Predicting white metal prices by a commodity sensitive exchange rate

We show that the exchange rate of South African Rand has statistically and economically significant out of sample forecasting power for palladium and platinum prices, and to a lesser extent for silver prices. We argue that this finding is consistent with the implications of the present value models of exchange rate determination. We utilize a recently developed method for testing for instabilities in predictive power, which markedly affects overall conclusions. For the palladium market, the predictive power is also robust to using cross exchange rates. Importantly, no reverse causality is detected from white metals to the exchange rate. We also employ asymmetric impulse response functions and show that positive and negative exchange rate shocks do not have materially different impacts on white metals.     

Senior official speech attributes and foreign exchange risk around business cycles

This paper examines the effects of four senior official speech attributes on the Euro-dollar intraday volatility from 2004 to 2015. We show that volatility responds differently to the four attributes - speaker's name, position, institution, and speech content - across economic states. There are more significant effects during the US crisis compared to the European crisis. The majority of speakers decrease volatility except during the US crisis period. Speeches delivered by European Central Bank and Bank of England officials exhibit larger volatility increases compared to the US Federal Reserve and the Treasury Department.     

The exchange rate effect of multi-currency risk arbitrage

Carry trade arbitrage strategies typically involve multiple currencies. Limits to arbitrage in such a setting not only slow the adjustment to the fundamental equilibrium, but can also generate transitory over- or undershooting of each exchange rate in accordance with the marginal risk contribution of each speculative position to the overall arbitrage risk. The paper uses a natural experiment to identify a particular global arbitrage opportunity and shows that arbitrage risk hedging modifies the exchange rate dynamics in the predicted manner. New spectral methods are applied to obtain a more precise inference on the cross-sectional trading pattern of the arbitrageurs.     

关于境内商业银行外币资金汇率风险管理的思考

文章试图为化解商业银行的客户外币融资需求持续旺盛与外币存款余额常年低位徘徊之间的矛盾提供办法和思路,即商业银行可以通过构建一个外汇组合提高自有外汇资金的收益,主动管理自有外币资本金汇率风险。这需要明确以下三个问题：构建此外汇组合的目的、评价此组合的标准和构建组合的方法。在此过程中,要注意兼顾风险和收益的均衡,确定收益核算口径和收益评价标准。     

Corporate cash flow and stock price exposures to foreign exchange rate risk

This paper estimates the foreign exchange rate exposure of 6917 U.S. nonfinancial firms on the basis of stock prices and corporate cash flows. The results show that several firms are significantly exposed to at least one of the foreign exchange rates Canadian Dollar, Japanese Yen and Euro, and significant exposures are more frequent at longer horizons. The percentage of firms for which stock price and earnings exposures are significantly different is relatively low, though it increases with time horizon. Overall, the impact of exchange rate risk on stock prices and cash flows is similar and determined by a related set of economic factors.     

中国企业“走出去”应关注汇率风险

全国政协委员、中国投资有限责任公司副总经理梁骧女士在接受《国际融资》杂志记者采访时表示：各国货币的汇率是市场行为,汇率波动很难避免和控制。对于“走出去”的企业而言,一定要关注汇率的波动,防范汇率风险。如果有条件的话,企业在“走出去”的过程中可以尝试以人民币作为结算货币。     

Globalization and portfolio risk over time: The role of exchange rate

We examine benefits of international diversification for the period 1 January 1988 to 30 June 2000. We introduce a new variable (lambda) that measures these benefits more directly than do the pairwise correlations among equity markets, which are used in most other studies. Our study shows that despite international integrations, the benefits of international diversification measured in USD persist. Using lambda, we provide evidence that the increase in co-movements between equity market returns (measured in local currencies) has been counterbalanced by movements in exchange rates. We confirm our results by subjecting the trend in lambda to several tests.     

Real exchange rate fluctuations, endogenous tradability and exchange rate regimes

The real exchange rate is driven by fluctuations of the relative price of traded goods and the relative price of nontraded to traded goods. This study explains the variance decomposition of the real exchange rate using a stochastic dynamic general equilibrium model of comparative advantage with money. Given interest rate shocks, exchange rate stability reduces the covariance between the two relative prices and raises the contribution of the relative price of nontraded to traded goods. Productivity shocks do not alter the covariance across exchange rate regimes and let the relative price of traded goods drive the real exchange rate.     

International portfolio selection with exchange rate risk: A behavioural portfolio theory perspective

This paper analyzes international portfolio selection with exchange rate risk based on behavioural portfolio theory (BPT). We characterize the conditions under which the BPT problem with a single foreign market has an optimal solution, and show that the optimal portfolio contains the traditional mean–variance efficient portfolio without consideration of exchange rate risk, and an uncorrelated component constructed to hedge against exchange rate risk. We illustrate that the optimal portfolio must be mean–variance efficient with exchange rate risk, while the same is not true from the perspective of local investors unless certain conditions are satisfied. We further establish that international portfolio selection in the BPT with multiple foreign markets consists of two sequential decisions. Investors first select the optimal BPT portfolio in each market, overlooking covariances among markets, and then allocate funds across markets according to a specific rule to achieve mean–variance efficiency or to minimize the loss in efficiency.     

Home bias,exchange rate disconnect,and optimal exchange rate policy

This paper examines how much the central bank should adjust the interest rate in response to real exchange rate fluctuations. The paper first demonstrates, in a two-country Dynamic Stochastic General Equilibrium (DSGE) model, that home bias in consumption is important to replicate the exchange rate volatility and exchange rate disconnect documented in the data. When home bias is high, the shock to Uncovered Interest rate Parity (UIP) can substantially drive up exchange rate volatility while leaving the volatility of real macroeconomic variables, such as GDP, almost untouched. The model predicts that the volatility of the real exchange rate relative to that of GDP increases with the extent of home bias. This relation is supported by the data. A second-order accurate solution method is employed to find the optimal operational monetary policy rule. Our model suggests that the monetary authority should not seek to vigorously stabilize exchange rate fluctuations. In particular, when the central bank does not take a strong stance against the inflation rate, exchange rate stabilization may induce substantial welfare loss. The model does not detect welfare gain from international monetary cooperation, which extends Obstfeld and Rogoff's [Obstfeld, M., Rogoff, K.,2002. Global implications of self-oriented national monetary rules, Quarterly Journal of Economics May, 503–535] findings to a DSGE model.     

Collapsing exchange rate regimes and exchange rate dynamics: Some further examples

This paper extends some recent perfect foresight models of balance of payments crises and exchange rate realignments to a world of smart speculators, sticky prices and restricted international capital movements. The likelihood and timing of a regime collapse are shown to depend upon initial foreign reserve endowments, monitary policy, speeds of market adjustment and future exchange rate policy. These factors are also shown to influence the dynamic behavior of the exchange rate and prices during a transitional period of floating.     

Real exchange rate behavior

Using random simulations with artificial data with identical sample characteristics to the long-sample exchange rate data employed by Lothian and Taylor (Lothian, J.R. and Taylor, M.P. (1996). The recent float from the perspective of the past two centuries. Journal of Political Economy 104, 488–509.), we show that standard unit-root tests have extremely low power over sample sizes corresponding to the recent float. The probability of rejecting the null hypothesis when it is false is extremely low with 20 years or even 50 years of data and only reaches an acceptable level over much longer spans.     

Gauging exchange rate targeting

In this paper, we examine whether a monetary authority targets the exchange rate, per se, or instead simply appears to do so as it responds to the exchange rate and other variables in service to inflation and output targets. We combine data-rich estimation with a system of forward-looking equations in order to disentangle the possibilities. The combined approach reveals the potentially misleading nature of standard estimates of the extent of exchange rate and inflation targeting. We illustrate the approach by applying it to two de jure inflation targetters, Canada and Korea. In contrast to standard methods and much past work, we find that neither country targets its exchange rate; and, both are bona fide inflation targetters.     

Nonlinear exchange rate predictability

We study whether the nonlinear behavior of the real exchange rate can help us account for the lack of predictability of the nominal exchange rate. We construct a smooth nonlinear error-correction model that allows us to test the hypotheses of nonlinear predictability of the nominal exchange rate and nonlinear behavior on the real exchange rate in the context of a fully specified cointegrated system. Using a panel of 19 countries and three numeraires, we find evidence of nonlinear predictability of the nominal exchange rate and of nonlinear mean reversion of the real exchange rate. Out-of-sample Theil’s U -statistics show a higher forecast precision of the nonlinear model than the one obtained with a random walk specification. Although the robustness of the out-of-sample results over different forecast windows is somewhat limited, we are able to obtain significant predictability gains—from a parsimonious structural model with PPP fundamentals—even at short-run horizons.     

Time-varying market,interest rate,and exchange rate risk premia in the US commercial bank stock returns

This paper examines the role of market, interest rate, and exchange rate risks in pricing a sample of the US Commercial Bank stocks by developing and estimating a multi-factor model under both unconditional and conditional frameworks. Three different econometric methodologies are used to conduct the estimations and testing. Estimations based on nonlinear seemingly unrelated regression (NLSUR) via GMM approach indicate that interest rate risk is the only priced factor in the unconditional three-factor model. However, based on ‘pricing kernel’ approach by Dumas and Solnik [(1995). J. Finance 50, 445–479], strong evidence of exchange rate risk is found in both large bank and regional bank stocks in the conditional three-factor model with time-varying risk prices. Finally, estimations based on the multivariate GARCH in mean (MGARCH-M) approach where both conditional first and second moments of bank portfolio returns and risk factors are estimated simultaneously show strong evidence of time-varying interest rate and exchange rate risk premia and weak evidence of time-varying world market risk premium for all three bank portfolios, namely those of Money Center bank, Large bank, and Regional bank.     

The impact of exchange rate risk on international asset pricing under various market structures

This article derives international equity pricing relations by taking into account inflationary exchange risk under various forms of market segmentation/integration. In a mean-variance framework, a two-country, two-period, two-goods model is analyzed under three different market structures: segmented, mildly segmented and integrated. It is found that as long as investors are consuming imported goods, in the presence of market frictions, inflationary exchange risk is an important determinant of real equity prices. This is the case because inflationary exchange rate affects the real purchasing power of investors.

Systematic risk, and oil price and exchange rate sensitivities in Asia-Pacific stock markets

This paper examines the relationship between beta risk and realized stock index return in the presence of oil and exchange rate sensitivities for 15 countries in the Asia-Pacific region using the international factor model. Thirteen of the 15 countries have the expected beta signs and show significant sensitivity to domestic risk when the world stock market is in both up and down modes. In terms of oil sensitivity, only the Philippines and South Korea are oil-sensitive to changes in the oil price in the short run, when the price is expressed in local currency only. Basically no country shows sensitivity to oil price measured in US dollar regardless whether the oil market is up or down. Nine countries are affected by changes in the exchange rate. In terms of relative factor sensitivity distribution, one is willing to conclude that these stock markets are more conditionally sensitive to local currency oil price changes than to beta risk wherever the relationships are significant.     

The pricing of exchange rate risk and stock market segmentation: The Canadian case

Empirical evidence by Eun and Resnick (1988), among others, has demonstrated the significance of exchange rate risk in the international asset allocation and they have noted that the risk is nondiversifiable. Yet, exchange rate risk was found by Jorion (1991) to be a risk factor that is not priced in the U.S. stock market. This study reexamines such counterintuitive results using data from the Toronto Stock Exchange. The evidence here weakly supports the pricing of the exchange rate risk. Further, the sample period in this study coincides with Jorion's to ensure that both studies examine the pricing of the exchange rate risk in the same global economic environment. The significant pricing of exchange rate risk in Canada and the insignificant pricing in the U.S. imply the possibility of market segmentation.     

The impact of the introduction of the Euro on foreign exchange rate risk exposures

This paper tests whether significant changes in stock return volatility, market risk, and foreign exchange rate risk exposures took place around the launch of the Euro in 1999. The experiment analyzes weekly returns for 3220 nonfinancial firms from 18 European countries, the United States, and Japan. We find that though the Euro's launch was associated with an increase in total stock return volatility, significant reductions in market risk exposures arose for nonfinancial firms both in and outside of Europe. We show that the reductions in market risk were concentrated in firms domiciled in the Euro area and in non-Euro firms with a high fraction of foreign sales or assets in Europe. The Euro's introduction led to a net absolute decrease in the foreign exchange rate exposure of nonfinancial firms, but these changes are statistically and economically small. We interpret our findings in the context of existing theories of exchange rate risk management.