http://repub.eur.nl/res/concept/jel-F31/ Recent publications classified by JEL Code F31 en http://repub.eur.nl/static-eur/img/logo.png http://repub.eur.nl http://repub.eur.nl/res/pub/38142/ 2012-05-21T00:00:00Z This paper compares two competing approaches to model foreign exchange market participants' behavior: statistical learning and fitness learning. These learning mechanisms are applied to a set of predictors: chartist and fundamentalist rules. We examine which of the learning approaches is best in terms of replicating the exchange rate dynamics within the framework of a standard asset pricing model. We find that both learning methods reveal the fundamental value of the exchange rate in the equilibrium but only fitness learning creates the disconnection phenomenon and only statistical learning replicates volatility clustering. None of the mechanisms is able to produce a unit root process but both of them generate non-normally distributed returns. Grauwe, P. de Markiewicz, A. http://repub.eur.nl/res/pub/38974/ 2012-02-01T00:00:00Z It is widely agreed that when moving from fixed to floating exchange rates the increase in exchange rate volatility is not matched by an equivalent rise in the volatility of fundamentals. We argue and demonstrate that in inter-regime comparisons one has to account for 'missing variables' that compensate for the fundamental variables' volatility under fixed exchange rates. Previous studies have often used foreign exchange reserves, but without much success. We argue why reserves are not a reliable measure, while IMF credit support is. Our empirical analysis identifies IMF support as a crucial and significant compensating variable. Arnold, I.J.M. MacDonald, R. Vries, C.G. de http://repub.eur.nl/res/pub/32458/ 2011-04-13T00:00:00Z We identify the benefits and costs of financial openness in terms of currency crises based on a novel quantification of the systemic impact of currency (financial) crises. We find that systemic currency crises mainly exist regionally, and that financial openness helps diminish the probability of a currency crisis after controlling for their systemic impact. To clarify further the effect of financial openness, we decompose it into the various types of capital inflows. We find that the reduction of the probability of a currency crisis depends on the type of capital and on the region. Finally yet importantly, we find that monetary policy geared towards price stability, through a flexible inflation target that takes into account systemic impact, reduces the probability of a currency crisis. Garita, G.A. Zhou, C. http://repub.eur.nl/res/pub/22283/ 2011-02-01T00:00:00Z Recent studies of purchasing power parity (PPP) use panel tests that fail to take into account heterogeneity in the speed of mean reversion across real exchange rates. In contrast to several other severe restrictions of panel models and tests of PPP, the assumption of homogeneous mean reversion is still widely used and its consequences are virtually unexplored. This paper analyzes the properties of homogeneous and heterogeneous panel unit root testing methodologies. Using Monte Carlo simulation, we uncover important adverse properties of the panel approach that relies on homogeneous estimation and testing. More specifically, power functions are low and assume irregular shapes. Furthermore, homogeneous estimates of the mean reversion parameters exhibit potentially large biases. These properties can lead to misleading inferences on the validity of PPP. Our findings highlight the importance of allowing for heterogeneous estimation when testing for a unit root in panels of real exchange rates. Koedijk, C.G. Tims, B. Dijk, M.A. van http://repub.eur.nl/res/pub/19732/ 2010-12-01T00:00:00Z This paper examines the relation between the Canadian dollar/US dollar (CAD) exchange rate and foreign exchange order flow employing a novel data set on CAD order flow over the period 1994–2005. We investigate empirically the predictive information content and the determinants of order flow. The results suggest that order flow has strong out-of-sample predictive power for CAD returns, yielding significant market timing ability and tangible economic gains in a stylized dynamic asset allocation context. In terms of its determinants, order flow appears to reflect not only the menu of macroeconomic variables typically suggested in the literature but is also closely related to commodity price fluctuations, as expected from a ‘commodity currency’. King, M. Sarno, L. Sojli, E. http://repub.eur.nl/res/pub/21024/ 2010-10-01T00:00:00Z Abstract Recent studies of purchasing power parity (PPP) use panel tests that fail to take into account heterogeneity in the speed of mean reversion across real exchange rates. In contrast to several other severe restrictions of panel models and tests of PPP, the assumption of homogeneous mean reversion is still widely used and its consequences are virtually unexplored. This paper analyzes the properties of homogeneous and heterogeneous panel unit root testing methodologies. Using Monte Carlo simulation, we uncover important adverse properties of the panel approach that relies on homogeneous estimation and testing. More specifically, power functions are low and assume irregular shapes. Furthermore, homogeneous estimates of the mean reversion parameters exhibit potentially large biases. These properties can lead to misleading inferences on the validity of PPP. Our findings highlight the importance of allowing for heterogeneous estimation when testing for a unit root in panels of real exchange rates. Koedijk, C.G. Tims, B. Dijk, M.A. van http://repub.eur.nl/res/pub/18331/ 2010-03-02T00:00:00Z Tourism is a major source of service receipts for many countries, including Taiwan. The two leading tourism countries for Taiwan, comprising a high proportion of world tourist arrivals to Taiwan, are Japan and USA, which are sources of short and long haul tourism, respectively. As it is well known that a strong domestic currency can have adverse effects on international tourist arrivals, daily data from 1 January 1990 to 31 December 2008 are used to model the world price and US$ / New Taiwan $ and Yen/ New Taiwan $ exchange rates, and tourist arrivals from the world, USA and Japan to Taiwan, as well as their associated volatility. The sample period includes the Asian economic and financial crises in 1997, and part of the global financial crisis of 2008-09. Inclusion of the exchange rate allows approximate daily price effects on world, US and Japanese tourist arrivals to Taiwan to be captured. The Heterogeneous Autoregressive (HAR) model does not reproduce the theoretical hyperbolic decay rates associated with fractionally integrated (or long memory) time series models, but it can nevertheless approximate quite accurately and parsimoniously the slowly decaying correlations associated with such models. The HAR model is used to approximate long memory properties in daily exchange rates and international tourist arrivals, to test whether alternative short and long run estimates of conditional volatility are sensitive to the approximate long memory in the conditional mean, to examine asymmetry and leverage in volatility, and to examine the effects of temporal and spatial aggregation. The empirical results show that the conditional volatility estimates are not sensitive to the approximate long memory nature of the conditional mean specifications. The QMLE for the GARCH(1,1), GJR(1,1) and EGARCH(1,1) models for world, US and Japanese tourist arrivals to Taiwan, and the world price and US$ / New Taiwan $ and Yen/ New Taiwan $ exchange rates, are statistically adequate and have sensible interpretations. Asymmetry (though not leverage) is found for several alternative HAR models for the world, US and Japanese tourist arrivals to Taiwan. For policy purposes, these empirical results suggest that an arbitrary choice of data frequency or spatial aggregation will not lead to robust findings as they are generally not independent of the level of aggregation used. Chang, C.L. McAleer, M.J. http://repub.eur.nl/res/pub/17313/ 2009-11-26T00:00:00Z Both domestic and international tourism are a major source of service export receipts for many countries worldwide, and is also increasingly important in Taiwan. One of the three leading tourism source countries for Taiwan is the Republic of Korea, which is a source of short haul tourism. Daily data from 1 January 1990 to 31 December 2008 are used to model the Korean Won / New Taiwan $ exchange rate and tourist arrivals from Korea to Taiwan, as well as their associated volatility. The sample period includes the Asian economic and financial crises in 1997, and a significant part of the global financial crisis of 2008-09. Inclusion of the exchange rate allows approximate daily price effects on Korean tourism arrivals to Taiwan to be captured. The Heterogeneous Autoregressive (HAR) model is used to capture long memory properties in exchange rates and Korean tourist arrivals, to test whether alternative estimates of conditional volatility are sensitive to the long memory in the conditional mean, and to examine asymmetry and leverage in volatility. The empirical results show that the conditional volatility estimates are not sensitive to the long memory nature of the conditional mean specifications. The QMLE for the GARCH(1,1), GJR(1,1) and EGARCH(1,1) models for Korean tourist arrivals to Taiwan and the Korean Won / New Taiwan $ exchange rate are statistically adequate and have sensible interpretations. Asymmetry (though not leverage) is found for several alternative HAR models. Chang, C.L. McAleer, M.J. http://repub.eur.nl/res/pub/17312/ 2009-11-24T00:00:00Z Both domestic and international tourism are a major source of service export receipts for many countries worldwide, and is also increasingly important in Taiwan. One of the three leading tourism source countries for Taiwan is the Republic of Korea, which is a source of short haul tourism. Daily data from 1 January 1990 to 31 December 2008 are used to model the Korean Won / New Taiwan $ exchange rate and tourist arrivals from Korea to Taiwan, as well as their associated volatility. The sample period includes the Asian economic and financial crises in 1997, and a significant part of the global financial crisis of 2008-09. Inclusion of the exchange rate allows approximate daily price effects on Korean tourism arrivals to Taiwan to be captured. The Heterogeneous Autoregressive (HAR) model is used to capture long memory properties in exchange rates and Korean tourist arrivals, to test whether alternative estimates of conditional volatility are sensitive to the long memory in the conditional mean, and to examine asymmetry and leverage in volatility. The empirical results show that the conditional volatility estimates are not sensitive to the long memory nature of the conditional mean specifications. The QMLE for the GARCH(1,1), GJR(1,1) and EGARCH(1,1) models for Korean tourist arrivals to Taiwan and the Korean Won / New Taiwan $ exchange rate are statistically adequate and have sensible interpretations. Asymmetry (though not leverage) is found for several alternative HAR models. Chang, C.L. McAleer, M.J. http://repub.eur.nl/res/pub/16035/ 2009-06-01T00:00:00Z We measure the economic value of information derived from macroeconomic variables and from technical trading rules for emerging markets currency investments. Our analysis is based on a sample of 21 emerging markets with a floating exchange rate regime over the period 1997-2007 and explicitly accounts for trading restrictions on foreign capital movements by using non-deliverable forward data. We document that both types of information can be exploited to implement profitable trading strategies. In line with evidence from surveys of foreign exchange professionals concerning the use of fundamental and technical analysis, we find that combining the two types of information improves the risk-adjusted performance of the investment strategies. Zwart, G.J. de Markwat, T.D. Swinkels, L.A.P. Dijk, D.J.C. van http://repub.eur.nl/res/pub/12962/ 2008-03-01T00:00:00Z This paper considers the nature and the distribution of trade and FDI effects of a potential enlargement of the European Monetary Union (EMU) to the 10 countries that obtained EU membership in 2004. One-way and two-way error component gravity models are estimated using a data set of unbalanced panel data that combine bilateral trade flows among 29 countries and the distribution of outward FDI stocks among these countries. The results reveal a complementarity between trade and investment and a relationship between trade and exchange rate volatility that depend on the sign of bilateral trade balances. Using a simulation-based technique, we find that estimates of FDI effects of EMU range between 18.5% for Poland and 30% for Hungary. Brouwer, J. Paap, R. Viaene, J.M.A. http://repub.eur.nl/res/pub/10743/ 2007-09-23T00:00:00Z This paper considers the nature and the distribution of trade and FDI effects of a potential enlargement of the European Monetary Union (EMU) to the ten countries that obtained EU membership in 2004. Intuitively, the implementation of a single currency for these countries means replacing several fluctuating currencies by a common currency. This gives rise to both “level” and “risk” effects of reduced currency movements on trade and investment. Another factor is the nature of the link between trade and FDI. This is also important not only because cross-border factor flows are becoming increasingly important, but also the international trade literature has long recognized that cross-border factor flows and trade in goods and services can be substitutes or complements. Given this background, one-way and two-way error component gravity models are estimated to examine for these theoretical expectations within a dataset of unbalanced panel data that combines bilateral trade flows among 29 countries and the distribution of outward FDI stocks among these countries (including the 10 new EU members). The data generally cover the period from 1990 to 2004. Our empirical results convincingly support: (i) a complementarity between trade and investment, (ii) a relationship between trade and exchange rate volatility that depends on the sign of bilateral trade balances, (iii) a positive effect of EU on trade and investment, and (iv) a positive effect of EMU on foreign investment. Using a simulation-based technique, we find that estimates of FDI effects of EMU range between 18.5 percent for Poland and 30 percent for Hungary. Paap, R. Viaene, J.M.A. Brouwer, J. http://repub.eur.nl/res/pub/9513/ 2007-03-29T00:00:00Z The forward premium puzzle (FPP) is the negative correlation between the forward premium and the realized exchange rate return at maturities of a month and beyond. Some recent evidence shows that at maturities of multiple years and at the highest intra day frequency the correlation is positive and close to one. This paper contributes by using futures data instead of forwards to complete the maturity spectrum at the (multi-) day level. We find that the correlation only slowly turns negative as the number of days to maturity is increased to the monthly level. The typical shape of the premium correlation with regard to the forward maturity length appears to be V-shaped. Bernoth, K. Hagen, J. von Vries, C.G. de http://repub.eur.nl/res/pub/9725/ 2007-03-22T00:00:00Z This paper examines the effect of monetary policy on the exchange rate during currency crises. Using data for a number of crisis episodes between 1986 and 2004, we find strong evidence that raising the interest rate: (i) has larger adverse balance sheet effects and is therefore less effective in countries with high domestic corporate short-term debt; (ii) is more credible and therefore more effective in countries with high-quality institutions; iii) is more credible and therefore more effective in countries with high external debt; and (iv) is less effective in countries with high capital account openness. We predict that monetary policy would have had the conventional supportive effect on the exchange rate during five of the crisis episodes in our sample, while it would have had the perverse effect during seven other episodes. For four episodes, we predict a statistically insignificant effect. Our results support the idea that the effect of monetary policy depends on its impact on fundamentals, as well as its credibility, as suggested in the recent theoretical literature. They also provide an explanation for the mixed findings in the empirical literature. Eijffinger, S.C.W. Goderis, B. http://repub.eur.nl/res/pub/8297/ 2007-01-11T00:00:00Z The exchange rate of Rp/USD has experienced three regimes since 1967: fixed, managed float, and free float. During the period of 1967 – 1986, Rp/USD was devalued for 8 times by the authority to help maintain the external balance. The devaluations were part of the expenditure switching policy and moreover, were then considered the right policy to correct the misalignment of the Rp/USD real exchange rate. However it became clear that such approach to quell the Rp/USD real exchange rate misalignment always failed later on due to the inflation. After 1986, the Indonesian authority switched the exchange regime to the managed float, when the crawling pegged intervention band was set and adjusted from time to time to keep the real exchange rate healthy. That means the the central bank of Indonesia, Bank Indonesia, would have to defend the Rp/USD from time to time. It went smooth and successful at first, and the economic agents enjoyed the period of certainty in ! their business activities until the currency crisis took place in 1997. Thus, this thesis investigates the Rp/USD behavior during 1995 – 2005. We want to know how whether the efficient market hypothesis holds in the case of Rp/USD. Subsequently we want to know how the Rp/USD behaves in the past and how it will be likely to behave in the future. Finally, we are interested in the volatility of the Rp/USD and how it can be related to the volatility of the other currencies: Japanese Yen, Singapore Dollar, Thai Baht, and Philippine Peso. Hardiyanto, A.V. http://repub.eur.nl/res/pub/8066/ 2006-10-26T00:00:00Z Ben Tims was born on 9 November 1975 in Rotterdam, the Netherlands. From 1994 till 1999 he studied econometrics at the Erasmus University Rotterdam. From September 1999 to December 2004 he has been a PhD student at the Financial Management department of the Rotterdam School of Management at Erasmus University Rotterdam. Since January 2005 he has been assistant professor at the same department. His research interests focus primarily on the dynamics on exchange rates. Tims, B. http://repub.eur.nl/res/pub/8073/ 2006-10-01T00:00:00Z Exchange rate returns are fat-tailed distributed. We provide evidence that the apparent non-normality derives from the behavior of macroeconomic fundamentals. Economic and probabilistic arguments are offered for such a relationship. Empirical support is given by testing against normality and through investigating the tail shapes of the fundamentals' distributions. The currently available data sets on floating exchange rates permit a clearer picture than the relatively short spans with macroeconomic data available previously. Cumperayot, P. Vries, C.G. de http://repub.eur.nl/res/pub/7173/ 2005-12-19T00:00:00Z This paper analyzes the properties of multivariate tests of purchasing power parity (PPP) that fail to take heterogeneity in the speed of mean reversion across real exchange rates into account. We compare the performance of homogeneous and heterogeneous unit root testing methodologies. The recent literature has successfully contested several severe restrictions on the structure of the model, but the assumption of homogeneous mean reversion is still widely used and its consequences are virtually unexplored. Using Monte Carlo simulation, we uncover important adverse properties of the methodology that relies on homogeneous estimation and testing. More specifically, power functions are low and assume irregular shapes. Furthermore, homogeneous estimates of the mean reversion parameters exhibit potentially large biases. This can have a dramatic impact on inferences made on the validity of the PPP hypothesis. Our findings highlight the importance of allowing for heterogeneous estimation when testing for a unit root in panels of real exchange rates. Koedijk, C.G. Tims, B. Dijk, M.A. van http://repub.eur.nl/res/pub/6583/ 2005-04-01T00:00:00Z This paper documents the existence of large structural breaks in the unconditional correlations among the British pound, Norwegian krone, Swedish krona, Swiss franc, and euro exchange rates (against the US dollar) during the period 1994-2003. Using the framework of dynamic conditional correlation (DCC) models, we find that such breaks occurred both at the time the formal decision to proceed with the euro was made in December 1996 and at the time of the actual introduction of the euro in January 1999. In particular, we document that most correlations were substantially lower during the intermittent period. We also find breaks in unconditional volatilities at the same points in time, but these are of a much smaller magnitude comparatively. Dijk, D.J.C. van Munandar, M.I.S.H. Hafner, C.M. http://repub.eur.nl/res/pub/16942/ 2004-11-01T00:00:00Z This paper analyzes purchasing power parity (PPP) for the euro area. We study the impact of the introduction of the euro in 1999 on the behavior of real exchange rates. We test the PPP hypothesis for a panel of real exchange rates within the euro area over the period 1973–2003. Our methodology exploits the cross-sectional dependence across real exchange rates and allows for heterogeneity in the rates of mean reversion. We present evidence in favor of PPP for the full panel of real exchange rates, but we show that accounting for cross-country differences within the euro area is essential. The unit root hypothesis can be rejected for some real exchange rates, but evidence for PPP is weak for others. We also investigate PPP between the ‘‘synthetic’’ euro against several other major currencies over the period 1979–2003. We find support for the PPP hypothesis for the full panel of real exchange rates. When the restriction of a common mean reversion coefficient is relaxed, we reject the unit root hypothesis for the euro-Swiss franc rate only. We conclude that the process of economic integration in Europe has accelerated convergence toward PPP within the euro area. Koedijk, C.G. Tims, B. Dijk, M.A. van