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on International Finance |
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Issue of 2012‒02‒08
five papers chosen by Vimal Balasubramaniam National Institute of Public Finance and Policy |
| By: | Stéphane Goutte (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - CNRS : UMR7599 - Université Paris VI - Pierre et Marie Curie - Université Paris VII - Paris Diderot); Benteng Zou (CREA - Center for Research in Economic Analysis - Université du Luxembourg) |
| Abstract: | Modified Cox-Ingersoll-Ross model is employed, combining with Hamilton (1989) type Markov regime switching framework, to study foreign exchange rates, where all parameter values depend on the value of a continuous time Markov chain. Basing on real data of some foreign exchange rates, the Expectation-Maximization algorithm is extended to this more general model and it is applied to calibrate all parameters. We compare the obtained results regarding to results obtained with non regime switching models and notice that our results match much better the reality than the others without Markov switching. Furthermore, we illustrate our model on various foreign exchange rate data and clarify some significant eco- nomic time periods in which financial or economic crisis appeared, thus, regime switching obtained. |
| Keywords: | Foreign exchange rate; Regime switching model; calibration; financial crisis |
| Date: | 2012–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:hal-00643900&r=ifn |
| By: | Dagfinn Rime (Norges Bank (Central Bank of Norway)); Hans Jørgen Tranvåg (Norwegian University of Science and Technology) |
| Abstract: | Using the longest data set on FX order flow to date, along with the broadest coverage of currencies to date, we examine the effect of FX order flow on exchange rates across small and large currencies, currencies with floating or fixed regimes, and across both tranquil and turbulent periods. Over our 15 years of data for eleven Asian and Australasian currencies, we find that order flow has a potentially strong impact on all exchange rates in the sample. The effect is strongest on floating exchange rates, both economically and statistically, but is sizeable also on the other exchange rates, especially during periods of turbulence. By creating a measure of regional order flow, we show that all exchange rates depreciate as flows are moved out of Asia/Australasia and into US dollars. This is true both across regimes and if their own flow is not included in the structure of the regional flow. |
| Keywords: | Order flow, microstructure, Asian and Australasian exchange rates, financial crises |
| JEL: | F31 G01 G15 |
| Date: | 2012–01–11 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2012_01&r=ifn |
| By: | Nicolas Véron |
| Abstract: | This paper takes stock of global efforts towards financial reform since the start of the financial crisis in 2007-08, and provides a synthetic (if simplified) picture of their status as of January 2012. Underlying dynamics are described and analysed both at the global level (particularly G-20, International Monetary Fund and the Financial Stability Board) and in individual jurisdictions, together with the impact the crisis has had on them. The possible next steps of financial reform are then reviewed along several dimensions including ongoing crisis management in Europe, the new emphasis on macroprudential approaches, the challenges posed by globally integrated financial firms, the implementation of harmonised global standards and the links between financial systems and growth. This text is forthcoming in: Barry Eichengreen and Bokyeong Park (eds) (2012), The global economy after the financial crisis, World Scientific Publishing. Financial support from the Korea Institute for International Economic Policy (KIEP) is gratefully acknowledged. |
| Date: | 2012–01 |
| URL: | http://d.repec.org/n?u=RePEc:bre:wpaper:680&r=ifn |
| By: | YiLi Chien; Kanda Naknoi |
| Abstract: | Our paper investigates whether the valuation effect caused by a large risk premium and a low risk-free rate can help to explain the enormous US current account and trade deficit observed in the past decade. To answer this question, we set up an endowment growth model in which investors are endowed with heterogeneous trading technologies. In our model, the average US investors load up more aggregate risk by investing in a risky asset abroad and issuing a risk-free asset. Thanks to the large risk premium as well as the low risk-free rate, the US can sustain a long-run trade deficit even as a debtor country. Quantitatively, we find that the valuation effect caused solely by the high risk premium and the low risk-free rate in our model, which is calibrated to match the external assets and liabilities of US economy, can account for more than half of the observed trade deficit and current account deficit. Our results suggest that the current US trade deficit might not necessarily lead to net export increases or dollar depreciation in the future. |
| Keywords: | Global Imbalances; External Account; Risk Premium; Asset Pricing; Limited Participation |
| JEL: | E21 F32 F41 G12 |
| Date: | 2011–10 |
| URL: | http://d.repec.org/n?u=RePEc:pur:prukra:1266&r=ifn |
| By: | Michael Donadelli (LUISS Guido Carli University); Lorenzo Prosperi (Toulouse School of Economics) |
| Abstract: | The analysis of the Equity Risk Premium (ERP) and the research efforts aimed at solving the Equity Premium Puzzle (Mehra and Prescott 1985), are still widely discussed in the economic and financial literature. The purpose of this paper is to show that differences in the ERP between developed and emerging markets lead to many empirical asset pricing issues. Using data from both markets, we first provide an ex-post simple time series analysis on the ERP. Compared to developed markets, and in line with existing literature, we find that emerging markets compensate investors with higher returns. We observe that the time varying nature of the ERP in emerging economies, relates mainly to economic cycles, shocks and other macro phenomena (i.e. global financial market integration). Basic statistics also show that during the last decade the ERP shrunk, especially in advanced economies. To improve investigations on the higher emerging marketsÕ equity premium, a standard global asset pricing model is adopted. On one hand, we mainly find that the one-factor model does not fully predict emerging marketsÕ equity premia. On the other hand, we discover that the inclusion of liquidity conditions and time-varying components provides reasonable explainations for the behaviour of equity premia in these ÒyoungÓ markets. Our final findings mainly suggests that global business cycle and financial integration process are crucial in determining the risk associated to emerging marketsÕ investments. |
| Keywords: | Stock markets returns, equity premium puzzle, Equity risk premium. |
| JEL: | C13 G12 G15 E44 |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:lui:casmef:1201&r=ifn |