Long-run dynamics of official and black-market exchange rates in Latin America

This paper attempts to investigate the long-run dynamic relationship between official and black-market exchange rates for four Latin America markets namely, Argentina, Brazil, Chile, and Mexico. We follow (Moore, M. J., & Phylaktis, K. (2000). Black and official exchange rates in the Pacific Basin: Some tests of dynamic behaviour. Applied Financial Economics, 10, 361–369.) and we distinguish between long-run informational efficiency and short-run predictability in a sense that these notions are compatible with cointegration and error-correction mechanisms (ECM). Our findings indicate a constant black-market premium for each country, which is taken as strong support for long-run informational efficiency between the official and black markets for foreign currency. In addition, the evidence of short-run predictability is not considered as a violation of market efficiency, but it is the outcome of optimal arbitrage by rational economic agents.     

Long-run dynamics of official and black-market exchange rates in Latin America

This paper attempts to investigate the long-run dynamic relationship between official and black-market exchange rates for four Latin America markets namely, Argentina, Brazil, Chile, and Mexico. We follow (Moore, M. J., & Phylaktis, K. (2000). Black and official exchange rates in the Pacific Basin: Some tests of dynamic behaviour. Applied Financial Economics, 10, 361–369.) and we distinguish between long-run informational efficiency and short-run predictability in a sense that these notions are compatible with cointegration and error-correction mechanisms (ECM). Our findings indicate a constant black-market premium for each country, which is taken as strong support for long-run informational efficiency between the official and black markets for foreign currency. In addition, the evidence of short-run predictability is not considered as a violation of market efficiency, but it is the outcome of optimal arbitrage by rational economic agents.     

Can central banks be heard over the sound of gunfire?

In this study, we examined the effectiveness of central bank communications during times of significant adverse shocks. Specifically, we examined how the National Bank of Ukraine (NBU) regulated foreign exchange (FX) markets during the Russo-Ukrainian War in 2022. Data collected from both the black and authorized FX markets suggested that the content of the NBU's announcements significantly impacted FX market agents. Announcements aimed at maintaining a fixed (floating) FX rate prompted an increase (decrease) in the black market premium in cash transactions. Moreover, the NBU's announcements influenced the sale side of foreign currency more than any other aspect, an area where the black market FX traders held near monopolistic power.     

Exchange Rate Exposure at the Firm and Industry Level

Previous work on the exposure of firms to exchange rate risk has primarily focused on U.S. firms and, surprisingly, found stock returns were not significantly affected by exchange‐rate fluctuations. The equity market premium for exposure to currency risk was also found to be insignificant. In this paper we examine the relation between Japanese stock returns and unanticipated exchange‐rate changes for 1,079 firms traded on the Tokyo stock exchange over the 1975–1995 period. Second, we investigate whether exchange‐rate risk is priced in the Japanese equity market using both unconditional and conditional multifactor asset pricing testing procedures. We find a significant relation between contemporaneous stock returns and unanticipated yen fluctuations. The exposure effect on multinationals and high‐exporting firms, however, is found to be greater in comparison to low‐exporting and domestic firms. Lagged‐exchange rate changes on firm value are found to be statistically insignificant implying that investors are able to assess the impact of exchange‐rate changes on firm value with no significant delay. The industry level analysis corroborates the cross‐sectional findings for Japanese firms in that they are sensitive to contemporaneous unexpected exchange‐rate fluctuations. The co‐movement between stock returns and changes in the foreign value of the yen is found to be positively associated with the degree of the firm's foreign economic involvement and inversely related to its size and debt to asset ratio. Asset pricing tests show that currency risk is priced. We find corroborating evidence in support of the view that currency exposure is time varying. Our results indicate that the foreign exchange‐rate risk premium is a significant component of Japanese stock returns. The combined evidence from the currency exposure and asset pricing analyses, suggests that currency risk is priced and, therefoe, has implications for corporate and portfolio managers.     

Mean and Variance Causality between Official and Parallel Currency Markets: Evidence from Four Latin American Countries

This paper examines the issue of mean and variance causality across four Latin American official and black markets for foreign currency using monthly data for the period 1976–1993. We apply a recent test developed by Cheung and Ng (1996) in order to test for mean and variance spillovers. The main findings are: (1) In contrast to the findings of previous studies, EGARCH-M processes characterize each bilateral exchange rate series in both markets; (2) There is substantial evidence of causality in both mean and variance with the causality in mean largely being driven by the causality in variance; and (3) The results indicate that the major exporter of causality is the Mexican black market with the black market of Argentina and the black and official markets of Brazil being the smallest contributors.     

Forecasting Emerging Market Exchange Rates from Foreign Equity Options

The use of derivatives to infer future exchange rates has long been a subject of interest in the international finance literature. With the recent currency crises in Mexico, Southeast Asia, and Brazil, work on exchange rate expectations in emerging markets is of particular interest. For some emerging markets, foreign equity options are the only liquid exchange‐traded derivatives with currency information embedded in their prices. Given that emerging markets sometimes undergo currency realignment with discrete jumps in their exchange rate, estimation of risk‐neutral probability density functions from foreign equity option data provides valuable evidence concerning market expectations. To illustrate the use of foreign equity options in estimating market beliefs, we consider Telmex options around the 1994 peso devaluation and find evidence that markets anticipated the change in the Mexican government's foreign exchange policy.     

VOLATILITY SPILLOVERS BETWEEN THE BLACK MARKET AND OFFICIAL MARKET FOR FOREIGN CURRENCY IN GREECE

The issue of volatility spillovers between the black and official exchange markets for U.S. dollars in Greece for 1975–89 is examined. A vector error correction‐bivariate EGARCH model is developed and estimated to capture potential asymmetric effects of innovations and volatility. During the period under investigation, reciprocal spillovers are found between the black and official exchange markets for dollars. Furthermore, spillovers are asymmetric in that bad news in one market has a greater effect on the volatility of the other market than good news. Additionally, the size of spillover effects is greater from the official market to the black market. Finally, the removal of the foreign exchange controls in January 1986 made the volatility of the official exchange rate higher and changed the nature of volatility spillovers between the two markets. JEL Classification: F31, F32     

Are global shocks leading indicators of currency crisis in Viet Nam?

This paper aims to identify leading indicators of a currency crisis in Viet Nam based on an early warning system for the period 1996–February 2016. This paper found that global financial shocks (e.g., regional and global financial crisis, unexpected changes in monetary policy of largest economies such as the United States and the People’s Republic of China), and domestic credit growth rate are leading indicators of a currency crisis in Viet Nam in all three models. Deficits in trade balance, international reserves, and overvaluation of the dong are also good indicators. In addition, a model in which a currency crisis or turbulence in the foreign exchange market is defined based on the exchange market pressure and parallel market premium, with window length of 2 months, outperformed for predicting a currency crisis in Viet Nam. Empirical results suggested that probability of predicting a true currency crisis was 77.5%.     

Rate of return parity and currency crises in experimental asset markets

This paper explores the impact of exchange rate uncertainty on the predictive power of rate of return parity in a laboratory environment, extending the work of Fisher and Kelly [Fisher, E.O., Kelly, F.S., 2000. Experimental foreign exchange markets. Pacific Economic Review 5, 365–388] and Childs and Mestelman [Childs, J., Mestelman, S., 2006. Rate of return parity in experimental asset markets. Review of International Economics 14, 331–347]. While these works use unchanging exchange rates, this paper allows for a change in the exchange rate between laboratory currencies. The data indicate rate of return parity is weakened by the potential for a currency crisis. The results also indicate that currency crises can be caused by self-fulfilling prophecies and that the level of reserves with which a fixed exchange rate is defended impacts the timing of a crisis but does not significantly change the likelihood of a currency crisis.     

The impact of the euro on Europe's financial markets

This paper presents an overview of the impact of the introduction of the euro on Europe's financial structure over the first four years since the start of EMU. It analyzes changes in money markets, bond markets, equity markets and foreign exchange markets. Euro's role in originating or catalyzing trends has been uneven across the spectrum of financial markets. From the supply side, banks and investors in fixed income markets have become more focused on the characteristics of individual borrowers rather than the nationality of the issuer and have built up expertise to evaluate credit risk. European equity markets have also been affected by the enhanced ability of investors to build strategies with a pan‐European perspective as prices increasingly reflected risk factors specific to industrial sectors rather than individual countries. On the borrower side, EMU has increased the attractiveness of market‐based financing methods by allowing debt issuers to tap institutional portfolios across the euro area. Lower barriers to cross‐border financial transactions have also increased the contestability of the market for financial services, be it at the wholesale or the retail level. The introduction of the euro has also highlighted the shortcomings of existing institutional structures and areas where excessive focus on narrowly defined interests may stand in the way of realizing the full potential benefits from the new environment. Diverging legal and institutional infrastructures and market practices can impede further financial market development and deepening. Hence, the euro has put a premium on cooperation between national authorities and institution as a means of achieving a more harmonized financial environment. The impact of EMU on depth in foreign exchange markets has been less clear‐cut, as volatility, spreads, trading volumes and liquidity appear not to have changed in a substantial way. Overall, it seems that the new currency has made some progress towards the goal of becoming a currency of international stature that would rival that of the US dollar. However, a number of the necessary next steps towards achieving this goal are also among the trickiest to implement.