The main purpose of this thesis is to explore whether the Balassa-Samuelson hypothesis can effectively explain the long-term change of the real exchange. The recent panel unit root, panel cointegration tests and fully modified OLS are applied to examine the four tested equations that are based on the Balassa-Samuelson hypothesis. 1. Relative differential productivity between traded and non-traded sectors influences price differential in two sectors. 2. We extend the relative productivity in non-traded and traded sectors causing change in non-traded relative price into the two-country model. 3. The appreciation (depreciation) of the real exchange results from the different relative price of the two-country model. 4. The appreciation (depreciation) of the real exchange is caused by the different relative productivity of the two-country model. The data span is from 1971 to 1995, and includes 12 OECD countries. There are three main different points from the existing literatures. 1. We apply some newly developed panel unit root tests to estimate the equations based on Balassa-Samuelson hypothesis. 2. The previous documents only estimated the model of one variable, but the estimation of two variables was rare. In the equation 14 and 15, we examined the two variables in both. 3. In the calculation of the price, owing to the difficulties of collecting data from various sectors, we use a special way to measure the price. Finally, we can observe from the results of the empirical study: when productivity of the domestic sectors differentiates, that is, 1% increase in relative productivity between traded and non-trade sectors causes 0.53% increase in domestic relative prices. When it is taken into the two-country model, the increase of productivity will cause the appreciation of the real exchange rate. This can explain why in the developed countries like the U.S. and Japan, the faster increase in domestic relative productivity causes the appreciation of real exchange rates in the long run.

The main purpose of this thesis is to explore whether the Balassa-Samuelson hypothesis can effectively explain the long-term change of the real exchange. The recent panel unit root, panel cointegration tests and fully modified OLS are applied to examine the four tested equations that are based on the Balassa-Samuelson hypothesis. The data span is from 1985 to 2002, and includes 7 east asian countries. 1. Relative differential productivity between traded and non-traded sectors influences price differential in two sectors. 2. We extend the relative productivity in non-traded and traded sectors causing change in non-traded relative price into the two-country model. 3. The appreciation (depreciation) of the real exchange results from the different relative price of the two-country model. 4. The appreciation (depreciation) of the real exchange is caused by the different relative productivity of the two-country model. Finally, we can observe from the results of the empirical study: when productivity of the domestic sectors differentiates, that is, 1% increase in relative productivity between traded and non-trade sectors causes 0.28% increase in domestic relative prices. When it is taken into the two-country model, the increase of productivity will cause the appreciation of the real exchange rate.

>Magister Scientiae - MSc / The case of pricing options under constant volatility has been common practise for decades. Yet market data proves that the volatility is a stochastic phenomenon, this is evident in longer duration instruments in which the volatility of underlying asset is dynamic and unpredictable. The methods of valuing options under stochastic volatility that have been extensively published focus mainly on stock markets and on options written on a single reference asset. This work probes the effect of valuing European call option written on a basket of currencies, under constant volatility and under stochastic volatility models. We apply a family of the stochastic models to investigate the relative performance of option prices. For the valuation of option under constant volatility, we derive a closed form analytic solution which relaxes some of the assumptions in the Black-Scholes model. The problem of two-dimensional random diffusion of exchange rates and volatilities is treated with present value scheme, mean reversion and non-mean reversion stochastic volatility models. A multi-factor Gaussian distribution function is applied on lognormal asset dynamics sampled from a normal distribution which we generate by the Box-Muller method and make inter dependent by Cholesky factor matrix decomposition. Furthermore, a Monte Carlo simulation method is adopted to approximate a general form of numeric solution The historic data considered dates from 31 December 1997 to 30 June 2008. The basket contains ZAR as base currency, USD, GBP, EUR and JPY are foreign currencies.

The price level convergence of the transition economies towards the reference economies is linked to the relative price of nontradables, which is explained by the total factor productivity differentials in tradable and nontradable sector. Basic concept is offered by the Balassa Samuelson model and its modifications. Testable equations are derived from these models, and the panel data approach is applied for their estimation. The results indicate faster growth of the relative price of nontradables in transition economies as succession of higher growth rate of the total factor productivity in tradable sector. Hence estimated models confirm the price level convergence of transition economies towards the reference economies. The analyses of price dynamics of the complementary field, i. e. of the tradables, follows, and the basic concept is represented by the rational bubble hypothesis. The stress is putted on the impact of the word prices on the price levels of the Czech Republic. After a cointegration analysis of the time series is carried out, the influence of the word prices of tradable commodities is estimated within a vector error correction model and regression analysis. This cost factors analysis is afterwards related to the export dynamics of the Czech Republic, and models suitable for quantitative analysis of export dynamics as well as its prediction based on vector error correction model and regression analysis are evaluated. Their forecasting ability is assessed within a simulation of ex-post forecasts and a root mean squared error. The aim is to consider the relationship between the price levels and the export dynamics, for the relation of both variables evaluated within the Granger causality seems to be less straightforward then the standard export equations suggest, and the estimated equations confirm significant influence of the export dynamics on the price level.