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Article
Publication date: 23 May 2020

Kofi Bondzie Afful and William Opoku

Sub-Saharan African (SSA) stock exchanges are imperfect and inefficient. Therefore, orthodox finance theories are unable to completely explain their market returns. Such…

Abstract

Purpose

Sub-Saharan African (SSA) stock exchanges are imperfect and inefficient. Therefore, orthodox finance theories are unable to completely explain their market returns. Such models mainly identify anomalies when applied to the sub-region. Consequently, this paper develops an original theoretical model to better explain market returns on the sub-continent.

Design/methodology/approach

This paper develops an alternate analytical framework that combines adaptive expectations, Keynesian LM model and modified uncovered interest parity (UIP) formulations to address empirical anomalies identified by previous literature when analyzing SSA's inefficient stock markets. Using panel data, the study first computes the fixed as well as random effects regressions and, later, a Generalized Method of Moments (GMM) dynamic panel regression for further empirical analysis.

Findings

Both the fixed and random effects regression results indicate that the relative output-money supply disparity and foreign inflation-money supply growth rate spread have positive effects on market returns in SSA. On the other hand, foreign interest rates have an inverse effect. Although the GMM dynamic panel regression has similar results, it additionally finds that market returns in SSA are autoregressive. This suggests that past returns are persistent.

Research limitations/implications

A key implication is that multipliers and transmission mechanisms in SSA may take longer to adjust, thereby limiting short-run market returns. Also, policymakers must encourage a critical mass of firms to list in order to enhance efficiency. Additionally, policy variables significantly influence returns. One limitation is the high market segmentation in SSA. This heightens heterogeneity, emphasizing fixed effects.

Practical implications

Also, the findings of this study may not apply to all emerging economies as SSA economies are highly heterogeneous.

Social implications

The segmented nature of SSA stock markets may have implications for income inequality and the distribution of resources within the economy. Also, it indicates that there are limits to how firms use capital markets on the sub-continent.

Originality/value

This paper abstracts from the strict ideal market conditions prescribed by modern finance theories and develops an original modified UIP model. It finds that SSA stock markets may be more sensitive to policy variables, instead of determinants postulated by orthodox finance concepts. The study offers opportunities for further critical examination of returns in imperfect frontier markets.

Details

International Journal of Emerging Markets, vol. 16 no. 4
Type: Research Article
ISSN: 1746-8809

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Article
Publication date: 18 April 2020

K.P. Prabheesh and Bhavesh Garg

This paper aims to investigate the interrelations between purchasing power parity (PPP) and uncovered interest parity (UIP) in BRICS economies, namely, Brazil, Russia…

Abstract

Purpose

This paper aims to investigate the interrelations between purchasing power parity (PPP) and uncovered interest parity (UIP) in BRICS economies, namely, Brazil, Russia, India, China and South Africa, by checking the validity of the capital-enhanced equilibrium exchange rate (CHEER) approach. Further, this study tests whether the CHEER results are data frequency-dependent.

Design/methodology/approach

The present study uses monthly data ranging from 1997M01 to 2016M12 and considers the US economy as the representative foreign country. The study uses structural break unit root test and structural break cointegration technique to test the presence of economic relationships between nominal exchange rates and each of the price and interest rate differentials. Then, the study examines the validity of the CHEER approach by testing the appropriate theoretical restrictions.

Findings

The cointegration results suggest the existence of two cointegrating vectors representing UIP and PPP conditions. For all countries, the data appear to support the hypothesis that the system contains UIP and PPP relations. However, each of the international parity hypotheses is strongly rejected when formulated in isolation and jointly, leading to repudiation of the CHEER validity. Further, it is found that the results are data frequency-dependent and suggest that higher frequencies should be used as they provide additional information.

Originality/value

First, the literature on equilibrium exchange rates in BRICS economies is scanty. BRICS economies are large-emerging economies and one of the fastest growing economies and thus entail an empirical enquiry on their exchange rates. Second, the empirical application has mainly used monthly data to test the validity of the CHEER approach. However, data frequencies could affect the results. To the best of the authors’ knowledge, this study is the first to check data frequency-dependency in examination of the CHEER approach.

Details

Studies in Economics and Finance, vol. 38 no. 2
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 3 July 2007

Kuntara Pukthuanthong, Lee R. Thomas Lee R. Thomas III and Carlos Bazan

Recent research indicates that the random walk hypothesis (RWH) approximately describes the behavior of major dollar exchange rates during the post‐1973 float. The present…

Abstract

Purpose

Recent research indicates that the random walk hypothesis (RWH) approximately describes the behavior of major dollar exchange rates during the post‐1973 float. The present analysis seeks to examine the profitability of currency futures trading rules that assume that spot exchange rates can be adequately modeled as a driftless random walk.

Design/methodology/approach

Two random walk currency futures trading rules are simulated over all available data from the period 1984‐2003. In both cases, the investor buys currencies selling at a discount and sells those selling at a premium, as the RWH implies. The two rules differ only in the way they allocate the hypothetical investor's resources among long and short foreign currency positions.

Findings

Results show that an investor who used these trading strategies over the past decade would have enjoyed large cumulative gains, although periods of profit were interrupted by periods of substantial loss.

Research limitations/implications

The findings encourage the hope that profitable random‐walk‐based strategies for currency futures trading can be devised. The simulation results have important implications for those willing to hedge, borrowers, and speculators.

Originality/value

This paper provides evidence that purchasing futures contracts on currencies priced at a discount and selling futures contracts priced at a premium has generally been a profitable trading strategy during the last two decades of floating exchange rates.

Details

International Journal of Managerial Finance, vol. 3 no. 3
Type: Research Article
ISSN: 1743-9132

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Article
Publication date: 5 October 2020

Phuong V. Nguyen

The primary purpose of this paper is to investigate the sources of the business cycle fluctuations in Vietnam. To this end, the author develops a small open economy New…

Abstract

Purpose

The primary purpose of this paper is to investigate the sources of the business cycle fluctuations in Vietnam. To this end, the author develops a small open economy New Keynesian dynamic stochastic general equilibrium (SOE-NK-DSGE) model. Accordingly, this model includes various features, such as habit consumption, staggered price, price indexation, incomplete exchange-rate pass-through (ERPT), the failures of the law of one price (LOOP) and the uncovered interest rate parity. It is then estimated by using the Bayesian technique and Vietnamese data 1999Q1–2017Q1. Based on the estimated model, this paper analyzes the sources of the business cycle fluctuations in this emerging economy. Indeed, this research paper is the first attempt at developing and estimating the SOE-NK-DSGE model with the Bayesian technique for Vietnam.

Design/methodology/approach

A SOE-NK-DSGE model—Bayesian estimation.

Findings

This paper analyzes the sources of the business cycle fluctuations in Vietnam.

Originality/value

This research paper is the first attempt at developing and estimating the SOE-NK-DSGE model with the Bayesian technique for Vietnam.

Content available

Abstract

Details

Strategic Direction, vol. 26 no. 4
Type: Research Article
ISSN: 0258-0543

Keywords

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Book part
Publication date: 12 November 2016

Zsuzsa R. Huszár, Ruth S. K. Tan and Weina Zhang

This study seeks to explore the presence and the relative strength of market efficiency in the onshore and offshore Renminbi (RMB) forward markets.

Abstract

Purpose

This study seeks to explore the presence and the relative strength of market efficiency in the onshore and offshore Renminbi (RMB) forward markets.

Methodology/approach

In the onshore and offshore foreign exchange markets, the RMB forward contracts are designed in similar ways. However, the underlying economic forces and regulatory frameworks are very different in these two markets. We first analyze the functioning of each market, by examining the covered interest rate parity (CIRP) conditions. Second, we explore the CIRP deviations in the two markets and quantify the role of market frictions and government interventions.

Findings

We find that the CIRP condition does not hold in either the onshore or the offshore RMB forward markets. We also find that the offshore market is more efficient than the onshore market in conveying private information about investors’ expectation.

Originality/value

Our results reveal that the onshore RMB forward market provides an imperfect platform for investors to manage their currency exposures. We suggest that by opening the offshore market to domestic participants and the onshore market to more foreigners, the forward rates may become more informative with a greater investor mix. These liberalization efforts are important steps in the right directions to improve market efficiency in the Chinese FOREX market.

Details

The Political Economy of Chinese Finance
Type: Book
ISBN: 978-1-78560-957-2

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Article
Publication date: 29 July 2014

Dimitrios I. Dimitriou and Theodore M. Simos

– This paper aims to investigate the contagion effects of stock and FX markets for the USA and european monetary union (EMU) during the US subprime crisis of 2007-2009.

Abstract

Purpose

This paper aims to investigate the contagion effects of stock and FX markets for the USA and european monetary union (EMU) during the US subprime crisis of 2007-2009.

Design/methodology/approach

The data sample is daily comprising a weighted Morgan Stanley Capital Index (MSCI) for US and EMU equity markets, as well as EUR/USD exchange rate and 3-month US and EMU interest rate indices. The authors model, simultaneously, the dynamic conditional correlations (DCC) for the triplet: US, EMU equity markets and euro – USD uncovered interest rate parity (UIP) via a multivariate GARCH(1,1)-DCC model. The authors also test for a level shift increase of DCCs during the crisis period by incorporating a dummy variable in a GARCH(1,1) model.

Findings

Our results suggest the presence of contagion for the US stock market and UIP. These results indicate that possibilities for portfolio diversification exist even in periods of severe financial turmoil. This can be explained by the different monetary policies that followed during the crisis. While USA increased liquidity through stimulus packages in early 2009, EMU preferred a strict monetary policy and fiscal austerity measures. Consequently, the EUR/USD exchange rate was less volatile than the EMU equities, resulting in their weak co-movement.

Originality/value

These findings confirm a specific pattern of contagion that provide important implications for international investors and policy-makers.

Details

Studies in Economics and Finance, vol. 31 no. 3
Type: Research Article
ISSN: 1086-7376

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Book part
Publication date: 1 March 2021

Choi-Meng Leong, Chin-Hong Puah, Venus Khim-Sen Liew and Matviychuk-Soskina Nadiya

The unstable money demand function over the recent decades may explain the unsatisfactory performance of the exchange rate model. Numerous studies have shown that Divisia…

Abstract

The unstable money demand function over the recent decades may explain the unsatisfactory performance of the exchange rate model. Numerous studies have shown that Divisia money serves as a better variable for a stable money demand function. In this study, Divisia money is used as an alternative money supply in MYR/USD exchange rate determination. This study finds that Divisia money differential, real income differential, relative short-term interest rate and real stock prices affect the MYR/USD exchange rate in the long run. The major implication of this study is that policy-makers could monitor the MYR/USD exchange rate via the money supplies following the principle of Divisia monetary aggregate, which assigns higher weightage to more frequently traded monetary assets.

Details

Recent Developments in Asian Economics International Symposia in Economic Theory and Econometrics
Type: Book
ISBN: 978-1-83867-359-8

Keywords

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Article
Publication date: 1 February 1992

Emmanuel Apel

Innovations – the unanticipated component – of theCanadian market‐determined bank rate announcements have an immediateimpact on the bilateral Canadian/US dollar spot…

Abstract

Innovations – the unanticipated component – of the Canadian market‐determined bank rate announcements have an immediate impact on the bilateral Canadian/US dollar spot exchange rate, with the sign of the impact depending on market perceptions of the monetary policy regime in which the central bank is operating. The expected bank rate changes do not have a significant impact on the spot rate. Moreover, a test of the “news” impact on the Canadian/US dollar must include the relationship between the latter and Deutschmark/ US$ spot rate, which is a proxy for the movement of the US dollar against major offshore currencies.

Details

Journal of Economic Studies, vol. 19 no. 2
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 6 April 2012

William R. Clark, Mark Hallerberg, Manfred Keil and Thomas D. Willett

The purpose of this paper is to review concepts and measurements related to financial globalization such as financial openness, financial integration, monetary…

Abstract

Purpose

The purpose of this paper is to review concepts and measurements related to financial globalization such as financial openness, financial integration, monetary interdependence, and the mobility and movement of capital.

Design/methodology/approach

This paper surveys the theoretical and empirical literature on monetary interdependence and financial globalization. The major ways in which these concepts are measured empirically are presented and critiqued.

Findings

Disagreements about the degree of financial integration and capital mobility are, in part, explained by the different approaches to measuring these concepts. One major challenge in obtaining a good measures is controlling for other major factors that may influence observed correlations among financial variables. While these relationships still cannot be estimated precisely, it can be safely said that while high for many countries, few if any financial markets are perfectly integrated across countries.

Originality/value

By offering a comprehensive analysis of these different measurements, the paper underscores the different implications for national policies and the operation of the international monetary system of different dimensions of globalization. In particular, the proposition that financial globalization has left most countries with little autonomy for domestic monetary policy is subject to serious debate, at least in the short run.

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