Exchange Rate Volatility in Integrating Capital Markets

Exchange Rate Volatility in Integrating Capital Markets PDF

Author: Giancarlo Corsetti

Publisher:

Published: 1990

Total Pages: 52

ISBN-13:

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This paper investigates the relationship between international capital liberalization and exchange rate volatility. While the effects of a capital controls liberalization on the transaction volume in the foreign exchange market are theoretically unambiguous, the effects on the volatility of exchange rate can have either sign. On one hand, the liberalization leads to increasing economy-wide and investor-specific uncertainty. On the other hand, the augiented number of participants in the market should reduce exchange rate fluctuations. The uncertainty effects should be dominant in the short run, while the increase in the number of traders in the longer run should make the market thicker and tend to reduce volatility. It is shown that, for a sample of countries which have liberalized capital controls in the last 15 years, structural breaks in the process generating exchange rate volatility have occurred very close to the time when liberalization measures were implemented. The results also suggest an increase in volatility after the structural breakpoint.

Integration of Financial Markets and National Price Levels

Integration of Financial Markets and National Price Levels PDF

Author: Mathias Hoffmann

Publisher:

Published: 2008

Total Pages: 49

ISBN-13: 9783865583857

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How does international financial integration affect national price levels? To analyze this question, this paper formulates a two-country open economy sticky-price model under either segmented or complete asset markets. It is shown that the effect of financial integration, i.e. moving from segmented to complete asset markets, is regime-dependent. Under managed exchange rates, financial integration raises the national price level. Under floating exchange rates, however, financial integration lowers national price levels. Thus, the paper proposes a novel argument to rationalize systematic deviations from PPP. Panel evidence for 54 countries supports the main findings. A 10% larger ratio of foreign assets and liabilities to GDP, our measure of international financial integration, increases the national price level by 0.27 percentage points under fixed and intermediate exchange rate regimes and lowers the price level by 0.3 percentage points under floating exchange rates.

The Integration of World Capital Markets

The Integration of World Capital Markets PDF

Author: Mr.Michael Mussa

Publisher: International Monetary Fund

Published: 1993-12-01

Total Pages: 66

ISBN-13: 145195039X

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This paper discusses the extent to which national capital markets have become linked, and identifies several of the more important consequences of that increased degree of integration. Alternative approaches to the measurement of capital market integration are reviewed, including deviations from the law of one price, differences between actual and optimally diversified portfolios, correlations between domestic investment and domestic saving, and cross-country links in consumption behavior. Two recent episodes of large-scale international capital flows—namely, the turmoil in the European Monetary System in the fall of 1992, and the surge of capital inflows into Latin America during the last three years—are examined for insights into the workings of today’s global capital market. Finally, the paper offers some concluding remarks on the future development of international capital markets, on exchange rate management, on alternative approaches to living with larger and more influential financial markets, and on the financing of investment in the formerly centrally planned economies.

The Integration of World Capital Markets

The Integration of World Capital Markets PDF

Author: Mr.Morris Goldstein

Publisher: International Monetary Fund

Published: 1993-12

Total Pages: 74

ISBN-13:

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This paper discusses the extent to which national capital markets have become linked, and identifies several of the more important consequences of that increased degree of integration. Alternative approaches to the measurement of capital market integration are reviewed, including deviations from the law of one price, differences between actual and optimally diversified portfolios, correlations between domestic investment and domestic saving, and cross-country links in consumption behavior. Two recent episodes of large-scale international capital flows—namely, the turmoil in the European Monetary System in the fall of 1992, and the surge of capital inflows into Latin America during the last three years—are examined for insights into the workings of today’s global capital market. Finally, the paper offers some concluding remarks on the future development of international capital markets, on exchange rate management, on alternative approaches to living with larger and more influential financial markets, and on the financing of investment in the formerly centrally planned economies.

Management of Foreign Exchange Risk

Management of Foreign Exchange Risk PDF

Author: Y. C. Lum

Publisher: Routledge

Published: 2020-09-02

Total Pages: 1149

ISBN-13: 1000172589

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This book provides a technical and specialised discussion of contemporary and emerging issues in foreign exchange and financial markets by addressing the issues of risk management and theory and hypothesis development, which have general implications for finance theory and foreign exchange market management. It offers an in-depth, comprehensive analysis of the issues concerning the volatility of exchange rates. The book has three main objectives. First, it applies the integrated study of exchange rate volatility in terms of depth and breadth. Second, it applies the integrated study of exchange rate volatility in Malaysia, as a case study of a developing country. Malaysia had imposed capital control measures in the past and has now liberalised its exchange rate market and will continue to liberalise it further in the long run. Hence, the need to understand exchange rate volatility measurement and management will be even more important in the future. Third, the book highlights new conditional volatility models for a developing country, such as Malaysia, and develops advanced econometric models which have produced results for sound risk management strategies and for achieving risk management in the financial market and the economy. Additionally, the authors recommend risk management themes which may be of relevance to other developing countries. This work can be used as a reference book by fund managers, financial market analysts, researchers, academics, practitioners, policy makers and postgraduate students in the areas of finance, accounting, business and financial economics. It can also be a supplementary text for Ph.D. and Masters’ students in these areas.

Financial Market Integration and Exchange Rate Policy

Financial Market Integration and Exchange Rate Policy PDF

Author: Mr.Donald J. Mathieson

Publisher: International Monetary Fund

Published: 1990-01-01

Total Pages: 66

ISBN-13: 1451930976

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This paper examines how a country’s exchange rate policy should be adjusted when the degree of integration between domestic and external financial markets increases as a result of both domestic financial liberalization and the relaxation of capital controls. As the financial structure is opened and liberalized, the optimal scale of exchange market intervention changes as the relative importance of different domestic and foreign shocks for output and price stability is altered. Nonetheless, the response of the optimal degree of intervention to increases in the variances of the various domestic and foreign shocks is similar across all financial structures.

International Financial Integration Through the Law of One Price

International Financial Integration Through the Law of One Price PDF

Author: Eduardo Levy Yeyati

Publisher: World Bank Publications

Published: 2006

Total Pages: 43

ISBN-13:

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"The authors argue that the cross-market premium (the ratio between the domestic and the international market price of cross-listed stocks) provides a valuable measure of international financial integration, reflecting accurately the factors that segment markets and inhibit price arbitrage. Applying to equity markets recent methodological developments in the purchasing power parity literature, they show that nonlinear Threshold Autoregressive (TAR) models properly capture the behavior of the cross market premium. The estimates reveal the presence of narrow non-arbitrage bands and indicate that price differences outside these bands are rapidly arbitraged away, much faster than what has been documented for good markets. Moreover, the authors find that financial integration increases with market liquidity. Capital controls, when binding, contribute to segment financial markets by widening the non-arbitrage bands and making price disparities more persistent. Crisis episodes are associated with higher volatility, rather than by more persistent deviations from the law of one price. "--World Bank web site.

Global Capital Markets

Global Capital Markets PDF

Author: Maurice Obstfeld

Publisher: Cambridge University Press

Published: 2004

Total Pages: 386

ISBN-13: 9780521671798

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This book is an economic survey of international capital mobility from the late nineteenth century to the present.

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