Showing papers on "Foreign exchange market published in 2013"

Do banks benefit from internationalization? Revisiting the market power-risk nexus

Abstract: We analyze the impact of bank internationalization on domestic market power (Lerner index) and risk for German banks. Risk is measured by the official declaration of regulatory authorities that a bank is distressed. We distinguish the volume of foreign assets, the number of foreign countries, and different modes of foreign entry. Our analysis has three main results. First, higher market power is associated with lower risk. Second, holding assets in many countries reduce market power at home, but banks with a higher share of foreign assets exhibit higher market power. Third, bank internationalization is only weakly related to bank risk.

Oil Prices and Emerging Market Exchange Rates

Abstract: This paper investigates the role of oil prices in explaining the dynamics of selected emerging countries' exchange rates. Using daily data series, the study concludes that a rise in oil prices leads to significant appreciation of emerging economies' currencies against the U.S. dollar. The authors divide daily returns from January 3, 2003, to June 2, 2010, into three subsamples and test the impact of changes in oil prices on exchange rate movements, generalizing impulse response functions to track the dynamic response of each exchange rate in three different time periods. Their findings suggest that oil price dynamics changed significantly in the sample period and the relationship between oil prices and exchange rates became more obvious after the 2008 financial crisis.

Regulating Digital Currencies: Bringing Bitcoin within the Reach of the IMF

Abstract: This paper examines the potentially destabilizing effects of emerging digital currencies on the international foreign currency exchange. Specifically, it examines “Bitcoin,” a decentralized, partially anonymous, and largely unregulated digital currency that has become particularly popular in the last few years. The paper argues that the International Monetary Fund, the institution responsible for coordinating the stability of foreign exchange rates, is ill-equipped to handle the widespread use of Bitcoins into the foreign exchange market. It highlights the inability of the Fund to intervene in the event of a speculative attack on a currency by Bitcoin users. The paper concludes by suggesting two interpretations of the Fund’s incorporating document, the Articles of Agreement, which would allow it to intervene in the event of such an attack.

Rating agencies’ signals during the European sovereign debt crisis: Market impact and spillovers

Abstract: The ongoing financial crisis has drawn considerable attention to the role of credit rating agencies in the financial system. We examine how the foreign exchange market reacts to sovereign credit events prior to (2000–2006) and during the crisis (2006–2010). The sample includes a broad set of countries in Europe and Central Asia in order to investigate spillover effects. We find that rating agencies’ signals do affect the own-country exchange rate and we identify strong spillover effects to other countries’ exchange rates in the region. In both cases, the impact of outlook and watch signals is stronger than the impact of actual rating changes. Market reactions and spillovers are far stronger during the financial crisis period than pre-crisis. Negative news from all three major agencies has an impact, whereas only Moody's positive news produces a reaction. Negative news from Fitch tends to have the strongest effect. The findings are important in enhancing understanding of the role of rating agencies and the market response to their signals.

Returns and volatility spillover between stock prices and exchange rates

Abstract: Purpose – The purpose of this paper is to analyze the nature of returns and volatility spillovers between exchange rates and stock price in the IBSA nations (India, Brazil, South Africa).Design/methodology/approach – The study uses VAR framework and the recently proposed Spillover measure of Diebold and Yilmaz to examine the returns and volatility spillover between exchange rates and stock prices of IBSA nations. In addition, multivariate GARCH with time varying variance‐covariance BEKK model is used as a benchmark against the spillover methodology proposed by Diebold and Yilmaz.Findings – The results of multivariate GARCH model suggests the integration between stock and foreign exchange markets and indicates the existence of bi‐directional volatility spillover between stock and foreign exchange markets in the IBSA countries. Spillover results using the Diebold Yilmaz model suggest the bi‐directional contribution between stock and foreign exchange market, in terms of both returns and volatility spillovers...

Empirical Research on Sovereign Debt and Default

Abstract: In this essay we review the empirical literature about sovereign debt and default. As we survey the work of economists, historians, and political scientists, we also emphasize parallel developments by theorists and recommend steps to improve the correspondence between theory and data.

Foreign Exchange Intervention in Emerging Markets: A Survey of Empirical Studies

Abstract: Nowadays foreign exchange interventions occur in emerging market economies, whereas empirical studies on interventions mainly refer to advanced economies. However, interventions in emerging markets are different from those in advanced economies: they occur ‘regularly’ and central banks have considerable leverage, derived from relatively high reserves, some non-sterilisation, the central bank’s information advantage and capital controls. Consequently, these interventions often successfully impact the level and volatility of exchange rates. Nevertheless, more research on interventions in emerging markets is needed analysing the influence of heterogeneous institutional circumstances, examining the role of central bank communication and using high-frequency data.

Overconfidence, overreaction and personality

Abstract: Purpose – The purpose of this paper is to systematically profile investors’ personality traits to examine if, and how, those traits are associated with phenomena observed in financial markets. In particular, the paper looks at overconfidence and overreaction in an experimental foreign exchange market. Design/methodology/approach – The paper measures the personality of the subjects using the short form of the NEO-PIR instrument, the NEO-FFI developed by Costa and McRae (1992) which is based on Norman's (1963) “Big Five” personality constructs of negative emotion, extraversion, openness to experience, agreeableness and conscientiousness. The paper measures psychological gender using questions developed by Bem (1994). Preference for innovation and risk-taking propensity are measured using instruments developed by Jackson (1976). The paper then examines the behavior of the subject who traded interactively in “real time” in an interactive-simulated foreign exchange market where “price discovery” was instantane...

Effects of International Financial and Energy Sanctions on Iran's Informal Economy

Abstract: This paper discusses the extent to which sanctions and the informal economy affect the political economy of Iran, and highlights some important transmission channels by which these sanctions affect the Iranian informal economy. The effects of the recent sanctions on Iran's informal economy have been transmitted mainly through the foreign exchange market. This article concludes that despite economic reforms under the Mohammad Khatami government, financial pressures and the foreign exchange market could contribute to an increase in the size of Iran's informal economy in the future. Though the financial and energy sanctions influence Iran's fiscal policies and negatively impact economic growth, a moderately sized informal economy could improve political stability to the country by reducing income inequality.

The Impact of Macro News and Central Bank Communication on Emerging European Forex Markets

Abstract: We employ a two-stage empirical strategy to analyze the impact of macroeconomic news and central bank communication on the exchange rates of three Central and Eastern European (CEE) currencies against the euro. First we estimate the nominal equilibrium exchange rate based on a monetary model. Second, we employ a high-frequency GARCH model to estimate the effects of the news and communication along with the estimated exchange rate misalignment on the exchange rate as well as its volatility. The analysis is performed during the pre-crisis (2004-2007) and crisis (2008-2009) periods. CEE currencies react to macroeconomic news during both periods in an intuitive manner that corresponds to exchange rate-related theories. However, the responsiveness of the currencies to central bank verbal interventions becomes important only during the crisis period.

Effects of Exchange Rate Volatility on the Stock Market: A Case Study of South Africa

Abstract: This study assessed the effects of currency volatility on the Johannesburg Stock Exchange. An evaluation of literature on exchange rate volatility and stock markets was conducted resulting into specification of an empirical model. The Generalised Autoregressive Conditional Heteroskedascity (1.1) (GARCH) model was used in establishing the relationship between exchange rate volatility and stock market performance. The study employed monthly South African data for the period 2000 – 2010. The data frequency selected ensured an adequate number of observations. A very weak relationship between currency volatility and the stock market was confirmed. The research finding is supported by previous studies. Prime overdraft rate and total mining production were found to have a negative impact on Market capitalisation. Surprisingly, US interest rates were found to have a positive impact on Market capitalisation. The study recommended that, since the South African stock market is not really exposed to the negative effects of currency volatility, government can use exchange rate as a policy tool to attract foreign portfolio investment. The weak relationship between currency volatility and the stock market suggests that the JSE can be marketed as a safe market for foreign investors. However, investors, bankers and portfolio managers still need to be vigilant in regard to the spillovers from the foreign exchange rate into the stock market. Although there is a weak relationship between rand volatility and the stock market in South Africa, this does not necessarily mean that investors and portfolio managers need not monitor the developments between these two variables. DOI: 10.5901/mjss.2013.v4n14p561

Forex-foreteller: currency trend modeling using news articles

Abstract: Financial markets are quite sensitive to unanticipated news and events. Identifying the effect of news on the market is a challenging task. In this demo, we present Forex-foreteller (FF) which mines news articles and makes forecasts about the movement of foreign currency markets. The system uses a combination of language models, topic clustering, and sentiment analysis to identify relevant news articles. These articles along with the historical stock index and currency exchange values are used in a linear regression model to make forecasts. The system has an interactive visualizer designed specifically for touch-sensitive devices which depicts forecasts along with the chronological news events and financial data used for making the forecasts.

A Genetic Programming Approach for EUR/USD Exchange Rate Forecasting and Trading

Abstract: The purpose of this article is to present a novel genetic programming trading technique in the task of forecasting the next day returns when trading the EUR/USD exchange rate based on the exchange rates of historical data. Aiming at testing its effectiveness, we benchmark the forecasting performance of our genetic programming implementation with three traditional strategies (naive strategy, MACD, and a buy & hold strategy) plus a hybrid evolutionary artificial neural network approach. The proposed genetic programming technique was found to demonstrate the highest trading performance in terms of annualized return and information ratio when compared to all other strategies which have been used. When more elaborate trading techniques, such as leverage, were combined with the examined models, the genetic programming approach still presented the highest trading performance. To the best of our knowledge, this is the first time that genetic programming is applied in the problem of effectively modeling and trading with the EUR/USD exchange rate. Our application now offers practitioners with an effective and extremely promising set of results when forecasting in the foreign exchange market. The developed genetic programming environment is implemented using the C++ programming language and includes a variation of the genetic programming algorithm with tournament selection.

Is China or India More Financially Open

Abstract: Measures of de facto capital account openness for China and India raise the question whether the Chinn-Ito measure of de jure capital account openness is useful and whether the Lane-Milesi-Ferretti measure of de facto openness ranks the two countries correctly. We examine eight dimensions of de facto capital account openness. Four measures based on onshore and offshore prices test the law of one price. Among the four quantity measures, we introduce two new ones into the debate: the openness of consolidated banking systems and the internationalisation of currencies. Generally, the measures show both economies becoming more financially open over time. In six of the eight dimensions, the Indian economy appears to be more open financially. Nevertheless, policy continues to segment onshore and offshore markets in both and policymakers face challenges in further financial integration.

Improved weight fuzzy time series as used in the exchange rates forecasting of us dollar to ringgit malaysia

Abstract: Foreign exchange rate (forex) forecasting has been the subject of several rigorous investigations due to its importance in evaluating the benefits and risks of the international business environments Many methods have been researched with the ultimate goal being to increase the reliability and efficiency of the forecasting method However as the data are inherently dynamic and complex, the development of accurate forecasting method remains a challenging task if not a formidable one This paper proposes a new weight of the fuzzy time series model for a daily forecast of the exchange rate market Through this method, the weights are assigned to the fuzzy relationships based on a probability approach This can be implemented to carry out the frequently recurring fuzzy logical relationship (FLR) in the fuzzy logical group (FLG) The US dollar to the Malaysian Ringgit (MYR) exchange rates are used as an example and the efficiency of the proposed method is compared with the methods proposed by Yu and Cheng et

Market Volatility and Foreign Exchange Intervention in EMEs: What Has Changed? - An Overview

Abstract: Over the past five years, huge swings in capital flows to and from emerging market economies (EMEs) have led many countries to re-examine their foreign exchange market intervention strategies. Quite unlike their experiences in the early 2000s, several countries that had at different times resisted appreciation pressures suddenly found themselves having to intervene against strong depreciation pressures. The sharp rise in the US long-term interest rate from May to August 2013 led to heavy pressures in currency markets. Several EMEs sold large amounts of forex reserves, raised interest rates and – equally important – provided the private sector with insurance against exchange rate risks. This volume, summarising the discussion and papers presented at the meeting of Deputy Governors of major EMEs in Basel on 21 – 22 February 2013, focuses on three main questions concerning foreign exchange intervention. First, what is the role of a flexible exchange rate in stabilising the economy and promoting financial stability and development? Second, how have the motives and strategy behind the interventions changed since the 2008 global financial crisis? Finally, is intervention effective and, if so, how can its efficacy be measured?The main conclusion emerging from the discussion is that a flexible exchange rate plays a crucial role in smoothing output volatility in EMEs. However, as highlighted by several papers in this volume, a highly volatile exchange rate can increase output volatility and itself become a source of vulnerability. Second, over the past five years, most official forex interventions in EMEs were intended to stem volatility rather than to achieve a particular exchange rate. Finally, the majority view was that exchange rate intervention needs to be consistent with the monetary policy stance. Persistent, one-sided intervention, associated with sharp expansion of central bank balance sheets, creates risks for the economy. Yet there was no consensus about the effectiveness of forex intervention. Whereas intervention was viewed as an instrument that could potentially curb forex volatility and support market functioning, many participants were skeptical about its effectiveness in the face of a shift in the equilibrium exchange rate. A review of replies from central banks to a survey questionnaire suggested that, while intervention may work mainly through the signalling channel, some of its effectiveness may be due to the fact that it was combined with other measures to moderate capital flows or prevent the build-up of certain positions in the foreign exchange market. In several cases, intervention had no persistent effects on the exchange rate and might have helped to exacerbate exchange rate volatility in the wrong direction. This overview is organised around the three main themes of the meeting. Section I looks at the role of a flexible exchange rate. Section II discusses the motives and objectives behind intervention. Section III reviews lessons learned about the effectiveness of intervention.Full publication: Market Volatility and Foreign Exchange Intervention in EMEs: What Has Changed?

Can social microblogging be used to forecast intraday exchange rates

Abstract: The Efficient Market Hypothesis (EMH) is widely accepted to hold true under certain assumptions. One of its implications is that the prediction of stock prices at least in the short run cannot outperform the random walk model. Yet, recently many studies stressing the psychological and social dimension of financial behavior have challenged the validity of the EMH. Toward this aim, over the last few years, internet-based communication platforms and search engines have been used to extract early indicators of social and economic trends. Here, we used Twitter's social networking platform to model and forecast the EUR/USD exchange rate in a high-frequency intradaily trading scale. Using time series and trading simulations analysis, we provide some evidence that the information provided in social microblogging platforms such as Twitter can in certain cases enhance the forecasting efficiency regarding the very short (intradaily) forex.

Some stylized facts of return in the foreign exchange and stock markets in Peru

Abstract: Purpose – The purpose of this paper is to find and describe some stylized facts for foreign exchange and stock market returns, which are explored using statistical methods.Design/methodology/approach – Formal statistics for testing presence of autocorrelation, asymmetry, and other deviations from normality are applied. Dynamic correlations and different kernel estimations and approximations to the empirical distributions are also under scrutiny. Furthermore, dynamic analysis of mean, standard deviation, skewness and kurtosis are also performed to evaluate time‐varying properties in return distributions.Findings – The findings include: different types of non‐normality in both markets, fat tails, excess furtosis, return clustering and unconditional time‐varying moments. Identifiable volatility cycles in both forex and stock markets are associated to common macro financial uncertainty events.Originality/value – The paper is the first work of this type in Peru.

Exchange Rate Policy and Devaluation in Malawi

Abstract: The Malawian economy has in recent months been plagued by a severe foreign exchange crisis, fueled in part by a steadily rising import bill, sharp successive declines in tobacco export prices, the suspension of direct government budget support from several development partners in 2011, and an all-time low in international investor confidence. Up until the regime change in April 2012, the government resisted calls for a devaluation, which at the time resulted in a thriving parallel foreign exchange market. At its peak, the Malawi kwacha was trading at a premium of up to 100 percent in this secondary market. Economic theory shows that such a situation has adverse implications for an economy in terms of the balance-of-payments adjustment process and income distribution in the economy. Those with access to foreign exchange at the official rate are able to extract rents by selling foreign currency or imported goods at inflated prices. Imports sold domestically are then often valued at the parallel exchange rate rather than the official rate, with the parallel market rate serving as the only adjustment mechanism through which equilibrium can be restored in the balance of payments. This has a significant impact on domestic inflation to the detriment of consumers, while those with preferential access to foreign exchange at the official rate capture large rents. A simulation exercise using an economy-wide model for Malawi considers how the economy responds to different types of foreign exchange shocks under fixed and flexible exchange rate regimes. While the foreign exchange crisis in itself has severe negative implications for the economy, our results suggest that the economy responds much better to these types of shocks under a flexible exchange rate regime (that is, devaluations or a free-floating currency). Our main simulation shows that under the latter policy, gross domestic product growth, although negative, is 1.5 percentage points higher than under a fixed exchange rate policy. Similarly, poverty is 6.9 percentage points lower. A relaxation of the exchange rate policy, however, is only part of the solution; in the longer run, good governance and sound macroeconomic policy that is conducive to growth are needed to address the underlying structural problems in the economy that also contribute to foreign exchange shortages.

The Micro-Macro Disconnect of Purchasing Power Parity

Abstract: This paper reconciles the persistence of aggregate real exchange rates with the faster adjustment of international relative prices in microeconomic data. Error correction model estimates indicate that a different mix of shocks drives international price deviations at the microeconomic level and that dynamic adjustment works through arbitrage in the goods market rather than the foreign exchange market. When half-lives are estimated conditional on a common set of estimated macro shocks, we find that micro relative prices exhibit every bit as much persistence as aggregate real exchange rates. These results challenge theories of real exchange rate persistence based on sticky prices and heterogeneity across goods.

Order Flow and the Real: Indirect Evidence of the Effectiveness of Sterilized Interventions

Abstract: This study presents indirect evidence of the effectiveness of sterilized interventions in Brazil based on the complete records of daily customer order flow data reported by Brazilian dealers, as well as foreign exchange intervention data over a time span of 10 years (2002-2011). We find that the effect of USD sales by end-users on the BRL/USD was much stronger on days in which the BCB did not intervene in the spot foreign exchange market.