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Author: Chu-Sheng Tai Publisher: ISBN: Category : Languages : en Pages :
Book Description
This paper studies time-varying price of risk and volatility in Asia-Pacific forward exchange markets in an attempt to see whether currency risk can be a potential source of risk premium to explain forward premium puzzle. To derive a measure of the risk premium, a conditional version of international CAPM (ICAPM) in the absence of PPP is estimated and the parameter restrictions are tested based on asset pricing theories. To incorporate time-varying feature of the risk premium into the model, not only are the second moments of asset returns allowed to change over time by utilizing a parsimonious parameterization of the asymmetric multivariate GARCH with conditionally t-distributed error process (MGARCH-t), but also the prices of risks are permitted to evolve through time based on some predetermined information variables. Estimation results indicate that the not only are currency risks priced, but also change over time. In addition, the explanatory power of the model measured by pseudo-R^2 is relatively high with an average of 38.211%, suggesting that the predicted time-varying forward risk premia are both statistically and economically significant. Finally, both forward premium and its squared are statistically significant in describing the dynamics of currency risk prices, implying the non-linearity of forward risk premium, which sheds a new light in the estimation of international asset pricing model and on the test of forward premium puzzle.
Author: Chu-Sheng Tai Publisher: ISBN: Category : Languages : en Pages :
Book Description
This paper studies time-varying price of risk and volatility in Asia-Pacific forward exchange markets in an attempt to see whether currency risk can be a potential source of risk premium to explain forward premium puzzle. To derive a measure of the risk premium, a conditional version of international CAPM (ICAPM) in the absence of PPP is estimated and the parameter restrictions are tested based on asset pricing theories. To incorporate time-varying feature of the risk premium into the model, not only are the second moments of asset returns allowed to change over time by utilizing a parsimonious parameterization of the asymmetric multivariate GARCH with conditionally t-distributed error process (MGARCH-t), but also the prices of risks are permitted to evolve through time based on some predetermined information variables. Estimation results indicate that the not only are currency risks priced, but also change over time. In addition, the explanatory power of the model measured by pseudo-R^2 is relatively high with an average of 38.211%, suggesting that the predicted time-varying forward risk premia are both statistically and economically significant. Finally, both forward premium and its squared are statistically significant in describing the dynamics of currency risk prices, implying the non-linearity of forward risk premium, which sheds a new light in the estimation of international asset pricing model and on the test of forward premium puzzle.
Author: John A. Carlson Publisher: ISBN: Category : Languages : en Pages : 42
Book Description
This paper presents a theoretical model of exchange-rate determination intended to address the forward premium puzzle. It also explains the empirical observation that risk premiums depend on interest differentials. The model's closed-form solution indicates that currency risk premiums depend on two factors: interest differentials and the current deviation of the exchange rate from its long-run equilibrium. If speculators have an alternative to exchange-rate speculation, then there is no presumption that uncovered interest parity holds even approximately in long-run equilibrium. The model is consistent with existing evidence suggesting that forward premiums are negatively related to rationally expected future exchange rate changes. New empirical evidence is provided in support of the model.
Author: Shu Yan Publisher: ISBN: Category : Languages : en Pages :
Book Description
Existing literature reports an empirical puzzle about the foreign exchange forward premium, the spread between the forward rate and the concurrently-observed spot exchange rate. The premium is often negatively correlated with subsequent changes in the spot rate. This defies economic intuition and possibly violates market efficiency. Various explanations have been offered, ranging from non-stationary risk premia through econometric mis-specifications. Some researchers have accepted the puzzle as a fact of inefficient foreign exchange markets, a phenomenon that provides profitable trading opportunities. We suggest there is really no puzzle at all. The simplest conceivable model adequately fits the data; forward exchange rates are unbiased predictors of subsequent spot rates. The puzzle has arisen because (a) the forward rate, the spot rate, and the forward premium all follow non-stationary (or nearly so) time series processes, and (b) the forward rate is a noisy predictor. We document these features with an extended sample and show how they can give the delusion of a puzzle.
Author: Jingyi Ren Publisher: ISBN: Category : Languages : en Pages : 175
Book Description
Chapter 11 proposes using foreign exchange rate currency options with different strike prices and maturities to capture both currency risks and expectations, for helping understand currency return dynamics. We show that currency returns, which are notoriously difficult to model empirically, are well-explained by the term structures of forward premia and options-based measures of FX expectations and risk. Although this finding is to be expected, expectations and risk have been largely ignored in empirical exchange-rate modeling. Using daily options data for six major currency pairs, we first show that currency options-implied standard deviation, skewness, and kurtosis consistently improve the explanatory power of quarterly currency returns than a standardized UIP regression. We then show that adding term structure information of options-implied moments further improves the explanatory power. Our results highlight the importance of expectations and risk in explaining currency returns and suggest that this information may be particularly useful during a crisis period. Chapter 2 studies the term structure of currency risk using FX options data, and finds it able to explain the cross-sectional variation of currency excess returns. With the tool of a new FX risk index, "FCX", I look into currency risk term structure and measure its shape by level and slope. I consistently find that for currencies paired by US dollars, the term structure of currency risk is flat at a low level prior to the 2008 crisis, upward-sloping after the crisis and peaks at a high level with a prominently negative slope during the crisis. This work is believed to be new in the currency research field. I then use this information to build trading strategies, earning a profit by longing currencies with the highest level or slope and shorting ones with the lowest level or slope. The profit by sorting slope is significantly high and robust to the 2008 crisis period, with a low correlation to the Carry Trade return, suggesting extra information in risk than the interest rate. Next, I extract global risk factors by level and slope to help understand the currency excess return, a long-lasting puzzle. The global risk factor by level substantially improves the cross-sectional explanatory power in currency excess returns compared to Lustig et al. (2011). Furthermore, I show that there is certain high risk corresponding to a high level and low slope, and high interest rate currency earns returns co-varying negatively to this risk, implying that it is a risky asset and thus requires a high risk premium, which explains the Carry Trade return well. Chapter 32 explores the possible macroeconomic connection in currency markets through the channel of FX risk term structure. There is a consensus in the literature that exchange rates are empirically “disconnected” from fundamentals, but a possible theoretical insight is that macroeconomic volatility shocks induce time-varying risks in the exchange rates. This chapter empirically investigates the connection between macroeconomic fundamentals and time-varying currency risks captured by the FX risk term structure, following the main findings of chapters 1 and 2. This chapter use both a small dataset of directly observable, country-specific key macroeconomic and international variables implied by exchange rate structural modeling and a small number of macroeconomic factors constructed from a large dataset of 126 U.S. macroeconomic series by principal component analysis. We perform a VAR analysis to examine impulse responses of FX risk term structure to the shocks of macroeconomic events and find that production variables can generate a relatively consistent and systematic impact pattern, which suggests potential macroeconomic connection. We also perform a direct single regression, regressing the 126 macroeconomic series of eight different groups on the FX risk term structure and apply the group LASSO technique for variable selection. Variables among both macroeconomic fundamentals and financial series are commonly selected, which suggests that financial markets’ co-movements also exist besides potential macroeconomic connection.
Author: Ahmad Zubaidi Baharumshah Publisher: Routledge ISBN: 1351152106 Category : Business & Economics Languages : en Pages : 262
Book Description
The East Asia countries were among the fastest growing economies in the world and of increasing importance to the world economy. These countries have taken the lead in adopting outward-oriented development policies. This volume focuses on the major issues on open economy macroeconomics in the East Asia economies that will be instructive to both academics and policymakers. The emphasis is on the countries that were severely affected by the 1997/98 Asian financial crises. Several aspects of exchange rate, current account, budget deficits, monetary and financial issues are considered in this book. In addition, several chapters are devoted to discussion on the issues of economic integration in the region. The contagion and the currency crisis are also discussed thoroughly. Most of the chapters are empirical in nature and the empirical evidence provided is based on the recent development in time series econometrics methods.
Author: M. Ayhan Kose Publisher: World Bank Publications ISBN: 1464815453 Category : Business & Economics Languages : en Pages : 403
Book Description
The global economy has experienced four waves of rapid debt accumulation over the past 50 years. The first three debt waves ended with financial crises in many emerging market and developing economies. During the current wave, which started in 2010, the increase in debt in these economies has already been larger, faster, and broader-based than in the previous three waves. Current low interest rates mitigate some of the risks associated with high debt. However, emerging market and developing economies are also confronted by weak growth prospects, mounting vulnerabilities, and elevated global risks. A menu of policy options is available to reduce the likelihood that the current debt wave will end in crisis and, if crises do take place, will alleviate their impact.
Author: Banco de Pagos Internacionales (Basilea, Suiza). Departamento Monetario y Económico Publisher: ISBN: 9789291319626 Category : Banks and banking, Central Languages : es Pages : 0
Author: Mr.Peter Isard Publisher: International Monetary Fund ISBN: Category : Business & Economics Languages : en Pages : 14
Book Description
This note provides an overview of the uncovered interest parity assumption. It traces the history of the interest parity concept, summarizes evidence on the empirical validity of uncovered interest parity, and discusses the implications for macroeconomic analysis. The uncovered interest parity assumption has been an important building block in multiperiod and continuous time models of open economies, and although its validity is strongly challenged by the empirical evidence, its retention in macroeconomic models is supported on pragmatic grounds, at least for the time being, by the lack of much empirical support for existing models of the exchange risk premium.
Author: Chu-Sheng Tai
Author: Chu-Sheng Tai
Author: Juan M. Londono
Author: John A. Carlson
Author: Shu Yan
Author: Jingyi Ren
Author: 
Author: Ahmad Zubaidi Baharumshah
Author: M. Ayhan Kose
Author: Banco de Pagos Internacionales (Basilea, Suiza). Departamento Monetario y Económico
Author: Mr.Peter Isard