CURRENCY CONVERTIBILITY AND LINKAGE BETWEEN CHINESE OFFICIAL AND SWAP MARKET EXCHANGE RATES

This article investigates the impact of currency convertibility under the current account on the informational linkage between official and swap market exchange rates for Chinese currency (renminbi). Findings indicate that currency convertibility increased the informational connection between the government's official exchange rate and the swap market exchange rate, exclusively traded by foreign investors, and thus improved the information content of renminbi exchange rates. Moreover, the results also suggest that more complete currency convertibility was needed for more informed renminbi exchange rates.     

Unconventional monetary policy and the dollar–euro exchange rate: further evidence from event studies

New evidence is presented on the impact on the US dollar–euro (USD–EUR) exchange rate of the unconventional monetary policy conducted by the US Federal Reserve (FED) and the European Central Bank (ECB). To that end, we employ an event study approach using daily the USD–EUR exchange rate for the period from 2 January 2007 to 31 January 2015. Our results indicate that the announcement and subsequent implementation of such measures by the ECB would have caused in general an appreciation of the dollar, while those by the FED would have caused a depreciation of the dollar.     

Do central bank foreign exchange interventions affect market expectations?

The aim of this article is to study the impact of the Brazilian central bank swap interventions on the FX market from 2006 to 2013. In this period, these nontraditional interventions were the main FX instrument of the Brazilian Government. Since the central bank operates through a sequence of daily interventions in most of the period, we employ the event study method, which is appropriate to investigate cumulative impact of intervention episodes. We analyse the effects on the risk neutral distribution of BRL-USD exchange rate, which incorporates economic valuation besides the likelihoods. We investigate both changes in level and in the dynamics of the moments. Our tests indicate that interventions have little effects on the exchange rate distribution. We only find evidences of some impact on the dynamics of the mean, volatility and skewness over long horizons when the central bank takes short positions on the exchange rate.     

利率互换的定价模型及其实证研究

本文研究利率互换的定价模型，以及利率互换的定价过程。从选取债券到拟合理论即期利率曲线、远期利率曲线，最后拟合出互换利率曲线，并对上述的定价模型和过程进行实证研究。对拟合结果与目前市场报价的相同点和差异进行分析，并对国内利率互换的套期保值策略进行实证研究。     

The pricing and hedging of structured notes with systematic jump risk: An analysis of the USD knock-out reversed swap

Most of the interest rate derivative pricing models are jump-diffusion models, where the jump risk is assumed diversifiable. In this paper, we propose a Heath–Jarrow–Morton model with systematic jump risk to derive the no-arbitrage condition using Esscher transformation. Based on the Heath–Jarrow–Morton model with systematic jump risk, the dynamic process of the LIBOR market model with systematic jump risk is then developed. By decomposing the USD knock-out reversed swap into three derivative components, i.e., interest rate swap, interest rate digital call (IRDC) and cap, the pricing of the swap can be obtained from the dynamic process of the LIBOR market model with systematic jump risk. We show how the swap issuers/investors can hedge the swap risk using these three derivative components. The numerical analyses are conducted to show the impact of jump risk on the values of IRDC, cap and swap.     

UNIFICATION OF CHINA'S FOREIGN EXCHANGE RATES

This paper studies China's foreign exchange market before and after the 1994 unification of the official and swap exchange rates. Examining segmentation as well as linkages among the foreign exchange adjustment centers (FEACs) reveals that the linkages were not strong enough to eliminate or narrow price differentials among FEACs. Hence, improving the foreign exchange market's efficiency requires a reform to unify the swap rates. This paper discusses the unification's implications for inflation, monetary policy, and current account convertibility.     

External monetary shocks and monetary integration: Evidence from the Bulgarian currency board

Starting July the 1st 1997, Bulgaria adopted a Currency Board (CB) monetary system. This paper aims at investigating if the adoption of the CB monetary system, which involves the cost of losing monetary autonomy, has provided a relatively better (with respect to other CEEC) monetary integration of Bulgaria with the European Monetary Union (EMU). Since Bulgarian monetary variables are endogenous under a CB, we focus on the ECB and FED interest rates as the main sources on monetary volatility. First, we find that ECB shocks are more rapidly absorbed and have less significant impact of domestic variables, with respect to other external monetary shocks (FED rate changes). Second, the responses of Bulgarian variables following changes in the ECB interest rate present lower persistence and significance, with respect to what the previous literature emphasized for other CEEC with monetary autonomy. This latter result still holds when accounting for different sources of cross-country heterogeneity outlined in the literature, thus supporting that the adoption of the CB may have worked as a rather good device in terms of integration of Bulgaria into the EMU.     

Convenience yield and real exchange rate dynamics: A present-value interpretation

In this paper, we empirically investigate the relationship between the convenience yield of government bonds and the real exchange rates using monthly data from 1999 to 2018. We extend the conventional models, based on the present-value relationship between the real exchange rate and economic fundamentals, while explicitly considering the role of the convenience yield. Empirical results suggest that our present-value models can capture the dynamic properties of the real exchange rate documented in the literature, including high persistence, excess volatility and excess co-movement compared with real interest rate differentials. We also find that the sum of expected convenience yields significantly drives real exchange rate movements. Moreover, we find that foreign exchange swap market friction also plays a role in explaining real exchange rates. Finally, we find that monetary policy at the zero lower bound may be essential in real exchange rate modelling.     

Asymmetric stabilizing impact of international reserves

This article studies international reserves’ nominal exchange rate stabilizing impact in emerging markets and developing countries, with a particular focus on its nonlinearity and asymmetry across different states of the economy. Using the fixed-effects and dynamic panel threshold models, we find the reserves to short-term debt threshold ratio after which the marginal stabilizing effect of reserves begins to fall during tranquil times. Such diminishing returns, however, do not appear to exist even at the excessive level of reserves during the global financial crisis, partly justifying precautionary demand for international reserves. These results call for extending reserve pooling or swap arrangements to enhance efficiency of reserve management by holding adequate, rather than excess, international reserves with an access to emergency lending during the crisis.     

Exchange Rate Volatility and Output Volatility: A Theoretical Approach*

This paper makes an attempt to determine the factors influencing exchange rate and exchange rate uncertainty, as well as output and output variability. In the context of a small open economy under flexible exchange rates regime it is found that the level both of exchange rate and output is affected by monetary and inflationary shocks, as well as shocks in government spending, output, and trade balance. Further, the uncertainty of exchange rate and output is associated positively with the uncertainty of all shocks while the contemporaneous occurrence of selected shocks imposes either a positive or negative impact on exchange rate and output volatility. Finally, it is shown that the effect of the determinants either of exchange rate volatility or output volatility is very sensitive to the parameter values.     

Central bank intervention and foreign exchange volatility

This paper provides additional empirical evidence on the topic of the effectiveness and the impact of Federal Reserve intervention on U.S. exchange rates. Using a daily measure of exchange rate intervention in the yen/dollar and mark/dollar exchange markets for the period January 3, 1985 to March 19, 1997, this paper finds a statistically significant impact of intervention on spot rates. A generalized autoregressive conditional heteroskedasticity exchange rate equation is used to measure the impact of intervention on exchange rate uncertainty. This study finds that intervention is associated with a significant increase in the interday conditional variance (uncertainty) of both bilateral spot exchange rates. This supports the view of Friedman and Schwartz that exchange rate intervention serves to destabilize the foreign exchange market by introducing additional levels of exchange rate uncertainty.     

Tail return analysis of Bear Stearns' credit default swaps

We compare several models for Bear Stearns' credit default swap spreads estimated via a Markov chain Monte Carlo algorithm. The Bayes Factor selects a CKLS model with GARCH–EPD errors as the best model. This model best captures the volatility clustering and extreme tail returns of the swaps during the crisis. Prior to November 2007, only four months ahead of Bear Stearns' collapse though, the swap spreads were indistinguishable statistically from the risk-free rate.     

Exchange rate volatility and bilateral exports of Malaysia to Singapore,China, Japan,the USA and Korea

This study examines the impact of exchange rate volatility on bilateral exports of Malaysia to Singapore, China, Japan, the USA and Korea. Exchange rate volatility is estimated by an autoregressive conditional heteroscedasticity model. The Johansen cointegration method and the dynamic ordinary least squares estimator are used in the estimations. There is some evidence of exchange rate volatility to have significant impact on real total exports in the long run, but more evidence of exchange rate volatility is found to have significant impact on sub-categories of real total exports in the short run. The impact of exchange rate volatility differs across bilateral exports. The impact of exchange rate volatility on exports can be negative or positive. Generally, exchange rate volatility is not harmful to bilateral exports of Malaysia.     

Precious metals–exchange rate volatility transmissions and hedging strategies

This study examines the conditional volatility and correlation dependency and interdependency for the four major precious metals (i.e., gold, silver, platinum and palladium), while accounting for geopolitics within a multivariate system. The implications of the estimated results for portfolio designs and hedging strategies are also analyzed. The results for the four metals system show significant short-run and long-run dependencies and interdependencies to news and past volatility. Furthermore, these results become more pervasive when the exchange rate and federal funds rate are included. Monetary policy also has a differential impact on the precious metals and the exchange rate volatilities. Finally, the applications of the results show the optimal weights in a two-asset portfolio and the hedging ratios for long positions.     

Different approaches of modelling reaction lags: how do Chilean manufacturing exports react to movements of the real exchange rate?

This study examines the relationship between export supply and the real exchange rate using annual Chilean data for the period 1960–1996. The hypotheses to be tested are first, that the real exchange rate does matter for the supply of exports?–?contrary to studies relying on quarterly data?–?and second, that the impact of a real depreciation only ceases to be positive and significant after about two–three years. Four different distributed lag models were considered as potentially adequate and useful to depict the impact of the real exchange rate over time. Even though all four models assumed different underlying lag structures, they all point to the importance of maintaining a competitive real exchange rate over time. The transfer function model is particularly well suited in shaping any lag structure in that it is not presumptive in form.     

不同汇率制度下汇率传递时滞的实证分析——基于中国、日本、巴西、阿根廷四国数据

本文采用向量误差修正模型及脉冲响应函数,选取中国、日本、巴西和阿根廷作为样本,运用1996-2009年的季度数据,分别对四国的汇率传递时滞进行实证分析。研究表明:不同汇率制度下,汇率变动对国内物价水平的影响存在差异,汇率传递均存在时滞。固定汇率制度下,汇率传递效应的时滞更长;在相对浮动的汇率制度下,汇率传递的时滞相对较短。本文样本中,中国的汇率传递时滞最长,为18个月。因此,在人民币汇率制度改革过程中,确定汇率波动区间以及考察汇率政策效果时,需要考虑汇率波动对国内物价影响时滞的长短。同时,受我国外汇市场化程度的影响,货币当局应当合理引导汇率预期,以适应货币政策目标的需要。     

Exchange rate volatility and capital inflows: role of financial development

There is vast literature examining the impact of exchange rate volatility on various macroeconomic aggregates such as economic growth, trade flows, domestic investment, and more recently capital flows. However, these studies have ignored the role of financial development while examining the impact of exchange rate volatility on capital flows. This study aims to analyze the impact of exchange rate volatility on capital inflows towards developing countries by incorporating the role of financial development over the time period 1980–2013. In this regard, the behavior of two types of capital flows is examined: physical capital inflows measured as foreign direct investment, and financial inflows quantified through remittance inflows. The empirical investigation comprises the direct as well as indirect effect of exchange rate volatility on capital inflows. The study employs dynamic system GMM estimation technique to empirically estimate the effect of exchange rate volatility on capital inflows. The empirical results of the study identify that exchange rate volatility dampens both physical and financial inflows towards developing countries. The indirect impact of exchange rate volatility through financial development, however, turns out positive and statistically significant. This finding reflects that financial development helps in reducing the harmful impact of exchange rate volatility on capital inflows. Hence, the study concludes that a developed financial system is an important channel through which developing countries may improve capital inflows in the long run.     

Passthrough of Exchange Rate and Tariffs into Import Prices of India: Currency Depreciation versus Import Liberalization*

This paper examines the extent of passthrough of exchange rate and tariff changes into import prices using sectoral panel data (at the two‐digit SITC level) for the post‐reform period in India (1990–2001). After having controlled for unobserved effects that might have an impact on the import prices by using sector dummies, we find that on average exchange rate passthrough (ERPT) is a dominant effect compared to tariff rate passthrough (TRPT) in explaining changes in India's import prices. The sectoral panel results suggest that the passthrough of exchange rates and tariff rates varies across products. ERPT into import prices is significant in 12 industries, whereas TRPT is significant only in six industries, with full passthrough. However, ERPT is incomplete only in four industries, but TRPT is incomplete in 36 industries, which means that firms exporting to India more frequently adopt strategies to maintain their market share against tariffs than against exchange rate changes. The sectoral differences in passthrough seem to be related to the sector's share in total imports and the sector's effective protection rate. Hence, India's relatively high levels of protection have an impact on the behavior of foreign exporters.     

外汇冲销式干预对中国货币政策独立性的影响研究

冲销干预对中国货币政策独立性的影响表现出长短期不一致的特征,在短期内有助于保持货币政策的独立性;但在长期内,冲销干预不仅会制约货币政策的操作空间,削弱其独立性,累积金融风险,导致恶性后果。对此,应优化央行票据的期限结构,完善以国债市场为核心的公开市场操作,发展外汇掉期交易,建立外汇平准基金制度,增强货币政策独立性。     

Exchange Rate Exposure of Sectoral Returns and Volatilities: Further Evidence From Japanese Industrial Sectors

In this paper we argue that the commonly employed exposure coefficient/beta is inadequate for capturing the entire impact of exchange rate changes on firms' future operating cash flows. Instead, we employ the bivariate Glosten–Jagannathan–Runkle generalized autoregressive conditional heteroskedasticity mean model to investigate four aspects of exchange rate exposure, including sensitivity of stock returns to exchange rate changes, sensitivity of stock returns to the volatility of exchange rate changes, sensitivity of conditional variance of returns to exchange rate volatility, and the dynamic conditional correlation between returns and exchange rate changes, respectively, using data from 10 industrial sectors in Japan. We find significant evidence of such exchange rate exposure which is not captured by the conventional measure. The diagnostic statistics confirm the adequacy of our model, and, hence, the robustness of the results.