Affect Exchange Rates Research Articles

Dynamic relationship between exchange rates and stock prices for the G7 countries: A nonlinear ARDL approach

• We examine the relationship between stock prices and exchange rates in G7 countries. • In the short -run, both the flow-oriented and the portfolio balance approaches are supported. • A nonlinear ARDL model shows that rising and falling stock prices have differential long-run impacts on exchange rates. • Our tests provide long-run support for the portfolio balance approach, but not for the flow-oriented approach. This paper employs linear and nonlinear ARDL models to examine the short-run and long-run relationship between stock prices and exchange rates in the G7 countries. Both the flow-oriented approach that exchange rates affect stock prices and the portfolio balance approach that stock prices affect exchange rates are supported in the short-run. Neither model is supported in the long-run using linear ARDL models, but the nonlinear ARDL model shows evidence supporting the portfolio balance approach in four of the countries. In these four countries we find that rising and falling stock prices have significant long-run effects on their exchange rates. Furthermore, Granger causality tests confirm that causality runs from stock prices to exchange rates in six of the countries. Thus, the use of a longer and more recent data set provides stronger long-run support for the portfolio balance approach than found in most of the recent literature, while we confirm results of recent research showing no long-run evidence of causation running from exchange rates to stock prices.

Economic Uncertainty During COVID-19 Pandemic in Latin America and Asia

The purpose of this article is to analyze the impact of COVID-19 pandemic on inflation and exchange rate volatility and to study the government measures implemented in order to support economies. Based on monthly data from January to September 2020 for 10 countries, the dynamic panel data model is used to study the effect of COVID-19 spread. The results reveal that high infections negatively affect exchange rate and inflation; the responses of governments increase inflation and result in a lower exchange rate. In fact, providing health protocols which entered the countries into a new economic and financial crisis since economic agents could not freely engage in economic activities. Therefore, policy makers in both regions should invest in health infrastructure to improve the capacity of the national health system to resist the epidemic of contagious diseases.

Comparative Study of Forecasting Models for Forex Predictions with the Impact of Different Currencies

- Foreign Exchange (Forex) is the exchange / trading of currencies from different countries with the aim of making profit. Exchange rates on Forex markets are always changing and it is hard to predict. Many factors affect exchange rates of certain currency pairs like inflation rates, interest rates, government debt, term of trade, political stability of certain countries, recession and many more. Uncertainty in Forex prediction can be reduced with the help of technology by using machine learning. There are many machine learning methods that can be used when predicting Forex. The methods used in this paper are Long Short Term Memory (LSTM), Gated Recurrent Unit (GRU), Support Vector Regression (SVR). XGBOOST, and ARIMA. The outcome of this paper will be comparison results that show how other major currency pairs have influenced the performance and accuracy of different methods. From the results, it was proven that XGBoost outperformed other models by 0.36% compared to ARIMA model, 4.4% compared to GRU model, 8% compared to LSTM model, 9.74% compared to SVR model. Keywords— Forex Forecasting, Long Short Term Memory, Gated Recurrent Unit, Support Vector Regression, ARIMA, Extreme Gradient Boosting

Does Economic Policy Uncertainty Affect Exchange Rate in China and Japan? Evidence from Threshold Cointegration with Asymmetric Adjustment

In this article, we estimate the links between nominal exchange rates (JPY/USD and CNY/USD) and economic policy uncertainty (EPU) in China and Japan by employing monthly data during the period span from January 1997 to September 2020. The threshold cointegration approach focus in TAR, M-TAR, C-TAR and C-MTAR is used. Results indicate the evidence of asymmetric effect in the adjustment process to equilibrium and the M-TAR is the best model to detect threshold effect for the (CNY/USD-CNYEPU) pair and the C-TAR is the best model to detect threshold effect for the (JPY/USD-JPYEPU) pair.

Exchange rate dependence and economic fundamentals: A Copula-MIDAS approach

The relationship between exchange rates is important for portfolio optimisation and risk management. Understanding the economic fundamentals that affect exchange rate dependence enables investors to improve their portfolio performance. This paper evaluates the impacts of differences in economic fundamentals on exchange rate dependence by introducing the mixed-frequency copula model with a generalised autoregressive score (GAS) dynamic structure. In an application to the Canadian dollar, British pound and Japanese yen, the widened differences in the money supply and interest rates tend to weaken exchange rate dependence, but the differences in output and inflation have no explanatory power for exchange rate dependence. Investors are suggested to account for both daily exchange rates and monthly economic fundamental information in portfolio management. In particular, the historical trends extracted from the economic fundamentals over the past 2 years enable investors to accurately predict exchange rate dependence and obtain additional economic benefits.

Do Oil Price Shocks Affect Exchange Rates in Oil-importing Countries: A Case of the Zambian Economy using the SVAR Approach

Oil price shocks have been argued to impact Real Effective Exchange Rates (REERs) in net oil importing countries, mostly through the wealth-transfer effect, which involves the transfer of wealth from net oil-importers to net oil-exporters, and the Terms of Trade Channel. Since this analysis had not been done for the Zambian case by decomposing oil price shocks, a Structural Vector Autoregressive Model (SVAR) was used to measure the contemporaneous impact of oil price shocks on REERs, and was complemented by Impulse Response Functions (IRFs), Granger Causality Tests and Forecast Error Variance Decomposition (FEVD). The long-run impact was analyzed by the Vector Error Correction Model (VECM) after satisfaction of cointegration requirements. The findings revealed that decomposed oil price shocks had no short-run contemporaneous impact on REERs at the 5% level. Similarly, it was found that decomposed oil price shocks and the combined effect of all the variables in the system did not granger-cause Zambia’s REERs, while FEVD results showed that oil price shocks were attributed for a minute proportion of the variation in REERs. These findings were attributed to Zambia’s profile as a predominantly copper and cobalt exporter, historic exchange rate controls, fuel subsidies, and price controls. Johansen’s cointegration test revealed the existence of at least one cointegrated equation in the system, so the subsequent VECM which was constructed revealed that decomposed oil price shocks had no long-run impact on REERs in Zambia, but that the Error Correction Term (ECT) which measures the speed to adjustment back to equilibrium after a short-run disturbance, was significant.

Effect of Exchange Rate Misalignment on Bilateral Trade Between Kenya and European Union: 2000-2016

The exchange rate is an important variable in international trade because a country's competitiveness is determined by the expectations on how trade reacts to its movements. To orient the economy outwards, Kenya has pursued various measures from the 1990s to the 2000s. Kenya also signed up for nonreciprocal trade with the European Union under the Cotonou agreement. Despite the export-oriented efforts, Kenya's trade has remained skewed towards imports and a widening trade deficit which seems to follow the weakening of the Kenya shilling. The main policy dilemma therefore, is how imports accelerated in an environment of unhindered European Union market access, hence the motivation of this study. The study adopted a dynamic modeling approach since previous and present values affect exchange rate and trade. The results show that the economic fundamentals drive the real exchange rate. In terms of misalignment, the exchange rate is overvalued to a maximum of 5.9 percent and undervalued up to 5.2 percent. The estimated misalignment hurts imports but has a positive, statistically insignificant effect on exports. The results of this study suggest that the monetary authority should ensure the exchange rate remains stable and within the 6 percent range while monitoring all the underlying determinants. Additionally, hedging instruments should be made available and affordable to traders.

Exchange Rate Volatility in the Covid-19 Period: An Analysis Using the Markov-Switching ARCH Model

Most analyses of exchange rate volatility in the economic literature are conducted by means of autoregressive conditional heteroskedasticity (ARCH) or generalized ARCH (GARCH) models. According to Humilton and Susmel such models often predict higher volatility than their actual volatility rates, and their predictive performance is considerably low. Diebold and Lamoureux and Lastapes attributed this to the structural change in the ARCH process. Moreover, Hamilton and Susmel developed the Markov-switching ARCH (MS-ARCH or SWARCH) model to overcome the reliability problem of parameter estimates that do not allow for a regime change. This method presents a nonlinear structure enabling regime changes. Therefore, the MS-ARCH method was preferred in the study. Considering the continuing massive impact of COVID-19 on the global financial system, its influence on exchange rates must also be explored. This question was addressed in the analysis. In this direction, the effect of volatility was estimated with the MS-ARCH model using the return values of USD/TRY exchange rate in the trading days between March 2020 and October 2021, the month March 2020 when the first COVID-19 case appeared in Turkey. Two volatility regimes, namely, low volatility and high volatility, were employed in the study. The findings demonstrate that the COVID-19 pandemic, along with various economic and political events in Turkey and the world, affects exchange rate volatility and that these volatility periods are permanent. It also depicts that the USD/TRY return series has high volatility and a strong regime dependency. From these results, it may be concluded that the forecasting of information on exchange rate volatility is important for asset pricing and risk management because exchange rate volatility can increase transaction costs and reduce gains in international trade. The article contributes to the existing body of literature by explaining volatility modeling in the light of the recent daily exchange rate returns during the COVID-19 pandemic.

The Dynamic Impact of FX Interventions on Financial Markets

Abstract Evidence on the effectiveness of foreign exchange (FX) interventions is either limited to short horizons or hampered by debatable identification. We address these limitations by identifying a structural vector autoregressive model for the daily frequency with an external instrument. Generally we find, for freely floating currencies, that FX intervention shocks significantly affect exchange rates and that this impact persists for months. The signaling channel dominates the portfolio channel. Moreover, interest rates tend to fall in response to sales of the domestic currency, whereas stock prices of large (exporting) firms increase after devaluation of the domestic currency.

COVID-19 PANDEMİSİNİN ULUSAL PARALAR VE FİNANSAL PİYASALAR ÜZERİNDEKİ ETKİLERİ: GELİŞMİŞ VE GELİŞMEKTE OLAN ÜLKELER ÜZERİNE BİR ANALİZ

Coronavirus outbreak which started as an epidemic in Wuhan, China and soon transformed into a pandemic in the first quarter of 2020 is about to bring a profound stagnation to many national economies. In the study, to understand the effects of the covid-19 pandemic on national currency and financial markets from the perspective of developing and developing countries, daily data including the stock market closing prices, exchange rate and WTI gross oil prices of the effects of COVID-19 in the period of March 10, 2020 and May 9, 2020 for developing and developed economies were used. China, South Korea, Brazil, and Turkey are chosen to represent the developing world and Italy, France, Germany, Spain and England represent the developed world. Logarithms of all variables were taken and in the econometric application part, vector autoregression model was used. At the end of the study, it was determined that the number of Covid-19 cases did not affect exchange rates, but had an effect on stock prices in developing economies. As a result, It has been determined that developing economies affect more than developed economies from pandemic.

Policy Signaling and Foreign Electoral Uncertainty: Implications for Currency Markets

AbstractThis paper examines the effects of foreign electoral shocks on currency markets. I develop a theory of signaling and uncertainty to explain why elections in countries with close economic ties should affect exchange rates. Methodologically, this paper focuses on several case studies, with the 2016 US election as a central case. I utilize an event analysis framework to measure the impact of the election on the Mexican peso by exploiting the plausible exogeneity of Donald Trump's tweets. I also measure changes in the peso using Trump's predicted chance of winning the election and show that the peso is weakest when Trump has the highest chance of winning the election. In addition, I include a series of robustness checks and analyses of other notable recent cases when electoral uncertainty affected currencies in other countries, including the 2018 Brazilian election. The results quantify the effect of foreign elections on exchange rates, building on the existing literature that focuses on how domestic elections shape currency markets. I conclude with a discussion of the external validity of the phenomenon demonstrated by the cases in the paper, charting future research on the topic and outlining ways to extend the findings.

Impacts of inflation on gold price and exchange rate in Vietnam: time-varying vs fixed coefficient cointegrations

PurposeThe paper aims to shed light on the effects of inflation on gold price and exchange rate in Vietnam by using time-varying cointegration.Design/methodology/approachUsing cointegration techniques with fixed coefficient and time-varying coefficient, the study exams the impacts of inflation in models and compares the results through coefficient estimates.FindingsA significant inflation impacts are found with the time-varying cointegration but not with the fixed coefficient cointegration models. Moreover, monetary policy affects exchange rate not only directly via its instruments as money supply and interest rate but indirectly via inflation. Also, interest rate is one of the determinants of gold price.Originality/valueTo the best of our knowledge, this paper is the first to use time-varying cointegration to analyze the impact of inflation on the gold price and exchange rate in Vietnam. Gold price and exchange rate fluctuations are always the essential and striking issues, which have been emphasized by economists and policymakers. In macroeconometric researches, cointegration models are often used to analyze the long-term relations between variables. Attentionally, applied models show a limitation when estimating coefficients are fixed. This characteristic might not really match with the data properties and the variation of the economy. Currently, time-varying cointegration models are emerging method to solve the above issue.

Are Exchange Rates More Volatile with Greater Uncertainty? Evidence from the PHP/USD Exchange Rate Using GARCH-MIDAS Models

This study explores the relationship between policy-related economic uncertainty and the volatility of the PHP/USD exchange rate returns. The study uses data constructed from Google Trends to measure uncertainty and employs GARCH-MIDAS models to differentiate the short-run and long-run components of exchange rate volatility. The results reveal that more policy-related economic uncertainty leads to decreased volatility in the long run, with uncertainty in the US having a greater effect than uncertainty in the Philippines. The counterintuitive outcomes may spring from the fact that uncertainty relates to the search for more information, which may exhibit a long-memory process where economic agents form beliefs that lead to risk aversion. This study also separates market-related uncertainty from policy-related uncertainty using a regression method, where results show that market-related uncertainty does not significantly affect exchange rate volatility in the long run.

Asymmetric effects of oil price changes on the Nigerian exchange rate

PurposeThe purpose of this paper is to examine the effect of crude oil prices on the Nigerian exchange rate with emphasis on discriminating between the effects of positive and negative changes in oil price on exchange rate.Design/methodology/approachThe authors used monthly time series data from 1996:1 to 2019:6 and adopted two oil price measures, namely, Brent crude and West Texas Intermediary prices. For analysis, the authors used stepwise least squares to estimate a non-linear ARDL (NARDL) model and Wald tests to determine cointegration and the presence of asymmetric effects.FindingsThe findings showed that positive and negative Brent crude price changes significantly affect exchange rates differently in nominal terms, both in the long-run and short-run. However, the differences were purely in terms of effect size because the exchange rate decreased for both negative and positive oil price changes.Originality/valueWhilst empirical research on asymmetries in the effect of oil price on exchange rate abounds, little evidence exists in Nigeria’s case. Although some studies previously tested for asymmetric oil price effects on the Nigerian currency, the approach used did not estimate long and short-run effects or test of long-run and short-run asymmetries. This paper fills this methodological gap using monthly using the NARDL approach. The NARDL approach provided the advantage of estimating effects for the long-run and short-run and testing for asymmetries in both time spans.

Presidential Approval Ratings and the Foreign Exchange Market

Do presidential approval ratings affect exchange rates? The empirical purview of the vast literature on this topic has been confined to the run-up to elections. The importance of approval ratings in non-election periods has therefore been under-studied. Examining daily data on the exchange rate of the Korean won during the presidency of Park Geun Hye, we find that the won weakened (1) when Park’s ratings were low and (2) when they bounced back unexpectedly from a low level. This finding explains why Park’s impeachment did not lead to a serious panic in the won market. It seems that well before the impeachment, the exchange rate already reflected the market’s concerns about the uncertainty in the government.

Uncertainty and exchange rate volatility: Evidence from Mexico

This paper analyzes the effect of different types of uncertainty by implementing an in-depth case study of Mexican peso US dollar exchange rate volatility. The paper exploits unique data from the Banco de México's Survey of Professional Forecasters to construct four distinct, direct knightian uncertainty measures, and two macro surprise measures. These measures, as well as text-based and financial data based measures common in the literature, are used to test for distinct uncertainty effects. Exchange rate volatility during 1999–2018 is regressed onto uncertainty measures capturing both domestic and international, economic and political uncertainty. The main results show higher knightian uncertainty leads to higher exchange rate volatility. While both domestic and international measures affect exchange rate volatility, international uncertainty measures based on text and financial data (the global EPU and the VIX) and our novel survey-based knightian measure of domestic political uncertainty dominate. The paper also presents evidence of an amplifying effect of domestic economic uncertainty on exchange rate volatility during recession periods. The results are robust to different exchange rate volatility measures and different specifications.

The Capital Flow Volatility Spillover in Some Selected African Economies

Purpose: The study conducted an empirical examination of the link between capital flows and exchange rate by examining the relative influence of FDI and FPI on the exchange rates. 
 Method: The study proceeded with the EGARCH model and the data sample covering the period from 1990-2016. The data were subjected to cross-country screening. The screening criteria are such that all the data that constitute capital in all sampled countries must have equal sample sizes. The measurement of capital flow in each of the sampled countries was restricted to two categories capital, namely, foreign portfolio investment (FPI) and foreign direct investment (FDI).
 Results: The research establishes that the behavior of capital flow volatility spillover of the sample countries' currencies exchange rate differs, with only South Africa's and Morocco's currencies revealing some slight similarity and existence of asymmetric volatility spillover from capital flows to exchange rate. Additionally, the study discloses that capital flows spillover has a considerable effect on exchange rate volatility than harmful spillover. The study also observed that positive shocks associated with capital flow volatility affect exchange rate value in Botswana more than capital outflow. Further positive capital flow spillover impending from capital inflow has a considerable effect on exchange rate volatility than the harmful spillover impending from the capital outflow. Further, the positive capital flow spill over impending from capital inflow significantly affects exchange rate volatility more than the negative spillovers that emanate from the capital outflow. 
 Implications: This suggests that the monetary policy should consider options that can accelerate capital flow into the Moroccan economy. However, in South Africa for any given quantum of capital flow into the economy, the South African Reserve Bank must use instruments to affect stability; otherwise, the currency exchange rate could remain unstable. Thus, capital withdrawals out of the Egyptian economy will create domestic currency instability.
 
 
 
 Keywords: Spill-over, Foreign Direct Investments (FDI), Portfolio Investments (PI), asymmetric, capital flow volatility, Exchange rate volatility.

Makroekonomik Göstergeler İle Döviz Kuru Arasındaki İlişkinin Analizi: (2005:01- 2019:10) Türkiye Uygulaması Analyzing The Relationships Between Macroeconomic İndicators and Exchange Rate (2005:01-2019:10): Case Study of Turkey

Purpose – The purpose of this study is to predicate either short and long run relationships between macroeconomic indicators and exchange rate the monthly data covering the period of (2005:01-2019:10) belongs to Turkey. At the some time, to effectively direct exchange rates it is neccessary to determine the factors which impacts exchange rates as much as to be helpful to economic policy makers and supervisors to handle exchange rate under control in Turkey. Design/methodology/approach – To predicate the relationships between macroeconomic indicators and exchange rate time serious data is used. In the analysis, to determine the stationary of variables, unit root test is implemented. As a result of the unit root test, the series were stationary from different levels. In this case, ARDL bound test was carried out to determine the long and short run relationships between the variables. Findings – According to the results of ARDL bound test, it has been concluded that there is a cointegration relationship between macroeconomic indicators and exchange rate, in the long run, a positive relations found between exchange rate, interest and inflation rates, but a negative relations are found between exchange rate and unemployment, money supply (M1) and foreign trade balance. In the short run, a negative relation was found between the exchange rate and the foreign trade balance, but a positive relations were found between the exchange rate and all other variables included in the analysis. Also, the value of the error correction model is negative and statistically significant. Discussion – Nowadays, the exchange rate is one of the most discussed economic issues among the macroeconomic indicators in the world. According to the theories, it is emphasized that macroeconomic factors play an important role in determining exchange rates. In order to effectively direct exchange rates, it is important for economic policy makers and supervisors to determine the factors affecting exchange rates.

Exploring the Relationships among Exchange Rate, Foreign Investment and Economic Growth Using Time Series Econometric Approaches: The Case of China’s Guangdong Province

As the Chinese government has been trying to promote the Belt and Road Initiatives and enhance the openness of its economic development, it is important to study and understand the depreciation/appreciation mechanism of Chinese yuan (CNY), especially how this affects or is affected by some key economic growth and openness measures like gross domestic product (GDP) and foreign direct investment (FDI). This paper is just to examine the short-run dynamics and long-run equilibrium relationships among the three important macroeconomic time series of CNY exchange rate, FDI and GDP. Twenty-year annual data from 1996 to 2015 for the top ten cities (in terms of GDP) in Guangdong, one of the economically influential provinces in China, are specifically collected for the study. The panel unit-root test, Johansen-Fisher cointegration test, Granger causality test, and vector autoregression (VAR) model are applied to analyze the data for exploring long-run relationships. Vector error correction (VEC) model and block exogeneity Wald test are also adopted to examine the short-run dynamics. Key research results include that, there is a long-run cointegration relationship among exchange rate, FDI and GDP, FDI and GDP are the long-run Granger causes of exchange rate such that FDI positively affects exchange rate whle GDP negatively influence exchange rate, and FDI is also the short-run Granger cause of exchange rate but the short-run relationship is negative. Discussions, and policy implications and future research directions are presented finally.

Analysis of the Linkage between South African’s Exchange Rate and Stock Price Index

In this study, we used a wavelet analysis method to analyze how stock price index is correlated with exchange rate in South African stock market andinterest rate was choosen as the control variable. As indicated by the empirical results, first, stock index is significantly correlated with exchange rate in the stock market of South Africa, no matter in the short term (1-4 years) or the long term (4-8 years). There is a significant correlation period, with correlation coefficient greater than 0.8. Second, for the short-term (1-4 years) relationship, after adding control variables, South Africa’s short-term negative correlation will be led by the stock exchange rate. That is, in condition of the negativity of both stock market and exchange rate, the stock market leads. And interest rate greatly affects the short-term (1-4 years) exchange rate and the stock price index in South Africa. And in the short term, the linkage between those two variables is not subject to the influence of 2008 financial crisis. Third, for the long-term (4-8 years) relationship, when we add control variables, regardless of its term, there is a negative correlation between stock market index and exchange rate in South African stock market, and stock market affects exchange rate. The long-term (4-8 years) correlation of stock price index and exchange rate in South African stock market was affected by the 2008 financial crisis. South African market is indeed the goal for investors to participating enthusiastically now. The above conclusions can serve as a lesson for hedging in corporate exchange rate, stock market, and also reference for global investors and all sorts of investor asset allocation.