strongly. Evolving expectations about the Renminbi seem to be joining the dollar/yen spot rate in exerting an influence on Asian foreign exchange markets. Asian currencies with more flexible exchange rates appear to be trading with an effective exchange rate orientation.
TL;DR: In this paper, the authors report on the foreign exchange risk management practices among Ghanaian firms involved in international trade and find that close to one half of the firms do not have any wellfunctioning risk management system.
Abstract: Purpose – This paper reports on the foreign exchange risk‐management practices among Ghanaian firms involved in international trade. The study focuses on how Ghanaian firms manage their foreign exchange risk and the problems involved in managing exchange rate exposure. It also seeks to ascertain the extent to which these firms use foreign exchange risk management techniques.Design/methodology/approach – Descriptive statistics were used in the presentation and analysis of empirical results.Findings – The results indicate that close to one‐half of the firms do not have any well‐functioning risk‐management system. Foreign exchange risk is mainly managed by adjusting prices to reflect changes in import prices resulting from currency fluctuation, and also by buying and saving foreign currency in advance. The main problems the firms face are the frequent appreciation of foreign currencies against the local currency and the difficulty in retaining local customers because of the high prices of imported inputs, wh...
TL;DR: The authors examined the reaction of financial market returns and volatility in a diverse group of six emerging markets to a set of IMF events during the Asian, Russian and Brazilian crises of 1997-1999.
TL;DR: The authors found that the trading- versus nontrading-period variance ratios in weather-sensitive markets are lower than those observed in the equity market and higher than those in the currency market and that the variance ratios are substantially lower during periods of the year when prices are most sensitive to the weather.
Abstract: We find that the trading- versus nontrading-period variance ratios in weather-sensitive markets are lower than those observed in the equity market and higher than those observed in the currency market. We also find that the variance ratios are substantially lower during periods of the year when prices are most sensitive to the weather. Moreover, the comovement of returns and volatilities for related commodities is stronger during the weather-sensitive season and this increase is driven by stronger comovement during non-trading periods. These results are consistent with a strong link between prices and public information flow and cannot be explained by pricing errors or changes in trading activity.
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TL;DR: The conventional wisdom is that central banks can intervene in foreign exchange markets to resist currency appreciation for some time because there is no simple, clear ceiling to the volume of domestic currency they can sell in forex markets as discussed by the authors.
Abstract: The conventional wisdom is that central banks can intervene in foreign exchange markets to resist currency appreciation for some time because there is no simple, clear ceiling to the volume of domestic currency they can sell in forex markets. Equally conventional is the view that prolonged, large-scale intervention must eventually weaken domestic macroeconomic performance whether because of higher inflation, the costs of misaligned exchange rates or distortions in the financial system or the exchange rate/maturity exposures built up by the public sector. Yet massive intervention during the five years 2000 to 2004 by the major emerging market central banks especially Asian central banks has not apparently had such negative effects. Indeed, inflation has been low, financial systems appear stronger and there has been sustained growth. What has happened? This paper seeks to answer this question.
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TL;DR: In this paper, the authors use currency options prices for the exchange rates of the three largest new EU member states Poland, Czech Republic and Hungary vis-a-vis the euro and the US dollar to estimate the risk-neutral density (RND) functions and the density interval bands.
Abstract: This paper uses data on currency options prices for the exchange rates of the three largest new EU member states Poland, Czech Republic and Hungary vis-a-vis the euro and the US dollar to estimate the risk-neutral density (RND) functions and the density interval bands. Analysing the RNDs, we find that only some of the implied moments on the Polish zloty exchange rate systematically move around policy events, while the implied moments on the RNDs on the Czech koruna and Hungarian forint show more systematic changes. Regarding the HUF/EUR currency pair, monetary policy news have a significant impact on all moments, while changes in implied standard deviation signal a higher probability of interest rate changes by the Hungarian central bank. The more marked results for HUF/EUR exchange rate could reflect the fixed exchange rate regime prevailing throughout the sample period.
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TL;DR: In this paper, the authors econometrically estimate determinants of the shares of major currencies in the reserve holdings of the world%u2019s central banks and find that the relationship between currency shares and their determinants is nonlinear.
Abstract: Might the dollar eventually follow the precedent of the pound and cede its status as leadinginternational reserve currency? Unlike ten years ago, there now exists a credible competitor: theeuro. This paper econometrically estimates determinants of the shares of major currencies in thereserve holdings of the world%u2019s central banks. Significant factors include: size of the home country,inflation rate (or lagged depreciation trend), exchange rate variability, and size of the relevant homefinancial center (as measured by the turnover in its foreign exchange market). We have not foundthat net international debt position is an important determinant. Network externality theories wouldpredict a tipping phenomenon. Indeed we find that the relationship between currency shares andtheir determinants is nonlinear (which we try to capture with a logistic function, or else with adummy %u201Cleader%u201D variable for the largest country). But changes are felt only with a long lag (weestimate a weight on the preceding year%u2019s currency share around .9). The advent of the eurointerrupts the continuity of the historical data set. So we estimate parameters on pre-1999 data, andthen use them to forecast the EMU era. The equation correctly predicts a (small) narrowing in thegap between the dollar and euro over the period 1999-2004. Whether the euro might in the futurerival or surpass the dollar as the world%u2019s leading international reserve currency appears to depend ontwo things: (1) do the United Kingdom and enough other EU members join euroland so that itbecomes larger than the US economy, and (2) does US macroeconomic policy eventually undermineconfidence in the value of the dollar, in the form of inflation and depreciation. What we learn aboutfunctional form and parameter values helps us forecast, contingent on these two developments, howquickly the euro might rise to challenge the dollar. Under two important scenarios the remainingEU members, including the UK, join EMU by 2020 or else the recent depreciation trend of the dollarpersists into the future the euro may surpass the dollar as leading international reserve currencyby 2022.
TL;DR: In this paper, the authors present four lessons for modeling short-run exchange-rate dynamics: currency flows are key, so models should focus on flows and equilibrium may be defined by equality between purchases and sales.
Abstract: Empirical research on the microeconomics of currency markets, an area known sometimes as currency market microstructure, has taken off in the past decade. This paper extracts from this research four lessons for modeling short-run exchange-rate dynamics. The first lesson is this: Currency flows are key, so models should focus on flows and equilibrium may be defined by equality between purchases and sales. The remaining three lessons concern the economic forces behind currency flows. Second lesson: Models should distinguish financial traders, who essentially use currencies as a store of value, from commercial traders, who use currencies as a medium of exchange. At short horizons cumulative financial flows have a positive relationship with exchange rates while cumulative commercial flows have a negative relationship. Third lesson: Financial traders are motivated by profits, rather than consumption, and their risk-taking will be constrained. Fourth lesson: Commercial traders are motivated by exchange-rate levels and rationally choose not to speculate. The paper notes that the workhorse models of international macroeconomics do not fit most of these lessons. These important lacunae in their microfoundations may help explain their limited empirical success. The paper sketches an optimizing model of currency flows that is consistent with the lessons. This model fits many of the puzzles associated with floating rates and predicts better than the random walk.
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TL;DR: In this article, the authors empirically investigated the main determinants of secret interventions in the foreign exchange (FX) market and used the recent experience of the Bank of Japan to estimate a model that explains the share of secret to reported interventions.
Abstract: This paper empirically investigates the main determinants of secret interventions in the foreign exchange (FX) market. Using the recent experience of the Bank of Japan, we estimate a model that explains the share of secret to reported interventions in the FX market. Two sets of determinants are clearly identified: the first is related to the probability of detection of the central bank orders by market participants; the second, to the central bank’s internal decision to opt for secrecy. Our estimations support the arguments of current microstructure theories that rationalize the use of secret interventions.
TL;DR: In this paper, the authors examined the presence of feedback trading, asymmetric behavior and autocorrelation linkages in several industrial and emerging economies' exchange rates, with respect to the US dollar, as well as the Euro.
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TL;DR: The precise objectives of policy and how they are reflected in foreign exchange market intervention depend on a number of factors, including the stage of a country's development, the degree of financial market development and integration, and a country’s overall vulnerability to shocks.
Abstract: Central banks intervene in foreign exchange markets in order to achieve a variety of overall economic objectives, such as controlling inflation, maintaining competitiveness or maintaining financial stability. The precise objectives of policy and how they are reflected in foreign exchange market intervention depend on a number of factors, including the stage of a country’s development, the degree of financial market development and integration, and a country’s overall vulnerability to shocks. The precise definition of which operations in forex markets constitute “intervention” has also been a matter of controversy.
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TL;DR: The authors used news wire reports to estimate the proportion of secret interventions (i.e., unreported official interventions) in the foreign exchange markets that have been conducted by the three major central banks since 1985.
Abstract: Using a new approach relying on news wire reports, we estimate the proportion of secret interventions (i.e., unreported official interventions) in the foreign exchange markets that have been conducted by the three major central banks since 1985. We therefore revisit the estimation of conditional probabilities of secret operations and compute them by both central bank and operation type. The proportion of secret interventions is found to be lower for concerted operations and to display a great deal of variability over time as well as across the three major central banks.
TL;DR: This paper studied the impact of central bank intervention on the microstructure of currency markets and found that intervention has long-lived effects on quotes when informative about policy objectives and economic fundamentals, or when the threat of future government action is significant and credible.
Abstract: We study the impact of Central Bank intervention on the microstructure of currency markets. We analyze the two major channels of effectiveness of currency management policies, imperfect substitutability and signaling, in a model of sequential trading in which the stylized monetary authority is a rational but not necessarily profit-maximizing player. In the context of our model and consistently with the available empirical literature, intervention has long-lived effects on quotes when informative about policy objectives and economic fundamentals, or when the threat of future government action is significant and credible. A monetary authority attempting to lean against the wind or to chase the trend of the domestic currency is more successful when dealers compete against each other for the incoming trades. The resulting process of intraday price formation and bid-ask spreads are shown to depend crucially on the degree of market power held by the forex dealers, on the sign and magnitude of the announced and realized intervention, on the perceived likelihood of a future intervention to occur, on the transparency of the order flow induced by the intervention, on the direction and heterogeneity of agents' beliefs and expectations, and on the elasticity of risk-averse investors' demand for foreign currency-denominated assets.
TL;DR: In this paper, a regime-switching approach is applied to estimate the chartist and fundamentalist (c&f) exchange rate model originally proposed by Frankel and Froot (1986).
Abstract: In this study a regime-switching approach is applied to estimate the chartist and fundamentalist (c&f) exchange rate model originally proposed by Frankel and Froot (1986). The c&f model is tested against alternative regime-switching specifications applying likelihood ratio tests. Nested atheoretical models like the popular segmented trends model suggested by Engel and Hamilton (1990) are rejected in favour of the multi-agent model. Our findings turned out to be relatively robust when assessing the models’ sub-sample estimates and out-of-sample performance.
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TL;DR: In this article, a simple model of the exchange rate in which agents optimize their portfolio and use different forecasting rules was developed, and they check the profitability of these rules ex post and select the more profitable one.
Abstract: We develop a simple model of the exchange rate in which agents optimize their portfolio and use different forecasting rules. They check the profitability of these rules ex post and select the more profitable one. This model produces two kinds of equilibria, a fundamental and a bubble one. In a stochastic environment the model generates a complex dynamics in which bubbles and crashes occur at unpredictable moments. We contrast these "behavioural" bubbles with "rational" bubbles.