Topic
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.
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TL;DR: In this article, the authors provided an analysis of the long-run relationships and short-run dynamics between stock prices and exchange rates as well as the channels through which exogenous shocks influence these markets.
91 citations
TL;DR: In this article, a Generalized Method of Moments estimation of the determinants of dollar/yen bid-ask spreads is undertaken, where a long time-series of daily spot foreign exchange trading volumes is used for the first time.
Abstract: A Generalized Method of Moments estimation of the determinants of dollar/yen bid–ask spreads is undertaken. In particular, a long time-series of daily spot foreign exchange trading volumes is used for the first time. In line with standard spread models and volume theories, it can be shown that unpredictable foreign exchange turnover (a measure of the rate of information arrival) increases spreads, while predictable turnover decreases them. Both effects are strongly significant when employing spot turnover instead of proxies like forward turnover as in previous studies. The results are also found to be robust when unpredictable Reuters quoting frequency is used as an instrument for unpredictable trading volumes to cope with their endogeneity. Spread estimations with plain (non-decomposed) volumes are rejected as misspecified. Finally, there is evidence for the conditional heteroscedasticity of unpredictable spot foreign exchange volumes.
91 citations
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TL;DR: The authors analyzed the transmission of real external shocks to the domestic economy under fixed and flexible exchange rate regimes for a broad sample of countries in a Panel VAR and found that flexible exchange rates do not insulate output better from external shocks if the country imports mainly low pass-through goods and can even amplify the output response if foreign indebtedness is high.
Abstract: A traditional argument in favor of flexible exchange rates is that they insulate output better from real shocks, because the exchange rate can adjust and stabilize demand for domestic goods through expenditure switching. This argument is weakened in models with high foreign currency debt and low exchange rate pass-through to import prices. The present study evaluates the empirical relevance of these two factors. We analyze the transmission of real external shocks to the domestic economy under fixed and flexible exchange rate regimes for a broad sample of countries in a Panel VAR and let the responses vary with foreign currency indebtedness and import structure. We find that flexible exchange rates do not insulate output better from external shocks if the country imports mainly low pass-through goods and can even amplify the output response if foreign indebtedness is high.
91 citations
TL;DR: In this paper, the authors examine the implications of carry trades for speculative dynamics and show that carry costs can drastically change the nature of the price dynamics and suggest that markets that combine significant costs of carry and low resilience have the pre-conditions for large and persistent deviations of price from fundamentals, followed by abrupt reversals.
Abstract: When a currency trader borrows Japanese yen at 1 percent to fund the purchase of US dollar assets that yield 5 percent, the trader makes a profit even if the dollar/yen exchange rate remains unchanged. This paper examines the implications of such carry trades for speculative dynamics. In the absence of carry costs, we establish the benchmark result that speculation can be ruled out. However, carry costs can drastically change the nature of the price dynamics. Our results suggest that markets that combine significant costs of carry and low "resiliency" (such as the foreign exchange market) have the pre-conditions for large and persistent deviations of price from fundamentals, followed by abrupt reversals. Not only does uncovered interest parity fail, but a currency with a high interest rate will exhibit the classic price pattern of going up by the stairs, and coming down in the elevator.
91 citations
TL;DR: This paper introduces a prediction and decision making model based on Artificial Neural Networks (ANN) and Genetic Algorithms that achieves 72.5% prediction accuracy and 23.3% Annualized Net Return.
91 citations