Asymmetric Cointegration,Nonlinear ARDL,and the J-Curve: A Bilateral Analysis of China and Its 21 Trading Partners

This article follows the nonlinear Autoregressive Distributed Lag (ARDL) error-correction methodology to explore nonlinearity in the relationship between the trade balances and the real exchange rates for China and its 21 partners. We find evidence for short-run asymmetric effects of exchange rate in cases of 18 partners, short-run adjustment asymmetry in cases of 11 partners, short-run cumulative asymmetry in cases of seven partners, and a significant long-run asymmetric effect cases of five partners. We find support for the “J-curve” that is only due to appreciation or depreciation of the Yuan in cases of five partners, including the U.S.     

Idiosyncratic risk and expected returns in frontier markets: Evidence from GCC

We investigate the pricing of idiosyncratic volatility of seven frontier markets in six GCC countries. We find a significant (marginal) negative relationship between expected returns and lagged idiosyncratic volatility for individual stocks in Saudi Arabia (Qatar) but none in Kuwait and Abu Dhabi. However, when we estimate conditional idiosyncratic volatility either by EGARCH or AR Models, the relationship turns positive. Introducing unexpected idiosyncratic volatility as an explanatory variable to control for any unexpected returns uncovers the true relationship between expected idiosyncratic volatility and expected returns. The evidence turns out to be robust for return reversals and other control variables. Moreover, the pricing of idiosyncratic risk is less evident in higher country governance and seems to be unrelated to the degree of financial development.     

Exchange rate volatility and its impact on domestic investment

The relationship between exchange rate uncertainty and domestic investment has attracted some attention in macro literature. Previous studies that investigated the relation concentrated on firm level data with mixed results. In this paper we argue that the relationship applies equally at the aggregate. We assess the short-run and long-run effects of exchange rate volatility on domestic investment in each of the 36 countries in our sample using time-series data. The application of the bounds testing approach indicates that exchange rate volatility has significant short-run effects on domestic investment in 27 countries. The short-run effects are translated into the long-run only in 12 countries.     

Real and nominal effective exchange rates of African countries during 1971Q1–2012Q4

One of the macro variables that are included in most models is the exchange rate. Overall performance of a country’s exchange rate is measured by changes in nominal or real effective exchange rate (REER). These rates are constructed and published mostly for industrial countries by international organizations. Less developed countries have received little attention. In this article, the two rates are constructed for 21 African countries using quarterly data over the period 1971Q1–2012Q4. As an application, we use the REERs to show that even in Africa the movements of the real effective rates follow a nonlinear path.     

Currency depreciations and the U.S.–Italian trade balance: Industry-level estimates

As one of the indebted Southern European countries that have put pressure on the Euro in recent months, Italy would benefit from a reduction in its external trade deficit. One channel could be through a weakening of its currency—which would only work if the Euro depreciated against the currency of an outside importer, such as the U.S. dollar. This study examines the response of the trade balances of 106 individual industries to such depreciations, using annual data and applying cointegration analysis. We find that only 19 industries register a long-run improvement, with these concentrated in miscellaneous manufactures (SITC sector 8). Two major products in the automotive industry—petroleum and road motor vehicles, show evidence of a “J-curve” effect.     

Asymmetric effects of exchange rate changes on the demand for money in China

In order to account for currency substitution, the majority of recent studies relating to the specification of the demand for money include the exchange rate as another determinant of the demand for money. However, those who have estimated the demand for money in China have been unable to find any significant effects of exchange rate changes on the demand for money by the Chinese. We show that this is due to the assumption that exchange rate changes have symmetric effects. Once depreciations are separated from appreciations of the yuan, those exchange rate changes are shown to have significant effects on the demand for money in China, but in an asymmetric manner.     

How Sensitive is U.S.-Canadian Trade to the Exchange Rate: Evidence from Industry Data

Previous research has followed four distinct paths to investigate the impact of currency depreciation on the trade balance of a country, using mostly aggregate trade data. In this paper we choose one of those paths and consider the trade between the U.S. and Canada. However, unlike previous research we disaggregate the trade data between the two countries by commodity and consider 152 industries that trade. After estimating inpayment and outpayment schedules for all 152 industries, we find that real depreciation has short-run effects on inpayments of 72 and outpayments of 53 industries. However, the short-run effects translate into the long-run effects only in 43 of inpayment models and 36 of outpayment models. Further analysis reveals that 1% real depreciation of the U.S. dollar has 1.29% positive effects on the U.S. net export earnings.     

Real and nominal effective exchange rates for 22 LDCs: 1971:1–1990:4

The International Monetary Fund constructs and publishes the real and nominal effective exchange rates, mostly for developed but not less developed countries. This paper employs a method of constructing real and nominal effective exchange rate from the literature to produce quarterly data over the 1971–1990 period for 22 developing nations. As an application, the stationarity of real effective exchange rates are determined to establish the empirical validity of the Purchasing Power Parity Theory (PPP). The results reveal that PPP fails to hold for most countries.     

Stability of the money demand function in Asian developing countries

Previous studies that estimated the money demand function in Asian developing countries either employed traditional estimation techniques or recently popularized cointegration technique. While the first group suffers from ‘spurious regression’ problems, the second group interpreted their finding of cointegration as a sign of stability of estimated parameters. This study, after incorporating the CUSUM and CUSUMSQ tests into cointegration analysis, shows that in some Asian countries even though real M1 or M2 monetary aggregates are cointegrated with their determinants, the estimated parameters are unstable.