A Range-Based Multivariate Model for Exchange Rate Volatility

In this paper we present a parsimonious multivariate model forexchange rate volatilities based on logarithmic high-low ranges ofdaily exchange rates. The multivariate stochastic volatility modeldivides the log range of each exchange rate into two independentlatent factors, which are interpreted as the underlying currencyspecific components. Due to the normality of logarithmic volatilitiesthe model can be estimated conveniently with standard Kalman filtertechniques. Our results show that our model fits the exchange ratedata quite well. Exchange rate news seems to be very currency-specificand allows us to identify which currency contributes most to bothexchange rate levels and exchange rate volatilities.exchange rates;multivariate stochastic volatility models;range-based volatility

A Range-Based Multivariate Model for Exchange Rate Volatility

In this paper we present a parsimonious multivariate model for exchange rate volatilities based on logarithmic high-low ranges of daily exchange rates. The multivariate stochastic volatility model divides the log range of each exchange rate into two independent latent factors, which are interpreted as the underlying currency specific components. Due to the normality of logarithmic volatilities the model can be estimated conveniently with standard Kalman filter techniques. Our results show that our model fits the exchange rate data quite well. Exchange rate news seems to be very currency-specific and allows us to identify which currency contributes most to both exchange rate levels and exchange rate volatilities

Empirical Studies on Exchange Rate Puzzles and Volatility

Dit proefschrift bestaat uit vijf empirische studies die gerelateerd zijn aan wisselkoersen. De eerste twee studies behandelen de fundamentele theorie van de Koopkrachtpariteit (KKP) die poneert dat goederen in verschillende landen dezelfde prijs zouden moeten hebben als deze in dezelfde valuta uitgedrukt zou zijn. De belangrijkste conclusie van deze studies is dat de veelvuldig gebruikte methodologie waarbij de restrictie geldt dat de halfwaardetijd homogeen is in een panel bestaande uit reële wisselkoersen, een dramatisch effect kan hebben op de conclusies voor de geldigheid van de KKP hypothese. De derde en vierde studie richten zich op een andere fundamentele economische theorie, de Ongedekte Interest Pariteit (OIP). OIP poneert dat het verwachte wisselkoersverschil gelijk is aan de termijnpremie. De lineaire modellen, die in de derde studie zijn gebruikt, zijn niet in staat om de dynamiek beter te beschrijven dan het standaard, zogeheten Random Walk model. Voor de niet-lineaire modellen in de vierde studie geldt echter dat OIP niet kan worden verworpen. De laatste studie betreft het meten van de wisselkoersvolatiliteit. Het multivariate Stochastische Volatiliteitsmodel wordt besproken, dat op efficiënte wijze wordt geschat doordat gebruik wordt gemaakt van de verdelings-eigenschappen van de volatiliteitsmaatstaf die gebaseerd is op de hoogste en laagste koersen. De geschatte valuta-specifieke volatiliteit-reeksen, die onttrokken worden van de wisselkoersvolatiliteit-reeksen, weten de gebeurtenissen die zich in de wisselkoersen voordoen goed weer te geven. De vijf studies uit dit proefschrift bieden een aantal geavanceerde empirische modellen dat nieuwe inzichten geeft in de dynamiek en determinanten van wisselkoersen.This thesis consists of five empirical studies related to exchange rates. The first two studies deal with the fundamental theory of Purchasing Power Parity (PPP), which postulates that goods in different countries should have the same price when expressed in the same currency. The main conclusion of these studies is that the common use of a methodology with the restriction of homogeneous mean reversion in a panel of real exchange rates can have a dramatic impact on inferences made on the validity of the PPP hypothesis. The third and fourth study focus on the Uncovered Interest rate Parity (UIP), which is another fundamental economic theory. UIP states that the expected change in the spot exchange rate is equal to the forward premium. The linear models used in the third study are unable to capture the dynamics better than the benchmark random walk model. For the nonlinear models in the fourth study, however, UIP can not be rejected. The last study concerns the measurement of the volatility of exchange rates. The parsimonious multivariate Stochastic Volatility model is discussed that is estimated efficiently by using the distributional properties of the range-based volatility measure, which makes use of high and low prices. The estimated currency-specific volatilities that are extracted from the exchange rate volatilities are able to pick up some of the most saliant events in exchange rates. The five studies presented in this thesis offer a number of extended and enhanced empirical models that shed new light on the dynamics and determinants of exchange rates

Purchasing Power Parity and Heterogeneous Mean Reversion

This paper analyzes the properties of multivariate tests of purchasing power parity (PPP) that fail to take heterogeneity in the speed of mean reversion across real exchange rates into account. We compare the performance of homogeneous and heterogeneous unit root testing methodologies. The recent literature has successfully contested several severe restrictions on the structure of the model, but the assumption of homogeneous mean reversion is still widely used and its consequences are virtually unexplored. Using Monte Carlo simulation, we uncover important adverse properties of the methodology that relies on homogeneous estimation and testing. More specifically, power functions are low and assume irregular shapes. Furthermore, homogeneous estimates of the mean reversion parameters exhibit potentially large biases. This can have a dramatic impact on inferences made on the validity of the PPP hypothesis. Our findings highlight the importance of allowing for heterogeneous estimation when testing for a unit root in panels of real exchange rates

Why Panel Tests of Purchasing Power Parity Should Allow for Heterogeneous Mean Reversion

Abstract Recent studies of purchasing power parity (PPP) use panel tests that fail to take into account heterogeneity in the speed of me

Conditioning carry trades: Less risk, more return

Prior studies show that extreme interest rate dfferentials (IRDs) and high foreign exchange rate (FX) volatility have substantial explanatory power for the validity of UIP. We show that these contemporaneous drivers also have predictive power by implementing a conditional currency carry trade (CT) strategy that excludes regimes for which UIP is likely to hold. Conditioning high FX volatility only, or on both FX volatility and extreme IRDs outperforms the base-case unconditional CT strategy in virtually any of the settings analyzed. Conditioning on very large IRDs only shows mixed findings. Our strategy works best for smaller CT portfolios

Continuous transport of Pacific-derived anthropogenic radionuclides towards the Indian Ocean

Unusually high concentrations of americium and plutonium have been observed in a sediment core collected from the eastern Lombok Basin between Sumba and Sumbawa Islands in the Indonesian Archipelago. Gamma spectrometry and accelerator mass spectrometry data together with radiometric dating of the core provide a high-resolution record of ongoing deposition of anthropogenic radionuclides. A plutonium signature characteristic of the Pacific Proving Grounds (PPG) dominates in the first two decades after the start of the high yield atmospheric tests in 1950’s. Approximately 40–70% of plutonium at this site in the post 1970 period originates from the PPG. This sediment record of transuranic isotopes deposition over the last 55 years provides evidence for the continuous long-distance transport of particle-reactive radionuclides from the Pacific Ocean towards the Indian Ocean

No Fukushima Dai-ichi derived plutonium signal in marine sediments collected 1.5-57km from the reactors

Based on AMS analysis, it is shown that no Pu signals from the Fukushima accident could be discerned in marine sediments collected 1.5-57km away from the Fukushima Da-ichi power plant (FDNPP), which were clearly influenced by accident-derived radiocesium. The 240Pu/239Pu atom ratios (0.21-0.28) were significantly higher than terrestrial global fallout (0.182 ± 0.005), but still in agreement with pre-FDNPP accident baseline data for Pu in near coastal seawaters influenced by global fallout and long-range transport of Pu from the Pacific Proving Grounds.This study has been funded by the Norwegian Research Council through its Centre of Excellence (CoE) funding scheme (Project No. 223268/F50)