The intrinsic value of gold: An exchange rate-free price index

In this paper, we propose a gold price index that enables market participants to separate the change in the ‘intrinsic’ value of gold from changes in global exchange rates. The index is a geometrically weighted average of the price of gold denominated in different currencies, with weights that are proportional to the market power of each country in the global gold market. Market power is defined as the impact that a change in a country’s exchange rate has on the price of gold expressed in other currencies. We use principal components analysis to reduce the set of global exchange rates to four currency ‘blocs’ representing the U.S. dollar, the euro, the commodity currencies and the Asian currencies, respectively. We estimate the weight of each currency bloc in the index in an error correction framework using a broad set of variables to control for the unobserved intrinsic value. We show that the resulting index is less volatile than the USD price of gold and, in contrast with the USD price of gold, has a strong negative relationship with global equities and a strong positive relationship with the VIX index, both of which underline the role of gold as a safe haven asset.     

On the relationship between exchange rates and equity returns: A new approach

This paper employs a new approach in order to investigate the underlying relationship between stock markets and exchange rates. Current approaches suggest that the relative equity market performance of two countries is linked to their exchange rate. In contrast, this study proposes an alternative approach where one global variable – global equity market returns – is believed to have an effect on exchange rates, with the relative interest rate level of a currency determining the sign of the relationship. Our empirical findings suggest that exchange rates and global stock market returns are strongly linked. The value of currencies with higher interest rates is positively related with global equity returns, whereas the value of currencies with lower interest rates is negatively related with global equity returns.     

Volatility transmission in emerging European foreign exchange markets

This paper studies the dynamics of volatility transmission between Central European (CE) currencies and the EUR/USD foreign exchange using model-free estimates of daily exchange rate volatility based on intraday data. We formulate a flexible yet parsimonious parametric model in which the daily realized volatility of a given exchange rate depends both on its own lags as well as on the lagged realized volatilities of the other exchange rates. We find evidence of statistically significant intra-regional volatility spillovers among the CE foreign exchange markets. With the exception of the Czech and, prior to the recent turbulent economic events, Polish currencies, we find no significant spillovers running from the EUR/USD to the CE foreign exchange markets. To measure the overall magnitude and evolution of volatility transmission over time, we construct a dynamic version of the Diebold–Yilmaz volatility spillover index and show that volatility spillovers tend to increase in periods characterized by market uncertainty.     

Exchange rate variability and monetary policy under rational expectations: Some Euro-American experience 1973–1979

We analyze the sources of changes in nominal and real rates of exchange between six European currencies and the U.S. dollar. We conclude that over the period 1973–1979 unexpected changes in the price of oil, together with unanticipated monetary shocks at home or in the U.S. were the most important causes of changes in exchange rates. A multi-state Kalman filter technique is used to compute empirical proxies for unanticipated changes in the exogenous variables. Since both oil price shocks and changes in U.S. monetary trends effect the European currencies in different degrees, it follows that differential domestic rates of inflation are not the only reason why arrangements to restrict exchange rate fluctuations, such as the European Monetary System, may run into trouble.     

Valuing foreign exchange rate derivatives with a bounded exchange process

Foreign exchange rates have been subjected to periods of tighter or looser controls as various political and economic forces have waxed and waned. When currencies were backed by gold there were fixed exchange rates. In 1973 floating exchange rates were adopted though many countries did try to keep their currency values within certain ranges. More recently the European Economic Community formalized this practice. Free-floating exchange rates might be well characterized by the lognormal distribution which is standard in option pricing. However, this is probably a poor approximation for exchange rates which are kept within some range by the actions of one or both governments or central banks. This paper develops a model which can be used to value options and other derivative contracts when the underlying exchange rate is bounded in a fixed range (a, b). Methods for pricing both European and American style options are developed.The author would like to thank Ken French and Geert Rouwenhorst for their comments and suggestions.     

The puzzling peso

In the past decade, some observers have noted an unusual aspect of the Mexican peso’s behavior: During periods when the U.S. dollar has risen (fallen) against other major currencies such as the euro, the peso has risen (fallen) against the dollar. Very few other currencies display this behavior. In this paper, we attempt to explain the unusual pattern of the peso’s correlation with the dollar by developing some general empirical models of exchange rate correlations. Based on a study of 29 currencies, we find that most of the cross-country variation in exchange rate correlations with the dollar and the euro can be explained by just a few variables. First, a country’s currency is more likely to rise against the dollar as the dollar rises against the euro, the closer it is to the United States and the farther it is from the euro area. In this result, distance likely proxies for the role of economic integration in affecting exchange rate correlations. Second, a country’s currency is more likely to exhibit this unusual pattern when its sovereign credit rating is more risky. This may reflect that currencies of riskier countries are less substitutable in investor portfolios than those of better-rated countries. All told, these factors well explain the peso’s unusual behavior, as Mexico both is very close to the United States and has a lower credit rating than most industrial economies.     

Is the dollar peg suitable for the largest economies of the Gulf Cooperation Council?

The slumping of the GCC currencies against other major currencies and the ensuing rising imported inflation have sparked an ongoing debate about the viability of the dollar peg. This paper extends and applies the contribution of Berger et al. (2001) to the largest economies of the GCC, namely Saudi Arabia, Qatar, and the UAE, by introducing a foreign inflation dimension. Empirical estimations suggest little or no evidence supporting the suitability of a fixed exchange rate regime in any of the three analyzed economies. It is this paper's contention that policy makers ought to play an immediate and active role in identifying a suitable more flexible exchange rate regime as well as an achievable timeline and road map to effectively abandoning the dollar peg.     

Implied volatility linkages among major European currencies

This paper examines linkages in expected future volatilities among major European currencies. For that purpose, volatility expectations implied by currency options on the euro, British pound, and Swiss franc quoted against the U.S. dollar are analysed. Vector autoregressive modelling is applied to ascertain the dynamics of the implied volatilities across currencies. The results show that the market expectations of future exchange rate volatilities are closely linked among major European currencies. Furthermore, it is found that the implied volatility of the euro significantly affects the volatility expectations of the British pound and the Swiss franc.     

Price discovery in currency markets

This paper examines the price discovery process in currency markets, basing its analysis on the pivotal distinction between the customer (end-user) market and the interdealer market. It first provides evidence that this price discovery process cannot be based on adverse selection between dealers and their customers, as postulated in standard models, because the spreads dealers quote to their customers are not positively related to a trade’s likely information content. The paper then highlights three factors familiar in the literature – fixed operating costs, market power, and strategic dealing – that may explain the cross-sectional variation in customers’ spreads. The paper finishes by proposing a price discovery process relevant to liquid two-tier markets and providing preliminary evidence that this process applies to currencies.     

Effective or Manipulated Crawling Pegged? Examining the Efficiency of China’s Foreign Exchange Markets

Through data on the balance of payments, this article examines the performance of the crawling peg system in China’s foreign exchange markets. We are interested in whether the exchange rates are steered by the market fundamentals or manipulation. We investigate the changes in market efficiency for the RMB against 12 major currencies in the past decade. Our findings reveal that even with a small floating band in China’s foreign exchange markets, if the market allows the exchange rate to adjust according to the price mechanism, then market efficiency does improve significantly. When the RMB was pegged to the USD at 6.83 during the global financial crisis, there was a severe market failure. That also occurred in 2014, when the China government began to depreciate the RMB to stimulate exports.     

The forward market in emerging currencies: Less biased than in major currencies

Many studies have replicated the finding that the forward rate is a biased predictor of the future change in the spot exchange rate. Usually the forward discount actually points in the wrong direction. But, at least until recently, those studies applied only to advanced economies and major currencies. We apply the same tests to a sample of 14 emerging market currencies. We find a smaller bias than for advanced country currencies. The coefficient is on average positive, i.e., the forward discount at least points in the right direction. It is never significantly less than zero. To us this suggests that a time-varying exchange risk premium may not be the explanation for traditional findings of bias. The reasoning is that emerging markets are probably riskier; yet we find that the bias in their forward rates is smaller. Emerging market currencies probably have more easily-identified trends of depreciation than currencies of advanced countries.     

Price clustering in foreign exchange spot markets

This paper documents the existence of price clustering in the foreign exchange spot market for the German mark, the Japanese yen, the United Kingdom pound, the French franc, the Italian lira, and the Swedish krona. The U.S. dollar exchange rate indicative quotes for these currencies tend to exhibit clustering around right-most digits that end in either a “zero” or a “five.” The tendency for exchange rates to cluster has increased with increases in trading volume and volatility. Moreover, the tendency for exchange rates to cluster differs across currencies.     

Intertemporal risk-return trade-off in foreign exchange rates

We investigate the intertemporal risk-return trade-off of foreign exchange (FX) rates for ten currencies quoted against the USD. For each currency, we use three risk measures simultaneously that pertain to that currency; its realized volatility, its realized skewness, and its value-at-risk. We apply monthly FX excess returns and risk measures calculated from daily observations. We find that there is a significant contemporaneous risk-return trade-off for the currencies under investigation. There is no evidence of noncontemporaneous risk-return trade-off. We pay special attention to the risk-return trade-off during the recent financial crisis.     

Gold and the Dollar (and the Euro, Pound, and Yen)

Usually, gold and the Dollar are negatively related; when the Dollar price of gold increases, the Dollar depreciates against other currencies. This is intuitively puzzling because it seems to suggest that gold prices are associated with appreciation in other currencies. Why should the Dollar be different? We show here that there is actually no puzzle. The price of gold can be associated with currency depreciation in every country. The Dollar price of gold can be related to Dollar depreciation and the Euro (Pound, Yen) price of gold can be related to Euro (Pound, Yen) depreciation. Indeed, this is usually the case empirically.     

European monetary integration and persistance of real exchange rates

The aim of this paper is to analyze whether the persistence properties of the European real exchange rates changed when their currencies joined the euro or during the monetary integration process. More specifically, we investigate whether, as a result of the single currency or the previous macroeconomic stability, nominal price rigidities have decreased and the persistence of real exchange has fallen. We test for stationarity against a change in the integration order on different competitiveness measures during the period that runs from the middle of the seventies to nowadays. The results show that the real exchange rates of the European periphery (Spain, Italy, Portugal, Greece and Finland) underwent a change in their order of integration from I(1) to I(0) at some time around the middle of the 1990s. On the other hand, the real exchange rates of the Central European countries, with a greater stability in the 1980s and 1990s, changed their integration order earlier, if at all, mostly during the 1980s. So, the euro seems to have had, on the whole, little influence on the persistence of real exchange rates. Only for a few countries do our findings detect a significant decrease in persistence related with the nominal convergence process.     

The random-walk behavior of the Euro exchange rate

We use Generalized Andrews–Ploberger (GAP) tests to examine the random-walk behavior of 17 OECD countries’ euro exchange rates at daily frequencies. The GAP tests reject the hypothesis of random-walk behavior less often than do traditional tests. Moreover, the random-walk hypothesis cannot be rejected for the euro’s exchange rate against most of the major currencies. We also use the generalized Box–Pierce tests to produce evidence that corroborates the above findings. Finally, and in contrast to the traditional tests, the GAP tests produce results that are consistent during the great moderation and the recent global financial crisis periods.     

Equilibrium Exchange Rate Hedging

We assume a world like the one that gives the capital asset pricing model, but with many goods and many countries. We assume that investors in a given country have homothetic utility functions with the same weights, and a currency that has a sure end-of-period value using a price index with those weights. Siegel's paradox (derived from Jensen's inequality) makes investors want a positive amount of exchange risk. When average risk tolerance is the same across countries, every investor will hold the same mix of market risk (through the world market portfolio of all assets) and exchange risk (in a diversified basket of foreign currencies). In fact, the ratio of exchange risk to market risk is equal to the average investor's risk tolerance. We can write the ratio of exchange risk to market risk (and the fraction of the market's exchange risk that investors hedge) as depending on an average of world market risk premia, an average of world market volatilities, and an average of exchange rate volatilities. The weights in these averages are the same as the weights of the different countries in the currency basket. Given these averages, the ratio (and the fraction hedged) will not depend directly on exchange rate means or covariances. In equilibrium, we can use the ratio of exchange risk to market risk to measure average risk tolerance: in this model, risk tolerance is observable.     

IS THE TOKYO SPOT FOREIGN EXCHANGE MARKET CONSISTENT WITH THE EFFICIENT MARKET HYPOTHESIS?

Recent Studies in the area of foreign exchange market efficiency have employed time series analysis to test for the absence of long-run equilibrium or cointegration relationships among the exchange rates for the major currencies. Cointegration directly violates the weak form of the Efficient Market Hypothesis in a speculative efficient market (Granger, 1986). In this study, we address the efficiency of the Tokyo spot foreign exchange market while updating the test procedures developed by Phillips and Ouliaris (1990), Johansen and Juselius (1990) and Johansen (1991). Cointegration is found to be absent, showing that the Tokyo spot market is consistent with the efficient market hypothesis.     

外汇风险传染网络测度与影响机制分析--基于静态和动态的双重视角

国际争端频发及不确定性风险增加的外部环境,叠加经济下行压力增大的内部环境,致使汇率波动变得更加敏感,外汇风险传染危害性提升。基于1999-2018年全球50种主要货币,本文引入复杂网络模型以及静态与动态两类相关系数算法,分析了汇率网络的总体关联性及各货币风险吸收效应和外溢效应。同时,本文采用混合效应面板回归研究了资本账户开放、汇率制度改革等政策因素的作用,在此基础上,分析了外汇风险传染的影响机制。研究发现,考察期内,各货币波动溢出比收益率溢出更平稳,收益率溢出关系稳定性相对较弱、变动幅度更大,这与金融危机和欧债危机爆发有关。全球主要货币总体关联性具有明显的时变特征和区制特征,且波动溢出与收益率溢出存在区制同步性。资本账户开放和汇率制度是外汇风险传染的重要影响因素,汇率市场化改革有助于缓释外汇风险传染,而资本账户开放将扩大外汇风险传染效应。     

中国银行间市场开创卢布交易业务完善市场功能

1994年人民币汇率形成机制改革以来,中国银行间外汇市场挂牌了美元、欧元、日元、英镑和港币等五种国际储备货币。本轮国际金融危机以来,主要货币汇率波动加大,微观主体出于节约汇兑成本的需要,对人民币与新兴市场货币兑换交易的需求不断上升。为满足经济主体的需求,中国人民银行积极探索在银行间外汇市场挂牌人民币对新兴市场货币交易。2010年11月22日,中国银行间外汇市场挂牌人民币对卢布交易。挂牌以来,中国银行间外汇市场人民币对新兴市场货币交易健康发展,报价日益活跃,成交快速增长。截至2011年9月末,银行间外汇市场人民币对卢布成交53.10亿元人民币,2011年下半年以来的交易量也已超过了人民币对英镑的交易量。在我国银行间市场挂牌人民币对卢布交易一周年之际,本刊特推出四家人民币对卢布做市商相关经验与感想的专题文章,供市场参考。