Price and volatility spillovers between exchange rates and stock indexes for the pre- and post-euro period

In this paper we explore the nature of the mean, volatility and causality transmission mechanism between stock and foreign exchange markets for the United States and some major European markets for the periods pre- and post-euro. The asymmetric volatility transmission is described by an extended Multivariate Exponential Generalized Autoregressive Conditionally Heteroskedastic (EGARCH) model. The results support the asymmetric and long-range persistence volatility spillover effect and show strong evidence of causality in the mean and variance between foreign exchange rate and stock price for both pre- and post-euro periods. However, the stock price has a more significant effect on foreign exchange rate for the two subsamples. These results are robust to the cross-correlation function test suggested by Cheung and Ng. The implication is particularly important for international portfolio managers when devising hedging and diversification strategies for their portfolios.     

Mean and volatility dynamics of Indian rupee/US dollar exchange rate series: an empirical investigation

The paper is concerned with time series modelling of foreign exchange rate of an important emerging economy, viz., India, with due consideration to possible sources of misspecification of the conditional mean like serial correlation, parameter instability, omitted time series variables and nonlinear dependences. Since structural change is pervasive in economic time series relationships, the paper first studies this aspect of the exchange rate series in detail and finds the existence of four structural breaks. Accordingly, the entire sample period is divided into five sub-periods of stable parameters each, and then the appropriate mean specification for each of these sub-periods is determined by incorporating functions of recursive residuals. Thereafter, the GARCH and EGARCH models are considered to capture the volatility contained in the data. The estimated models thus obtained suggest that return on Indian exchange rate series is marked by instabilities and that the appropriate volatility model is EGARCH. Further, out-of-sample forecasting performance of the model has been studied by standard forecasting criteria, and then compared with that of an AR model only to find that the findings are quite favorable for the former.      

US exports and time-varying volatility of real exchange rate

The effect of exchange rate volatility on trade is a controversial issue in international economics. Despite a widespread view that an increase in exchange rates volatility reduces trade, there is no real consensus on the direction or the size of the exchange rate volatility–trade level linkages. This paper investigates the relationship between US trade volume and exchange rate volatility using cointegration and error-correction models. We use conditional variances of the real effective exchange rate (REER) series modeled as a generalized autoregressive conditional heteroskedastic (GARCH) process to measure the exchange rate volatility. The cointegration results indicate a significant negative relationship between US export volume and exchange rate volatility. The short-run dynamics of the relationship, however, show that the effects of both real exchange rates and exchange rate volatility are insignificant.     

Conditional volatility persistence and volatility spillovers in the foreign exchange market

I investigate the magnitudes and determinants of volatility spillovers in the foreign exchange (FX) market, using realized measures of volatility and heterogeneous autoregressive (HAR) models. I confirm both meteor shower effects (i.e., inter-regional volatility spillovers) and heat wave effects (i.e., intra-regional volatility spillovers) in the FX market. Furthermore, I find that conditional volatility persistence is the dominant channel linking the changing market states of each region to future volatility and its spillovers. Market state variables contribute to more than half of the explanatory power in predicting conditional volatility persistence, with the model that calibrates volatility persistence and spillovers conditionally on market states performing statistically and economically better. The utilization of market state variables significantly extends our understanding of the economic mechanisms of volatility persistence and spillovers and sheds new light on econometric techniques for volatility modeling and forecasting.     

Regime switches in exchange rate volatility and uncovered interest parity

We use a regime-switching model to examine how exchange rate volatility is related to the failure of uncovered interest parity. Main findings are as follows. First, exchange rate returns are strongly influenced by regime switches in the relationship between the returns and interest rate differentials. Second, low-yielding currencies appreciate less frequently, but once it occurs, their movements are faster than when they depreciate. Third, depreciation of low-yielding currencies and low volatility are mutually dependent on each other. Finally, these three findings are more evident for shorter horizons. The second and third results are consistent with a market participants’ view: short-term carry trades in a low-volatility environment and their rapid unwinding substantially influence exchange rates. We consider the effects of funding liquidity to explain these results.     

人民币兑美元汇率的长期趋势分析

两种货币汇率水平以及波动方向,短期来说取决于两国利率的相对水平(符合利率平价理论);长期来说则取决于两国物价的相对水平(符合购买力平价理论).所有其他因素对汇率所产生的影响,基本上是间接通过对利率或物价水平的作用而传递的.不过,以上的短期趋势和长期趋势的有效性,需要在一个市场化的环境中.     

Nominal exchange rate volatility,relative price volatility,and the real exchange rate

We model real exchange rate, nominal exchange rate, and relative price volatility using real and nominal factors. We analyze these volatility measures across developing and industrialized countries. We find that the inclusion of nominal factors achieves a sizable reduction in the real exchange rate volatility spread between developing and industrialized countries. In addition, we find that nominal factors matter to real exchange rate volatility in the short run and the long run, and that for developing countries, a higher share of real exchange rate volatility stems from relative price volatility.     

A twelve-area model for the equilibrium Chinese Yuan/US dollar nominal exchange rate

This paper investigates the equilibrium CNY/USD nominal exchange rate during 1976-2008. We extend for the first time the five-area FABEER model to a twelve-area TABEER model for China. All parameters are estimated with allowance for endogenous structural breaks. Our investigation of the sustainable current account highlights macroeconomic factors that determine savings and investment in the medium-term. We find that all cointegration relationships are subject to structural breaks. The equilibrium nominal rate was overvalued in most years from early 1990s until 2003. It has been strongly undervalued during 2004-2008. We further compute misalignment rates using a sustainable current account of 3%. Our findings suggest such exogenous input leads to results biased towards larger undervaluation.     

US dollar/Euro exchange rate: a monthly econometric model for forecasting

The intent of this paper is the construction of an econometric model able to produce reliable and reasonable forecasts for the US dollar/Euro real exchange rate. In order to achieve this aim, an area-wide model is analysed. The aggregation is motivated by the fact that the Euro-zone is under a single monetary policy. Furthermore, a more parsimonious parametric model enables one to consider an important source of non-stationarity given by the presence of structural breaks using the multivariate cointegration analysis. Against the Meese-Rogoff critique, the out-of-sample one-step-ahead forecasts using actual values of the exogenous produced by the estimated VECM are reasonably satisfactory.     

Regime shifts in interest rate volatility

I find evidence of regime shifts in interest rate volatility using short-rate data from the U.S., the U.K., Japan, and Canada. The regime shifts, if unaccounted for, could lead to spurious volatility persistence when the volatility processes are estimated with the stochastic volatility (SVOL) model. In contrast, the apparent persistence in volatility drops sharply in three out of the four countries when I estimate the volatility processes with the regime-switching stochastic volatility (RSSV) model. I also contribute to the literature by showing how to account for correlation in the regime-switching stochastic volatility model, which is important for modeling asymmetric volatility.     

Monetary disequilibria and the euro/dollar exchange rate

Although stable money demand functions are crucial for the monetary model of the exchange rate, empirical research on exchange rates and money demand is more or less disconnected. This paper tries to fill the gap for the euro/dollar exchange rate. We investigate whether monetary disequilibria provided by the empirical literature on US and European money demand functions contain useful information about exchange rate movements. Our results suggest that the empirical performance of the monetary exchange rate model improves when insights from the money demand literature are explicitly taken into account.     

Information arrivals and intraday exchange rate volatility

This paper investigates the link between information arrivals and intraday DEM/$ volatility. Information arrivals are measured by the numbers of news items that appeared in the Reuters News Service. We separate news stories into different categories and find that total headline news counts, US and German macroeconomic news and German Bundesbank monetary policy news all have a significant impact on intraday DEM/$ volatility. The larger quantitative effects of the German Bundesbank monetary policy news and US macroeconomic news at 15-min intervals are consistent with the findings of a two-stage adjustment process of public information arrivals [Fleming and Remolona, J. Finance (1999) 1901]. Our results suggest that the persistent of intraday exchange rate volatility set off by public information is extended by traders’ private information about 15 min later. The conclusions are obtained from ARCH models that incorporate intraday seasonal volatility terms.     

Time-varying market,interest rate,and exchange rate risk premia in the US commercial bank stock returns

This paper examines the role of market, interest rate, and exchange rate risks in pricing a sample of the US Commercial Bank stocks by developing and estimating a multi-factor model under both unconditional and conditional frameworks. Three different econometric methodologies are used to conduct the estimations and testing. Estimations based on nonlinear seemingly unrelated regression (NLSUR) via GMM approach indicate that interest rate risk is the only priced factor in the unconditional three-factor model. However, based on ‘pricing kernel’ approach by Dumas and Solnik [(1995). J. Finance 50, 445–479], strong evidence of exchange rate risk is found in both large bank and regional bank stocks in the conditional three-factor model with time-varying risk prices. Finally, estimations based on the multivariate GARCH in mean (MGARCH-M) approach where both conditional first and second moments of bank portfolio returns and risk factors are estimated simultaneously show strong evidence of time-varying interest rate and exchange rate risk premia and weak evidence of time-varying world market risk premium for all three bank portfolios, namely those of Money Center bank, Large bank, and Regional bank.     

The relationship between futures trading activity and exchange rate volatility,revisited

This paper examines the relationship between trading activity in currency futures and exchange rate volatility. In order to measure trading activity, the paper uses both volume and open interest to distinguish between speculators/day traders and hedgers. The study uses three different measures of volatility: (1) the extreme value estimator that measures intra-day volatility; (2) historical volatility; and (3) conditional volatility from the GARCH (1, 1) process. Main finding is that speculators and day traders destabilize the market for futures. Whether hedgers stabilize or destabilize the market is inconclusive. The results suggest that speculators’ demand for futures goes down in response to increased volatility. Meanwhile, the demand from hedgers shows mixed results, depending on the method used to measure volatility.     

A cyclical model of exchange rate volatility

In this paper, we investigate the long run dynamics of the intraday range of the GBP/USD, JPY/USD and CHF/USD exchange rates. We use a non-parametric filter to extract the low frequency component of the intraday range, and model the cyclical deviation of the range from the long run trend as a stationary autoregressive process. We use the cyclical volatility model to generate out-of-sample forecasts of exchange rate volatility for horizons of up to 1 year under the assumption that the long run trend is fully persistent. As a benchmark, we compare the forecasts of the cyclical volatility model with those of the range-based EGARCH and FIEGARCH models of Brandt and Jones (2006). Not only does the cyclical volatility model provide a very substantial computational advantage over the EGARCH and FIEGARCH models, but it also offers an improvement in out-of-sample forecast performance.     

Realized volatility spillovers between US spot and futures during ECB news: Evidence from the European sovereign debt crisis

We study the simultaneity impact of the European Central Bank news on the daily realized volatility transmission mechanism (spillovers) among various US spot and futures markets. To this end, we apply a bias-corrected vector autoregressive model via Wild bootstrap simulation. We use minute-by-minute intraday data to construct daily realized volatility. We consider 429 news form the ECB as important events employing two major classifications, namely, a country classification with the highest total number of days related ECB news and a type of ECB news classification. We find that investors in futures markets react more vigorously and mainly for the ECB news that is associated with the group of EMU member states applied structural reforms. Yet, more importantly, we show that the US stock markets response heterogeneously to the ECB news, as we find key disagreements in the reactions both across the US markets and the types of ECB news studied. Such evidence is consistent with the explanation of the differential interpretation of information among market participants. From a practical point of view, we suggest that investors in the US spot market can effectively use two or more futures contracts to minimize their exposure to volatility risk associated with that news.     

Real dollar exchange rate under the Bretton-Woods and floating exchange-rate regimes

The focus of the paper is on real exchange rates for the dollar over the period 1957 to 1985. Most such exchange rates followed an almost steplike pattern, showing relatively little movement in the late 1950s and 1960s, falling abruptly and then remaining low in the 1970s and finally in the 1980s rising back to levels close to those that prevailed initially. Contrary to much recent commentary, therefore, the period that appears different is not the last five years but the decade that preceded them. An important factor underlying this pattern of exchange-rate movement, according to results presented in the paper, was the behavior of monetary policy and, hence, inflation in the United States. What remains to be established is the precise mechanism linking money and real exchange rates and the (relative) strength of those links.     

Long memory and fractional integration in high frequency data on the US dollar/British pound spot exchange rate

This paper analyses the long-memory properties of a high-frequency financial time series dataset. It focuses on temporal aggregation and other features of the data, and how they might affect the degree of dependence of the series. Fractional integration or I(d) models are estimated with a variety of specifications for the error term. In brief, we find evidence that a lower degree of integration is associated with lower data frequencies. In particular, when the data are collected every 10 min there are several cases with values of d strictly smaller than 1, implying a mean-reverting behaviour; however, for higher data frequencies the unit root null cannot be rejected. This holds for all four series examined, namely Open, High, Low and Last observations for the US dollar/British pound spot exchange rate and for different sample periods.