The impact of trade and financial expansion on volatility of real exchange rate.
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ABSTRACT:
SUBMITTER: Chen Z
PROVIDER: S-EPMC8782506 | biostudies-literature |
REPOSITORIES: biostudies-literature
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Project description:Maintaining a stable exchange rate is a challenging task for the world, especially for developing economies. This study examines the impact of asymmetric exchange rates on trade flows in selected Asian countries and finds that the effects of increased exchange rate volatility on exports and imports differ among Pakistan, Malaysia, Japan, and Korea. The quarterly data from the period 1980 to 2018 is collected from the International Financial Statistics (IFS) database maintained by the International Monetary Fund (IMF). We employ both linear and non-linear Autoregressive Distributed Lag (ARDL) models for estimation. The non-linear models yielded more significant findings, while the linear models did not indicate any significant effects of exchange rate volatility on trade flows. The results of the study suggest that in the case of Pakistan, both the linear and non-linear models indicate that increased exchange rate volatility adversely affects exports and imports, while decreased volatility enhances both. This implies that stabilizing the exchange rate would be beneficial for Pakistan's trade. In contrast, the linear model applied to Malaysia shows no long-run effects of exchange rate volatility on exports. However, the result suggests that decreased volatility stimulates Malaysia's exports. Therefore, in the case of Malaysia, stabilizing the exchange rate could contribute to boosting exports. We also found that increased exchange rate volatility boosts exports of Japan. On the other hand, decreased volatility hurts exports of Japan. As for the long-run effects of exchange rate volatility on imports, we found that increased volatility boosts imports of Korea. The study provides various policy implications regarding the impact of exchange rate volatility on trade flows in developing economies. The study highlights the importance of country-specific considerations in understanding the impact of exchange rate volatility on trade flows, and has important policy implications for promoting trade and economic growth in these nations. It emphasizes the need to model exchange rate volatility separately for developed and developing countries and to continue research and analysis to identify ways to mitigate its negative effects on the economy.
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Project description:This article analyzes cross-country data encompassing 130 countries and regions from 2000 to 2019 to investigate the correlation between financial crises, labor market frictions, and economic volatility. The empirical findings demonstrate that financial crises have a milder impact on real gross domestic product (GDP) in developing countries with flexible labor markets. This trend also applies to non-eurozone developed countries, where labor market flexibility aids crisis mitigation. However, this pattern doesn't hold for eurozone countries. Further examination of developing nations reveals that those with heightened labor market flexibility tend to experience reduced adverse effects on non-tradable sectors, thereby mitigating the impact on real GDP.
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Project description:We document how the entire distribution of exchange rate returns responds to changes in global financial conditions. We measure global financial conditions as the common component of country-specific financial condition indices, computed consistently across a large panel of developed and emerging economies. Using quantile regression, we provide a characterisation and ranking of the tail behaviour of a large sample of currencies in response to a tightening of global financial conditions, corroborating (and quantifying) some of the prevailing narratives about safe haven and risky currencies. Compared to most standard approaches, our methodology delivers a more nuanced picture of exchange rate behaviour, allowing for example to make probabilistic statements about the likelihood of observing large swings in returns given the prevailing global financial environment. We also identify macroeconomic fundamentals associated with different tail dynamics: currencies of countries with higher interest rates, low levels of international reserves and large fiscal deficits display more marked increases in the likelihood of large losses in response to a tightening of global financial conditions. Supplementary Information The online version contains supplementary material available at 10.1057/s41308-022-00160-0.
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Project description:Motivated by recent financial crises, significant research efforts have been put into studying contagion effects and herding behaviour in financial markets. Much less has been said regarding the influence of financial news on financial markets. We propose a novel measure of collective behaviour based on financial news on the Web, the News Cohesiveness Index (NCI), and we demonstrate that the index can be used as a financial market volatility indicator. We evaluate the NCI using financial documents from large Web news sources on a daily basis from October 2011 to July 2013 and analyse the interplay between financial markets and finance-related news. We hypothesise that strong cohesion in financial news reflects movements in the financial markets. Our results indicate that cohesiveness in financial news is highly correlated with and driven by volatility in financial markets.
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Project description:Diffusion exchange spectroscopy (DEXSY) provides a means to isolate the signal attenuation associated with exchange from other sources of signal loss. With the total diffusion weighting b1+b2=bs held constant, DEXSY signals acquired with b1=0 or b2=0 have no exchange weighting, while a DEXSY signal acquired with b1=b2 has maximal exchange weighting. The exchange rate can be estimated by fitting a diffusion exchange model to signals acquired with variable mixing times. Conventionally, acquired signals are normalized by a signal with b1=0 and b2=0 to remove the decay due to spin-lattice relaxation. Instead, division by a signal with equal bs but b1=0 or b2=0 reduces spin-lattice relaxation weighting of the apparent exchange rate (AXR). Furthermore, apparent diffusion-weighted R1 relaxation rates can be estimated from non-exchange-weighted DEXSY signals. Estimated R1 values are utilized to remove signal decay due to spin-lattice relaxation from exchange-weighted signals, permitting a more precise estimate of AXR with less data. Data reduction methods are proposed and tested with regards to statistical accuracy and precision of AXR estimates on simulated and experimental data. Simulations show that the methods are capable of accurately measuring the ground-truth exchange rate. The methods remain accurate even when the assumption that DEXSY signals attenuate with b is violated, as occurs for restricted diffusion. Experimental data was collected from fixed neonatal mouse spinal cord samples at 25 and 7°C using the strong static magnetic field gradient produced by a single-sided permanent magnet (i.e., an NMR MOUSE). The most rapid method for exchange measurements requires only five data points (an 80 s experiment as implemented) and achieves a similar level of accuracy and precision to the baseline method using 44 data points. This represents a significant improvement in acquisition speed, overcoming a barrier which has limited the use of DEXSY on living specimen.
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Project description:BackgroundIn the current era of strong worldwide market couplings the global financial village became highly prone to systemic collapses, events that can rapidly sweep throughout the entire village.Methodology/principal findingsWe present a new methodology to assess and quantify inter-market relations. The approach is based on the correlations between the market index, the index volatility, the market Index Cohesive Force and the meta-correlations (correlations between the intra-correlations.) We investigated the relations between six important world markets--U.S., U.K., Germany, Japan, China and India--from January 2000 until December 2010. We found that while the developed "western" markets (U.S., U.K., Germany) are highly correlated, the interdependencies between these markets and the developing "eastern" markets (India and China) are volatile and with noticeable maxima at times of global world events. The Japanese market switches "identity"--it switches between periods of high meta-correlations with the "western" markets and periods when it behaves more similarly to the "eastern" markets.Conclusions/significanceThe methodological framework presented here provides a way to quantify the evolvement of interdependencies in the global market, evaluate a world financial network and quantify changes in the world inter market relations. Such changes can be used as precursors to the agitation of the global financial village. Hence, the new approach can help to develop a sensitive "financial seismograph" to detect early signs of global financial crises so they can be treated before they develop into worldwide events.
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Project description:Despite a direct ban on charging interest, interest-based benchmarks are used as a pricing reference by a majority of Islamic banks, due in part to the absence of stable and widely- published alternatives. Benchmarking interest rate exposes Islamic banks to the problems of conventional banks, particularly the interest rate risk. Against this backdrop, the present study empirically examines the dynamic linkage between the interest rate volatility and the financing of Islamic banks. The empirical analysis is carried using evidence from the Islamic banking industry of Pakistan during the time period 2006-2020. The multivariate Johansen and Jusiles Co-integration test and Vector Error Correction Model (VECM) are used as the baseline econometric models. Moreover, the DCC-GARCH model is employed for robustness and ensuring the consistency of results. The results indicate that a significant long-term and short-term relationship exists between the interest rate volatility and the financing of Islamic banking industry providing significant evidence for co-movements and convergence. These findings suggest that paradoxical as it may seem, the financing of Islamic banks operating within a dual banking system is subject to interest rate risk, mainly due to benchmarking interest rate, which in-turn makes Islamic banks vulnerable to the rate of return risk and withdrawal risk. Moreover, corporate financing, in particular, is more vulnerable to interest rate risk.
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Project description:This paper assesses the impact of gold and oil price fluctuations on the volatility of the South African stock market and its component indices or sectors - namely, the financial, industrial and resource sectors - to infer the link between the commodity and stock markets in South Africa. Use is made of the vector autoregressive asymmetric dynamic conditional correlation generalised autoregressive conditional heteroskedasticity (VAR-ADCC-GARCH) model to this end. Moreover, the paper assesses the magnitude of the optimal portfolio weight, hedge ratio and hedge effectiveness for portfolios constituted of a pair of assets, namely oil-stock and gold-stock pairs. The findings of the study show that there is significant volatility spillover between the gold and stock markets, and the oil and stock markets. This finding suggests the importance of the link between the commodity and stock markets, which is essential for portfolio management. With reference to portfolio optimization and the possibility of hedging when using the pairs of assets under study, the findings suggest the importance of combining gold and stocks as the best strategy to hedge against stocks risk, especially during financial crises.
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Project description:The research examines a comovement and spillover of volatility among foreign exchange, conventional and shariah stock markets in Association of South East Asian Nation-5 (ASEAN) countries and Gulf Cooperation Council (GCC) countries. Generalized Autoregressive Conditional Heteroskedasticity-Baba, Engle, Kraft and Kroner (GARCH-BEKK) and Dynamic Conditional Correlation (GARCH-DCC) models are used to capture the correlation and transmission volatility of the markets. The overall results show that both the Shariah and the conventional stock indices respond similarly to each country's currency. A bidirectional (two-way relationship) volatility spillover exists only in Malaysia and a unidirectional (one-way relationship) volatility is observed in Indonesia, Singapore, Thailand, and Bahrain. The rest of the markets-the Philippines, Saudi Arabia, and the United Arab Emirates (UAE)-do not have any volatility spillover evidence. Based on DCC outcomes, the conventional and Shariah stock in ASEAN-5 countries and GCC countries reveal the market efficiency, i.e., a positive high conditional correlation. Only Bahrain shows less efficiency than the other countries. It implies no portfolio diversification advantage in conventional and Shariah stock indices. Contrarily, currency and stock (conventional and Shariah) markets provide portfolio diversification benefits for all ASEAN-5 and GCC countries.
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