scholarly journals The impact of a political shock on foreign exchange markets in a small and open economy: A dynamic modelling approach

2021 ◽  
Vol 10 (3) ◽  
pp. 137-152
Author(s):  
Ibrahim A. Onour ◽  
Bruno S. Sergi
Keyword(s):  
Exchange Rate ◽  
Foreign Exchange ◽  
Return On Investment ◽  
Foreign Exchange Markets ◽  
Necessary Condition ◽  
Adjustment Process ◽  
Capital Outflow ◽  
Informal Market ◽  
Exchange Markets ◽  
The Impact

Abstract This paper aims to analyse the dynamics of foreign exchange markets in a country facing political uncertainty that prompt capital outflow from the country1. The economic environment under investigation is characterized by dual foreign exchange markets: a formal or official market for foreign exchange with insufficient and volatile foreign exchange flows, and a strong and thriving informal market, with a higher exchange rate2. The findings in the paper indicate a necessary condition for stabilization of the exchange rate system and that is that the return on investment should exceed the depreciation rate of domestic currency in the formal foreign exchange market. This condition implies that the return on investment should at least compensate investors for the opportunity cost of holding domestic money in their private portfolio wealth. Our findings also indicate that stability of the foreign exchange rates is more difficult to achieve under insufficient official reserves as the recovery process from a shock becomes more costly in terms of time period needed for the adjustment process to complete. The dynamic path of the foreign exchange premium shows that under massive capital outflow caused by economic sanctions, the informal market exchange rate overshoots the equilibrium stationary exchange rate, and the size of such overshooting depends on the size of available foreign exchange reserves held by the central bank.

scholarly journals What Determines the Behaviour of Real Exchange Rate in Pakistan?

1993 ◽  
Vol 32 (4II) ◽  
pp. 1015-1029 ◽  
Author(s):  
Salim Chishti ◽  
M.A Ynul Hasan
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Foreign Exchange ◽  
Foreign Exchange Market ◽  
Foreign Exchange Markets ◽  
Adjustment Process ◽  
Trade Restrictions ◽  
The Real ◽  
Exchange Markets ◽  
The Exchange Rate

It is now widely acknowledged that the role of the real exchange rate is crucial in the adjustment process of the economy. While exchange rates are, generally, relative prices of national currencies under a floating rate regime, they may be viewed as being determined by the interaction of supply and demand in the foreign exchange markets. This premise, though uncontentious, renders simply a beginning for comprehending the determination of the exchange rate and its ensuing relationship to various macroeconomic variables and to policy. It has been argued rather forcefully [e.g., Edwards and Wijnbergen (1987); Edwards (1988, 1988a); Khan (1986); Khan and Lizondo (1987)] that any analysis in this regard to be labelled as comprehensive would characterise the exchange rate as being detc;:rmined by a complex process of interaction simultaneously with other variables in tbe national and international macroeconomy rather than being determined simply by 'purchasing power parity' (PPP) as proposed by Cassel (1918). Citing Cassel's writings in this context, Officer (1976) noted the reasons for such a departure from a stable relationship between the real exchange rate and the PPP as being due to frequent trade restrictions, distorted tariff policies, speculations in the 'foreign exchange market, large capital outflows, government's heavy handed ~intervention in the foreign exchange markets, etc.

The long-run effects of geopolitical risk on foreign exchange markets: evidence from some ASEAN countries

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Hon Chung Hui
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Foreign Exchange ◽  
Risk Index ◽  
Foreign Exchange Markets ◽  
Content Type ◽  
Long Run ◽  
Exchange Markets ◽  
Exchange Rate Models ◽  
Asean Countries

PurposeThe purpose of this paper is to analyse the long-run relationship between geopolitical risk and exchange rates in four ASEAN countries.Design/methodology/approachWe augment theoretical nominal exchange rate models available in the literature with the geopolitical risk index developed by Caldara and Iacoviello (2019), and then estimate these models using the ARDL approach to Cointegration.FindingsOur analysis uncovers evidence of Cointegration in the exchange rate models when the MYR-USD, IDR-USD, THB-USD and PHP-USD exchange rates are used as dependent variable. Next, geopolitical risk is a significant long-run driver for these exchange rates. Third, in all countries higher geopolitical risk leads to a depreciation of domestic currency.Research limitations/implicationsThere are implications for entrepreneurs, central banks, portfolio managers and arbitrageurs who actively trade in financial markets. Financial market players can benefit from a better understanding of how geopolitical events affect the portfolio of financial assets across various countries, while entrepreneurs can work out hedging strategies.Originality/valueThis is a contribution to the study of interlinkages between political risk and foreign exchange markets. It is the first study to adopt the geopolitical risk index of Caldara and Iacoviello (2019) to the study the foreign exchange markets of ASEAN countries.

scholarly journals Economic News Releases and Financial Markets in South Africa

Economies ◽  
2019 ◽  
Vol 7 (4) ◽  
pp. 112
Author(s):  
Konstantinos Gkillas ◽  
Dimitrios Vortelinos ◽  
Christos Floros ◽  
Athanasios Tsagkanos
Keyword(s):  
South Africa ◽  
Foreign Exchange ◽  
Global Financial Crisis ◽  
Foreign Exchange Markets ◽  
Economic News ◽  
News Releases ◽  
Before And After ◽  
Exchange Markets ◽  
The Global Financial Crisis ◽  
The Impact

We examine the impact of economic news releases on returns, volatility and jumps of the stock and foreign exchange markets of South Africa. We also assess the impact of macroeconomic determinants. The dataset range is fifteen years covering the period from January, 2000 to December, 2014. Results are robust to different sub-periods before and after the global financial crisis of 2008. Volatility is estimated with the use of the median realized variance estimator. Jumps are also detected. The impact of the announcements is assessed building using regression techniques. Returns, volatility and jumps of both stock and foreign exchange markets are significantly explained nationally by macroeconomic fundamentals and economic news releases.

Exchange Rate Theory: Chaotic of Foreign Exchange Markets

1994 ◽  
Vol 104 (425) ◽  
pp. 966
Author(s):  
Ronald MacDonald ◽  
Paul De Grauwe ◽  
Hans Dewachter ◽  
Mark Embrechts
Keyword(s):  
Exchange Rate ◽  
Foreign Exchange ◽  
Foreign Exchange Markets ◽  
Rate Theory ◽  
Exchange Markets
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