Currency Shocks Research Articles

Can cryptocurrencies be a hedging tool? Evidence from the Turkish stock market

ABSTRACT The study examines the hedge properties of BTC, ETH, and BNB for the Istanbul Stock Exchange 100 Index (XU100). Investors who add cryptocurrencies to XU100-only portfolios reduce risks by 12.10% to 18.60%. Results show that during global events like COVID-19 and the Russia-Ukraine war, the hedge effectiveness of cryptocurrencies is low. However, during Turkey-specific events such as the Pastor Brunson currency shock, the swap crisis, the dismissal of Central Bank Governor Naci Ağbal, irrational interest rate cuts, the announcement of the currency-protected deposit system, and the February 6 earthquake, the hedging properties of cryptocurrencies against the XU100 index significantly improve.

Exchange rate and corporate investment: Heterogeneous effects via the global value chain networks

This study analyzes how exchange rates affect corporate investment by scrutinizing firms' global value chain (GVC) networks. A salient feature of our analysis is that we adopt novel GVC datasets and methodologies to construct upstream- and downstream-specific exchange rates. We couple these GVC-integrated real exchange rates with global firm-level data and document that unfavorable exchange rate movements hinder operating performance and, therefore, corporate investment, especially among financially constrained firms. We use two large currency shocks in Brazil and Sweden to provide causal evidence. The results highlight nonnegligible frictions of how GVC-integrated real exchange rates affect corporate investment.

Dominant currency shocks and foreign exchange pressure in the periphery

The spillover effects of a strong dollar and euro, two dominant currencies, on emerging market economies (the periphery) are examined. The paper empirically studies dominant currency shocks on the foreign exchange (FX) constraint, economic growth, external debt, and inflation. Comparing a dollar shock to euro and commodity price shocks, using various empirical methodologies across regimes of trade invoicing and commodity dependence, the paper shows that appreciation of the trade weighted exchange rate (the dollar index) can worsen the FX constraint and decrease growth in the periphery, failing to achieve the conventional macroeconomic adjustments of a competitive currency depreciation. A strong dollar reduces external debt, but a strong euro has the opposite effect. An FX-constraint shock emanating from the periphery appreciates the US dollar, affirming dollar’s safe-haven status. These findings have implications for balance of payments and exchange rate policy management for a larger group of emerging markets and developing economies.

Wavelet-Based Analysis of the Comovement Between Exchange Rate and Stock Returns in Sacu Countries

ABSTRACT: The Southern African Customs Union is the oldest customs union in the world and the member states form a currency union with the South African Rand being the regional currency anchor. Therefore, currency movements amongst SACU member are dependent on the developments on the Rand which, in turn, can affect stock market development in the region. We examine the time-frequency relationship between exchange rates and stock market returns in SACU countries using continuous wavelet transforms. Our empirical analysis is two-staged. Firstly, we employ wavelet power spectrum to examine the time-frequency properties of the individual series. Secondly, we use wavelet coherence analysis and phase dynamics to examine the synchronization between the variables in a time-frequency space. Our findings show stronger (weaker) exchange rate-stock returns relations are found during periods of higher (lower) inflation whereas we observe a stronger (weaker) relationship during periods of lower interest rate environment. Moreover, we find more significant long-run relationships for countries with more independent monetary policy (South Africa and Botswana) whereas these relations are more prominent over the short-run for countries with pegged exchange rates (Eswatini and Namibia). We also observe that periods of oil and currency shocks impact the exchange rate-stock returns relationship in SACU countries with pegged exchange rates (Eswatini and Namibia). Our findings bear important implications for different stakeholders. For instance, this study has implications for exchange rate policy as it addresses the issue of whether the exchange rate can be used to improve market performance or exchange rate developments spillover into the stock market. Furthermore, corporate managers and stock market participants would be interested in our findings as it identifies periods of market inefficiency when exchange rates can be used to beat the stock market.

Digesting FOREXS: Information Transmission Across Asset Classes and Return Predictability

We provide novel evidence that equity investors react to currency shocks with a delay. Using the cross-section of currency returns and the relative presence of U.S. firms in foreign economies, we compute a foreign operations-related exchange shock (FOREXS) measure. We find FOREXS to predict firms’ future cash flows and stock returns, driving much of the previously documented underreaction to foreign information. An FOREXS-based long-short strategy yields a 6.74% annualized abnormal return. FOREXS predictive power comes from firms’ incomplete hedging and investors’ limited attention, highlighting the challenges involved when processing information from a different asset class. This paper was accepted by David Sraer, finance. Funding: Z. Da acknowledges financial support from the Beijing Outstanding Young Scientist Program [Grant BJJWZYJH01201910034034] and the 111 Project [Grant B20094]. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4778 .

Fine wine pricing in a small and highly competitive market

PurposeThis study aims to identify the price determinants of fine wines in a small and competitive market. These characteristics are found in many lesser-known wine-producing countries and are often difficult to analyse because of lack of data.Design/methodology/approachThis study hand-collects and transcribes wine-related data for 149 Swiss wineries and 2,454 individual wines over the period 2014–2018 directly from wine lists provided by wineries. This study uses multivariate ordinary least squares regressions to analyse the relation between wine attributes and prices and to assess the effect of a currency shock caused by the sudden appreciation of the Swiss franc in 2015 as well as a reduction in information asymmetries induced by the novel coverage of Swiss wines by The Wine Advocate.FindingsPrices mainly depend on collective reputation, production techniques and product positioning. Surprisingly, following a sharp appreciation of the Swiss franc, producers did not reduce prices. The arrival of a highly influential wine expert on the market also had a positive price effect on rated wines and producers. Both hint at wineries attempting to position themselves relative to competitors.Originality/valueFew studies examine the price drivers in lesser-known wine markets, where competition is fierce. This study’s results show that wine pricing differs from other more famous and larger wine regions. In addition, to the best of the authors’ knowledge, this study is also the first to analyse the impact of a currency shock and a reduction in information asymmetries on wine prices.

Dominant Currency Shocks and Foreign Exchange Pressure in the Periphery

Dominant Currency Shocks and Foreign Exchange Pressure in the Periphery

Price distortions and municipal bonds premiums: evidence from Switzerland

This study examines the pricing of municipal bonds before and after a currency shock in Switzerland. Two approaches are used to decompose the municipal to treasuries bond spreads into liquidity, maturity, and default risk premiums. The first approach is the model of the cross-sectional instrumental variables, and the second approach is the model of the instrumental variables with panel data. This study examines the composition of spreads for both approaches, in three scenarios: before, throughout, and after the currency shock. The study performed Durbin-Wu-Hausman tests for each decisive model to verify endogeneity issues, including the Lagrangian Multiplier test, the Cragg-Donald Wald F statistic to confirm the relationship of instrumental and endogenous variables, and the structural break test (Bai-Perron test) to determine the existence of structural breaks in bond distortions. This study finds that the currency price distortions of the Swiss franc in January 2015 made long-run changes in the composition of the municipal bond spreads. This research contributes to the understanding of municipal bond pricing by showing that default risk accounts for a large portion of the municipal bond spread, while maturity risk plays a lesser role. According to our empirical findings, unexpected large currency price shocks may have long-term implications on the municipal bond spreads.

Exchange rate shocks in multicurrency interbank markets

We simulate the impact on the nonbank liabilities of banks in a multiplex interbank environment arising from changes in currency exposure. Currency shocks as a source of financial contagion in the banking sector have not, so far, been considered. Our model considers two sources of contagion: shocks to nonbank assets and exchange rate shocks. Interbank loans can mature at different times. We demonstrate that a dominant currency can be a significant source of financial contagion. We also find evidence of asymmetries in losses stemming from large currency depreciations versus appreciations. A variety of scenarios are considered allowing for differences in the sparsity of the banking network, the relative size and number of banks, changes in nonbank assets and equity, the possibility of bank breakups, and the dominance of a particular currency. Policy implications are also drawn.

Exchange rate shocks in multicurrency interbank markets

We simulate the impact on the nonbank liabilities of banks in a multiplex interbank environment arising from changes in currency exposure. Currency shocks as a source of financial contagion in the banking sector have not, so far, been considered. Our model considers two sources of contagion: shocks to nonbank assets and exchange rate shocks. Interbank loans can mature at different times. We demonstrate that a dominant currency can be a significant source of financial contagion. We also find evidence of asymmetries in losses stemming from large currency depreciations versus appreciations. A variety of scenarios are considered allowing for differences in the sparsity of the banking network, the relative size and number of banks, changes in nonbank assets and equity, the possibility of bank breakups, and the dominance of a particular currency. Policy implications are also drawn.

Optimum Currency Area in Asean 5 Countries: Is it Appropriate to Use American Dollar As the Standar Currency?

Many times ASEAN countries experienced economic crisis in 1997/1998 and financial crisis in 2008. The similar patterns of cisis among those countries make some researchers conduct research of single currency unification. This research has a purpose to analyze the impact of ASEAN 5’s currencies (Rupiah, Ringgit, Singapore Dollar, Baht, and Peso) to a currency shock in the other ASEAN countries. The concept of this study uses the exchange rate approach pegged of ASEAN countries with American Dollars and Singapore Dollars. Furthermore, this research analyzes a symmetrical currency response to the currency shock in the other countries. The method of the study comes closer short-term and long-term models of Vector Auto regression (VAR) by using monthly data in real exchange rate variables from 1990 to 2019. The result of impulse response function (IRF) shows that responses to ASEAN currency pegged the currency to Singapore Dollars rather than US Dollars

Libra or Librae? Basket based stablecoins to mitigate foreign exchange volatility spillovers

The paper aims to assess, from an empirical viewpoint, the advantages of a stablecoin whose value is derived from a basket of underlying currencies, against a stablecoin which is pegged to the value of one major currency, such as the dollar. To this aim, we first find the optimal weights of the currencies that can comprise our basket. We then employ volatility spillover decomposition methods to understand which foreign currency mostly drives the others. We then look at how the stability of either stablecoin is affected by currency shocks by means of spillover networks built on VAR models. Our empirical findings show that our basket based stablecoin is less volatile than all single currencies. This result is fundamental for policy making, and especially for emerging markets with a high level of remittances: a Librae (basket based stablecoin) can preserve their value during turbolent times better than a Libra (single currency based stablecoin).

Partisan Depositor Responses to a Currency Shock

Depositor responses to a large currency shock vary depending on political views. Triggered by a combination of economic policies and a geopolitical conflict with the U.S., the Turkish lira depreciated 14% against the U.S. dollar on August 10, 2018. Using unique depositor-level micro data from a Turkish bank, we find that households significantly increase their share of deposits held in foreign currency after the currency shock, and the shift to FX is most pronounced in areas with low support for president Erdogan, while people in areas with high support are significantly less likely to move from lira to FX. These shifts to FX persist long after the shock, despite the lira regaining much of its lost value. The change in depositor currency preferences is associated with an increase in foreign-currency lending and increasing currency mismatches on Turkish banks' balance sheets, which translate into differences in bank profitability.

The Pricing of an Experience Good in a Competitive and Opaque Market

This paper explores the price determinants of fine wines in a competitive and opaque market. Intense international competition, high production costs and information asymmetries, result in Swiss wine prices that mostly depend on collective reputation, production techniques, and product positioning. Following an exogenous currency shock, producers have reacted with a 5% price increase. Finally, a reduction in information asymmetries with the arrival of an influential wine expert on the market had a positive price effect on rated wines and producers. These two findings suggest that wine producers have used this situation to review their wines' pricing and positioning.

Оцінка стану державного боргу України та напрями його оптимізації

The article aims at studying the current state of Ukraine's national debt and developing directions for its optimization. It is established that the currency component in the structure of Ukraine's national debt is slightly lower than the threshold level for the currency component in the debt structure set by the IMF for developing countries. This structure of Ukraine’s national debt indicates the dependence of the domestic financial system on currency exchange rate fluctuations and the need to increase foreign exchange costs for servicing debt obligations. The amount of debt on loans from international financial organizations and government agencies of foreign countries comprises about a third of the total amount of national and guaranteed debt, indicating significant support Ukraine receives from its international partners, especially from the International Monetary Fund. The currency component in Ukraine’s national and state-guaranteed debt indicates high vulnerability of its financial system to currency shocks. It is established that the structure of Ukraine’s national and state-guaranteed debt by types of interest rates is quite optimistic and indicates a low vulnerability of public finances to interest rate risks. The size of Ukraine’s national and state-guaranteed debt in hryvnia equivalent increased during 2013–2020 by more than 4.4 times, and its growth in USD was quite moderate. It is determined that during 2020 the size of Ukraine’s national and state-guaranteed debt increased by 27.7% in hryvnia equivalent, due to the following situations: financing the state budget deficit; the allocation of funds to combat COVID-19; national currency devaluation, etc. The ratio of national and state-guaranteed debt to GDP, reaching a maximum of 81.0% at the end of 2016, gradually decreased to 50.3% at the end of 2019, which corresponds to the norm established by the national legislation. However, the values of this index for the period under review exceed the threshold level of national debt set by international standards for countries with emerging markets (30-50% of GDP). It is shown that the 2013 2019 period saw a tendency to increase the total cost of repayment and servicing of Ukraine’s national debt, which creates the risk of refinancing national debt, causes additional pressure on the state budget and GDP, and limits Ukraine’s ability to finance its social and economic goals of social development. The main risks for Ukraine’s debt obligations are highlighted, and ways to optimize them are outlined. The need to establish a National Debt Management Agency, the activity of which would help reduce both the debt burden and the cost of public debt servicing, is substantiated.

State and tendencies of development of the banking system in the context of structural reform of the national economy of Ukraine

The relevance of the study lies in the fact that the fulfilment of the potential of the banking system is capable of providing positive structural changes in the economy of Ukraine. The purpose of the study is to analyse the state and trends of the banking system of Ukraine in the focus of its impact on the structural reform of the national economy. The study used methods of statistical analysis (to analyse the state and dynamics of the banking system) and the analogue method (to identify the extent of the development of the banking system on structural changes in the economy). It was substantiated that the effective functioning of the banking system is key to successful economic development of the national economy, in particular its reform. It is proved that a mechanism of redistribution of financial resources and money acts through the banking system; therefore, they are mobilised and involved in economic circulation in those sectors of the economy that need it most. The state and trends of development of the banking system as preconditions of fulfilment of its potential in structural reform of national economy are generalised. As a result of the analysis of the state and trends of the banking system, both their positive and negative features were identified. It is proved that in Ukraine, at the present stage of development of the national economy, the banking system has been cleared of low-liquid and conditionally fictitious banking structures, the volumes of assets, in particular highly liquid ones, are growing, and the loan portfolio of banks is improving, their financial results, liquidity and solvency, resistance to currency shocks, bank lending to the economy increase. The study also demonstrated that the country's banking system is described by a number of systemic shortcomings, especially the high level of concentration of bank capital and deposits in the largest banks, as well as state banks in a number of segments of the banking sector by number of departments, ATMs, terminals, active payment cards. There is a trend to weaken the penetration of the banking sector into the economy, especially in terms of affordable lending to individuals and strategic sectors of the economy. The practical value of the study lies in the fact that based on the identified shortcomings of the banking system and its impact on structural reforms, strategic lines of work for improving government regulation in this area have been identified

Do Risk Disclosures Matter When It Counts? Evidence from the Swiss Franc Shock

ABSTRACTWe examine the relation between disclosure quality and information asymmetry among market participants following an exogenous shock to macroeconomic risk. In 2015, the Swiss National Bank abruptly announced that it would abandon the longstanding minimum euro‐Swiss franc exchange rate. We find evidence suggesting that firms with more transparent disclosures regarding their foreign exchange risk exposure ex ante exhibit significantly lower information asymmetry ex post. The information gap in bid‐ask spreads appears within 30 minutes of the announcement and persists for two weeks, during which new information gradually substitutes for past disclosures. We validate the information dynamics of past risk disclosures with three field surveys: (1) Sell‐side analysts emphasize the importance of existing (risk) disclosures in evaluating the translational and transactional effects of the currency shock. (2) Lending banks’ credit officers rely on past disclosures as the primary information source available for smaller (unlisted) firms in the immediate aftermath of the shock. (3) Investor‐relations managers use existing financial filings as a key resource when communicating with external stakeholders. The results suggest that historical disclosures help investors attenuate information asymmetry in light of unexpected news.

The Impact of Currency Shocks on Sanandaj Municipality Revenues in Iran

Exchange rate fluctuations have been affecting economic demand in recent years. The purpose of this study is to review the effects of exchange shocks on Sanandaj Municipality Revenues. The statistical population is Sanandaj municipality during 2006-2018 and SPSS, Eviews softwares were used for data analysis. The results show that since the correlation test is not significant at the level of 0.95, there is no significant relationship between two variables of municipality income and exchange fluctuations. Thus, the main hypothesis is rejected. In other words, exchange shocks have no impact on Sanandaj municipality revenues. Also based on the correlation test, since the correlation test is not significant at the level of 0.95, the relationship between the two variables of municipality income and negative exchange fluctuations is not significant and the sub-hypothesis (1) is rejected, and finally based on correlation test, since the correlation test is not significant at the level of 0.95, the relationship between two variables of municipality and positive exchange fluctuations is not significant. Thus, the sub-hypothesis (2) is rejected as well. It could be concluded that, Sanandaj municipality revenues do not follow the currency rate fluctuations.

Libra or Librae? Basket Based Stablecoins to Mitigate Foreign Exchange Volatility Spillovers

The paper aims to assess, from an empirical viewpoint, the advantages of a stablecoin whose value is derived from a basket of underlying currencies, against a stablecoin which is pegged to the value of one major currency, such as the dollar. To this aim, we first find the optimal weights of the currencies that can comprise our basket. We then employ volatility spillover decomposition methods to understand which foreign currency mostly drives the others. We then look at how the stability of either stablecoin is affected by currency shocks, by means of VAR models and impulse response functions. Our empirical findings show that our basket based stablecoin is less volatile than all single currencies. This results is fundamental for policy making, and especially for emerging markets with a high level of remittances: a librae (basket based stable coin) can preserve their value during turbolent times better than a libra (single currency based stable coin).

America – China Trade War on Triangle Currency Shock

This paper is to analyze the impact of trade war United States – Republic of China on ASEAN currency shock with the subject are the triangle counties; Indonesia, Malaysia, and Singapore. By comparing currency of those 3 states, we resulted the different impact of trade war of US–China on each country. Foreign exchange of Indonesia Rupiah is more volatile than Malaysia and Singapore. It mean that influence of US-China trading war on currency shock is depend on the economics power of each countries in the international trading. Indonesia as an emerging country also became the alternative penetration target. Besides the difference of international transaction system on those countries, we realize that Indonesia is a big country, so that the volume of consumptive is exactly large of amount.