Exchange rate uncertainty and the efficiency of the forward market for foreign exchange

Exchange Rate Uncertainty and the Efficiency of the Forward Market for Foreign Exchange. — The paper investigates to what extent exchange rate uncertainty can account for the observed deviations from the forward market efficiency hypothesis (FMEH). The empirical analysis employs a simple varying parameter regression to allow uncertainty to modify the central parameters of the FMEH in a direct way. Uncertainty is proxied by significant exchange rate changes. The results indicate that there is considerable support for the FMEH if one allows the intercept term to vary over time.     

The trading behavior and price impact of foreign, institutional, individual investors and government: Evidence from Korean equity market

We examine the dynamic relation between stock returns and four types of investment flows using Korean daily data for the period 1998–2010, focusing on the investment/trading behavior of four types of investors – individual, institutional, government, and foreign – and the effect of cross-border investment flows on the Korean equity market. We find that, first, foreigners and institutional investors tend to drive the Korean equity market, and their trades seem to be information-driven, whereas individual investors do not drive the Korean equity market and their trades do not seem to be information-driven. Second, as a result, both foreigners and institutional investors performed well in the sample period, whereas individual investors performed poorly. Third, the four types of investors differ in their trading behavior. In response to U.S. market returns, foreigners and institutional investors tend to take a momentum strategy whereas individual investors and government tend to take a contrarian strategy.     

Trade Flows,Exchange Rate Uncertainty,and Financial Depth: Evidence from 28 Emerging Countries

This article investigates the effects of real exchange rate uncertainty on manufactures exports from 28 emerging economies, representing 82% of all developing country manufactures exports, and explores the sources of heterogeneity in the uncertainty effects by controlling for the direction of trade (south‐north or south‐south), and the level of financial development of the exporting country. The empirical results show that for more than half of the countries, the uncertainty effect is unidirectional, either south‐south or south‐north, and the median impact is negative. In addition, while we find that financial development augments trade, exchange rate shocks can negate this effect. Last but not least, trade among developing economies improves export growth under exchange rate shocks.     

Currency Exposure in China under the New Exchange Rate Regime: National Level Evidence

The present paper studies China's national level currency exposure since 2005 when the country adopted a new exchange rate regime allowing the renminbi (RMB) to move towards greater flexibility. Using generalized autoregressive conditional heteroskedastic and constant conditional correlation‐generalized autoregressive conditional heteroskedastic methods to estimate the augmented capital asset pricing models with orthogonalized stock returns, we find that China equity indexes are significantly exposed to exchange rate movements. In a static setting, there is strong sensitivity of stock returns to movements of China's tradeweighted exchange rate, and to the bilateral exchange rates except the RMB/dollar rate. However, in a dynamic framework, exposure to all the bilateral currency pairs under examination is significant. The results indicate that under the new exchange rate regime, China's gradualist approach to moving towards greater exchange rate flexibility has managed to keep exposure to a moderate level. However, we find evidence that in a dynamic setting, the exposure of the RMB to the dollar and other major currencies is significant. For China, the challenge of managing currency risk exposure is looming greater.     

Systemic Risks Spillovers and Interdependence among Stock Markets: International Evidence with Covar‐Copulas

Empirical studies have provided ample evidence on the potential benefits of international diversification with portfolios that consist of both domestic and foreign assets. This coupled with sudden and periodic crashes in global and developed equity markets have stimulated the interest of investors to diversify across markets that have the potential to provide decorrelation with global markets during turbulent periods. At the same time, international diversification may intensify cross‐border listing of stocks with its antecedent implication of shocks transmission. The above have engendered renewed interest among researchers to explore the dependence levels and spillover effects of shocks among emerging and developed equity markets. This paper examines tail dependence structure and (extreme) systemic risks spillover effects among international equity markets using advanced econometric techniques that underpin the modelling of asset returns. We find evidence of low positive significant dependencies between all African markets and their developed counterparts, except for Egypt. Although no evidence of spillover effects to the markets in Africa was found, both unidirectional and bi‐directional causality between some African and developed equity markets is found, albeit with differences. We are unable to ascribe the dynamics in the causality structure to level of market integration. It is inferred that the degree of individual local markets interdependence with developed counterparts may reflect the relative size, liquidity and degree of foreign investors' participation.     

Dynamic Relationships between Exchange Rates and Foreign Direct Investment: Empirical Evidence from Korea

This paper examines the short‐run and long‐run dynamic relationships between exchange rates and foreign direct investment (FDI) in Korea. Monthly data retrieved from the Bank of Korea from January 1999 to March 2012 are examined. A cointegration test, a vector error correction model, the Wald test and impulse responses techniques are applied to analyze the data. The present study finds that, first, long‐run causation between exchange rates and FDI flows exists, which implies that a change in exchange rates negatively affects FDI flows in the long run. Second, short‐run causation between exchange rates and FDI flows exists, which confirms that there is reciprocal feedback between the two variables. Finally, the study finds evidence of a structural break from the global financial crisis of 2007–2009 shock to FDI flows in Korea. An external shock affects changes in the endogenous variables and, thus, causes instability in the cointegrating vector in the system.     

Geographic Spread of Currency Trading: The Renminbi and Other Emerging Market Currencies

This paper studies the ongoing diffusion of renminbi (RMB) trading across the globe, the first of such research of an international currency. It analyses the distribution in offshore RMB trading in 2013 and 2016 using comprehensive data from the Triennial Central Bank Survey of foreign exchange markets. In 2013, Asian centers favored by the policy of RMB internationalization had disproportionate shares in global RMB trading. Over the following three years, RMB trading seemed to converge to the spatial pattern of all currencies, with a half‐life of seven to eight years. The previously most traded emerging market currency, the Mexican peso, shows a similar pattern, although it is converging to the global norm more slowly. Three other emerging market currencies show a qualitatively similar evolution in the geography of their offshore trading. Overall, the RMB's internationalization is tracing an arc from the influence of administrative measures to the working of market forces.