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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15 Sep 1994
TL;DR: The authors summarizes the methods and types of indicators that are often employed, both insid and outside the IMF, to assess whether exchange rates are broadly in line with economic fundamentals and concludes that they are not.
Abstract: This paper summarizes the methods and types of indicators that are often employed, both insid and outside the IMF, to assess whether exchange rates are broadly in line with economic fundamentals.
87 citations
TL;DR: The question of whether domestic bonds are perfect substitutes for foreign bonds in investors' portfolios, implying that the expected rates of returns must be equalized across currencies, is an important one for two reasons as discussed by the authors.
Abstract: I. Motivations for the Test The question of whether or not domestic bonds are perfect substitutes for foreign bonds in investors' portfolios, implying that the expected rates of returns must be equalized across currencies, is an important one for two reasons. The question is crucial, first, for choosing among various asset-market models of exchange rate determination and, second, for evaluating tests of efficiency in the forward exchange market. To illuminate the first motivation, a brief discussion of models of exchange rate determination is necessary. All "asset-market" models share the assumption that there are no significant transactions costs, capital controls, or other impediments to the international flow of capital. Thus actual portfolios adjust instantaneously to equal desired portfolios. This implies, for example, covered interest parity: the domestic interest rate should differ from the foreign interest rate by an amount exactly equal to the forward discount rate. Perfect substitutability between domestic and foreign bonds is the stronger assumption that market participants are indifferent as to the currency composition of their portfolio. It implies uncovered interest parity: the domestic interest rate must differ from the foreign interest rate by an amount exactly equal to the expected rate of depreciation. The perfect substitutability assumption is far from standard. In fact, exchange rate models within the asset-market view can be classified into those that belong to the "monetary approach," defined by the assumption of perfect substitutability, and those that belong to the "portfolio-balance approach," defined by the assumption of imperfect substitutability. In the portfolio-balance approach, investors hold well-defined proportions of their wealth in the form of each country's assets, with the proportions depending on the expected rates of return, as in equation (1):
87 citations
TL;DR: In this paper, the West German Bundesbank's use of sterilization during the recent years of exchange-rate flexibility is investigated. And the authors conclude that the Bundesbank has little if any power to influence the exchange rate over that time span without altering current or expected future money-market conditions.
87 citations
TL;DR: In this paper, models predicting overshooting and magnification, respectively, will be checked for their consistency with two key empirical regularities: A The observed pattern of price level vs exchange-rate volatility B The observed patterns of spot exchange rate vs forward exchange rate volatility.
86 citations
TL;DR: In this article, the authors show that typical efficiency tests of foreign exchange markets are strictly valid only when individuals are risk neutral and prices are non-stochastic, and that the neglect of these factors is of little significance.
86 citations