Foreign Exchange Market Participants Research Articles

Methodological approach to assessing the development of the Russian currency market

The relevance of this study is related to the need to determine the main directions for the development of the Russian foreign exchange market and assess its state. Financial globalization integrates the national currency markets of countries into a single geo-economy, any economic crisis that arises in this system can acquire a worldwide scale, in this regard, and assessing the prospects for the development of the Russian currency market is a very urgent problem today. The insufficient development of the theoretical foundations for the development of the foreign exchange market makes it relevant to systematize the conceptual foundations for the development of the foreign exchange market and form a comprehensive methodological approach to its assessment. As a rule, economists study the state of the foreign exchange market through the dynamics of the exchange rate (real and nominal), while not taking into account other aspects of the functioning of the foreign exchange market (the volume of foreign exchange transactions, foreign exchange market participants, the number of foreign exchange accounts, the state of the country’s external debt, the size of gold and foreign exchange reserves, having correspondent accounts with foreign banks). The article discusses a methodological approach to assessing the development of the Russian foreign exchange market, which includes several stages. A methodology is proposed for assessing the development of the Russian foreign exchange market, which allows one to study indicators at two levels.

Strategic confrontation within monetary and financial authorities, and foreign exchange market participants in Iran: non-cooperative static games approach

Strategic confrontation within monetary and financial authorities, and foreign exchange market participants in Iran: non-cooperative static games approach

РЕЖИМ ВАЛЮТНОГО КУРСУ ЯК ОБ’ЄКТ РЕГУЛЯТОРНОЇ ПОЛІТИКИ ДЕРЖАВИ В УМОВАХ ВІДКРИТОСТІ НАЦІОНАЛЬНОЇ ЕКОНОМІКИ

The article summarizes the patterns of development of exchange rate policy in Ukraine as the transition from administrative to economic methods of regulating the foreign exchange market in the process of increasing the degree of its liberalization. It is shown that the evolution of the exchange rate regime is described by the following chain: fixed, currency corridor, flexible, adjustable-floating, floating. The change in the objects of monetary targeting took place in the following sequence: credit channel, monetary aggregates, exchange rate, inflation. The main task of the NBU's exchange rate policy is to ensure price stability, and an additional one is the impact on the hryvnia exchange rate. It is determined that currently the main instrument of the NBU's monetary policy is the interest rate, and foreign exchange interventions are ancillary to the inflation targeting and floating exchange rate, which acts as a compensator for negative foreign exchange shocks and supports the competitiveness of producers. It is shown that within the current exchange rate regime in Ukraine foreign exchange interventions are carried out on the principles of reducing the role, scale and frequency as the currency market is liberalized, non-interference in its fundamental trends, priority of foreign exchange demand by foreign exchange market participants. and transparency of the criteria for the participation of entities in auctions and bidding. It is argued that the purpose of foreign exchange interventions is: replenishment of official foreign exchange reserves, smoothing the shortcomings of the foreign exchange market in case of its limited ability to self-regulate, loss of benchmarks for pricing, high exchange rate volatility, which negatively affects the currency security of the state and businesses. It is established that between foreign exchange interventions and the interest rate there is a transmission mechanism to strengthen the main instrument in regulating the foreign exchange and monetary markets on the principles of effectiveness of its consequences for the economy in case of adequate perception of NBU signals.

Analysis of the development of the foreign exchange market in the Russian Federation

The article focuses on the financial foreign exchange market, the development and condition of which determines the financial well-being of most commercial enterprises of the Russian Federation. The purpose of the research is to give review of the Russian foreign exchange market’ development and situation. The main factors influencing the level of the exchange rate of foreign currencies expressed in national currency are considered.
 The domestic and international foreign exchange market of Russia for the period 2016-2020 is analyzed. The dynamics of conversion operations, the structure of participants in the domestic foreign exchange market by type of currency. The results of trading on the foreign exchange market, futures and options as a currency instrument, the share of options and futures on the futures market of the Russian Federation, as well as the dynamics of the US dollar against the ruble and exchange trading indicators for the period from 2016 to 2020.
 The conditions, results and prospects of the development of the financial foreign exchange market of the Russian Federation are discussed in this article

Trading Macro-Cycles of Foreign Exchange Markets Using Hybrid Models

Most existing studies on forecasting exchange rates focus on predicting next-period returns. In contrast, this study takes the novel approach of forecasting and trading the longer-term trends (macro-cycles) of exchange rates. It proposes a unique hybrid forecast model consisting of linear regression, multilayer neural network, and combination models embedded with technical trading rules and economic fundamentals to predict the macro-cycles of the selected currencies and investigate the predicative power and market timing ability of the model. The results confirm that the combination model has a significant predictive power and market timing ability, and outperforms the benchmark models in terms of returns. The finding that the government bond yield differentials and CPI differentials are the important factors in exchange rate forecasts further implies that interest rate parity and PPP have strong influence on foreign exchange market participants.

Efficiency of Tanzania's foreign exchange market

AbstractThis paper examines market efficiency in the foreign exchange market in Tanzania. A nonlinear Markov switching model was used to analyse the Tanzanian shilling against the US dollar spanning from 2 January 2009 to 30 April 2020. The estimation period was 2 January 2009–28 May 2019, and the post‐sample forecast period was 28 May 2019–30 April 2020. From the results of the two‐state Markov switching model, we define State 1, which is more volatile, as the inefficient state and State 2, which is less volatile, as the efficient one. In the unconditional probabilities from the Markov switching model, the exchange rate has a 94% probability in the inefficient state, which indicates that 94% of all speculators fully extract information when predicting future exchange rates, while 30% of all investors do not; suggesting that the foreign exchange market undergoes conditions of efficiency and inefficiency. In addition, findings showed that the exchange rate is expected to spend approximately 18 days in regime 1 and 8 days in regime 2. The policy implication of these findings is that foreign exchange market participants should pay attention to regimes and underlying market conditions when designing and applying their investment strategies.

The Nexus of COVID-19 Pandemic, Foreign Exchange Rates, and Short-Term Returns

The current study examines short-term abnormal returns of eight major currencies including EUR/USD, GBP/USD, USD/AUD, USD/CAD, USD/CHF, USD/CNY, USD/JPY, and USD/SEK in response to the evolution of the COVID-19 pandemic using event study approach in three different scenarios. Firstly, short-term abnormal returns of major currencies are estimated on the day of World Health Organization’s (WHO) announcement declaring COVID-19 as a pandemic. Secondly, they are estimated on the day of the announcement of the first confirmed case of COVID-19 in the respective country. Thirdly, they are estimated on the day of the announcement of the first death from COVID-19 in each country. The results provided evidence that major currency investors earned positive returns in these three different scenarios. The implications of the current study are more important than anticipated. Government policymakers, foreign exchange market regulators, and foreign exchange market participants can anticipate short-term returns while establishing foreign exchange policies, designing rules and regulations, and finalizing trading and hedging strategies, respectively, in situations such as the current COVID-19 pandemic. 
 Received Date: September 20, 20202 Last Received: October 23, 2020 Acceptance: November 13, 2020

Asymmetric effect of exchange rate volatility on trade in sub-Saharan African countries

PurposeThe purpose of this study is to examine the effect of asymmetric structure inherent in exchange rate volatility on trade in sub-Saharan African countries from 2005 to 2017.Design/methodology/approach17 countries in sub-Saharan African Countries are used for the study. Exchange rate volatility is generated using generalised autoregressive conditional heteroscedacity (1,1), while the asymmetric components of exchange rate volatility are generated using a refined approach of cumulative partial sum developed by Granger and Yoon (2002). Two-step generalised method of moments is used as the estimation technique in order to address the problem of endogeneity, commonly found in panel data.FindingsThe result from the study shows the evidence of exchange rate volatility clustering which is strictly persistent in sub-Saharan African countries. The asymmetric components (positive and negative shocks) of exchange rate volatility have negative and significant effect on trade in the region. Meanwhile, the effect of negative exchange rate volatility is higher on trade when compared with the positive exchange rate volatility. Furthermore, real exchange rate has negative and significant effect on trade in sub-Saharan African countries.Research limitations/implicationsThe outcomes of this study are important for participants in foreign exchange market. As investors in foreign exchange market react more to the negative news than positive news, investors need to diversify their risk. Also, regulators in the market need to formulate appropriate macroeconomic policies that will stabilize exchange rate in the region.Originality/valueThis study deviates from extant studies in the literature by incorporating asymmetric structure into the exchange rate trade nexus using a refined approach.

Kako možemo posmatrati promene deviznog kursa? Pregled odabranih faktora uticaja na međunarodno devizno tržište

This paper defines the participants in the international foreign exchange market and the influence of natural, political, and economic factors on the movement of the exchange rate, and analysis of circumstances that may contribute to the change of the exchange rate. The paper aims to present the analysis of the exchange rate through macroeconomic phenomena and define the factors influencing the change in the exchange rate and the impact on the work of participants in that process. As risk management measures can prevent the influence of significant factors defined in the paper, measures, and types of risk exposure are determined.

Coups d'état and the foreign exchange market

AbstractI empirically examine the effect of coups d'état on the foreign exchange market using a monthly panel dataset covering 150 countries over the period 1980–2015. Specifically, I investigate whether foreign exchange market's participants sanction a country following a coup d'état event by allowing depreciations of its national currency against a weighted basket of currencies of its trading partners. I combine different identification strategies and find that the occurrence of a coup d'état induces a depreciation of the nominal effective exchange rate in the coup d'état country and generates negative spillover effects on neighbouring countries. Once a coup occurs, a country level of financial buffers and the flexibility of its exchange rate regime allow reducing the magnitude of the depreciation. In addition, I provide evidence that coups also increase the likelihood of experiencing a currency crisis by about 2 percentage points in coup d'état countries compared to non‐coup d'état countries.

Financialised internationalisation and structural hierarchies: a mixed-method study of exchange rate determination in emerging economies

This paper conducts an extensive mixed-method study of exchange rate determination in the Brazilian foreign exchange market. It combines semi-structured interviews with foreign exchange market participants in Brazil and London and advanced time-series econometrics. In line with Post Keynesian theory and critical realist ontology, the interviews uncover the context-specific expectations and underlying processes and structures that condition exchange rate dynamics in Brazil and emerging economies more generally. The results point to important structural changes in Brazil’s financial integration in the form of currency internationalisation and financialisation. Moreover, they show that this internationalisation has been mediated through a structured and hierarchic international monetary system which fundamentally distinguishes exchange rate drivers in emerging economies from those in developed ones.

The National Bank of Ukraine Communication Strategy Optimization within the Framework of Impact on Exchange Rate Expectations of Economic Agents

An important challenge in terms of smoothing excessive exchange rate volatility under the conditions of flexible exchange rate arrangement is optimization of the communication strategy of the country’s monetary regulator. Over the past two decades, communication (information support) has become an increasingly important aspect of monetary policy. Communication enables influence of the volatility of financial markets, improvement of the predictability of monetary policy, and helps to achieve macroeconomic objectives. Nevertheless, as of today, consensus on the issue into what the optimal strategy of the central bank communication is has not been reached, either in Ukraine, nor in developed countries yet. Considering the abovementioned, the methodical approaches to improve the central bank’s communication strategies, based on the use of its verbal interventions in the context of smoothing out excessive cyclical volatility of exchange rates of the national currency, are determined in this article. It is suggested to consider the growth of the factor “information signal/information noise” as a criterion of the central bank’s optimal communication strategy. It is proved that the monetary regulator’s main task should be the continual provision of information concerning a fundamentally justified level of the exchange rate and the level of deviation of the actual rate of the national currency from its fundamental-equilibrium level, as of a given time, to the national foreign exchange market participants. The methodological approach to the improvement of information support of forecasting fundamentally specified value of the national currency is outlined.

The Retail Spot Foreign Exchange Market Structure and Participants

The retail foreign exchange (forex) market is one which is only just starting to become a focus of research. Importantly, while it shares similarities and linkages to the more well-known institutional spot forex market, there are some key differences. These variations allow for a more concentrated arena in which to observe speculative activity. This paper documents the major features of retail forex trading and how it relates to the institutional market. It also examines the market participants and their behaviour. In doing so it provides a reference point for those not familiar with retail forex and introduces some potential areas for research development.

Gold, currencies and market efficiency

Gold and currency markets form a unique pair with specific interactions and dynamics. We focus on the efficiency ranking of gold markets with respect to the currency of purchase. By utilizing the Efficiency Index (EI) based on fractal dimension, approximate entropy and long-term memory on a wide portfolio of 142 gold price series for different currencies, we construct the efficiency ranking based on the extended EI methodology we provide. Rather unexpected results are uncovered as the gold prices in major currencies lay among the least efficient ones whereas very minor currencies are among the most efficient ones. We argue that such counterintuitive results can be partly attributed to a unique period of examination (2011–2014) characteristic by quantitative easing and rather unorthodox monetary policies together with the investigated illegal collusion of major foreign exchange market participants, as well as some other factors discussed in some detail.

Behavioral Pattern of Emerging Asia CurrencyOption Risk Reversals: An Indicatorfor Foreign Exchange Hedging

By identifying Emerging Asia currency option risk reversal as a behavioral variable, we find the influence of currency spot return and carry return has significant bearing in hedging patterns of foreign exchange market participants. We note that appreciation of Emerging Asia currencies in the foreign exchange spot market as well as increased carry return tend to mislead foreign exchange market participants from fully hedging their trading exposure in Emerging Asia currencies, which were notable in all 10 currencies that were analyzed, with the exception of the Chinese yuan. In the case of the Chinese yuan, foreign exchange market participants were fully hedged against changes in the currency spot return and carry return. In this study, the influence of hedging patterns was identified by using the outlying factor as a barometer in modelling hedging patterns of foreign exchange market participants, as well the correlation among currency option risk reversals, currency spot return, and carry return. <b>TOPICS:</b>Emerging, currency, options

Exchange Rate Forecast: a New Approach for Armenian Dram

The paper contains an analysis of advantages and drawbacks of existing modeling approaches to exchange rate forecast and currency risk management. The behavioral features of foreign exchange market participants and their impact on market’s long-term memory were analyzed after the onset of significant events. Special attention was paid to the “Pareto distribution series” to find the point values of the rates that form the trends and determine the trajectory of currency rates. Based on the existing researches of FX rate prediction models authors developed an alternative approach that gives more accurate forecasts of the FX rates and, respectively, currency risk assessment in national banking systems.

Learning to forecast the exchange rate: Two competing approaches

This paper compares two competing approaches to model foreign exchange market participants' behavior: statistical learning and fitness learning. These learning mechanisms are applied to a set of predictors: chartist and fundamentalist rules. We examine which of the learning approaches is best in terms of replicating the exchange rate dynamics within the framework of a standard asset pricing model. We find that both learning methods reveal the fundamental value of the exchange rate in the equilibrium but only fitness learning creates the disconnection phenomenon and only statistical learning replicates volatility clustering. None of the mechanisms is able to produce a unit root process but both of them generate non-normally distributed returns.

Exchange rate dynamics under state-contingent stochastic process switching

This paper offers a closed-form solution of a process switching problem, i.e., switching the exchange rate regime from free-floating to a completely fixed one. An example of such regime change is the adoption of the Euro. In contrast to previous studies on the subject, this paper analyzes a specific case when foreign exchange market participants consider both the Euro locking rate and locking date as uncertain. Preceding the locking, the exchange rate is determined by three factors: fundamental, market expectations for the Euro locking rate, and date. The model is used to examine the conditions under which the exchange rate volatility is mitigated by the prospect of locking.

Is Tunisian Real Effective Exchange Rate Mean Reverting? Evidence from Nonlinear Models

This paper investigates mean reversion in the deviation of Tunisian real effective exchange rate (REER) from its fundamental value. This paper uses the smooth transition auto-regression (STAR) methodology advocated by Granger and Terasvirta (1993) in order to test whether the Tunisian REER is mean reverting over the period 1990:01 to 2010:01. The empirical results show that data support the hypothesis that deviations can be characterized by asymmetric responses towards appreciation and depreciation with the speed of transition between the expansion and contraction regimes being relatively high. The research results have both methodological and practical originality. On the practical side, the main policy implications the paper puts forward are that foreign exchange market participants should adopt the LSTAR model rather than ESTAR model in their attempt to effectively comprehend the behavior of the exchange rates. On the methodological side, this study makes use of robust test for STAR type nonlinearity. This procedure has been deemed immune against outliers and does not need a priori knowledge regarding their presence and/or timing.

Impact of the Louvre Accord on Actual and Anticipated Exchange Rate Volatilities

The Louvre Accord resulted in an agreement among central banks to stabilize exchange rate movements. This study assesses how foreign exchange market participants reacted to the agreement. Specifically, we analyze actual volatilities and anticipated volatilities implied from currency option premia during a two-year period surrounding the Accord. We find that volatility, whether actual or anticipated, is not tempered in the post-Accord period. Thus, the Accord was unsuccessful as a cooperative international effort to reduce exchange rate volatility. Implications of this finding for stabilization policy are offered.