We provide some characterizations of the absence of triangular arbitrage in the spot exchange rates of a group of countries. When the matrix of exchange rates of the group does not fulfill the ...conditions given in those characterizations, we provide a measure of distance to the space of matrices of exchange rates that are triangular arbitrage‐free. Using this distance, we compute the closest no‐arbitrage matrix of exchange rates of the group. We apply the methodology developed to the exchange rates between the currencies of Brazil (real), European Union (euro), Great Britain (pound sterling), and USA (dollar) to analyze the possibility of triangular arbitrage in those foreign exchange markets.
I empirically examine the effect of coups d'état on the foreign exchange market using a monthly panel dataset covering 150 countries over the period 1980–2015. Specifically, I investigate whether ...foreign exchange market's participants sanction a country following a coup d'état event by allowing depreciations of its national currency against a weighted basket of currencies of its trading partners. I combine different identification strategies and find that the occurrence of a coup d'état induces a depreciation of the nominal effective exchange rate in the coup d'état country and generates negative spillover effects on neighbouring countries. Once a coup occurs, a country level of financial buffers and the flexibility of its exchange rate regime allow reducing the magnitude of the depreciation. In addition, I provide evidence that coups also increase the likelihood of experiencing a currency crisis by about 2 percentage points in coup d'état countries compared to non‐coup d'état countries.
Exploiting the 2015 central parity reform in China, we examine whether and how currency flotation affects corporate payout policies. The reform shifted China's currency regime from a crawling peg to ...the US dollar to partial flotation, significantly increasing its currency risk. We find that firms with high foreign currency exposures reduced their cash dividends postreform relative to firms with low foreign currency exposures. The dividend reduction is more pronounced for firms with less financial hedging or less financial flexibility before the reform. Firms display asymmetrical responses to foreign exchange gains versus losses. Specifically, while firms cut cash dividends when experiencing foreign exchange losses, they do not increase cash dividends when obtaining foreign exchange gains. A falsification test shows no changes in firms’ stock dividends that do not involve cash flows. Overall, our study shows that currency flotation, through increasing currency risks, dampens firms’ cash dividends.
In a financial system, entities (e.g., companies or markets) face systemic risk that could lead to financial instability. To prevent this impact, we require quantitative systemic risk management we ...can carry out using conditional value-at-risk (CoVaR) and a network model. The former measures any targeted entity's tail risk conditional on another entity being financially distressed; the latter represents the financial system through a set of nodes and a set of edges. In this study, we modify CoVaR along with its multivariate extension (MCoVaR) considering the joint conditioning events of multiple entities. We accomplish this by first employing a multivariate Johnson's SU risk model to capture the asymmetry and leptokurticity of the entities' asset returns. We then adopt the Cornish-Fisher expansion to account for the analytic higher-order conditional moments in modifying (M)CoVaR. In addition, we attempt to construct a conditional tail risk network. We identify its edges using a corresponding Delta (M)CoVaR reflecting the systemic risk contribution and further compute the strength and clustering coefficient of its nodes. When applying the financial system to global foreign exchange (forex) markets before and during COVID-19, we revealed that the resulting expanded (M)CoVaR forecast exhibited a better conditional coverage performance than its unexpanded version. Its superior performance appeared to be more evident over the COVID-19 period. Furthermore, our network analysis shows that advanced and emerging forex markets generally play roles as net transmitters and net receivers of systemic risk, respectively. The former (respectively, the latter) also possessed a high tendency to cluster with their neighbors in the network during (respectively, before) COVID-19. Overall, the interconnectedness and clustering tendency of the examined global forex markets substantially increased as the pandemic progressed.
With the RMB becoming the fifth international payment currency and its inclusion in the SDR currency basket, coupled with the opening of China's capital market, RMB-related exchange rates have ...attracted increasing attention because of China's RMB internationalization strategy. Using the DCC-GARCH model, we investigate how domestic (China) and international (USA, EU, UK, and Japan) policies and situations, including RMB internationalization, U.S. QE, European Debt Crisis, Brexit, and Abenomics, influence co-movement of the USD/CNY and SDR/CNY exchange rates from 2010 to 2017. We analyze the co-movement and provide explicit explanations for distinct areas (unrelated, long-term negative, and abruptly positive co-movement areas). Further, we find that RMB-related exchange rates remain largely influenced by domestic policies, while because of China's opening-up policies they are also influenced by the international situations. Both US and EU policies exert a remarkable influence, but the effects of UK and Japan policies are decreasing.
This study takes the foreign exchange rates of Taiwan, Hong Kong and Japan as the research issue, and utilises the VEC GJR-Asymmetric GARCH model to analyse the interaction among spot exchange rates ...of these three countries. The empirical results prove that the average returns of all foreign exchange markets have their own- and cross-spillovers, and the volatility of the return rate exists ARCH and /or GARCH effects. In addition, using Japanese forward premium/discount as information variable, empirical results find that Japanese forward premium/discount have important explanatory power for the links of Taiwan, Hong Kong, and Japanese spot exchange rates, and the original volatility spillover effect has disappeared, indicating that Japanese forward premium/discount is indeed an information variable. In terms of the volatility asymmetry effect, the results show that the estimated coefficients of asymmetry in Taiwan and Japan are positively significant, indicating that under the impact of bad news, their own market volatilities will be greater than good news. We also justify that the foreign exchange rates of Taiwan and Hong Kong, Taiwan and Japan, and Hong Kong and Japan are more closely linked to each other in the face of the two major events. The US-China trade war and the COVID-19 outbreak have triggered risk contagion, with a crisis in one country quickly spreading to another, intensifying the link between the foreign exchange markets of Taiwan, Hong Kong, and Japan. Our findings may help investors and policymakers find responses to such foreign exchange market turbulence.
Since the Global Financial Crisis in 2008, emerging market economies’ central banks have started to use foreign exchange derivative instruments frequently in exchange rate markets to provide a ...hedging instrument for currency risks and to support market liquidity. In this context, the central banks of three major emerging markets—the Central Bank of Brazil, Central Bank of Mexico, and Central Bank of the Republic of Türkiye—have started to implement non-deliverable forward (NDF) auctions. In this study, the impact of the NDF programs on financial market indicators is examined using a synthetic control method, which controls for the endogeneity and causality problems commonly faced by studies on the effect of central bank exchange market interventions. The empirical findings indicate that the NDF programs of the Central Bank of Brazil and Central Bank of Mexico have a significant impact on the exchange rate level but limited impact on the volatility and no impact on risk reversals. Conversely, the NDF program of the Central Bank of the Republic of Türkiye has a significant downward impact on the implied volatility and risk reversal but no significant impact on the level of the exchange rate. The difference in the effectiveness of similar practices of these three central banks is considered to be related mostly to the size of the programs.
This paper studies how several macrofinancial factors are associated over time with the evolution of covered interest parity (CIP) deviations in the decade after the Global Financial Crisis. Changes ...in a number of risk- and policy-related factors have a significant association with the evolution of CIP deviations. Key measures of FX market liquidity and intermediaries' risk-taking capacity are strongly correlated with the cross-currency basis (the deviation from CIP), and the close relationship between broad U.S. dollar strength and the basis is driven mainly by a common factor depending on other safe-haven currencies' comovements. Post-crisis monetary policies also play a role, as demonstrated by the relationship between CIP deviations, central bank balance sheets, and term premia. Risk-related factors have more explanatory power than monetary policy-related factors over the entire 2010–2018 period, but they are approximately equally influential over the period's second half. Further highlighting the role of bank regulation, we offer evidence that the year-end dynamics of the three-month dollar basis depend on financial regulations targeting global systemically important financial institutions.
•We investigate whether the weather affects foreign exchange markets.•Existing research on weather and financial markets is confined to stock markets.•The literature has studied many currency ...anomalies, but not the weather issue.•We use seven weather variables, eight currency pairs and five market indices.•The weather has no effect on the stock and currency markets of London and New York.
Since Saunders (1993), there has been ongoing research on whether the weather can affect asset prices. Our study of the impact of weather on stock and foreign exchange (henceforth FX) markets shows that the weather has no effect during 2002–2018, suggesting that any effect may have dissipated after discovery as practitioners have tried to use investment vehicles to exploit it. The results indicate that mood changes caused by the weather do not significantly affect FX and stock returns.
In this research, we analyzed how Turkish financial markets and foreign investors in the stock market reacted to the terror attacks in Turkey. Our analysis, which was performed using the terror index ...for the stock market and the foreign exchange market, revealed that returns, abnormal returns, and cumulative abnormal returns were not affected by the terror attacks; however, foreign investors in the stock market were affected. When the geographic regions of the terror attacks were analyzed, the findings showed that foreign investors were negatively affected mainly by the terror attacks that occurred in southeast Anatolia. Attack type and target type were important only for foreign investors. An evaluation of the interaction between the terror attacks and the markets with the involvement of the terrorist organizations indicated that only the foreign investors in the stock market were affected by Al-Qaeda and PKK-linked terror attacks. An evaluation of the effect of terror attacks in foreign countries on Turkish financial markets revealed no effect on the domestic stock market and foreign exchange markets. We also examined the volatility spillovers from the terror index to the stock market and found that terrorist attacks increased the volatility of the stock market.
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