We investigate the impacts of geopolitical risks (GPRs) on financial stress (FS) in major emerging economies from 1985 to 2019. Applying a recently developed panel quantile estimation method, we show ...that GPRs pose serious risks to the stability of the financial condition in emerging economies. Namely, when FS is already equal to or above average, GPRs intensify this instability to a remarkable degree. Nevertheless, GPRs do not ignite the stress when the financial situation is benign. In emerging economies, foreign exchange markets and, to a lesser extent, the banking industry and the debt market suffer more severe consequences of geopolitical tensions than the stock market. In contrast, advanced economies, represented by the Group of Seven (G7), have witnessed detrimental consequences of GPRs on their stock markets, but negligible effects on other parts of their financial systems.
Exchange Rate Predictability Rossi, Barbara
Journal of economic literature,
12/2013, Letnik:
51, Številka:
4
Journal Article
Recenzirano
Odprti dostop
The main goal of this article is to provide an answer to the question: does anything forecast exchange rates, and if so, which variables? It is well known that exchange rate fluctuations are very ...difficult to predict using economic models, and that a random walk forecasts exchange rates better than any economic model (the Meese and Rogoff puzzle). However, the recent literature has identified a series of fundamentals/methodologies that claim to have resolved the puzzle. This article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up-to-date, thorough empirical analysis. Overall, our analysis of the literature and the data suggests that the answer to the question: "Are exchange rates predictable?" is, "It depends"—on the choice of predictor, forecast horizon, sample period, model, and forecast evaluation method. Predictability is most apparent when one or more of the following hold: the predictors are Taylor rule or net foreign assets, the model is linear, and a small number of parameters are estimated. The toughest benchmark is the random walk without drift.
This study employs the network connectedness approach to examine the risk spillover between the economic policy uncertainty (EPU) and exchange rate volatility (ERV) of 21 countries. Using monthly ...data from January 1997 to August 2022, we find that the spillover effect of ERV on EPU is greater than that of the inverse. In addition, the spillover effect of EPU on ERV is mainly concentrated in the foreign exchange markets of developing countries. This finding indicates that the foreign exchange markets of developing countries are more susceptible to shocks of global economic risk, and the spreading of risk contagion between EPU and ERV mainly follows the pathway "increase in global ERV → rising global EPU → further intensified volatility in the foreign exchange markets of developing countries." A rolling-window analysis shows that the spillover between global EPU and ERV is time-varying. The cross-market spillovers between EPU and ERV in the post-crisis period continued to rise and further increased sharply after the outbreak of the COVID-19 pandemic.
There is a significant difference between de facto and de jure regimes in terms of exchange rates, especially in emerging market economies. A simple open economy model is used to test the empirical ...plausibility of a managed exchange rate system in which the monetary authority responds to exchange rate movements with foreign exchange intervention as an additional goal of monetary policy. This study demonstrates that this system fits the data better than a float-system specification. In addition, it is found that the authorities in Asian countries are more likely to intervene in the foreign exchange market with a higher degree of concern regarding exchange rate movements. The study empirically confirms that all emerging market inflation targeters have employed a de facto managed exchange rate system while adopting a de jure float system.
A country may adopt policy measures such as raising its foreign exchange reserves to better prepare for sudden reversal of international capital flows or currency attacks, which in principle should ...reduce financial vulnerability for its firms and the entire economy, but the beneficial effect of such policies may be partially offset by endogenous firms' decisions to take on more risks. We present a robust but previously undocumented relationship between corporate leverage and country-level foreign exchange reserve holdings. For 6610 non-financial firms in 23 emerging markets from 2000 to 2006, we show that more foreign reserve accumulation leads to higher corporate leverage. The effect is significantly greater in sectors that are intrinsically more sensitive to uncertainty. We go from correlation to causality via a two-prong instrumental variable strategy: simultaneously (1) instrumenting FX reserves by global commodity price movement, and (2) examining leverage of firms outside the commodity-sensitive sectors.
•Endogenous firm risk-taking may attenuate the benefits of FX reserve accumulation.•FX reserve accumulation often leads to higher corporate leverage in emerging markets.•Such effect is stronger in sectors that are intrinsically more sensitive to uncertainty.•Causality is addressed by using global commodity prices to instrument FX reserves.•Causality is further addressed by studying leverage in the non-commodity sectors.
This paper utilizes a panel cointegration approach to investigate the relationship between remittances and financial development in the top remittance recipient countries in Sub-Saharan Africa. Our ...results point to a significant and positive long-run relationship. More specifically, the pooled-mean group estimates indicate that a one-percentage point increase in remittance inflows promotes financial development by more than one percentage point. In addition, the results support the existence of bidirectional causality between remittances and financial development in the long-run. We also find some evidence that remittance pricing has a negative impact on the long-run relationship between remittances and financial development. While the results suggest that remittance inflows promote financial development, migrant workers may be timing the foreign exchange market to remit.
In this paper, a structural model is proposed that allows monetary authorities to determine the size of foreign exchange market interventions that are expected to be necessary to implement a minimum ...exchange rate regime. An empirical application of the proposed model to the minimum exchange rate regime that the Swiss National Bank (SNB) implemented vis‐à‐vis the euro from September 2011 to January 2015 reveals that it is well suited to explain the actual size of these interventions and that, in January 2015, the SNB’s euro purchases might have been large without the abandonment of the minimum exchange rate regime, which is consistent with the official statements of the SNB in the aftermath of that episode.
This paper conducts an extensive mixed-method study of exchange rate determination in the Brazilian foreign exchange market. It combines semi-structured interviews with foreign exchange market ...participants in Brazil and London and advanced time-series econometrics. In line with Post Keynesian theory and critical realist ontology, the interviews uncover the context-specific expectations and underlying processes and structures that condition exchange rate dynamics in Brazil and emerging economies more generally. The results point to important structural changes in Brazil’s financial integration in the form of currency internationalisation and financialisation. Moreover, they show that this internationalisation has been mediated through a structured and hierarchic international monetary system which fundamentally distinguishes exchange rate drivers in emerging economies from those in developed ones.
Technical analysis involves the prediction of asset price movements from inductive analysis of past movements. We establish a number of stylized facts, including that technical analysis is widespread ...in the foreign exchange market and that it may be profitable. We then analyze four arguments that have been put forward to explain this: that the market may not be fully rational; that technical analysis may exploit the influence of official interventions; that it may be an efficient form of information processing; and that it may inform on nonfundamental influences. While each may have some validity, the latter is the most plausible.
This paper aims to study the phased influencing factors of renminbi (RMB) exchange rate (CNY against USD) and investigate the predictability of the factors selected by multimodel. We first take the ...time points when China's main exchange reform policies are launched as the demarcation points and divide the entire sample from July 2005 to December 2020 into three periods. Then, we select the potential predictors using several sources, including all factors (without any selection), the factors selected by each of the five commonly used machine learning methods, the significantly correlated factors selected by traditional regression analysis method, and multimodel‐driven factors. Finally, we predict the exchange rate based on the above selected factors and compare the prediction results. The research results show that the main influencing factors are different in different periods, and the influence of phase events cannot be ignored. Even if their influence on the exchange rate has decreased as a result of the “811” exchange rate reform, the money supply and foreign exchange reserves continue to be the primary drivers of RMB exchange rates during the whole period of the sample. Additionally, RMB exchange rate forward is a robust influencing factor in all periods. By comparing the forecast errors, we find that the prediction accuracy of the factors selected based on multimodel is higher than that of the factors selected based on a single method or the tradition method. The findings of this paper provide the following insights for exchange rate managers: In exchange rate risk management, it is important to pay attention to the impact of macroeconomic factors such as foreign exchange reserves and the impact of staged events, and market expectations of exchange rates are equally important. At the technical level, it is recommended to improve the forecasting accuracy by forecasting exchange rates based on common factors selected by multiple better machine learning methods simultaneously rather than those selected by a single method.
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