The monetary model of the US Dollar–Japanese Yen exchange rate: An empirical investigation

This article considers the long-run performance of the monetary approach to explain the dollar–yen exchange rates during a period of high international capital mobility. We apply the Johansen methodology to quarterly data over the period 1980:01–2009:04 and show that the historical inadequacy of the monetary approach is due to the breakdown of its underlying building-blocks, money demand stability and purchasing power parity. Our findings on long-run weak exogeneity tests emphasize the importance of the extended model employed here. This shows that cumulative shocks to nominal exchange rates can be explained by variables outside the usual price and interest rates

Exchange rate uncertainty and international portfolio flows

This paper examines the impact of exchange rate uncertainty on different components of portfolio flows, namely equity and bond flows, as well as the dynamic linkages between exchange rate volatility and the variability of these two types of flows. Specifically, a bivariate GARCH-BEKK-in-mean model is estimated using bilateral data for the US vis-à-vis Australia, the UK, Japan, Canada, the euro area, and Sweden over the period 1988:01-2011:12. The results indicate that the effect of exchange rate uncertainty on equity flows is negative in the euro area, the UK and Sweden, and positive in Australia, whilst it is negative in all countries except Canada (where it is positive) in the case of bond flows. Under the assumption of risk aversion, this suggests that exchange rate uncertainty induces a home bias and causes investors to reduce their financing activities to maximise returns and minimise exposure to uncertainty. Furthermore, since exchange rate volatility and the variability of flows are interlinked, exchange rate or credit controls on these flows can be used to pursue economic and financial stability

On the linkages between stock prices and exchange rates: evidence from the banking crisis of 2007-2010

This study examines the nature of the linkages between stock market prices and exchange rates in six advanced economies, namely the US, the UK, Canada, Japan, the euro area, and Switzerland, using data on the banking crisis between 2007 and 2010. Bivariate UEDCC-GARCH models are estimated producing evidence of unidirectional Granger causality from stock returns to exchange rate changes in the US and the UK, in the opposite direction in Canada, and bidirectional causality in the euro area and Switzerland. Furthermore, causality-in-variance from stock returns to exchange rate changes is found in the US and in the opposite direction in the euro area and Japan, whilst there is evidence of bidirectional feedback in Switzerland and Canada. The results of the time-varying correlations also show that the dependence between the two variables has increased during the recent financial crisis. These findings imply limited opportunities for investors to diversify their assets during this period

Modelling stock volatilities during financial crises: A time varying coefficient approach

We examine how the most prevalent stochastic properties of key financial time series have been affected during the recent financial crises. In particular we focus on changes associated with the remarkable economic events of the last two decades in the volatility dynamics, including the underlying volatility persistence and volatility spillover structure. Using daily data from several key stock market indices, the results of our bivariate GARCH models show the existence of time varying correlations as well as time varying shock and volatility spillovers between the returns of FTSE and DAX, and those of NIKKEI and Hang Seng, which became more prominent during the recent financial crisis. Our theoretical considerations on the time varying modelwhich provides the platformupon which we integrate our multifaceted empirical approaches are also of independent interest. In particular, we provide the general solution for time varying asymmetric GARCH specifications, which is a long standing research topic. This enables us to characterize these models by deriving, first, their multistep ahead predictors, second, the first two time varying unconditional moments, and third, their covariance structure.Open Access funded by European Research Council under a Creative Commons license

International portfolio flows and exchange rate volatility in emerging Asian markets

© 2017 The Author(s). This paper investigates the e¤ects of equity and bond portfolio in ows on exchange rate volatility using monthly bilateral data for the US vis-a-vis seven Asian developing and emerging countries (India, Indonesia, Pakistan, the Philippines, South Korea, Taiwan and Thailand) over the period 1993:01-2015:11. GARCH models and Markov switching speci cations with time-varying transition probabilities are estimated in addition to a benchmark linear model. The evidence suggests that high (low) exchange rate volatility is associated with equity (bond) in ows from the Asian countries toward the US in all cases, with the exception of the Philippines. Therefore, capital controls could be an e¤ective tool to stabilise the foreign exchange market in countries where ows a¤ect exchange rate volatility

Military spending and economic growth in China: a regime-switching analysis

This article has been made available through the Brunel Open Access Publishing Fund.This article investigates the impact of military spending changes on economic growth in China over the period 1953 to 2010. Using two-state Markov-switching specifications, the results suggest that the relationship between military spending changes and economic growth is state dependent. Specifically, the results show that military spending changes affect the economic growth negatively during a slower growth-higher variance state, while positively within a faster growth-lower variance one. It is also demonstrated that military spending changes contain information about the growth transition probabilities. As a policy tool, the results indicate that increases in military spending can be detrimental to growth during slower growth-higher growth volatility periods. © 2014 © 2014 The Author(s). Published by Taylor & Francis

Portfolio flows and the US dollar-yen exchange rate

This paper investigates the effects of portfolio flows on the US dollar-Japanese yen exchange rate changes over the period 1988:01 to 2011:04. Using a time varying transition probability Markov-switching framework, the results suggest that the impact of portfolio flows on the dollar-yen exchange rate changes is state dependent. In particular, the results show that portfolio inflows from Japan towards the US, more than monetary variables, strengthen the probability of remaining in the dollar-yen appreciation state. Therefore credit controls on the flows can be used as a policy tool to pursue economic and financial stability