Model Of Rate Determination Research Articles

Impact of asymmetry on exchange rate determination: The role of fundamentals

This study tries to take a new look at the exchange rate determination model by employing recent developments in time series estimation methodologies. For this purpose, the validity of the sticky price monetary exchange rate model has been searched for the Turkish lira / US dollar case. Estimation results considering both linear and non–linear modeling approaches highly support the theoretical foundations and reveal explicitly the asymmetric nature of the model. The paper infers that since the nominal exchange rate seems to be determined through the economic fundamentals, it should not be used as a policy tool with a long–term perspective.

Managing inventory financing in a volatile market: A novel data-driven copula model

Inventory financing is crucial to helping businesses survive during an economic crisis—such as that caused by the COVID-19 pandemic—and supporting economic recovery in the aftermath. However, inventory financing is particularly risky in a volatile market environment since fluctuating collateral prices increase default risk. This paper presents an innovative data-driven copula model that was combined with the European call option theory to set loan-to-value ratios and determine interest rates that can help improve inventory finance providers’ (IFPs) competitiveness and manage their risk in volatile market environments. Specifically, the loan-to-value ratio estimated by the data-driven GARCH-EVT-Copula can help IFPs extract more value from collateral units due to its ability to capture both the autocorrelations among collateral prices and the dependencies among prices in different collateral units. The interest rate determination model derived from the European call option theory is employed to derive interest rates and reveal the risks of collateral units. The generated loan-to-value ratio and interest rate can serve as a reference for IFPs when preparing inventory financing contracts. Furthermore, the copula parameterization process can help IFPs identify the least risky and most predictable collateral unit. Finally, an extended analysis over the COVID-19 period demonstrates that the proposed approach can offer superior performance in a highly volatile market environment.

Does Purchasing Power Parity Hold Between Asian Economies Before and After the Financial Crisis? Evidence from the Time-Series Model

In exchange rate determination models, the purchasing power parity (PPP) acts as a fundamental theory, which provides the basis for exchange rate determination across countries respectively. The main objective of this study is to investigate if there exists long-run purchasing power parity in the long run between the Asian economies and developed economies. This will help to understand the long-run exchange rate determination in these countries and helps to make effective monetary policies. This study tests the long-run PPP relationships between Asian economies (China, Japan, Singapore) with the UK and the US respectively. It is important to observe whether PPP holds between Asian economies and the economies of the UK and US by using time-series analysis respectively. Johansen Cointegration test is used to examine the relative PPP among these countries on full sample and sub-samples before and after the global financial crisis respectively. In full sample and subsamples, the Cointegration results show that PPP holds Asian economies (China, Japan, and Singapore) with the UK and the US respectively. This study finds significant evidence to accept that PPP holds which implies that the domestic prices of Asian economies are influenced by the US and UK prices and it explains a significant amount of variation in their domestic prices and inflation.

Analysis of Factors Affecting the Determination of Freight Rates for Container Ships in the Global Shipping Market

Purpose - The purpose of this study is to analyze major factors affecting the freight rates of container ships. Recently, freight rates for container ships are increasing rapidly in the global shipping market. Therefore, empirical research on how various factors of supply and demand fluctuations in container transportation affect freight rates in the mid- to long-term are needed. Design/Methodology/Approach - In this study, a research model was established based on Clarkson s maritime freight rate determination model. The four variables included in the independent variables correspond to the basic factors that determine supply and demand. Demand-related variables include container traffic volume, and supply-related variables include container ship capacity and container ship dismantling. The study began with tests of the stationarity of time series data. The unit root tests showed that all concerned variables were non-stationary. Accordingly, the result of the cointegration test showed that the tested variables are not cointegrated. Findings - Empirical evidence using first difference data shows that container ship capacity and container volume did have a significant effect on the freight rate fluctuations of container ships. On the other hand, the dismantling amount of container ships showed a different direction from the expected value, and the bunker oil price did not have much influence on the freight rate change of container ships. Research Implications - The analysis results suggest that container ship capacity and container volume, which mean the demand side and supply side, have an important effect on freight rate fluctuations in the supply and demand of the container market. In other words, it was confirmed that the most important factor in determining freight rates in the container market is a variable that directly corresponds to supply and demand. These results will help predict container ship freight rates in the shipping market, and use them to help decision makers make the right decisions.

경제정책 불확실성 지수가 환율결정에 주는 영향분석

The free-floating exchange rate system was applied in South Korea after the 1997 Asian financial crisis. Since then, a lot of studies on exchange rate determination were conducted based on the monetary approach. However, after the 2008 global financial crisis, the economic policies of major countries had a greater impact on financial markets, but fewer studies were published on how the exogenous changes in economic policies affect the foreign exchange market of small open economies. Based on the related literature, we selected explanatory variables such as money supply, income, interest rate, terms of trade, and capital account, and then constructed a Won/Dollar exchange rate determination model by adding Economic Policy Uncertainty(EPU) indexes Baker, Bloom, and Davis(2016) devised as supplementary variables. The empirical analysis period is from October 2000 to December 2020, and regression analysis was performed using both a linear multiple regression model a non-linear VECM model. Monetary model-related variables, such as money supply and interest rate were proved to be more significant factors before the financial crisis. On the other hand, the influence of the EPU indexes was greater after the financial crisis and in particular, the Korea EPU index and Japan EPU index had a significant impact.

Exchange Rate in Ethiopia: A Graphical Analysis of Trends and Determinates

The question of exchange rate determination has been just in the core of academic debates. Even though many exchange rate determination models and their amendments have been developed, scholars/writers still cannot agree on which model best describes behavior of exchange rate. Exchange rate is an essential element of the macro- economic variables that needs to be address in Ethiopia since the Ethiopian birr consistently losing its value and it is necessary to know the factors affecting, in order to analysis the determinate factors, to see which of those possible factors need to be care to control the exchange rate. The objective of this paper was to analysis the relationship among the level of exchange rate in Ethiopia and selected main determinant factors argued in both flow and stock theory of exchange rate determination. The analysis was carried out by detail reviewing the prior researchers work on the area and using correlation and trend analysis for the 18 (2000-2017 G.C) year data obtained from National bank of Ethiopia Quarterly Bulletin. The result shows that nominal exchange rate of Ethiopia relates positively with government spending, broad money supply, inflation level, economic growth, interest rate and negatively with term of trade balance and current account balance. Moreover, it revealed that, government spending; broad money supply and nominal interest rate are the major determinants than inflation, economic growth term of trade balance, and current account balance. Keywords: Exchange rate, balance of payment theory, Monetary theory, Ethiopia DOI: 10.7176/JESD/12-3-05 Publication date: February 28 th 2021

Determinants of Exchange Rate in Ethiopia: A Graphical Approach

The question of exchange rate determination has been just in the core of academic debates. Even though many exchange rate determination models and their amendments have been developed, scholars/writers still cannot agree on which model best describes behavior of exchange rate. Exchange rate is an essential element of the macro- economic variables that needs to be address in Ethiopia since the Ethiopian birr consistently losing its value and it is necessary to know the factors affecting, in order to analysis the determinate factors, to see which of those possible factors need to be care to control the exchange rate. The objective of this paper was to analysis the relationship among the level of exchange rate in Ethiopia and selected main determinant factors argued in both flow and stock theory of exchange rate determination. The analysis was carried out by detail reviewing the prior researchers work on the area and using correlation and trend analysis for the 18 (2000-2017 G.C) year data obtained from National bank of Ethiopia Quarterly Bulletin. The result shows that nominal exchange rate of Ethiopia relates positively with government spending, broad money supply, inflation level, economic growth, interest rate and negatively with term of trade balance and current account balance. Moreover, it revealed that, government spending; broad money supply and nominal interest rate are the major determinants than inflation, economic growth term of trade balance, and current account balance. Indeed, it is concluded as there is some theoretical and empirical deviations on the result of this study, may be due to the effect of some other missed variables (gov’t intervention level, political risk, cultural sentiment. Keywords: Exchange rate, balance of payment theory, Monetary theory, Ethiopia DOI: 10.7176/IAGS/68-01 Publication date: July 31 st 2020

The Dynamics of the Exchange Rate and Extension of Monetary Trilemma

Simultaneous making policy of interest rates, exchange rates and capital accounts can be extended to trilemma theory, contrary to its earlier theories, provided that the imbalances of the private sector, the government and the capital account adjusted through the policy variables such as the government expenditures, the interest rates on domestic deposits, the interest rates on domestic loans, effective exchange rates, foreign prices and foreign interest rates. On the other hand, the components of the extension of trilemma theory in the form of internal and external imbalances affect the exchange rate. In other words, if the real sector markets of the economy are not cleared through the aforementioned trilemma components, and policy variables, internal and external imbalances will be affected by opposite direction of net domestic assets (ΔNDA) and net foreign assets (ΔNFA) of the banking system. This is in accordance with the fundamental principles of the monetary approach balance of payments and exchange rate. Policy variables do not put pressure on the unofficial exchange rate as long as they have the same effect on the net changes in the domestic and foreign assets of the banking system. The purpose of this study is to consider the effect of internal and external imbalances on exchange rate through the simultaneous equations system, generating impulses in policy variables, and examining reactions in Iranian economy. In this paper, the monetary exchange rate determination model is analyzed and examined by using the extension of trilemma theory for macroeconomic data of Iran in the form of internal and external imbalances. The results of this study suggest that policy variables can stabilize the unofficial exchange rate (with other conditions being constant) through trading off internal and external imbalances. Thus, the economic policymaker can, while independently policing interest rates, capital accounts and government expenditures and other policy variables in this research, maintain exchange rate stability as a strategic variable and anchor the general level of prices.

Research on the UBI Car Insurance Rate Determination Model Based on the CNN-HVSVM Algorithm

With the support of Internet of Vehicles technology, UBI (Usage Based Insurance) car insurance rate determination has certain guiding significance for achieving accurate pricing of car insurance rates and satisfying the personalized needs of users. Based on the CNN (Convolutional Neural Networks) algorithm and SVM (Support Vector Machine) algorithm, this paper establishes a rating model for UBI car insurance rates. The model first performs a series of operations such as convolutions, pooling and nonlinear activation function mapping using the CNN algorithm so that it can extract the features from the driving behavior data of UBI customers. Then, it introduces the Hull Vector to optimize the operating efficiency of the SVM algorithm. The HVSVM (Hull Vector Support Vector Machine) algorithm classifies customers according to their driving behavior, and thus obtains UBI customer car insurance rate grades. Therefore, this paper proposes a UBI car insurance rate grade determination model based on the CNN-HVSVM algorithm. The empirical results of the model show that the CNN-HVSVM algorithm has higher discrimination accuracy in the risk rating process of UBI customer driving behavior than the CNN algorithm, BP neural network algorithm and SVM algorithm; and when dealing with large training sets, it has a speed advantage over the CNN-SVM algorithm. Furthermore, it is easy to realize in the process of establishing the UBI car insurance rate determination model and it has good robustness, which can adapt to diverse data sets, thus achieving better results in the car insurance rate determination process. Therefore, the CNN-HVSVM model can predict the grade of UBI car insurance users more accurately and efficiently, and the prediction results are more consistent with the actual situation, which has strong applicability and flexibility. The UBI car insurance premium rate determination model based on the CNN-HVSVM algorithm can determine driver behavior more fairly and reasonably, and has certain practical significance for promoting car insurance rate market reform, which can better promote future UBI research work.

Understanding low interest rates: evidence from Japan, Euro Area, United States and United Kingdom

AbstractThe paper investigates the factors determining long‐term interest rates. Our estimation results for major industrialized economies suggest that central banks have actually had a key influence on the level of long‐term interest rates. We thus show that 1) the customary neoclassical model of interest rate determination, on which central banks tend to rely, is neither rooted in the institutional setup of the credit markets nor supported by the data, and that 2) the Austrian explanation incorporated in the model of Wicksell–Mises–Hayek of the credit and business cycle fits better the economic reality. As central bank policy makers might lack the necessary knowledge and foresight to set market rates to levels consistent with economic fundamentals, there is a high chance of misalignments of market rates. The correction of misalignments could lead to severe economic disruptions.

Google Trends and Structural Exchange Rate Models for Turkish Lira–US Dollar Exchange Rate

AbstractIn this paper, we use Google Trends data to proxy macro fundamentals that are related to two conventional structural determination of exchange rate models: purchasing power parity model and the monetary exchange rate determination model. We assess forecasting performance of Google Trends based models against random walk null on Turkish Lira–US Dollar exchange rate for the period of January 2004 to August 2015. We offer a three-step methodology for query selection for macro fundamentals in Turkey and the US. In out-of-sample forecasting, results show better performance against no-change random walk predictions for specifications both when we use Google Trends data as the only exchange rate predictor or augment it with exchange rate fundamentals. We also find that Google Trends data has limited predictive power when used in year-on-year growth rate format.

On the J M Keynes-Joan Robinson Correspondence Between September and November, 1936: How Keynes Finally Came to Realize That Joan Robinson Had No Understanding Whatsoever About His Liquidity Preference Theory of the Rate of Interest or the General Theory

In the course of examining papers sent to him by Joan Robinson for review and comments before publication in late 1936, Keynes discovered that Joan Robinson had absolutely no understanding whatsoever about his theory of the rate of interest, which was based on the Liquidity Preference Function, in the General Theory. Despite repeated attempts by Keynes to correct her errors, Joan Robinson persisted in resisting Keynes’s attempt to repair her deeply flawed work on liquidity preference. Keynes finally realized in November 1936 that his acknowledgment of her on page xii of the General Theory regarding her comments on the draft copies of the General Theory he had sent her was mistaken. Keynes had no alternative in his letter to J. Robinson of November 9th, 1936, but to state to her bluntly that “… your argument as it stands is most certainly nonsense.” Robinson’s argument was that the rate of interest is determined by the demand and supply of money alone. Keynes had finally come to realize over the three month time period of their correspondence that Joan Robinson had no grasp whatsoever about his IS-LM(LP) (Hicks’s 1937 IS-LL and Hansen’s 1953 IS-LM are distorted versions of Keynes’s model) model of interest rate determination in Effective Demand (Y) and interest rate (r) space. Robinson viewed Keynes’s Liquidity Preference theory of the rate of interest of the General Theory as a purely monetary theory of the rate of interest that was determined only by the demand for money and the supply of money. According to Robinson, Keynes in the General Theory had shown that the rate of interest is a purely and uniquely determined monetary variable only. Keynes’s Y=C plus I and Y=Cplus S model, leading to the conclusion that I=S, which generates the IS equation on pages 63,115 and page 298 of the General Theory, had no role to play in determining the rate of interest. Therefore, the rate of interest can only be determined by the speculative demand for money,M= L2(r). Keynes had already seen this faulty description of his theory described to him in correspondence with Hawtrey in the January-March, 1936 time period. Keynes ‘s response to Hawtrey was that Hawtrey’s summary was completely wrong. Keynes was surely shocked to see Robinson making the same, identical mistake as Hawtrey. Interestingly, this correspondence between Keynes and Robinson has never been examined at any time by any economist or academic since it first appeared in print in Volume 14 of the CWJMK in 1973. For instance, the only mention made by Skidelsky about this correspondence (1992, p.627) was that the slowness of trains in Europe gave Keynes a chance to “…read the proofs of Joan Robinson’s new book.” The footnote provides no additional information. The reason why this correspondence has never been examined should be obvious. It completely destroys the strident claims, made by the Post Keynesian and Institutionalist schools of economics, that Keynes never presented an IS-LM type model in the General Theory because his theory was a purely monetary theory of the rate of interest only. Practically all of Skidelsky’s work on the General Theory, which was directly based on Joan Robinson, can now be seen to be completely flawed. One comes to the truly bizarre conclusion that the Post Keynesian and Institutionalist schools have, for the last 82 years, based their understanding of the General Theory, not on Keynes, but on Joan Robinson’s badly flawed “interpretation” of Keynes and the General Theory.

The common component of bilateral US exchange rates: to what is it related?

Using principal component analysis, we identify a common component driving a panel of 15 monthly bilateral exchange rates against the US dollar. We find this common (first principal) component is related to the fundamentals commonly used in exchange rate determination models, such as US nominal and real macroeconomic variables, financial market variables and commodity prices. We obtain the relevant set of fundamentals using the Lasso (least absolute shrinkage and selection operator) technique and find that this set changes over time.

Exchange rate dynamics in a Taylor rule framework

This paper establishes a dynamic exchange rate determination model incorporating capital control and foreign exchange intervention in a Taylor rule framework. It uses the SVAR model to identify the sources of real exchange rate dynamics for three pairs of currencies: RMB/USD, Yen/USD and GBP/USD. It shows that demand shock, instead of supply shock, plays a dominant role in real exchange determination. Monetary policy has little effect but central bank intervention plays a role in keeping exchange rate persistence for RMB/USD and Yen/USD. Risk premium shock is almost irrelevant to exchange rate dynamics for Yen/USD and GBP/USD. In the case of China, capital control plays a critical role in exchange rate determination. The results show that social welfare losses of China is the largest, suggesting that capital account liberalization would benefit the country in the long term. Therefore, the central bank of China should gradually open up the capital account, give up the fixed exchange rate or the managed floating exchange rate regime, and reduce central bank intervention to improve the effectiveness of monetary policy and social welfare.

Google Trends and Forecasting Performance of Exchange Rate Models

In this paper, internet search data provided from Google Trends is utilized to nowcast the known variates of alternative exchange rate determination models. The sample covers 12 OECD countries’ exchange rates for the period from Jan 2004 to June 2014. The results indicate that inclusion of Google Trends-based nowcasting values of macro fundamentals to the current set of government released-macro-economic variables improve the out-of-sample forecast of Purchasing Power Parity model in seven currency pairs and of Monetary model in four currency pairs. In this paper we claim that, for proper testing of the structural models, since there is a lag in the release of official data on macro fundamentals, the literature should focus more on using ex ante variables on current macro fundamentals and nowcasting of these variables with utilization of Google Search Inquiries can be one alternative for this purpose.

Determining the EUR/USD exchange rate with U.S. and German government bond yields in the post-crisis period

This research shows how U.S. and German government bond yields can determine the EUR/USD exchange rate in the short run. After presenting the discussion on fundamental, technical and microstructure approach exchange rate determination models, a conclusion is made that out of the components of fundamental models the interest rates could be the best determinants for explaining exchange rate fluctuations in the short term. For the research the mostly traded currency pair, the EUR/USD, was chosen and 2-year, 10-year U.S. and German government bond yields were selected as determinants of the exchange rate. After performing the linear regression procedure it has shown that the model can determine 5 per cent of the daily EUR/USD fluctuations with a change in 2-year U.S. government debt yield being the greatest determinant in the model. It affects the exchange rate as it is stated in the uncovered interest rate parity model – when the yield increases, the USD declines against the euro and vice versa. Another finding is that an increase in the German 10-year government bond yield increases the price of the euro and the increase in the U.S. 10-year debt yield leads to an appreciation of the USD.

Effective Exchange Rates in Central and Eastern European Countries: Cyclicality and Relationship with Macroeconomic Fundamentals

Abstract This paper examines the evolution of effective exchange rates in nine Central and Eastern European countries in terms of development trends, volatility and cyclicality. Consequently, it provides direct empirical evidence on the nature of the relationship between effective exchange rates and selected macroeconomic fundamentals, addressing a key precondition of numerous exchange rate determination models and theories that attempt to explain the role of exchange rates in the economy. The results suggest that flexible exchange rate arrangements are reflected in both nominal and real effective exchange rates having higher volatility and variability. Furthermore, the results provide mixed evidence in terms of intensity, direction and cyclicality, but show a weak correlation between exchange rates and fundamentals. Sufficiently high coefficients are found only for money supply. Consequently, using fundamentals for the determination of exchange rates and using the exchange rate to explain economic development may be of limited use for the countries analyzed.

Differences in subprime loan pricing across races and neighborhoods

We investigate whether race and ethnicity influenced subprime loan pricing during 2005, the peak of the subprime mortgage expansion. We combine loan-level data on the performance of non-prime securitized mortgages with individual- and neighborhood-level data on racial and ethnic characteristics for metropolitan areas in California and Florida. Using a model of rate determination that accounts for predicted loan performance, we evaluate the differences in subprime mortgage rates in terms of racial and ethnic groups and neighborhood characteristics. We find evidence of adverse pricing for Blacks and Hispanics. The evidence of adverse pricing is strongest for purchase mortgages and mortgages originated by non-depository institutions.

Race, Redlining, and Subprime Loan Pricing

We investigate whether race and ethnicity influenced subprime loan pricing during 2005, the peak of the subprime mortgage expansion. We combine loan-level data on the performance of non-prime securitized mortgages with individual- and neighborhood-level data on racial and ethnic characteristics for metropolitan areas in California and Florida. Using a model of rate determination that accounts for predicted loan performance, we evaluate the differences in subprime mortgage rates in terms of racial and ethnic groups and neighborhood characteristics. We find evidence of adverse pricing for blacks and Hispanics. The evidence of adverse pricing is strongest for purchase mortgages and mortgages originated by non-depository institutions.

Exchange Rate Expectations, Unbiasedness and Central Bank Intervention: The Experience of the Southern Cone

This paper uses new survey data on foreign exchange expectations for Argentina, Brazil and Uruguay to test the hypothesis of unbiasedness. The pattern emerging is revealing: only Argentinean forecasts are unbiased predictors of exchange rate movements, while agents err systematically for Brazil and Uruguay. We argue that the systematic intervention of the Argentinean Central Bank in the foreign exchange market is likely to explain this result, as it simplifies the forecast exercise in that market. As long as the requirements to predict well are simple, agents perform well. If instead the exchange rate determination model is intricate, expectation failures arise.