Essays on exchange rate economics

Exchange rate economics has achieved substantial development in the past few decades. Despite extensive research, a large number of unresolved problems remain in the exchange rate debate. This dissertation studied three puzzling issues aiming to improve our understanding of exchange rate behavior. Chapter Two used advanced econometric techniques to model and forecast exchange rate dynamics. Chapter Three and Chapter Four studied issues related to exchange rates using the theory of New Open Economy Macroeconomics. ^ Chapter Two empirically examined the short-run forecastability of nominal exchange rates. It analyzed important empirical regularities in daily exchange rates. Through a series of hypothesis tests, a best-fitting fractionally integrated GARCH model with skewed student-t error distribution was identified. The forecasting performance of the model was compared with that of a random walk model. Results supported the contention that nominal exchange rates seem to be unpredictable over the short run in the sense that the best-fitting model cannot beat the random walk model in forecasting exchange rate movements. ^ Chapter Three assessed the ability of dynamic general-equilibrium sticky-price monetary models to generate volatile foreign exchange risk premia. It developed a tractable two-country model where agents face a cash-in-advance constraint and set prices to the local market; the exogenous money supply process exhibits time-varying volatility. The model yielded approximate closed form solutions for risk premia and real exchange rates. Numerical results provided quantitative evidence that volatile risk premia can endogenously arise in a new open economy macroeconomic model. Thus, the model had potential to rationalize the Uncovered Interest Parity Puzzle. ^ Chapter Four sought to resolve the consumption-real exchange rate anomaly, which refers to the inability of most international macro models to generate negative cross-correlations between real exchange rates and relative consumption across two countries as observed in the data. While maintaining the assumption of complete asset markets, this chapter introduced endogenously segmented asset markets into a dynamic sticky-price monetary model. Simulation results showed that such a model could replicate the stylized fact that real exchange rates tend to move in an opposite direction with respect to relative consumption. ^

Essays on Exchange Rate Economics

Exchange rate economics has achieved substantial development in the past few decades. Despite extensive research, a large number of unresolved problems remain in the exchange rate debate. This dissertation studied three puzzling issues aiming to improve our understanding of exchange rate behavior. Chapter Two used advanced econometric techniques to model and forecast exchange rate dynamics. Chapter Three and Chapter Four studied issues related to exchange rates using the theory of New Open Economy Macroeconomics. Chapter Two empirically examined the short-run forecastability of nominal exchange rates. It analyzed important empirical regularities in daily exchange rates. Through a series of hypothesis tests, a best-fitting fractionally integrated GARCH model with skewed student-t error distribution was identified. The forecasting performance of the model was compared with that of a random walk model. Results supported the contention that nominal exchange rates seem to be unpredictable over the short run in the sense that the best-fitting model cannot beat the random walk model in forecasting exchange rate movements. Chapter Three assessed the ability of dynamic general-equilibrium sticky-price monetary models to generate volatile foreign exchange risk premia. It developed a tractable two-country model where agents face a cash-in-advance constraint and set prices to the local market; the exogenous money supply process exhibits time-varying volatility. The model yielded approximate closed form solutions for risk premia and real exchange rates. Numerical results provided quantitative evidence that volatile risk premia can endogenously arise in a new open economy macroeconomic model. Thus, the model had potential to rationalize the Uncovered Interest Parity Puzzle. Chapter Four sought to resolve the consumption-real exchange rate anomaly, which refers to the inability of most international macro models to generate negative cross-correlations between real exchange rates and relative consumption across two countries as observed in the data. While maintaining the assumption of complete asset markets, this chapter introduced endogenously segmented asset markets into a dynamic sticky-price monetary model. Simulation results showed that such a model could replicate the stylized fact that real exchange rates tend to move in an opposite direction with respect to relative consumption.

Exchange rate dynamics, structural breaks, and central bank interventions in Colombia

We evaluate the effectiveness of the Colombian Central Bank´s interventions in the foreign exchange market during the period 2000 to 2014 -- We examine the stochastic process that describes the exchange rate, with a focus on the detection of structural breaks or unit roots in the data to determine whether the Central Bank´s interventions were effective -- We find that the exchange rate can be described either by a random walk or by a trend-stationary model with multiple breaks -- In neither cases do we find any evidence that the exchange rate was affected by the Central Bank interventions

Volatility transmission between stock and exchange-rate markets: A connectedness analysis

This paper empirically investigates volatility transmission among stock and foreign exchange markets in seven major world economies during the period July 1988 to January 2015. To this end, we first perform a static and dynamic analysis to measure the total volatility connectedness in the entire period (the system-wide approach) using a framework recently proposed by Diebold and Yilmaz (2014). Second, we make use of a dynamic analysis to evaluate the net directional connectedness for each market. To gain further insights, we examine the time-varying behaviour of net pair-wise directional connectedness during the financial turmoil periods experienced in the sample period Our results suggest that slightly more than half of the total variance of the forecast errors is explained by shocks across markets rather than by idiosyncratic shocks. Furthermore, we find that volatility connectedness varies over time, with a surge during periods of increasing economic and financial instability.

Is there timing ability in currency markets? Evidence from ADR issuances

Is there timing ability in the exchange rate markets? We address this question by examining foreign firms' decisions to issue American Depositary Receipts (ADRs). Specifically, we test whether foreign firms consider currency market conditions in their ADR issuance decisions and, in doing so, display some ability to time their local exchange rate market. We study ADR issuances in the U.S. stock market between 1976 and 2003. We find that foreign firms tend to issue ADRs after their local currency has been abnormally strong against the U.S. dollar and before their local currency becomes abnormally weak. This evidence is statistically significant even after controlling for local and U.S. past and future stock market performance and predicable exchange rate movements. Currency market timing is especially significant i) for value companies, relatively small (yet absolutely large) companies issuing relatively large amounts of ADRs, companies with higher currency exposure, manufacturing companies, and emerging market companies, ii) during currency crises (when mispricings are rife) and after the integration of the issuer's local financial market with the world capital markets, iii) when the ADR issue raises capital for the issuing firm (Level III ADR), and iv) regardless of the identity of the underwriting investment bank. Currency market timing is also economically significant since it translates into total savings for the issuing firms of about $646 million (or 1.86% of the total capital-raising ADR issue volume). In contrast, we find no evidence of currency timing ability in a control sample made of non-capital raising ADRs (Level II ADRs). These findings suggest that some companies may have, at least occasionally, private information about foreign exchange.

Diversification and value-at-risk

A pervasive and puzzling feature of banks’ Value-at-Risk (VaR) is its abnormally high level, which leads to excessive regulatory capital. A possible explanation for the tendency of commercial banks to overstate their VaR is that they incompletely account for the diversification effect among broad risk categories (e.g., equity, interest rate, commodity, credit spread, and foreign exchange). By underestimating the diversification effect, bank’s proprietary VaR models produce overly prudent market risk assessments. In this paper, we examine empirically the validity of this hypothesis using actual VaR data from major US commercial banks. In contrast to the VaR diversification hypothesis, we find that US banks show no sign of systematic underestimation of the diversification effect. In particular, diversification effects used by banks is very close to (and quite often larger than) our empirical diversification estimates. A direct implication of this finding is that individual VaRs for each broad risk category, just like aggregate VaRs, are biased risk assessments.

The impacts of FOREX fluctuations on construction business performance : an organisational capabilities perspective

Construction projects are a high risk business activity. When undertaking projects in an international context, it is further complicated by the risk of fluctuations in the foreign exchange rates (FOREX). Construction business performance is affected by these fluctuations. They affect progress and cause delays, which in turn create problems for subcontractors, namely cost overruns, disputes, arbitration, total abandonment and litigation. FOREX fluctuations also cause the price of raw materials to increase, leading the cost overruns. Managing FOREX risk is critical and past research have focused on the need for adequate insurance, careful planning and management, and foreign exchange futures hedging to overcome issues that have been caused by the FOREX risk. Analysis of FOREX risk in international construction business usually focused only on issues at the project level. There is currently lack of understanding of Organisational Capabilities (OC) to manage the impacts of FOREX risk, which when examined, are seen in isolation. This paper attempts to bridge the gap by discussing the impacts of FOREX fluctuations on the international construction business. The focus is on the OC perspective and the need to develop OC framework to mitigate the risk in sustaining construction business performance.

Volatility transmission in global financial markets

As financial markets have become increasingly integrated internationally, the topic of volatility transmission across these markets has become more important. This thesis investigates how the volatility patterns of the world's main financial centres differ across foreign exchange, equity, and bond markets.

Volatility transmission in global financial markets

This paper considers the transmission of volatility in global foreign exchange, equity and bond markets. Using a multivariate GARCH framework which includes measures of realised volatility as explanatory variables, significant volatility and news spillovers are found to occur on the same trading day between Japan, Europe, and the United States. All markets exhibit significant degrees of asymmetry in terms of the transmission of volatility associated with good and bad news. There are also strong links between diffusive volatilities in all three markets, whereas jumpactivity is only importantwithin the equitymarkets. The results of this paper deepen our understanding of how news and volatility are propagated through global financial markets.

Macro-economic analysis of forestry options on carbon sequestration in India

The forestry sector provides a number of climate change mitigation options. Apart from this ecological benefit, it has significant social and economic relevance. Implementation of forestry options requires large investments and sustained long-term planning. Thus there is a need for a detailed analysis of forestry options to understand their implications on stock and flow of carbon, required investments, value of forest wealth, contribution to GNP and livelihood, demand management, employment and foreign trade. There is a need to evaluate the additional spending on forestry by analysing the environmental (particularly carbon abatement), social and economic benefits. The biomass needs for India are expected to increase by two to three times by 2020. Depending upon the forest types, ownership patterns and land use patterns, feasible forestry options are identified. It is found among many supply options to be feasible to meet the 'demand based needs' with a mix of management options, species choices and organisational set up. A comparative static framework is used to analyze the macro-economic impacts. Forestry accounts for 1.84% of GNP in India. It is characterized by significant forward industrial linkages and least backward linkage. Forestry generates about 36 million person years of employment annually. India imports Rs. 15 billion worth of forest based materials annually. Implementation of the demand based forestry options can lead to a number of ecological, economic and institutional changes. The notable ones are: enhancement of C stock from 9578 to 17 094 Mt and a net annual C-sequestration from 73 to 149 Mt after accounting for all emissions; a trebling of the output of forestry sector from Rs. 49 billion to Rs. 146 billion annually; an increase in GDP contribution of forestry from Rs. 32 billion to Rs. 105 billion over a period of 35 years; an increase in annual employment level by 23 million person years, emergence of forestry as a net contributor of foreign exchange through trading of forestry products; and an increase in economic value of forest capital stock by Rs. 7260 billion with a cost benefit analysis showing forestry as a profitable option. Implementation of forestry options calls for an understanding of current forest policies and barriers which are analyzed and a number of policy options are suggested. (C) 1997 Elsevier Science B.V.

Assessment of genetic diversity and identification of core collection in sandalwood germplasm using RAPDS

Sandalwood is an economically important aromatic tree belonging to the family Santalaceae. The trees are used mainly for their fragrant heartwood and oil that have immense potential for foreign exchange. Very little information is available on the genetic diversity in this species. Hence studies were initiated and genetic diversity estimated using RAPD markers in 51 genotypes of Santalum album procured from different geographcial regions of India and three exotic lines of S. spicatum from Australia. Eleven selected Operon primers (10mer) generated a total of 156 consistent and unambiguous amplification products ranging from 200bp to 4kb. Rare and genotype specific bands were identified which could be effectively used to distinguish the genotypes. Genetic relationships within the genotypes were evaluated by generating a dissimilarity matrix based on Ward's method (Squared Euclidean distance). The phenetic dendrogram and the Principal Component Analysis generated, separated the 51 Indian genotypes from the three Australian lines. The cluster analysis indicated that sandalwood germplasm within India constitutes a broad genetic base with values of genetic dissimilarity ranging from 15 to 91 %. A core collection of 21 selected individuals revealed the same diversity of the entire population. The results show that RAPD analysis is an efficient marker technology for estimating genetic diversity and relatedness, thereby enabling the formulation of appropriate strategies for conservation, germplasm management, and selection of diverse parents for sandalwood improvement programmes.

Increasing the contribution of small-scale fisheries to poverty alleviation and food security

The objectives of these Technical Guidelines are to provide a focus on small-scale fisheries and their current and potential role in contributing to poverty alleviation and food security by expanding on the guidance on small-scale fisheries offered by the Code. The Guidelines are complementary to existing Technical Guidelines for Responsible Fisheries. Most small-scale fishers are in developing countries and many live in communities characterized by poverty and food insecurity. Small-scale fishing communities are faced with an array of serious problems, including overexploitation and depletion of resources, lack of alternative sources of employment, rapid population growth, migration of populations, displacement in coastal areas due to industrial development and tourism, pollution and environmental degradation and conflicts with large commercial fishing operations. However, small-scale fisheries are critical for food security and poverty alleviation in many countries. The first part of the Guidelines discusses the current contribution, role and importance of small-scale fisheries in poverty alleviation and food security. It examines the importance of small-scale fisheries for poverty alleviation at a national, local and household level. It also notes the nutritional qualities of fish and thus the particular role of fish in nutritional aspects of food security. The fact that about half of all fish caught for human consumption comes from small-scale fisheries underlines the importance of this subsector for the world fish supply. In many countries small-scale fisheries contribute to national food security both directly – where fish is a crucial part of the daily diet, and indirectly – by generating foreign exchange earnings that enable the purchase through trade of a range of food products. The second part of the Guidelines explores ways through which the contribution of small-scale fisheries to poverty alleviation and food security could be enhanced. A vision for the future of small-scale fisheries is presented as a goal towards which the subsector should develop. Ensuring greater participation by small-scale fishers and their communities in the formulation of policies, the development of related legislation and regulations, and in management decision-making and implementation processes, is vital to the realization of this vision. The central role of effective fisheries management, the importance of considering cross sectoral uses of fisheries and related resources, the special role of women in fish marketing, processing and value addition, the significant scope for trade, the critical role that adequate financing may have in enabling transitions for effective fisheries management and the role of knowledge in making informed decisions are all discussed in these Guidelines. (PDF contains 97 pages)

The market for processed foodstuffs in Nigeria: The case of canned fish

This paper highlights the potential contribution of the processed food industry (especially with regard to prepared and preserved fish) to the domestic industrial sector. Data for the study were collected from a sample of 85 retail canned fish sellers in South-Western Nigeria (45 and 40 respondents in Oyo and Lagos states respectively). Approaches were also made to government officials and merchant-agents connected with the importation, trade-regulation and distribution of fish in Nigeria. The study examined, in considerable detail, the marketing channels, services, prices and margins of canned fish in the area of study. The paper concludes that efforts should be made to encourage local processing and canning of fish not only to save on foreign exchange and importation costs but also to be able to meet the rapidly growing demand for this product in the country

Economic analysis of fish import demand in Nigeria

The significance of the fishery industry in the Nigerian economy is examined, considering source of domestic fish production and government fish production programmes and also analysis Nigeria's fish imports during the period 1971-80. Suggestions are made regarding the regulation of fish imports to conserve foreign exchange and the removal of constraints in domestic fish production expansion

Investment prospects in inshore trawling in Nigeria

Commercial trawling for finfish in Nigeria's inshore water is a recent activity. Intensive industrial trawling started when the Federal Government distributed trawlers to viable fishermen cooperatives during the Third National Development Plan Period (1975-80). Hitherto, industrial fisheries development in the country focused on the assessment of the potential fish stock on Nigeria's continental shelf and measures to increase artisanal production. As a result of increasing demand for fish and shortage of foreign exchange to import fish, measures to increase fish supply leaned towards industrial exploitation of the fisheries potentials of Nigeria's continental shelf. Based on this background, this paper examines the investment prospects of trawling for fish in inshore waters. The fisheries potentials of the inshore zone of Nigeria are identified. Catch efficiency and profitability of inshore trawling are estimated. Measures that can safeguard the longterm interest of the trawling industry are recommended