Exchange rate dynamics and their effect on macroeconomic volatility in selected CEE countries

To understand the potential for forming an optimum currency area it is important to investigate the origins of macroeconomic volatility. We focus on the contribution of real exchange rate shocks to macroeconomic volatility in selected Central and Eastern European countries. The contribution of real exchange rate shocks relative to other shocks allows us to evaluate whether the real exchange rate is a source of volatility or a buffer against shocks, as the theory suggests. The identification of the contributions is based on variance decomposition in two-country structural VAR models, which are identified by the sign restriction method. For most of the countries in the sample, shocks are predominantly symmetric relative to their effective counterpart, although the role of non-symmetric shocks is non-negligible. In general, for all the countries considered except Bulgaria and Slovenia, the real exchange rate does not generate large volatility over the business cycle and, with the exception of Bulgaria and Romania, is mostly driven by the non-symmetric shocks. These results are consistent with the real exchange rate having a shock-absorbing nature.     

人民币汇率对FDI影响的实证分析

文章通过对汇率与FD I相关理论的述评和构建计量模型后认为:人民币汇率长期波动的降低和人民币贬值都能促进FD I的流入,而短期波动对FD I的影响并不显著。在2005年7月我国实行更有弹性的汇率机制后,保持汇率的长期稳定对促进外资流入具有重大的意义,同时可以在短期内调整汇率波动的自由度,加大宏观调控的政策空间。由于GDP增长比汇率变化对FD I的影响更为显著,因此名义汇率的升值并不会使我国今后的FD I流入明显下降。     

The effect of nominal exchange rate volatility on real macroeconomic performance in the CEE countries

This paper analyzes the relation between nominal exchange rate volatility and several macroeconomic variables, namely real output growth, excess credit, foreign direct investment (FDI) and the current account balance, in the Central and Eastern European EU member states. Using panel estimations for the period between 1995 and 2008, we find that lower exchange rate volatility is associated with higher growth, higher stocks of FDI, higher current account deficits, and higher excess credit. At the same time, the recent evidence seems to suggest that following the global financial crisis, “hard peg” countries may have experienced a more severe adjustment process than “floaters”. The results are economically and statistically significant and robust.     

An assessment of another decade of capital controls in Colombia: 1998–2008

We explore the effectiveness of capital controls in Colombia. We analyze the impact of administrative restrictions to capital flows on aggregate capital flows, the composition of capital flows, the real exchange rate, and economic activity using restricted versions of vector error correction models (VEC) that control for exogenous global financial conditions. The models are estimated using monthly data ranging from August of 1998 to May of 2008. In addition we estimate GARCH models to identify if capital controls have had relevant impacts on the volatility of the nominal exchange rate and of other relevant asset prices. These models are estimated using weekly data covering the same time period. Results suggest that the capital controls used since 1998 have been ineffective in reducing capital flows and the trend of the Colombian peso to appreciate. In addition there is no evidence suggesting a change in the composition of capital flows induced by capital controls. We find some evidence in favor of capital controls reducing nominal exchange rate volatility at high frequencies.     

Nonlinear effects of exchange rate volatility on the volume of bilateral exports

In this paper, we investigate empirically the impact of exchange rate volatility on real international trade flows utilizing a 13‐country data set of monthly bilateral real exports for 1980–1998. We compute one‐month‐ahead exchange rate volatility from the intra‐monthly variations in the exchange rate to better quantify this latent variable. We find that the effect of exchange rate volatility on trade flows is nonlinear, depending on its interaction with the importing country's volatility of economic activity, and that it varies considerably over the set of country pairs considered. Copyright © 2003 John Wiley & Sons, Ltd.     

Uncertainty shocks,central bank characteristics and business cycles

This paper investigates the conjecture that central bank independence and transparency moderate the negative effect of uncertainty shocks on real output. To test this conjecture, the real GDP growth rate is regressed on the interaction terms between measures of central bank characteristics and the proxy for macroeconomic uncertainty, i.e. stock market volatility. To address potential endogeneity concerns, stock market volatility is instrumented in a Two Stage Least Squares model by plausibly exogenous natural disaster, terrorist attack, political coup and revolution shocks. The estimation results provide strong evidence that central bank independence reduces the adverse effect of uncertainty shocks. There is also evidence for the moderating impact of transparency. However, due to the limited availability of transparency data, the result is less conclusive.     

Realized volatility forecasting and market microstructure noise

We extend the analytical results for reduced form realized volatility based forecasting in ABM (2004) to allow for market microstructure frictions in the observed high-frequency returns. Our results build on the eigenfunction representation of the general stochastic volatility class of models developed byMeddahi (2001). In addition to traditional realized volatility measures and the role of the underlying sampling frequencies, we also explore the forecasting performance of several alternative volatility measures designed to mitigate the impact of the microstructure noise. Our analysis is facilitated by a simple unified quadratic form representation for all these estimators. Our results suggest that the detrimental impact of the noise on forecast accuracy can be substantial. Moreover, the linear forecasts based on a simple-to-implement ‘average’ (or ‘subsampled’) estimator obtained by averaging standard sparsely sampled realized volatility measures generally perform on par with the best alternative robust measures.     

The role of implied volatility in forecasting future realized volatility and jumps in foreign exchange,stock, and bond markets

We study the forecasting of future realized volatility in the foreign exchange, stock, and bond markets from variables in our information set, including implied volatility backed out from option prices. Realized volatility is separated into its continuous and jump components, and the heterogeneous autoregressive (HAR) model is applied with implied volatility as an additional forecasting variable. A vector HAR (VecHAR) model for the resulting simultaneous system is introduced, controlling for possible endogeneity issues. We find that implied volatility contains incremental information about future volatility in all three markets, relative to past continuous and jump components, and it is an unbiased forecast in the foreign exchange and stock markets. Out-of-sample forecasting experiments confirm that implied volatility is important in forecasting future realized volatility components in all three markets. Perhaps surprisingly, the jump component is, to some extent, predictable, and options appear calibrated to incorporate information about future jumps in all three markets.     

The exchange rate and macroeconomic determinants: Time-varying transitional dynamics

In this paper, I consider modeling the effects of the macroeconomic determinants on the nominal exchange rate to be channeled through the transition probabilities in a Markovian process. The model posits that the deviation of the exchange rate from its fundamental value alters the market's belief in the probability of the process staying in certain regime next period. This paper further takes into account the ARCH effects of the volatility of the exchange rate. Empirical results generally confirm that fundamentals can affect the evolution of the dynamics of the exchange rate in a nonlinear way through the transition probabilities. In addition, I find that the volatility of the exchange rate is associated with significant ARCH effects which are subject to regime changes.     

The dynamic impact of oil price shocks on the stock market and the USD/RMB exchange rate: Evidence from implied volatility indices

Using daily data from March 16, 2011, to September 9, 2019, we explore the dynamic impact of the oil implied volatility index (OVX) changes on the Chinese stock implied volatility index (VXFXI) changes and on the USD/RMB exchange rate implied volatility index (USDCNYV1M) changes. Through a TVP-VAR model, we analyse the time-varying uncertainty transmission effects across the three markets, measured by the changes in implied volatility indices. The empirical results show that the OVX changes are the dominant factor, which has a positive impact on the USDCNYV1M changes and the VXFXI changes during periods of important political and economic events. Moreover, USDCNYV1M changes are the key factor affecting the impact of OVX changes on VXFXI changes. When the oil crisis, exchange rate reform, and stock market crash occurred during 2014–2016, the positive effects of uncertainty transmission among the oil market, the Chinese stock market, and the bilateral exchange rate are significantly strengthened. Finally, we find that the positive effects are significant in the short term but diminish over time.     

Time series properties of ARCH processes with persistent covariates

We investigate the time series properties of a volatility model, whose conditional variance is specified as in ARCH with an additional persistent covariate. The included covariate is assumed to be an integrated or nearly integrated process, with its effect on volatility given by a wide class of nonlinear volatility functions. In the paper, such a model is shown to generate many important characteristics that are commonly observed in financial time series. In particular, the model yields persistence in volatility, and also well predicts leptokurtosis. This is true for any type of volatility functions considered in the paper, as long as the covariate is integrated or nearly integrated. Stationary covariates cannot produce important characteristics observed in many financial time series. We present two empirical applications of the model, which show that the default premium (the yield spread between Baa and Aaa corporate bonds) affects stock return volatility and the interest rate differential between two countries accounts for exchange rate return volatility. The forecast evaluation shows that the model generally outperforms GARCH and FIGARCH at relatively lower frequencies.     

HOW PUZZLING IS THE PPP PUZZLE? AN ALTERNATIVE HALF‐LIFE MEASURE OF CONVERGENCE TO PPP

Evidence of lengthy half‐lives for real exchange rates in the presence of a high degree of exchange rate volatility has been considered as one of the most puzzling empirical regularities in international macroeconomics. This paper suggests that the measure of half‐life used in the literature might be problematic and proposes alternative measures with desirable properties. Their focus on the cumulative effects of the shocks distinguishes them from the measures used in the literature. An empirical analysis of bilateral US dollar real exchange rates employing the alternative half‐life measure produces results consistent with theory and indicates that the PPP puzzle is less pronounced than initially thought. Copyright © 2012 John Wiley & Sons, Ltd.     

Causality and volatility patterns between gold prices and exchange rates

This paper provides a new perspective on the link between gold prices and exchange rates. Based on gold prices denominated in five different currencies and the related bilateral exchange rates, we put causalities and short-run volatility transmission under closer scrutiny. We provide evidence that the identification of a strong hedge function of gold requires an explicit modeling of the volatility component. For all currencies, exchange rate depreciations initially have a negative impact on the gold price after one day which turns out to be positive after two days in most of the cases. Contrary to previous studies, our results point to a specific role of the dollar in the context of gold-exchange rate relationships: volatility of dollar exchange rates more frequently results in strong hedging functions of gold prices. Furthermore, the gold price denominated in the US dollar tends to increase after a depreciation of the dollar.     

Econometric analysis of jump-driven stochastic volatility models

This paper introduces and studies the econometric properties of a general new class of models, which I refer to as jump-driven stochastic volatility models, in which the volatility is a moving average of past jumps. I focus attention on two particular semiparametric classes of jump-driven stochastic volatility models. In the first, the price has a continuous component with time-varying volatility and time-homogeneous jumps. The second jump-driven stochastic volatility model analyzed here has only jumps in the price, which have time-varying size. In the empirical application I model the memory of the stochastic variance with a CARMA(2,1) kernel and set the jumps in the variance to be proportional to the squared price jumps. The estimation, which is based on matching moments of certain realized power variation statistics calculated from high-frequency foreign exchange data, shows that the jump-driven stochastic volatility model containing continuous component in the price performs best. It outperforms a standard two-factor affine jump–diffusion model, but also the pure-jump jump-driven stochastic volatility model for the particular jump specification.     

The Yen Real Exchange Rate may be Stationary after all: Evidence from Non‐linear Unit‐root Tests*

The empirical literature that tests for purchasing power parity (PPP) by focusing on the stationarity of real exchange rates has so far provided, at best, mixed results. The behaviour of the yen real exchange rate has most stubbornly challenged the PPP hypothesis and deepened this puzzle. This paper contributes to this discussion by providing new evidence on the stationarity of bilateral yen real exchange rates. We employ a non‐linear version of the augmented Dickey–Fuller test, based on an exponentially smooth‐transition autoregressive model (ESTAR) that enhances the power of the tests against mean‐reverting non‐linear alternative hypotheses. Our results suggest that the bilateral yen real exchange rates against the other G7 and Asian currencies were mean reverting during the post‐Bretton Woods era. Thus, the real yen behaviour may not be so different after all but simply perceived to be so because of the use of a restrictive alternative hypothesis in previous tests.     

Further Evidence on PPP Adjustment Speeds: the Case of Effective Real Exchange Rates and the EMS*

Two different approaches intend to resolve the ‘puzzling’ slow convergence to purchasing power parity (PPP) reported in the literature [see Rogoff (1996) , Journal of Economic Literature, Vol. 34.] On the one hand, there are models that consider a non‐linear adjustment of real exchange rate to PPP induced by transaction costs. Such costs imply the presence of a certain transaction band where adjustment is too costly to be undertaken. On the other hand, there are models that relax the ‘classical’ PPP assumption of constant equilibrium real exchange rates. A prominent theory put together by Balassa (1964, Journal of Political Economy, Vol. 72) and Samuelson (1964 Review of Economics and Statistics, Vol. 46) , the BS effect, suggests that a non‐constant real exchange rate equilibrium is induced by different productivity growth rates between countries. This paper reconciles those two approaches by considering an exponential smooth transition‐in‐deviation non‐linear adjustment mechanism towards non‐constant equilibrium real exchange rates within the EMS (European Monetary System) and effective rates. The equilibrium is proxied, in a theoretically appealing manner, using deterministic trends and the relative price of non‐tradables to proxy for BS effects. The empirical results provide further support for the hypothesis that real exchange rates are well described by symmetric, nonlinear processes. Furthermore, the half‐life of shocks in such models is found to be dramatically shorter than that obtained in linear models.     

The impact of VIX on China’s financial market: A new perspective based on high-dimensional and time-varying methods

Based on the new perspective of high-dimensional and time-varying methods, this paper analyzes the contagion effects of US financial market volatility on China’s nine financial sub-markets. The results show evidence of non-linear Granger causality from the US financial volatility (VIX) to the China’s financial markets. Increased US financial volatility has a negative next-day impact on the stock, bond, fund, interest rate, foreign exchange, industrial product and agricultural product markets, and a positive next-day impact on the gold and real estate markets. US financial volatility has the greatest impact on industrial product market, following by stock, agricultural product, fund, real estate, bond, gold, foreign exchange, and interest rates. Major risk events such as the global financial crisis can cause an enhanced contagion effect of US financial volatility to China's financial markets. This paper supports the achievements of China's actions to prevent and resolve major financial risks in the period of the COVID-19 epidemic.     

Estimation of objective and risk-neutral distributions based on moments of integrated volatility

In this paper, we present an estimation procedure which uses both option prices and high-frequency spot price feeds to estimate jointly the objective and risk-neutral parameters of stochastic volatility models. The procedure is based on a method of moments that uses analytical expressions for the moments of the integrated volatility and series expansions of option prices and implied volatilities. This results in an easily implementable and rapid estimation technique. An extensive Monte Carlo study compares various procedures and shows the efficiency of our approach. Empirical applications to the Deutsche mark–US dollar exchange rate futures and the S&P 500 index provide evidence that the method delivers results that are in line with the ones obtained in previous studies where much more involved estimation procedures were used.     

TIME‐VARYING DYNAMICS OF THE REAL EXCHANGE RATE: AN EMPIRICAL ANALYSIS

We use a time‐varying structural vector autoregression to investigate evolving dynamics of the real exchange rate for the UK, euro area and Canada. We show that demand and nominal shocks have a substantially larger impact on the real exchange rate after the mid 1980s. Real exchange rate volatility, relative to fundamentals, also shows a marked increase after this point in time. However, there is some evidence suggesting a closer business cycle co‐movement of the real exchange rate and fundamentals. Simulations from an open‐economy DSGE model show that these results are consistent with a decline in exchange rate pass‐through. Copyright © 2012 John Wiley & Sons, Ltd.     

Effect of FDI and Time on Catching Up: New Insights from a Conditional Nonparametric Frontier Analysis

We use an appropriate nonparametric two‐step approach on conditional efficiencies to investigate how foreign direct investment (FDI) and time affect the process of catching up. By using a dataset of 44 countries over 1970–2007, we explore the channels under which FDI fosters productivity by disentangling the impact of this factor on the production process and its components: impact on the attainable production set (input–output space) and the impact on the distribution of efficiencies. We extend existing methodological tools—conditional nonparametric efficiency measures—to examine these interrelationships. We emphasize the usefulness of smoothing over time to better analyze the potential dynamic influence of FDI on efficiency. We find that both FDI and time play an important role as influencing efficiency distribution and affecting, to a smaller extend, the production set. This effect of FDI does not seem to vary much over time. By the second‐stage nonparametric regression of the conditional efficiencies over FDI and time we identify clearly the effect of time and FDI on conditional efficiency and we determine idiosyncratic efficiency, which represents the‘Solow residual’, measured by looking to the unexplained part of the conditional efficiencies. Copyright © 2014 John Wiley & Sons, Ltd.