Puzzles In International Financial Markets
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Author | : Karen K. Lewis |
Publisher | : |
Total Pages | : 94 |
Release | : 1994 |
Genre | : Foreign exchange rates |
ISBN | : |
This paper presents a survey of two basic puzzles in international finance. The first puzzle is the `predictable excess return puzzle.' The returns on foreign currency deposits relative to domestic currency deposits should be equalized based upon uncovered interest parity. However, not only do researchers find that deviations from uncovered interest parity are predictable ex ante, but their variance exceeds the variance in expected exchange rate changes. In the paper, I describe different explanations of this phenomenon including the view that excess returns are driven by a foreign exchange risk premium, peso problems or learning, and market inefficiencies. While the research to date has been able to better define the `predictable excess return puzzle' and to suggest the most likely directions for future progress, no one explanation has provided a full answer to the puzzle. The second puzzle is the `home bias puzzle.' Empirical evidence shows that domestic residents do not diversify sufficiently into foreign stocks. This evidence is clear whether looking at models based on portfolio holdings or outcomes of consumption realizations across countries. In this paper, I examine several possible explanations including non-traded goods and market inefficiencies, although even after considering these possibilities, the puzzle remains.
Author | : Guglielmo Maria Caporale |
Publisher | : |
Total Pages | : 30 |
Release | : 2014 |
Genre | : |
ISBN | : |
Author | : Seojin Lee |
Publisher | : |
Total Pages | : 93 |
Release | : 2015 |
Genre | : |
ISBN | : |
The overall theme of this dissertation is the explanation of puzzles in international finance. Empirically, exchange rates seem to be disconnected to the economic fundamentals, and it is referred to as the exchange rate disconnect puzzle. Another puzzling feature in foreign exchange market is that high interest rate currency tends to appreciate, and it is called as ``uncovered interest rate parity puzzle.'' Chapter 1 and 3 of this dissertation examine the exchange rate disconnect puzzle, while chapter 2 investigates the explanation for the UIP puzzle. The first chapter, ``Imperfect Proxies for Market Expectations and the Exchange Rate Disconnect Puzzle'', develop an econometric framework which can capture the relation between exchange rate and economic variables. Conventional empirical studies assume the linear relation between exchange rate and its determinants implied by the theory. I show that this linear modeling strategy leads to the spurious instance of the exchange rate disconnect puzzle and propose the new model which allows imperfectness of the macro variables as a predictor for market expectation. The proposed model provides empirical evidence that the domestic currency appreciates in response to an unanticipated increase in domestic output growth or inflation. Furthermore, results for out-of-sample predictability tests suggest that the proposed model outperforms the random walk model over various horizons less than two years, for most of the countries under investigation. The second chapter of my dissertation, ``Is It Risk or Expectational Error? Explaining Deviation from Uncovered Interest Parity'' explores the behavior of ex-ante excess return to explain the UIP puzzle. Implementing empirical models of ex-ante excess return has proven to be very difficult and previous attempts have not been successful in explaining what makes ex-ante excess return. In this chapter, I propose the new framework which estimates the ex-ante excess return more efficiently by incorporating information in economic variables. The extracted series show that high inflation or output in the foreign country raises the ex-ante excess return for holding foreign currency, while high inflation or high output in home country lowers it. Moreover, using the survey-based forecast of exchange rate data, I find that ex-ante excess return is strongly connected with the market's systematic forecast error instead of with the implied risk premium. These empirical findings suggest that the market's expectation is not fully rational, and this systematic expectational error results in the UIP puzzle. Lastly, the third chapter, ``Commodity Currency Predictions: the Role of Expectations'', examines the dynamic linkage between commodity prices and exchange rate. Even though exchange rates and commodity prices are highly correlated contemporaneously, commodity prices are not shown to have predictive power for exchange rates. With several time-series techniques and alternative data, such as survey-based forecast of exchange rate and foreign exchange option prices, I show that commodity price is linked to the future exchange rate through the market expectation: markets consider aggregate commodity prices when they form expectations of the exchange rates. These empirical findings suggest that commodity price movements are incorporated into the nominal exchange rate with lasting impact beyond one quarter.
Author | : Mark P. Kritzman |
Publisher | : John Wiley & Sons |
Total Pages | : 214 |
Release | : 2002-08-19 |
Genre | : Business & Economics |
ISBN | : 9780471228844 |
Mit einigen wichtigen Theorien muß jeder Finanzexperte vertraut sein, wenn er die Grundlagen der Finanzanalyse verstehen will. In der Regel jedoch, werden diese Theorien nur unzureichend verstanden. "Puzzles of Finance" befaßt sich eingehend mit diesen komplizierten Finanzthemen und liefert dem Leser verständliche Erklärungen und Definitionen, die sich auf ein absolutes Minimum an Terminologie und Mathematik beschränken.
Author | : Maurice Obstfeld |
Publisher | : |
Total Pages | : 84 |
Release | : 2000 |
Genre | : International trade |
ISBN | : |
"We also address a variety of international pricing puzzles, including the purchasing power parity puzzle emphasized by Rogoff, and what we term "the exchange rate disconnect puzzle." The latter category of riddles includes both the Meese-Rogoff exchange rate forecasting puzzle and the Baxter-Stockman neutrality of exchange rate regime puzzle. Here, although many elements need to be added to our extremely simple model, trade costs still play an essential role."--Authors.
Author | : Eric Girardin |
Publisher | : Springer Nature |
Total Pages | : 125 |
Release | : 2019-09-13 |
Genre | : Business & Economics |
ISBN | : 303017123X |
Mainstream research has rationalized China’s stock market on the basis of paradigms such as the institutional approach, the efficient market hypothesis, and corporate valuation principles. The deviations from such paradigms have been analyzed as puzzles of China’s stock market. Girardin and Liu explore to what extent, in the perspective of Chinese cultural and historical characteristics, far from being puzzles, these 'deviations’ are rather the symptoms of a consistent strategy for the design, development and regulation of a government-dominated financial system. This book will help investors, observers and researchers understand the hidden logic of the design and functioning of China’s modern stock market, taking a political economy view.
Author | : Dilip K. Ghosh |
Publisher | : Springer |
Total Pages | : 352 |
Release | : 2016-01-01 |
Genre | : Business & Economics |
ISBN | : 1349231614 |
This edited collection examines the emerging issues arising from increasingly globalized financial markets. Topics covered include: the exchange of rate market, equilibrium and efficiency, inflation and interest rates, capital movements, the balance of payments and international reserves, foreign debt, country risk analysis, currency market arbitrage and speculative designs under market imperfection, international tax issues and trade liberalization and offshore banking.
Author | : Sylvain Leduc |
Publisher | : |
Total Pages | : 282 |
Release | : 1999 |
Genre | : Foreign exchange market |
ISBN | : |
Author | : Imad A. Moosa |
Publisher | : Edward Elgar Publishing |
Total Pages | : 352 |
Release | : 2020-11-27 |
Genre | : Business & Economics |
ISBN | : 1839105623 |
In this fascinating book, Imad A. Moosa challenges existing preconceptions surrounding normative economics, arguing that what some economists see as undisputed facts of life may be myths caused by dogmatic thinking. Plausible explanations are suggested for puzzles in various areas of economics and finance, such as the home bias puzzle, the PPP puzzle and the presidential puzzle. Controversies in Economics and Finance is a thought-provoking and stimulating read that exposes common flaws in economic analysis. It will be of great benefit to academics, graduate students and policy-makers looking to understand the limits of economic analysis.
Author | : Ben Bernanke |
Publisher | : Mit Press |
Total Pages | : 418 |
Release | : 2001-02-19 |
Genre | : Macroeconomics |
ISBN | : 9780262025034 |
The NBER Macroeconomics Annual presents, extends, and applies pioneering work in macroeconomics and stimulates work by macroeconomists on important policy issues. Each paper in the Annual is followed by comments and discussion.