Capital control and exchange rate volatility

The study offers one conceptual and theoretical framework for evaluating the economic effects of a trading tax on foreign exchange transactions. Taxes and the price stickiness mechanism are taken into account in the model. When prices are flexible, full monetary neutrality can be obtained even in the short-term. Intuitively, taxes on foreign exchange transactions discourage speculation by rising currency trading costs, and, thus, increase the stability of the exchange rate. Finally, the results show that not only the exchange rate but consumption, investment and employment will become less volatile by imposing trading taxes on foreign exchange transactions.     

The conditional heteroscedasticity of the yen–dollar exchange rate

This paper examines the conditional heteroscedasticity of the yen–dollar exchange rate. A model is constructed by extending the asymmetric power autoregressive conditional heteroscedasticity model to a process that is fractionally integrated. It is found that, unlike the equity markets, the appreciation and depreciation shocks of the yen against the dollar have similar effects on future volatilities. Although the results reject both the stable and the integrated models, our analysis of the response coefficients of the past shocks and the application of the models to the estimation of the capital requirements for trading the currencies show that there are no substantial differences between the fractionally integrated models and the stable models. © 1998 John Wiley & Sons, Ltd.     

Stable processes of exchange

In this paper we address a long standing gap in economic theory—the gap between claims for the dynamic efficiency of trading in markets, and the findings of formal economic theory, which justify those claims only under restrictive assumptions. We use agent-based methods to study the dynamics of exchange with trading agents who are characterized by several different preference relations. We see that outcomes converge with high probability to Pareto optima in the cases studied, including the well-known example due to Scarf.     

Strategyproof exchange of indivisible goods

The exchange of heterogeneous indivisible goods is considered among agents with responsive preferences, who may be endowed with several goods. We introduce the segmented trading cycle rules which allow the agents to trade goods, one-for-one, subject to market segmentation. In particular, the market is divided into segments such that each agent in each segment may trade at most one good. The segmented trading cycle rules are characterized by four axioms: strategyproofness, nonbossiness, trade sovereignty, and strong individual rationality.     

Autocorrelation of the trade process: Evidence from the Helsinki Stock Exchange

This study investigates how duration-based trading intensity modifies the first-order autocorrelation and the transitory variance of the trade process. Because prices are conditional expected values, a structural model in which the trade duration represents the rate at which prices incorporate new information is developed. This refined model is an extension of the one developed by Madhavan, Richardson, and Roomans (1997) and allows parameters characterizing the arrival rate of new information to be derived. Testing this model with data from the Helsinki Stock Exchange, I was able to determine that a model ignoring trading intensity effects on price changes would underestimate the transitory effects of the trade process. This finding suggests that trade duration captures neglected elements of implicit trading costs that increase with market microstructure effects.     

Impact study on the interest rate futures market

Any announcement from the Federal Reserve has a huge impact on the interest rate markets. The press releases from the Federal Open Market Committee (FOMC) are major inputs to the market and the random intervention model is applied to interest rate futures transaction data to measure FOMC announcement impact. Missing prices during non-trading time periods are imputed iteratively during the estimation of model parameters. The study shows that the market trading on the announcement day is different from the market trading on a non-announcement for both the Eurodollar and T-Note futures market.     

Moneyless exchange: Attitudes of participants in Australian community barter systems

Community-based barter systems, known as LETS, appear to have become in-stitutionalised, that is accepted as an alternative exchange system across Australia and in other Western countries. LETS are non-profit enterprises, which allow members of a community to exchange goods and services without cash. A search of the literature reveals that very little empirical investigation has been conducted on these systems. Hence, the purpose of this study is to provide insight on the motivations for the establishment of these systems and to contribute to the literature on community-based barter. This paper reports the findings of a survey of 371 members of Australian LETS. The findings indicate that LETS are most attractive to the unemployed and those with low household incomes. LETS have been established to empower and build cohesive communities; the benefits of membership are both economic and psycho-social, and include a better quality of life, increased freedom and opportunities for using skills. The disadvantages of membership in LETS include limited trading opportunities and some trading problems. While pricing varies across transactions, most members report that they generally buy and sell within the system at the equivalent of the cash price. The success of LETS is based on the establishment and maintenance of good trading relationships and these systems are expected to continue irrespective of the economic climate.     

Noise trading and autocorrelation interactions in the foreign exchange market: Evidence from developed and emerging economies

This paper seeks to empirically determine whether feedback trading strategies result in stabilization or destabilization in the foreign exchange market and if such strategies are a distinctive characteristic of an emerging economy or they are a common element to both developed and emerging economies. These hypotheses are tested via the use of a feedback model augmented with a generalized autoregressive conditional heteroskedasticity (GARCH) process for modeling the errors. The results suggest presence of both positive and negative feedback trading and asymmetric behavior in both types of economies. Irrespective of the nature of feedback trading, presence of asymmetric behavior implies that market traders rely on central banks to intervene so they can realize short-term profits. Finally, in cases of a positive first-order autoregressive parameter presence of the bandwagon effect is implied, whereby past currency movements are followed by expectations of currency movements in the same direction.

Implied volatility term structure and exchange rate predictability

This paper provides empirical evidence of the predictive power of the currency implied volatility term structure (IVTS) for the behavior of the exchange rate from both cross-sectional and time series perspectives. Intriguingly, the direction of the prediction is not the same for developed and emerging markets. For developed markets, a high slope means low future returns, while for emerging markets it means high future returns. We analyze predictability from a cross-sectional perspective by building portfolios based on the slope of the term structure, and thus present a new currency trading strategy. For developed (emerging) currencies, we buy (sell) the two currencies with the lowest slopes and sell (buy) the two with the highest slopes. The proposed strategy performs better than common currency strategies – carry trade, risk reversal, and volatility risk premium (VRP) – based on the Sharpe ratio, considering only currency returns, which supports the exchange rate predictability of the IVTS from a cross-sectional perspective.     

Incorporating the RMB internationalization effect into its exchange rate volatility forecasting

Recently, the Chinese government has launched the renminbi (RMB) internationalization policy as an impetus to foster China’s global economic integration. The RMB internationalization effect on China’s economy and the RMB exchange rate has attracted massive attention in recent financial research. In this paper, we adopt a genetic programming (GP) method to generate new RMB exchange rate volatility forecasting models incorporating the RMB internationalization effect. Our models are proved to have significant accuracy improvement in predicting both RMB/US dollar and RMB/euro exchange rate volatilities, compared with standard GARCH volatility models, which are incapable of capturing the RMB internationalization effect. Furthermore, our models display salient practical implications for policy makers to formulate monetary policies and currency traders to design effective trading strategies.     

International stock exchange listing and the reduction of political risk

The impending 1997 assimilation into the People's Republic of China made the 1980s a challenging period for Hong Kong, one in which Kong Kong-based companies relocated their corporate domiciles to other countries as political insurance. International listing, however, is another way for companies to reduce political risk. This paper examines the post-1985 effects of Hong Kong-based company stocks being quoted on London's International Stock Exchange. We document that there is no price effect for these companies after the first trading day and a significant increase in the average trading volume surrounding the event day. This may be attributed to the London market makers who build up their stakes before the listing and who unwind their positions in the Hong Kong market after the event day. We also find that there is, on average, a decrease in systematic risk of these companies after being traded on the London market. Furthermore, the evidence shows that there is an increase in systematic risk for companies that are not listed in London after 4 June 1989, however, not for those London-listed Hong Kong companies. The results constitute evidence to support the inference that there is a reduction of local political risk for internationally listed companies.     

A dynamic equilibrium model of search, production, and exchange

We study a general equilibrium model where agents search for production and trading opportunities, that generalizes the existing literature by considering a large number of differentiated commodities and agents with idiosyncratic tastes. Thus, agents must choose nontrivial exchange as well as production strategies. We consider decreasing, constant, and increasing returns to scale in the matching technology, and characterize the circumstances under which there exist multiple steady state equilibria, or multiple dynamic equilibria for given initial conditions. We also characterize the existence of dynamic equilibria that are limit cycles. Equilibria are not generally optimal, and when multiple equilibria coexist they may be ranked. We analyze comparative statics and find that certain intuitive results do not necessarily hold without restrictions on the stochastic structure.     

Bilateral trade flows and exchange rate sensitivity: Evidence from likelihood-based panel cointegration

This paper estimates price and income elasticities for bilateral trade equations between Sweden and her eight major trading partners for the period 1960–2001. The methodology used here is the likelihood-based panel cointegration recently developed in the literature. Evidence is found that depreciation of the SEK is expected to improve the Swedish export sector towards six of her eight major trading partners. Regarding Swedish imports, only in four of the eight cases, the price elasticity indicates that depreciation of the SEK decreases Swedish imports. Considering the Marshall–Lerner condition, this is fulfilled for two of the eight countries in the sample. The income elasticities are found to be positive for all countries in the sample. The policy implications of our results are discussed.     

Inter-market competition for exchange traded funds

We examine how the different mix of informed and liquidity trading in the market for ETFs affects the nature of inter-market competition. We find that both the characteristics of the securities and the structures of the competing markets jointly determine the nature of inter-market competition. Given the superior execution quality on the ECNs and the low adverse selection costs in the ETF market, anonymous market such as the ECNs, attract both liquidity and informed traders. We also find that markets compete in a subset of ETFs. In addition, we find that quotebased competition is prevalent in the market for ETFs.     

An analysis of Australian exchange traded options and warrants

This study focuses on the price discovery process in Australian option and warrant markets. Characterizing these two markets in terms of their cost structures and institutional features, we formally test competing price discovery hypotheses. The general findings indicate that the warrants market is the dominant market suggesting that their lower trading cost outweigh their less attractive institutional features. Additionally, we find that idiosyncratic differences among firms may result in a clientele effect thus providing justification for the coexistence of these seemingly redundant markets.     

A model of information diffusion with asymmetry and confidence effects in financial markets

We present a model of multi-period continuous information diffusion in financial markets. We show that price and trading volume exhibit asymmetric term structures to information flow, where the diffusion rate accelerates more slowly at short horizons than it decelerates at long horizons. Bounded rationality is modelled by an endogenous trader confidence index which declines as stock price information becomes noisier, where lower confidence translates into lower trading volume and slower price accretion. Information diffusion slows and asymmetries are accentuated as traders lose confidence in information accuracy. Our empirical findings support the model's predictions of asymmetric momentum patterns and confidence effects.     

Illusory profitability of technical analysis in emerging foreign exchange markets

We conduct an extensive examination of the profitability of technical analysis in ten emerging foreign exchange markets. Studying 25,988 trading strategies for emerging foreign exchange markets, we find that the best rules can sometimes generate an annual mean excess return of more than 30%. Based on standard tests, we find hundreds to thousands of seemingly significant profitable strategies. However, almost all of these profits vanish once the data snooping bias is taken into account. Overall, we show that the profitability of technical analysis is illusory.     

Multilateral adjustment,regime switching and real exchange rate dynamics

The purpose of this paper is to examine the role of multilateral adjustment to U.S. external imbalances in driving bilateral real exchange rate movements by developing a new regime-switching model that consists of a Markov-switching model with a time-varying transition matrix that depends on a threshold variable. Consequently, the dynamics of the real exchange rate can be modeled in the context of two regimes: one in which multilateral adjustment to large U.S. external imbalances is an important factor driving movements in the real exchange rate and the second in which the real exchange rate is driven mainly by country-specific macroeconomic fundamentals. We apply this model to the bilateral real Canada–U.S. dollar exchange rate and compare its performance to several other alternative models. All of the models are estimated using a Bayesian approach. Our findings suggest that during periods of large U.S. imbalances, an exchange rate model for the real Canada–U.S. dollar exchange rate should allow for multilateral adjustment effects.     

Cointegration and models of exchange rate determination

The application of new techniques in testing for cointegration indicate the inappropriate- ness of the pure monetary model to explain movements in the nominal exchange rate. In general the fundamental variables are found to be integrated of different orders and there is a lack of cointegration between the exchange rate variables in the monetary model and relative prices. Estimation of other dynamic models are found to give rise to parameter estimates which do not support the monetary model. The results are broadly consistent across five countries. These results imply that it is not worthwhile to forecast from the monetary model and its main variants.     

A Bayesian approach to experimental analysis: trading in a laboratory financial market

We employ a Bayesian approach to analyze financial markets experimental data. We estimate a structural model of sequential trading in which trading decisions are classified in five types: private-information based, noise, herd, contrarian and irresolute. Through Monte Carlo simulation, we estimate the posterior distributions of the structural parameters. This technique allows us to compare several non-nested models of trade arrival. We find that the model best fitting the data is that in which a proportion of trades stems from subjects who do not rely only on their private information once the difference between the number of previous buy and sell decisions is at least two. In this model, the majority of trades stem from subjects following their private information. There is also a large proportion of noise trading activity, which is biased towards buying the asset. We observe little herding and contrarianism, as theory suggests. Finally, we observe a significant proportion of (irresolute) subjects who follow their own private information when it agrees with public information, but abstain from trading when it does not.