Modeling The Term Structure Of Exchange Rate Expectations
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Modeling The Term Structure Of Exchange Rate Expectations
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Author : Christian Bauer
language : en
Publisher:
Release Date : 2007
Modeling The Term Structure Of Exchange Rate Expectations written by Christian Bauer and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2007 with categories.
Recent approaches in international finance on exchange rates explicitly account for the maturity of interest rates. We integrate the interest parity idea into a modern microstructure model of foreign exchange and national bond markets and develop a model of the term structure of exchange rate expectations. The reaction function of the spot rate on changes of the basic economic variables such as the interest rate is generalized. This capital market model is able to reproduce standard results (e.g. overshooting) without reference to macroeconomic variables like rigid prices. In addition, the semi-elasticity of the spot exchange rate on interest rate changes depends on both the term structure of interest rates in both countries and determinants of the financial markets. The effects of interest rate changes on the spot exchange rate are diminished, if the exchange rate expectations for short and for long horizons have opposite signs. Finally, we show that there are several rational methods of building expectations which are not mutually consistent. This ambiguity of rational expectation building might contribute to explanations of the diversity of empirical results in the literature known as UIP puzzle.
The Out Of Sample Success Of Term Structure Models As Exchange Rate Predictors
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Author : Richard H. Clarida
language : en
Publisher:
Release Date : 2002
The Out Of Sample Success Of Term Structure Models As Exchange Rate Predictors written by Richard H. Clarida and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2002 with Economics categories.
A large literature suggests that standard exchange rate models cannot outperform a random walk forecast and that the forward rate is not an optimal predictor of the spot rate. However, there is evidence that the term structure of forward premia contains valuable information for forecasting future spot exchange rates and that exchange rate dynamics display nonlinearities. This paper proposes a term-structure forecasting model of exchange rates based on a regime-switching vector equilibrium correction model which is novel in this context. Our model significantly outperforms both a random walk and a linear term-structure vector equilibrium correction model for four major dollar rates across a range of horizons.
A Theory Of Exchange Rates And The Term Structure Of Interest Rates
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Author : Hyoung-Seok Lim
language : en
Publisher:
Release Date : 2003
A Theory Of Exchange Rates And The Term Structure Of Interest Rates written by Hyoung-Seok Lim and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2003 with Foreign exchange categories.
The Term Structure Of Exchange Rate Predictability
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Author : Huichou Huang
language : en
Publisher:
Release Date : 2016
The Term Structure Of Exchange Rate Predictability written by Huichou Huang and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with categories.
In this paper we study the exchange rate predictability across a range of investment horizons by return decomposition into forward premium component and carry trade risk premium component, for which we propose a term structure model to capture exchange rate dynamics with a broad set of predictors meanwhile handle both parameter and model uncertainties. We demonstrate the time-varying term-structural and model disagreement effects of exchange rate determinants as well as the projections of predictive information over the term structure. We also utilize the time-variation in the probability weighting from dynamic model averaging to identify the scapegoat drivers of customer order flows, which are also informative about the term structure of carry trade risk premia. Our findings reveal that heterogeneous agents learn to forecast exchange rates and switch trading rules over time, resulting in the dynamic country-specific and global exposures of exchange rates to short-run non-fundamental risk and long-run business cycle risk. Hedging pressure and liquidity are identified to contain predictive information that is common to a range of forecasting horizons. Policy-related predictors are important for short-run forecasts up to 3 months while crash risk indicators matter for long-run forecasts from 9 months to 12 months. We further comprehensively evaluate both statistical and economic significance of the model allowing for a full spectrum of currency investment management, and find that the model generates substantial performance fees of 6.5% per annum.
Nonlinear Exchange Rate Models
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Author : Lucio Sarno
language : en
Publisher: International Monetary Fund
Release Date : 2003-05-01
Nonlinear Exchange Rate Models written by Lucio Sarno and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2003-05-01 with Business & Economics categories.
This paper provides a selective overview of nonlinear exchange rate models recently proposed in the literature and assesses their contribution to understanding exchange rate behavior. Two key questions are examined. The first question is whether nonlinear autoregressive models of real exchange rates help resolve the "purchasing power parity (PPP) puzzles." The second question is whether recently developed nonlinear, regime-switching vector equilibrium correction models of the nominal exchange rate can beat a random walk model, the standard benchmark in the exchange rate literature, in terms of out-of-sample forecasting performance. Finally, issues related to the adequateness of standard methods of evaluation of (linear and nonlinear) exchange rate models are discussed with reference to different forecast accuracy criteria.
Empirical Investigation Of Currency And Term Structure Of Interest Rates With Nonlinear Asset Pricing Models And Cointegration
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Author : Ahmet Can Inci
language : en
Publisher:
Release Date : 2001
Empirical Investigation Of Currency And Term Structure Of Interest Rates With Nonlinear Asset Pricing Models And Cointegration written by Ahmet Can Inci and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2001 with Capital assets pricing model categories.
Exchange Rate Regimes And The Expectations Hypothesis Of The Term Structure
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Author : Stefan Gerlach
language : en
Publisher:
Release Date : 1997
Exchange Rate Regimes And The Expectations Hypothesis Of The Term Structure written by Stefan Gerlach and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1997 with Euro-dollar market categories.
Expectations And The Foreign Exchange Market
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Author : Craig S. Hakkio
language : en
Publisher: Routledge
Release Date : 2017-04-21
Expectations And The Foreign Exchange Market written by Craig S. Hakkio and has been published by Routledge this book supported file pdf, txt, epub, kindle and other format this book has been release on 2017-04-21 with Business & Economics categories.
Originally published in 1984. This book examines two important dimensions of efficiency in the foreign exchange market using econometric techniques. It responds to the macroeconomics trend to re-examining the theories of exchange rate determination following the erratic behaviour of exchange rates in the late 1970s. In particular the text looks at the relation between spot and forward exchange rates and the term structure of the forward premium, both of which require a joint test of market efficiency and the equilibrium model. Approaches used are the regression of spot rates on lagged forward rates and an explicit time series analysis of the spot and forward rates, using data from Canada, the United Kingdom, the Netherlands, Switzerland and Germany.
The Term Structure Of Interest Rate Differentials In A Target Zone
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Author : Lars E. O. Svensson
language : en
Publisher:
Release Date : 1990
The Term Structure Of Interest Rate Differentials In A Target Zone written by Lars E. O. Svensson and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1990 with Brownian motion processes categories.
The term structure of interest rate differentials is derived in a model of a small open economy with a target zone exchange rate regime. The target zone is modeled as a regulated Brownian motion. The interest rate differentials are computed as the solution to a parabolic partial differential equation with derivative boundary conditions, both via a Fourier-series analytical solution and via a direct numerical solution. Several specific properties of the term structure of interest rate differentials are derived. For instance, for given time to maturity the interest rate differential is decreasing in the exchange rate, and for given exchange rate the interest rate differential's absolute value and its instantaneous variability are both decreasing in the time to maturity. Devaluation/realignment risks are incorporated and imply upward shifts of the interest rate differentials. Some implications of the theory are found to be broadly consistent with data on Swedish exchange rates and interest differentials for the period 1986-1989.
Alternative Tests Of Rational Expectations Models
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Author : Robert J. Shiller
language : en
Publisher:
Release Date : 1980
Alternative Tests Of Rational Expectations Models written by Robert J. Shiller and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1980 with Economic forecasting categories.
A linearized version of the rational expectations models of the term structure is put forth in terms of a complete vector of equally spaced observations along the yield curve. A data series on intermediate maturity yields which meets the specifications of the model is presented. The model is tested against a specific and easily interpreted alternative. Earlier studies of rational expectations models, which used "volatility tests" or "likelihood ratio tests," are discussed.