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Author: Olasupo Olusi Publisher: ISBN: Category : Languages : en Pages : 41
Book Description
Exchange rates arrangements aim at reducing uncertainty attached to currency fluctuations hence a reduction in systematic risks. This paper analyzes the behaviour of risk premiums in major equity markets, following the introduction of the euro. Using a multifactor asset pricing model, we find exchange rate risk premium in the largest eurozone markets (Germany and France) rose sharply after 1999, unlike in the quot;smallerquot; markets (Italy and the Netherlands). Market risk premium declined in the eurozone markets except Germany. It appears the euro resulted in systematic risk reduction in the smaller eurozone markets at the expense of their larger partners. This challenges an important rationale for the euro.
Author: Olasupo Olusi Publisher: ISBN: Category : Languages : en Pages : 41
Book Description
Exchange rates arrangements aim at reducing uncertainty attached to currency fluctuations hence a reduction in systematic risks. This paper analyzes the behaviour of risk premiums in major equity markets, following the introduction of the euro. Using a multifactor asset pricing model, we find exchange rate risk premium in the largest eurozone markets (Germany and France) rose sharply after 1999, unlike in the quot;smallerquot; markets (Italy and the Netherlands). Market risk premium declined in the eurozone markets except Germany. It appears the euro resulted in systematic risk reduction in the smaller eurozone markets at the expense of their larger partners. This challenges an important rationale for the euro.
Author: Bok-Keun Yu Publisher: ISBN: Category : Languages : en Pages : 92
Book Description
The main objective of this dissertation is to explore the country risk premium and exchange risk premium based on the price parity models for the developed and Asian emerging market countries against two large open economies, the Euro Area and the US, since the introduction of the euro in 1999. Traditionally, the US dollar has been used as the "foreign" currency. But since the emergence of the euro, both of these currencies have been playing major roles as the main currency for trading assets in global financial markets. Hence we believe that it is meaningful to compare interest rate differentials constructed from these two major currencies. In Chapter 1, we conduct surveys on the related literature and important stylized facts. In the literature review section, we carefully look at the empirical results and interpretations regarding the covered interest differentials (CIDs) and covered interest parity (CIP), forward rate puzzle, and uncovered interest differentials (UIDs) and uncovered interest parity (CIP). Next, we preview some characteristics of short-term nominal government bond yields, and examine similarities between the nominal government bond yields and the central banks' key rates in 4 major currency economies (Euro Area, US, UK, Japan). We briefly investigate the establishment and development of the EMU and the characteristics and differences of monetary policies in the ECB and the Fed. We also foresee the trends and changes in exchange rates, amounts outstanding in international bonds and notes, and official foreign exchange reserves in 4 major currencies. In Chapter 2, we specify the empirical model, and discuss the empirical results such as interest differentials, the country and exchange risk premium, the relationship between the exchange risk premium and UIDs, and nonstationarity and long-run equilibrium relationship. The important empirical results of this dissertation are summarized in the following paragraphs. The US short-term bond carries a lower risk than the Euro Area bond in view of the country risk premium. We find that the country risk premium itself is quantitatively small, and identify that a major source of interest differentials is the exchange risk premium in most countries. From the analysis on the exchange risk premium, we can infer that the US dollar is preferred to the euro as a financial asset in spite of its depreciation against other major currencies since 2002. The cointegration analysis shows that the CIP data series can be regarded as a long-run equilibrium relationship in some countries, but the UIP data series are not without proper adjustment of a time-varying exchange risk premium in almost all countries. Through our empirical analysis, we can confirm that most of the exchange risk premium is closely related to interest differentials which come mostly from differences in the monetary policy stance in each country. Our findings provide some evidence that the US has been more aggressive in the business cycles during the period analyzed, while other countries, including the Euro Area, were more prudent. Thus, this paper suggests that monetary policies combined with macroeconomic conditions for different countries are important in understanding interest differentials, especially in light of exchange rate risks.
Author: Giancarlo Corsetti Publisher: International Monetary Fund ISBN: 1475516800 Category : Business & Economics Languages : en Pages : 49
Book Description
Sovereign risk premia in several euro area countries have risen markedly since 2008, driving up credit spreads in the private sector as well. We propose a New Keynesian model of a two-region monetary union that accounts for this “sovereign risk channel.” The model is calibrated to the euro area as of mid-2012. We show that a combination of sovereign risk in one region and strongly procyclical fiscal policy at the aggregate level exacerbates the risk of belief-driven deflationary downturns. The model provides an argument in favor of coordinated, asymmetric fiscal stances as a way to prevent selffulfilling debt crises.
Author: Jean Dermine Publisher: Clarendon Press ISBN: Category : Business & Economics Languages : en Pages : 418
Book Description
One of the greatest events in financial history will occur in 1999: the birth of the euro and the emergence of a unified European capital market. This is the first academic text to consider the medium term impact of a single currency on these markets. It tackles several key questions:Once the euro is in place, what is likely to change in European capital markets?How is the structure of the bond, equity, and derivative markets going to be affected?Are these markets going to be integrated?Is the disappearence of exchange rate uncertainty going to affect risk premium on the equity and corporate debt markets?Is the euro going to compete with the US dollar, and does this matter?Is the introduction of the euro likely to change the sources of competitive advantages of financial institutions?What are going to be the key factors for success in the industry?The European Capital Markets Institute commissioned a report to address these issues. Drawn from various countries and fields of research - banking, economics, and finance - the contributors analyse the structural effects of the introduction of euro on European capital markets.
Author: Eylem Ersal-Kiziler Publisher: ISBN: Category : Banks and banking, Central Languages : en Pages : 23
Book Description
The pattern of debt flows to peripheral European Monetary Union members seems puzzling: they are mostly indirect and channeled through the large countries of the European Monetary Union. This paper examines to what extent the introduction of the euro and the elimination of the intra-area currency risk can explain this puzzle. A three-country dynamic stochastic general equilibrium framework with endogenous portfolio choice and two currencies is developed. In the equilibrium, the core members of the European Monetary Union emerge as the main group of lenders to the peripheral European Monetary Union members. Outside lenders are pushed from the periphery debt markets because of currency risk. The model generates a pattern of debt flows consistent with the data despite the absence of any exogenous frictions or market segmentations.
Author: Bill B. Francis Publisher: ISBN: Category : Languages : en Pages : 43
Book Description
In this paper, we examine if the introduction of the euro impacted the risk exposures, risk premiums and, hence, the cost of equity of the banking industry of 11 Eurozone countries, five non-Eurozone European countries, and three non-European countries. Using a multi-factor asset-pricing model that allows time variation in the risk exposures, we find a statistically significant and economically large decline in the cost of equity of the banking industry across the three groups of countries following the introduction of the euro. Though we find an increase in the market and currency exposures after the euro, consistent with increased competition among banks, the fall in the cost of equity arises from an economically large decline in the currency premium. As expected, the Eurozone banking industry experienced the largest decrease. Our results are inconsistent with the argument that increased banking competition arising from the legislative changes accompanying the introduction of the euro would result in an increase in the overall risk premium of the banking sector.
Author: Mauro Grande Publisher: Routledge ISBN: 1351159100 Category : Political Science Languages : en Pages : 403
Book Description
As time elapses since the introduction of the Euro, it is legitimate to start asking what impact the new currency and the single monetary policy have had on European integration. This book provides the most comprehensive review of financial integration in the euro area. The volume includes an introduction to the institutional features of the euro area and the literature on financial integration. It examines developments in the financial structures at large and moves forward to focus on specific areas pertaining to financial intermediaries, the bond and equity markets, and market-based debt finance. It is particularly suited to researchers and students of developments in the euro area, central banking, money and banking, as well as international relations and international business more generally. While the introductory chapters will help in bringing undergraduates on board, the later chapters will particularly benefit the early graduate student as well as the professional observer.
Author: Romain Lafarguette Publisher: International Monetary Fund ISBN: 1513569406 Category : Business & Economics Languages : en Pages : 33
Book Description
This paper presents a rule for foreign exchange interventions (FXI), designed to preserve financial stability in floating exchange rate arrangements. The FXI rule addresses a market failure: the absence of hedging solution for tail exchange rate risk in the market (i.e. high volatility). Market impairment or overshoot of exchange rate between two equilibria could generate high volatility and threaten financial stability due to unhedged exposure to exchange rate risk in the economy. The rule uses the concept of Value at Risk (VaR) to define FXI triggers. While it provides to the market a hedge against tail risk, the rule allows the exchange rate to smoothly adjust to new equilibria. In addition, the rule is budget neutral over the medium term, encourages a prudent risk management in the market, and is more resilient to speculative attacks than other rules, such as fixed-volatility rules. The empirical methodology is backtested on Banco Mexico’s FXIs data between 2008 and 2016.
Author: Olasupo Olusi
Author: Olasupo Olusi
Author: Bok-Keun Yu
Author: Fernando González
Author: Giancarlo Corsetti
Author: Jean Dermine
Author: Eylem Ersal-Kiziler
Author: Söhnke M. Bartram
Author: Bill B. Francis
Author: Mauro Grande
Author: Romain Lafarguette