This thesis examines exchange rate exposure of 30 U.S. industries between 1974 and 2008 using traditional and orthogonalized linear models. Similar to the literature, when using traditional linear model we find that exposure is very time dependent and often insignificant. However, we discover that orthogonalization helps uncover more evidence of industry exposure. Within the orthogonalized linear model framework, we find that exposure is statistically and economically important, and the effect of orthogonalization is more pronounced for exposure to currency indices. We also test symmetry in exchange rate exposure by subdividing the sample period into the periods of appreciations and depreciations. Interestingly, we find little evidence that exchange rate is asymmetric even if we use orthogonalized linear model. Lastly, we discover that exchange rate exposure cannot be explained by our international trade data.

My dissertation consists of three essays in international capital markets. In Chapter I, we examine the herd trading behavior of institutional investors trading around the world. Using a new transaction-level trades database of 531 U.S. institutional investors trading across 37 countries for the period 2002-2009, we find robust evidence of intra- and inter-period herdings at the monthly frequency. We find no evidence that trades by institutions in our sample destabilize local stock markets. Further analysis shows that: (i) in the buy side, both intra- and inter-period herdings are more pronounced in countries with weaker information environments; and (ii) in the sell side, intra-period herding is more pronounced in countries with stronger information environments, whereas inter-period herding is not significantly related to information environments. In Chapter II, we document that the degree of co-movement between bilateral USD ex- change rates has increased substantially since the introduction of the euro in 1999 and investigate what drives the increased co-movement. For each of our 33 sampled bilateral USD exchange rates, we measure the degree of co-movement using the R-square from re- gressing weekly exchange rate changes on the weekly world exchange rate factor. Our results show that, for the majority of sample exchange rates, the R-square has increased substan- tially over the period 1999-2010. Specifically, the average R-square was 0.15 in 1999, but it increased to 0.47 by more than 200% in 2010. Further analysis reveals that the rising influence of the euro relative to USD over a third currency can explain most of the increase in the measured co-movement over time. In Chapter III, we examine the level and trend of U.S. domestic market integration. For each of our sample states, we construct the state (market) portfolio comprising public firms headquartered within the state and compute R-square, our measure of integration, from regressing state portfolio returns on national stock market factors. Using weekly returns, we estimate the regression for each year of our sample period 1963-2008. The key findings are: (i) For the majority of sample states, the R-square exhibits a statistically significant upward trend, implying that U.S. domestic stock markets were not fully integrated and have been integrating during the sample period; (ii) consistent with the previous result, the explanatory power of the state factor over individual stock returns has been decreasing for the majority of states; and (iii) the increasing integration of U.S. domestic stock markets is associated with the decreasing home state bias, suggesting that investors' pursuit of nation- wide investment opportunities may be a significant driver of domestic financial integration.

<p>This paper uses co-integration method and error-correction model to re-examine the relationship between real exchange rate and expected interest rate differentials, including cumulated current account balance, over floating exchange rate periods. As indicated by the dynamic model, I find that there is a long run relationship among the variables using Johansen co-integration method. Final conclusion is that the empirical evidence is provided to show that our error-correction model leads to a good real exchange rate forecast.</p>

<p>This thesis investigates the determinants of Taiwan’s import changes and the underlying factors of the decreasing Swedish export to Taiwan between 1994 and 2005.</p><p>The empirical study includes 36 countries from both the Pacific Rim and OECD. Based on a modified gravity model of trade, the regression model aims to examine how GDP growth in the exporting country, exchange rate changes, common language, and membership in APEC affect Taiwan’s import volume. The result shows estimates with expected signs, with 49.8 percent of the vari-ance in Taiwan’s changed import volume explained by the exogenous variables. Exchange rate change and language are statistically significant.</p><p>Data on commodity groups of importance for Sweden and Taiwan are also ex-amined, and they show that Taiwan has changed its import demand and has started to import goods other than those Sweden in previous years strongly exported to Taiwan. Taiwan’s regional trading partners have also gained export shares at the expense of Swedish exports.</p><p>The results are in line with theory and it will be hard for Sweden in the future to compete with the increasing regional trade of East Asia where common lan-guage and culture are of big importance.</p>

<p>The purpose of this thesis is to examine how a depreciation in the exchange rate affects the trade balance in an economy over time. The outcomes of a depreciation are possible to analyze through the J-curve phenomenon that shows the relation between the exchange rate and the trade balance both in the short-run and the long-run. The data used in this thesis cover 39 countries and their quarterly changes in exchange rate between 1982 and 2005. The largest depreciation for each country during these years was detected and is the base for this research. In this thesis, focus is on the trade ratio rather than the trade balance for empirical purposes. The relation between the largest depreciations and its effect on the trade ratio are examined in two sets of regressions. The results show no evidence of a J-curve in neither one of the sets of regressions, even though the trade ratio is positively affected by the depreciation. When testing only for significantly large depreciations in the exchange rate the affect on the trade ratio is stronger, all else equal. According to the findings in this thesis, a depreciation in the real effective exchange rate causes the trade ratio to increase immediately and then decrease over time. The conclusion is that the findings are not in line with the J-curve phenomenon tested for; however, they support standard trade theory with the Marshall-Lerner condition being met i.e. a depreciation in the exchange rate will affect the trade balance positively.</p>

No description available.

<p>Trying to find explanations to movements in the exchange rate is something that econo-mists have been dealing with to a great extend lately. Especially since the break down of the Bretton Wood system in the early 1970’s, when many countries introduced a floating sys-tem instead. One of the most famous and often tested models is Jeffery A. Frankel’s Real Interest Differential (RID) model from 1979.</p><p>This paper investigates which of the variables included in the model are affecting move-ments in the exchange rate for Sweden, the UK and Japan against the US dollar between January 1995 and December 2004. The variables in question are money supply, industrial production, interest rate and inflation differential. The model has purchasing power parity and uncovered interest parity as underlying theoretical assumptions, two main building blocks of open macro economics, and when combined, they can offer a relationship be-tween changes in the exchange rate and the interest rate differential.</p><p>The results show that the variable interest rate differential constitutes a significant explana-tory variable for exchange rate movements regarding all three countries included in the model. Both Sweden and the UK have also, in accordance with the RID model, the ex-pected negative sign on the coefficient. The results regarding the other variables are mixed between the countries, but it can in general be said that the model seems to be able to ex-plain movements in the exchange rate to a certain degree.</p>

Univ., Diss.--Bern, 2007.

Fluctuation of exchange rate has affected the increasing burden of foreign debt payment in emerging economies. This issue has negatively influenced the economic growth. It has been a severe obstacle considering that governments have to issue public debt denominated in foreign currency to finance the budget deficit. Hence, there is an urgent necessity to implement an efficient public debt management to minimize the exchange rate exposure. This thesis analyses how efficient the foreign debt portfolio management is in the 14 emerging economies under examination in the period of 1990-2013. Panel Dynamic Fixed-effect Estimator and Granger Causality approach are applied to analyze how responsive the currency composition of foreign debt portfolio to the exchange rates movement. The thesis examines the four biggest foreign debt shares that are denominated in US dollar, Euro, British pound, and Japanese yen, and the related exchange rates movement in the economies under consideration. The observation concludes that the foreign debt portfolio management in these emerging economies is not efficient or not optimal. The evidences prove that changes in the exchange rates of Euro, British pound, and Japanese yen relative to US dollar Granger cause changes in respected debt shares. It means that there is no substitution effects from the appreciation of the currencies vis-à-vis the US dollar during the year of observation.

This thesis analyses financial stability in eight members of the Executives’ Meeting of East Asia-Pacific Central Banks (EMEAP) economies. One of the factors that may increase financial imbalances (and hence it affects financial stability of an economy) is the accumulated outstanding debt of the economic agents. For example, the corporate sector’s outstanding debt can negatively affect activity of lenders and hence the capabilities of the economy. Since banks are important financial intermediaries in most financial systems, the financial status of banking sector is also important to analyse financial stability of a country. Macroeconomic conditions and financial system structure are some of the important factors that can affect financial conditions (financial soundness) of banks and hence the banking sector. Financial soundness of banks can secure the stability of the financial system. Chapter 2 shows that financial imbalances that arise from accumulated outstanding debt within the corporate sector have a negative effect on the technical capabilities (total factor productivity) of the economy. Therefore, monetary authority (central bank) should control over the debt level. To address this, chapter 2 focuses on the design of monetary policy rule for a small open economy in the context of a Dynamic Stochastic General Equilibrium (DSGE) model. This model is extended to show the effects of financial imbalances on the economy. Real exchange rate is another important factor that affects the firm’s real marginal cost, aggregate supply and aggregate demand as discussed in this chapter. The derived optimal monetary policy rule indicates that the monetary authority responds to financial imbalances through output gap when financial imbalances exist due to accumulated outstanding debt. Moreover, the optimal policy rule shows that the response of the monetary authority to exchange rate movements is indirect, through the domestic inflation and output gap. Chapter 3 describes the effect of the financial system structure on financial stability through investigating the financial soundness of the banking sector. Bank financial soundness is the measure of the stability of the financial system and is defined by return on assets, equity capital-asset ratio and return volatility. The first two items increase financial soundness, whereas return volatility decreases financial soundness of a bank. The structure of the financial system is described as market-based or bank-based. Given interrelations between financial sectors and between economies of the EMEAP countries, chapter 3 uses the global (infinite dimensional) vector autoregressive (VAR) model that has been proposed recently to estimate the generalised impulse responses of financial stability measure. Results show that the market-based financial system can increase financial stability through increasing financial soundness of the banking system. Chapter 4 uses nonperforming loans (NPLs) (as one of the main factors behind Asian financial crisis in 1997/8) to analyse financial soundness of banks. NPLs determine loans default rates that decreases banks’ financial soundness. Chapter 4 tests the resistance of the banking system of the EMEAP countries to large macroeconomic shocks (stresses) in a stress-test framework, computing frequency distributions of default rates in three main macroeconomic scenarios (baseline model, stressed real GDP growth and stressed real interest rate). Default rate indicates the possible loss of banks and hence it is an indicator of credit risk which weakens banks’ financial strength. The stress-test indicates that stressing real GDP growth with negative extreme shocks leads to an increase in frequency of higher default rates (in comparison with the baseline model), whereas positive shock to real interest rate may secure financial stability through increasing the frequency of lower default rates and decreasing frequency of higher default rate.