Foreign exchange market

About: Foreign exchange market is a research topic. Over the lifetime, 6661 publications have been published within this topic receiving 153384 citations. The topic is also known as: forex & FX.

Calendar anomalies in the Turkish foreign exchange markets

Abstract: This paper investigates calendar anomalies in the Turkish foreign exchange markets during 1986–1994 period. Changes in the free market and official daily exchange rates between the Turkish lira (TL) and US dollar (USD) and the German mark (DM) are examined for empirical regularities on different days of the week, around the turn of the month and before holidays. The findings reveal that free market rates exhibit day-of-the-week and week-of-month effects. In addition free market DM returns display a holiday anomaly. These calendar anomalies are explained by cash disbursement patterns, together with currency substitution in the economy. The impact of treasury auctions and banks' management of liquidity on day-of-the-week effect is also discussed.

Ugandan trade policy and export performance in the 1990s

Abstract: The Ugandan economy has been transformed since 1987. We ask how effective have the reforms been in increasing the incentives to exporters. Uganda has made significant progress in reducing the anti-export bias in its trade policy. Taxes on exports have been abolished, the foreign exchange market is liberalised and exporters are allowed to retain their export earnings. Import protection has also been reduced considerably. However, while the relative incentives to exporting have improved, export earnings have not. The real problem facing Uganda is the severe lack of export diversification and the fact that it is a price taker on world markets. Uganda can take measures to encourage export diversification, both in terms of quality and niche markets for traditional commodities and in terms of encouraging non-traditional exports. Trade policy reforms are only part of such a strategy. Improved infrastructure and institutional support are an important component of export support, to reduce the adverse effects of natural barriers. We conclude that the principal trade policy reforms have been implemented, and the policy environment is right now for export support, through investment in infrastructure and institutional support. Outline

Volatility and the Carry Trade

Abstract: The currency 'carry trade', in which an investor buys assets in a higher yielding currency by borrowing in a lower yielding currency, has been consistently exploited as a source of profits by investors. In this paper, we discuss the effectiveness of the carry trade as prospective risk (measured by implied volatilities) in exchange rates varies. Based on simple equilibrium arguments we propose the hypothesis that the carry trade is effectively a form of short volatility trade. We also explore a simple strategy that combines carry with options and present a heuristic statistic for the measurement of the economics of the carry trade. We test the stratgy on actual historical carry and option price data and find that the hypothetical strategy allows for the presence of arbitrage opportunities between the forex option and carry markets.

Macro Lessons from Microstructure

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.

Parallel markets, the foreign exchange auction, and exchange rate unification in Zambia

Abstract: A large thriving parallel market for foreign exchange has coexisted with a rich menu of official exchange rate policies aimed at achieving a more flexible exchange rate and price system as well as financial and trade liberalization. Despite aggresive policies in these areas, particularly for the exchange rate, the black market premium (defined as the ratio of the black market rate to the official rate) remains high. The authors examine the origins of the parallel market, the statistical properties of the parallel premium, and the shocks and macroeconomic policy changes that influence its evolution. Using annual data, they specify and estimate and eclectic error-correction model for the premium. They find that the large parallel market might have caused problems in macroeconomic management and economic reform. Also, the findings show that foreign inflation and depreciation of the black market rate (in a cost-push manner) directly increases domestic inflation. The authors conclude that exchange rate reform without fiscal reform may be futile and that it is important to liberalize major trade and financial markets in such a way as to compress the parallel market and prevent the premium from serving as a major signal to the economy.