Korean Exchange Rate Research Articles

Effect of foreign exchange intervention: The case of Korea

AbstractUsing a rolling‐window approach that allows time‐varying coefficients, we estimate the vector autoregressive model with the Markov chain Monte Carlo method to analyse the effectiveness of foreign exchange interventions in Korea. Our results show that a negative shock in international reserves (buying domestic currency or selling foreign currency) results in a significant appreciation of the domestic currency, a reduction in implied volatility and an increase in capital inflows. We also find that Korean exchange rate policies focus on the stabilization of the foreign exchange market rather than the depreciation of the Korean won. These patterns appear more obvious after the 2008 global financial crisis. This suggests that time variation should be taken into account to better understand the effects of foreign exchange interventions.

Analyzing Oil Price Shocks and Exchange Rates Movements in Korea using Markov Regime-Switching Models

Korea imports all of its crude oil, and is the world's fifth largest oil importing country. We analyze the effects of oil prices, interest rates, consumer price indexes (CPIs), and industrial production indexes (IPIs) on the regime shift behavior of the Korean exchange rates against the USA from January 1991 to March 2019. We use the Markov regime switching model (MRSM) to detect the regime shift behavior of the movements of Korean exchange rates. In order to select the optimal MRSM, we fit a total of 30 models considering four explanatory variables. The selected model based on Akaike information criteria (AIC) and maximum log likelihood (MLL) includes the log-differentials of oil prices, the log-differentials of CPIs compared to those of the US, and its own auto-regressive terms. Based on the selected MRSM model, throughout all markets, we find evidence to support the existence of two distinct regimes: a stable regime with low-volatility, and an unstable regime with high-volatility. The regime with high-volatility includes the Asian financial crisis of 1997 and the global financial crisis of 2008–2009 in the Korean exchange rates market. In the regime with low-volatility, the Korean exchange rates are not significantly influenced by any of the explanatory variables, except for its own auto-regressive terms. In the regime with high-volatility, the Korean exchange rates are significantly influenced by the CPIs and oil prices. The transition probability from the regime with low-volatility to the regime with high-volatility is about ten times that of the opposite case.

Rare disaster risk and exchange rates: An empirical investigation of South Korean exchange rates under tension between the two Koreas

We investigate the rare disaster hypothesis. Assuming that news articles reporting North Korea's actions that raise tensions on the Korean peninsula affect the probability and expected damage of a disastrous war in the region, we find by applying nonparametric regression that the South Korean exchange rate depreciates as the number of such news articles increases. We also find through an event study that the South Korean exchange rate depreciates immediately after nuclear tests, although its duration is short. The response of the exchange rate to news escalating tension levels varies over time, which is similar to the habituation learning process.

Korean exchange rate forecasts using Bayesian variable selection

ABSTRACT Using Bayesian variable selection, we demonstrate that economic variables forecast Korea-US exchange rates better than random walk or random walk with drift model at a short horizon. It implies that the failure of out-of-sample exchange rate forecasts is due to the uncertainties associated with selecting proper predictors, rather than the lack of relationship between the exchange rate and its theoretical determinants. Our results also suggest that time-variant and asymmetric weights on predictors should be taken into account to understand exchange rates dynamics. (JEL classification: C11, C53, F31)

Inflation Expectations and Risk Premiums: Implications for Korean Exchange Rates

ABSTRACTNominal yield can be decomposed into real rates, inflation expectations, and inflation risk premia. We estimate an affine term structure model that allows us to decompose nominal bond yields and use the model to study Korea–US exchange rate movements. Our results show that expected inflation and the inflation risk premium have considerable predictive power for Korea–US exchange rates beyond other yield curve factors and macro-variables. In particular, we find that those two nominal factors play a stronger role after 2005. It implies that not only the level of inflation but also inflation uncertainty should be taken into account for predicting Korea–US exchange rates dynamics (JEL classification: E43, F31, G12).

Korean exchange rate and FTAs under the Roh Moo-hyun administration

Korean exchange rate and FTAs under the Roh Moo-hyun administration

ASIAN FINANCIAL CRISIS AND KOREAN TRADE DYNAMICS

Since the Asian financial crisis in 1997, Korean international trade has gone up substantially in both volume and trade balances. The improvement is largely due to an expansion of international markets through various bilateral trade agreements and the structural changes in Korean exchange rates. This article investigates the exchange rate–trade balance dynamics, popularly known as the J-Curve phenomenon. Employing the bounds-testing approach to cointegration and error-correction modeling on Korean bilateral trade for the pre- and post-Asian crisis periods, the study finds that support for the strict version of the J-Curves has been fading after the crisis. While the weaker version of J-Curve is generally supported in both pre- and post-crisis sample periods, we also notice patterns such as M, N, or W-Curves. There exists a long-run relationship among the Korean exchange rates, domestic income, foreign income, and Korean trading balances. (JEL F14, F32)

Measuring misalignments in the Korean exchange rate

This paper measures to what extent the real effective exchange rate of the Korean won is misaligned from its equilibrium value by estimating the equilibrium value using the behavioral equilibrium exchange rate (BEER) approach. The economic fundamentals such as the terms of trade, the relative price of non-traded to traded goods, net foreign assets and real interest rate differentials are employed to assess the equilibrium exchange rate. Considering the drastic changes in Korea's trade pattern, the trade partner weights, which are used to compute the real effective exchange rate, are not fixed, but variable. The estimation results using the quarterly data from 1982Q1 to 2009Q4 indicate that the actual exchange rate of the Korean won was substantially overvalued for the period from 2005Q1 to 2007Q4, and substantially undervalued for the period from 2008Q2 to 2009Q3. The actual exchange rate deviates from the BEER and from the long-run equilibrium (or sustainable value) of the BEER by 32% and by 24% respectively in 2008Q4.

TRADING VOLUME, VOLATILITY, AND GARCH EFFECTS IN THE SOUTH KOREAN WON/US DOLLAR EXCHANGE MARKET: EVIDENCE FROM CONDITIONAL QUANTILE ESTIMATION

Under the MDH, this paper investigates the asymmetry in the positive relationship between unexpected volume and volatility, and whether the unexpected volume series as a proxy for the rate of information arrival absorbs the GARCH effects. This is achieved by applying a quantile regression approach to the won/dollar exchange market with reliable data on trading volumes. Interestingly, the results show that in a freely floating exchange rate system, the positive relationship increases as exchange rate returns are higher. Contrary to previous studies, despite a significantly positive relationship, the inclusion of volumes alone does not reduce volatility persistence at medium or high levels of returns. In addition, the reform of the South Korean exchange rate system had an impact on the relationship, which occurred in response to a financial crisis.

Speculative Attack and Korean Exchange Rate Regime

Kim, Ji Hong.December, 2004.Speculative attack and Korean exchange rate regime,Report,[Seoul]KDI school of Public Policy and Management,Working papers,21

Information flows between non-deliverable forward (NDF) and spot markets: Evidence from Korean currency

This paper investigates the interrelation and information flows between the Won–Dollar spot and offshore forward, i.e., NDF markets. In particular, this paper focuses on the impact of the reform in the Korean exchange rate systems, which occurred in December 1997 in response to the currency crisis, on the relation between the two markets. Using the augmented GARCH formulation, this paper finds that during the pre-reform period a mean spillover effect exists from the spot to the NDF market but not vice versa, and a volatility spillover effect exists in both directions. After the reform, however, the results are reversed and a mean spillover effect exists from the NDF to the spot market. Also, the volatility spillover effect exists only in the same direction. These findings suggest that there are information flows between the two markets, and the reform has changed the direction of the dynamic relation.

Long-term Trend in the Korean Exchange Rate and Its Implication (Written in Korean)

Long-term Trend in the Korean Exchange Rate and Its Implication (Written in Korean)