Do Financial Market Variables Show Indicator Properties Relative to Exchange Rate Returns? |
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Authors: | Olli Castrén |
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Institution: | (1) D-Financial Stability, European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany |
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Abstract: | This paper assesses the contemporaneous indicator properties of financial market variables relative to movements in six major
developed country currency pairs. As indicator variables changes in various relative asset prices, short-term portfolio flows
and currency options data are used. We find that changes in equity index differentials, short-term speculative flows and risk
reversals on currency options prices exhibit consistent indicator properties for several currency pairs. Since 1999, changes
in short-term interest rate differentials have gained importance as indicators. The best indicator variables explain over
50 per cent of monthly returns of the USD/EUR and GBP/USD exchange rates and over 60 per cent of the appreciation and depreciation
episodes of the USD/EUR and JPY/EUR currency pairs.
JEL no. F31, F32, G15, C35 |
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Keywords: | Exchange rates asset prices capital flows market microstructure GMM logit estimation |
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