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Book part
Publication date: 4 July 2019

Erdoğan Kotil

The exchange rate has been an important topic in the Turkish Economy for many years. It affects prices with exchange rate pass-through. The aim of this chapter is to…

Abstract

The exchange rate has been an important topic in the Turkish Economy for many years. It affects prices with exchange rate pass-through. The aim of this chapter is to analyze the dual relationship between exports and imports, exports and the exchange rate, imports and the exchange rate by using time series analysis. The results indicate that there is only one causal relationship between exports and imports. The direction is from imports to exports.

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Contemporary Issues in Behavioral Finance
Type: Book
ISBN: 978-1-78769-881-9

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Article
Publication date: 2 November 2015

Muhammad Umar and Gang Sun

– The purpose of this study is to analyze the relationship between country risk, stock prices and the exchange rate of the renminbi (RMB) compared to that of the US dollar.

Abstract

Purpose

The purpose of this study is to analyze the relationship between country risk, stock prices and the exchange rate of the renminbi (RMB) compared to that of the US dollar.

Design/methodology/approach

An extended open macroeconomic model with investment–saving, liquidity preference–money supply and aggregate supply functions was used by applying comparative static analysis. After checking the series for stationarity and cointegration, a vector autoregressive model was applied. Lag length was selected based on the Akaike information criterion, and the coefficients were calculated for the overall sample and for pre- and post-July 2005 periods.

Findings

The stock market index is a significant determinant of variation in the exchange rate: when the Chinese stock market performs well, the RMB appreciates and vice versa. Country risk is not a significant determinant of the exchange rate, but the exchange rate of the RMB is a highly significant determinant of the country risk of China: depreciation of the RMB results in higher country risk and vice versa.

Research limitations/implications

Linear interpolation was used to calculate the monthly values of some of the variables for which only annual data were available.

Practical implications

The authorities should revalue the exchange rate of the RMB against the US dollar, which will result in lower country risk for China. One way to achieve this is to strengthen the performance of stock markets.

Originality/value

To the best of the authors’ knowledge, this is the first study to explore the relationship between the country risk of China and the exchange rate of the RMB. Using an open macroeconomic model, this novel research analyzes the relationships between country risk, stock prices and the exchange rate of the RMB from a different perspective.

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Journal of Financial Economic Policy, vol. 7 no. 4
Type: Research Article
ISSN: 1757-6385

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Article
Publication date: 31 May 2011

Jacques A. Schnabel

This paper seeks to argue that any competitive advantage realized by a firm that produces domestically and exports to a foreign market due to a real depreciation…

Abstract

Purpose

This paper seeks to argue that any competitive advantage realized by a firm that produces domestically and exports to a foreign market due to a real depreciation (appreciation) of the domestic (foreign) currency is purely transitory and thus not sustainable. Diversification of manufacturing operations across a number of countries and appropriate production rescheduling in light of real exchange rate changes are required to transform the character of this competitive advantage from merely transitory to sustainable.

Design/methodology/approach

Analytic proof is provided of the dependence of an exporting firm's real profit margin on the real exchange rate. A simple contemporaneous and one‐period lagged model of the current account balance is then posited to argue that real exchange rates exhibit mean‐reversionary behavior.

Findings

The Marshall‐Lerner condition, which is a mainstay of balance‐of‐payments models is shown to imply that real exchange rates exhibit mean‐reversionary behavior. Extensive empirical evidence is cited that accords with this theoretical conclusion. Thus, any gain in competitive advantage due to a change in real exchange rates that accrues to a firm with a single manufacturing operation is merely transitory and not sustainable.

Practical implications

To position itself to achieve sustainable competitive advantage from changes in real exchange rates, a firm must maintain a global supply chain diversified across many countries. With the flexibility provided by such disparate plant locations, production schedules can be adjusted in response to real exchange rate changes, to wit, increased (reduced) manufacturing should be programmed in countries whose currencies have experienced real depreciations (appreciations). Owing to oscillating real exchange rates, these requisite production schedule adjustments are expected to be perpetual.

Originality/value

The algebraic formulation of the firm's inflation‐adjusted profit margin's dependency on the real exchange rate and the analytical proof that the Marshall‐Lerner condition implies mean‐reversionary behavior in real exchange rates are both novel. The implications with regard to competitive advantage are likewise original.

Details

Competitiveness Review: An International Business Journal, vol. 21 no. 3
Type: Research Article
ISSN: 1059-5422

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Article
Publication date: 27 June 2008

Yu Hsing

The purpose of this paper is to examine movements of the Singapore dollar exchange rate against the US dollar.

Abstract

Purpose

The purpose of this paper is to examine movements of the Singapore dollar exchange rate against the US dollar.

Design/methodology/approach

An extended open macroeconomic model with the IS, LM, and AS functions and comparative static analysis are employed and applied. The Newey‐West method is employed to estimate consistent estimates for the standard error and covariance when the forms of both autocorrelation and heteroskedasticity are unknown.

Findings

The real exchange rate in Singapore is negatively associated with real M1, country risk, the real US treasury bill rate, and a binary variable for the period since the Asian financial crisis, and positively influenced by the real stock price, world output, and the amount of foreign exchange reserves. Real government deficit spending is statistically insignificant.

Research limitations/implications

Other exchange rate models may be considered and compared.

Practical implications

The Reserve Bank of Singapore may use the outcomes of this paper as a reference in monitoring exchange rate movements. Among others, changes in country risk, stock values, foreign exchange, the world interest rate, and world output are expected to influence the exchange rate.

Originality/value

Several important variables such as country risk, the Asian financial crisis, stock values, and the amount of foreign exchange are included to find their impacts on the exchange rate.

Details

International Journal of Development Issues, vol. 7 no. 1
Type: Research Article
ISSN: 1446-8956

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Article
Publication date: 31 December 2010

Tantatape Brahmasrene and Jui‐Chi Huang

A plethora of studies suggests the pricing decisions depend on product substitutability, costs, market structures, and the magnitude of exchange rate uncertainty in the…

Abstract

A plethora of studies suggests the pricing decisions depend on product substitutability, costs, market structures, and the magnitude of exchange rate uncertainty in the international setting. Taking a departure from existing literature, this paper examines the average degree of exchange rate pass‐through to the prices of export product under low to high exchange rate volatility. A panel data estimation method is performed using the annual US export data to 69 export destinations across 111 four‐digit Standard Industrial Classification (SIC) industries. An average zero or insignificant pass‐through estimate for all industries in the high exchangerate‐fluctuation sub‐sample confirms the hypothesis. In this period of high exchange risk, the possible high hedging engagements disconnect the relationship between exchange rate movements and export pricing.

Details

World Journal of Entrepreneurship, Management and Sustainable Development, vol. 6 no. 1/2
Type: Research Article
ISSN: 2042-5961

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Book part
Publication date: 2 December 2003

Jongmoo Jay Choi, Takato Hiraki and Nobuya Takezawa

This paper examines the exchange risk sensitivity of Japanese firms, and the exchange risk pricing in the Japanese stock market for the period of 1975–2001. We find that…

Abstract

This paper examines the exchange risk sensitivity of Japanese firms, and the exchange risk pricing in the Japanese stock market for the period of 1975–2001. We find that an appreciation of the yen is positively associated with industry portfolio returns. This supports the dominance of wealth effects over cash flow effects. This is in contrast to U.S. studies that report a weak, negative relationship between stocks and the domestic currency. The results are more pronounced in the pre-Crash period, and vary somewhat depending on the exchange risk measures used. Similarly, the exchange risk is priced in the pre-Crash period, but not in the post-Crash period. These results suggest that the exchange rate elasticity of the Japanese economy has declined in the post-bubble period of economic stagnation.

Details

The Japanese Finance: Corporate Finance and Capital Markets in ...
Type: Book
ISBN: 978-1-84950-246-7

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Article
Publication date: 27 July 2012

Yutaka Kurihara

The purpose of this article is to analyse methods for determination of exchange rates in response to fundamental economic variables and changes in monetary policies.

Abstract

Purpose

The purpose of this article is to analyse methods for determination of exchange rates in response to fundamental economic variables and changes in monetary policies.

Design/methodology/approach

The paper undertakes empirical examination of exchange rate movements and their structural changes in response to changes in macroeconomic variables and monetary policies in the USA, the Euro area, and Japan.

Findings

Exchange rates have been influenced by macroeconomic fundamentals and have been impacted by the conduct of monetary policies in some cases. Some structural changes in exchange rates have coincided with implementation of drastic monetary policies but not in others. The Japanese quantitative easing policy has had an effect on exchange rates.

Originality/value

Monetary policy has been often examined; however, few studies have examined the response of exchange rate movements to monetary policies. Moreover, structural changes in exchange rates are examined in comparison with domestic monetary policies in the USA, the Euro Area, and Japan.

Details

Studies in Economics and Finance, vol. 29 no. 3
Type: Research Article
ISSN: 1086-7376

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Article
Publication date: 7 August 2007

Stuart Hyde

This study seeks to investigate the sensitivity of stock returns at the industry level to market, exchange rate and interest rate shocks in the four major European…

Abstract

Purpose

This study seeks to investigate the sensitivity of stock returns at the industry level to market, exchange rate and interest rate shocks in the four major European economies: France, Germany, Italy, and the UK.

Design/methodology/approach

The paper utilises the methodology of Campbell and Mei (1993) to decompose systematic risks into components attributable to news about future dividends (cash flows), real interest rates and excess returns.

Findings

In addition to significant market risk, the paper finds significant levels of exposure to exchange rate risk in industries in all four markets. Significant levels of interest rate risk are only identified in Germany and France. All three sources of risk contain significant information about future cash flows and excess returns.

Research limitations/implications

Future research could investigate the extent of exposure in other markets, or investigate whether the findings change at the firm level. Additionally it could be investigated whether recent asset pricing work such as Campbell and Vuolteenaho (2004) can be utilised to investigate this research problem.

Practical implications

The paper identifies which industry portfolios have significant exposures and decomposes these risks. This information is relevant for investors and portfolio managers, as well as financial management within the firm.

Originality/value

The paper utilises an alternative econometric methodology to investigate the extent of exposure to exchange rate and interest risks in industrial portfolios in four European markets.

Details

Managerial Finance, vol. 33 no. 9
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 22 April 2004

Marc W. Simpson and Sanjay Ramchander

This paper shows that the University of Michigan’s ”Survey of Consumers“ can be useful in predicting the direction of change in five U.S. dollar exchange rates. The…

Abstract

This paper shows that the University of Michigan’s ”Survey of Consumers“ can be useful in predicting the direction of change in five U.S. dollar exchange rates. The explanatory power, however, is contingent on the particular survey question employed and the forecast horizon under consideration. The study finds that the survey question regarding car purchases does especially well in predicting the future direction of exchange rate movements. Furthermore, the results generally indicate that the survey is more useful when making distant (i.e., 12‐month ahead) currency forecast than for making near term (i.e., 3‐month and 6‐month ahead) predictions.

Details

American Journal of Business, vol. 19 no. 1
Type: Research Article
ISSN: 1935-5181

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Article
Publication date: 1 February 1983

Joan O'Connell

This article is concerned with the reconsideration of the proposition that monetary policy is more effective under flexible exchange rates than under fixed, in the light…

Abstract

This article is concerned with the reconsideration of the proposition that monetary policy is more effective under flexible exchange rates than under fixed, in the light of the low elasticities of imports and exports with respect to the exchange rate that may prevail in the short run. It is shown that when the framework put forward in this context is modified, recent results are not generally supportable.

Details

Journal of Economic Studies, vol. 10 no. 2
Type: Research Article
ISSN: 0144-3585

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