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.

Why does the Australian Dollar Move so Closely with the Terms of Trade

Abstract: The paper is motivated by two empirical results. Australia’s terms of trade exhibit temporary fluctuations around a slowly declining trend, and movements in Australia’s real exchange rate tend to follow those in the terms of trade. Together these results imply predictability in Australia’s real exchange rate as well as the presence of predictable excess returns that are sometimes quite large. Using a simple econometric model, with the terms of trade as the sole explanator, the paper demonstrates the forecastability of Australia’s real exchange rate over horizons ranging from one to two years. It then quantifies the magnitude of the predictable excess returns to holding Australian dollar denominated assets over such horizons, finding them to be highly variable and sometimes quite large in magnitude. The results suggest a relative scarcity of forward-looking foreign exchange market participants with an investment horizon of a year or more.

Unexpected Real Consequences of Floating Exchange Rates

Abstract: After a decade of floating exchange rates, international monetary reform is again in the air, and it is thus timely to ask how well (or badly) the current system is functioning. But compared to what? Because the current monetary arrangements came into effect following years of vigorous debate on the merits of exchange rate flexibility, some observers appear to forget that these arrangements were not in reality ‘adopted’, let alone ‘designed.’2 Rather, they were initiated by the collapse of the Bretton Woods regime and given markedly after-the-fact approval by an International Monetary Fund whose members were unable to agree upon an alternative, i.e. any system imposing even minimal restraints on the national policies of members. Since the present time seems no more propitious than the early 1970s for the willing sacrifice of national sovereignty by IMF members,3 any argument for system reform must be solidly grounded in the accumulated experience of floating, not the dogmas of the Bretton Woods era.

Expectations driven distortions in the foreign exchange market

Abstract: This paper explores the phenomenon of lasting deviations of the exchange rate from its fundamental value in the foreign exchange market. Motivated by empirical observations a chartists–fundamentalists model is developed in which boundedly rational agents repeatedly choose between technical and fundamental trading rules to determine their speculative investment positions. Crucial for the dynamics is how the traders perceive the fundamental exchange rate. This perception process is based on psychological evidence. Simulations give rise to bubbles but simultaneously display quite realistic exchange rate dynamics (unit roots in the exchange rates, fat tails for returns, and volatility clustering).

Stabilization Policies in Developing Countries with a Parallel Market for Foreign Exchange; A Formal Framework

Abstract: The paper develops and tests a model of a developing economy that incorporates trade and capital restrictions, illegal transactions, a parallel foreign exchange market, currency substitution features, and forward-looking rational expectations. Temporary expansionary demand policies are associated with an increase in output and prices, a fall in the stock of net foreign assets, and a depreciation of the parallel exchange rate. The speed of adjustment is inversely related to the degree of rationing in the official foreign currency market. A once-for–all devaluation of the official exchange rate has no long-term effect on the premium.

Exchange Rate and Stock Price Interactions in European Emerging Financial Markets Before and after the Euro

Abstract: In this paper, we investigate price interactions between two main components of European emerging financial markets, namely the foreign exchange market and the stock market, before and after the adoption of the Euro by most European Union (EU) economies. We estimate and test a bivariate vector autoregressive model using daily observations on the stock price index and nominal exchange rate for Hungary, Czech Republic and Poland, during 2/1/1995 - 31/12/1998 for the pre-Euro period and 1/1/1999 - 31/12/2003 for the Euro period. We find that for the pre-Euro period, stock prices unidirectionally Granger-cause exchange rates in Hungary only; in the Czech Republic and Poland, mutually reinforcing interactions between exchange rates and stock prices seem to exist. During the Euro period, exchange rates unidirectionally Granger-cause stock prices in all the three sample economies. We also find higher positive correlations among the stock markets in Hungary, Czech and Poland during the Euro period than is the case in the pre-Euro period. Similar results are obtained with respect to the foreign exchange markets. These findings are consistent with the dynamic nature of the transition process, suggesting that causality and correlations are much more easier to detect as the markets become more integrated with the EU.