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1 – 10 of 991The aim of this paper is threefold: (1) to develop a new measure of investor sentiment rational (ISR) of developing countries by applying principal component analysis (PCA), (2…
Abstract
Purpose
The aim of this paper is threefold: (1) to develop a new measure of investor sentiment rational (ISR) of developing countries by applying principal component analysis (PCA), (2) to investigate co-movements between the ten developing stock markets, the sentiment investor's, exchange rates and geopolitical risk (GPR) during Russian invasion of Ukraine in 2022, (3) to explore the key factors that might affect exchange market and capital market before and mainly during Russia–Ukraine war period.
Design/methodology/approach
The wavelet approach and the multivariate wavelet coherence (MWC) are applied to detect the co-movements on daily data from August 2019 to December 2022. Value-at-risk (VaR) and conditional value-at-risk (CVaR) are used to assess the systemic risks of exchange rate market and stock market return in the developing market.
Findings
Results of this study reveal (1) strong interdependence between GPR, investor sentiment rational (ISR), stock market index and exchange rate in short- and long-terms in most countries, as inferred from (WTC) analysis. (2) There is evidence of strong short-term co-movements between ISR and exchange rates, with ISR leading. (3) Multivariate coherency shows strong contributions of ISR and GPR index to stock market index and exchange rate returns. The findings signal the attractiveness of the Vietnamese dong, Malaysian ringgits and Tunisian dinar as a hedge for currency portfolios against GPR. The authors detect a positive connectedness in the short term between all pairs of the variables analyzed in most countries. (4) Both foreign exchange and equity markets are exposed to higher levels of systemic risk in the period of the Russian invasion of Ukraine.
Originality/value
This study provides information that supports investors, regulators and executive managers in developing countries. The impact of sentiment investor with GPR intensified the co-movements of stocks market and exchange market during 2021–2022, which overlaps with period of the Russian invasion of Ukraine.
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Given the difficulties in finding significant exchange rate exposure in the extant literature, this paper attempts to resolve the so-called “exposure puzzle” by investigating…
Abstract
Purpose
Given the difficulties in finding significant exchange rate exposure in the extant literature, this paper attempts to resolve the so-called “exposure puzzle” by investigating whether currency movements have any significant impact on international industry returns.
Design/methodology/approach
This paper utilizes the multivariate Generalized AutoRegressive Conditional Heteroskedasticity (MGARCH) methodology to estimate both symmetric and asymmetric exchange rate exposures for each industry common across 12 countries simultaneously.
Findings
The empirical results show that exchange rate exposure is not only statistically significant but also economically important based on the estimation of an asymmetric three-factor exposure model using MGARCH methodology. This is an extremely important finding as it suggests that the “exposure puzzle” may not be a puzzle at all once a better methodology is utilized in the estimation.
Research limitations/implications
Because this study tries to resolve the exchange rate exposure puzzle by focusing on whether exchange rate movements affect ex-post returns as opposed to ex ante expected returns and given the significant exposures with respect to different risk factors found in the study, it is interesting to see if any of these risk factors commands a risk premium. In other words, a natural extension of this study is to test whether any of these risk factors is priced in international industry returns.
Practical implications
The findings of the study have interesting implications for international investors who would like to diversify their portfolios across different industries and are concerned about whether the unexpected movements in the bilateral exchange rates will affect their portfolio returns in addition to its interest rate and world market risk exposures.
Originality/value
The study utilizes the MGARCH methodology, which has not been fully exploited in the exchange rate exposure literature.
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Oguzhan Ozcelebi, Jose Perez-Montiel and Carles Manera
Might the impact of the financial stress on exchange markets be asymmetric and exposed to regime changes? Departing from the existing literature, highlighting that the domestic…
Abstract
Purpose
Might the impact of the financial stress on exchange markets be asymmetric and exposed to regime changes? Departing from the existing literature, highlighting that the domestic and foreign financial stress in terms of money market have substantial effects on exchange market, this paper aims to investigate the impacts of the bond yield spreads of three emerging countries (Mexico, Russia, and South Korea) on their exchange market pressure indices using monthly observations for the period 2010:01–2019:12. Additionally, the paper analyses the impact of bond yield spread of the US on the exchange market pressure indices of the three mentioned emerging countries. The authors hypothesized whether the negative and positive changes in the bond yield spreads have varying effects on exchange market pressure indices.
Design/methodology/approach
To address the research question, we measure the bond yield spread of the selected countries by using the interest rate spread between 10-year and 3-month treasury bills. At the same time, the exchange market pressure index is proxied by the index introduced by Desai et al. (2017). We base the empirical analysis on nonlinear vector autoregression (VAR) models and an asymmetric quantile-based approach.
Findings
The results of the impulse response functions indicate that increases/decreases in the bond yield spreads of Mexico, Russia and South Korea raise/lower their exchange market pressure, and the effects of shocks in the bond yield spreads of the US also lead to depreciation/appreciation pressures in the local currencies of the emerging countries. The quantile connectedness analysis, which allows for the role of regimes, reveals that the weights of the domestic and foreign bond yield spread in explaining variations of exchange market pressure indices are higher when exchange market pressure indices are not in a normal regime, indicating the role of extreme development conditions in the exchange market. The quantile regression model underlines that an increase in the domestic bond yield spread leads to a rise in its exchange market pressure index during all exchange market pressure periods in Mexico, and the relevant effects are valid during periods of high exchange market pressure in Russia. Our results also show that Russia differs from Mexico and South Korea in terms of the factors influencing the demand for domestic currency, and we have demonstrated the role of domestic macroeconomic and financial conditions in surpassing the effects of US financial stress. More specifically, the impacts of the domestic and foreign financial stress vary across regimes and are asymmetric.
Originality/value
This study enriches the literature on factors affecting the exchange market pressure of emerging countries. The results have significant economic implications for policymakers, indicating that the exchange market pressure index may trigger a financial crisis and economic recession.
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Izabela Pruchnicka-Grabias, Iwona Piekunko-Mantiuk and Scott W. Hegerty
The Polish economy has undergone major challenges and changes over the past few decades. The country's trade flows, in particular, have become more firmly tied to the country’s…
Abstract
Purpose
The Polish economy has undergone major challenges and changes over the past few decades. The country's trade flows, in particular, have become more firmly tied to the country’s Western neighbors as they have grown in volume. This study examines Poland's trade balances in ten Standard International Trade Classification (SITC) sectors versus the United States of America, first testing for and isolating structural breaks in each time series. These breaks are then included in a set of the cointegration models to examine their macroeconomic determinants.
Design/methodology/approach
Linear and nonlinear and nonlinear autoregressive distributed lag models, both with and without dummies corresponding to structural breaks, are estimated.
Findings
One key finding is that incorporating these breaks reduces the significance of the real exchange rate in the model, supporting the hypothesis that this variable already incorporates important information. It also results in weaker evidence for cointegration of all variables in certain sectors.
Research limitations/implications
This study looks only at one pair of countries, without any third-country effects.
Originality/value
An important country pair's trade relations is examined; in addition, the real exchange rate is shown to incorporate economic information that results in structural changes in the economy. The paper extends the existing literature by conducting an analysis of Poland's trade balances with the USA, which have not been studied in such a context so far. A strong point is a broad methodology that lets compare the results the authors obtained with different kinds of models, both linear and nonlinear ones, with and without structural breaks.
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Jan Černohorský, Liběna Černohorská and Petr Teplý
The aim of this chapter is to describe the purpose of the introduction of the exchange rate commitment by the Czech National Bank (CNB) in the period from November 2013 to April…
Abstract
The aim of this chapter is to describe the purpose of the introduction of the exchange rate commitment by the Czech National Bank (CNB) in the period from November 2013 to April 2017 and its effects on the real economy. The main reason for introducing the exchange rate commitment was concern about the possibility of a prolonged deflationary period in Czechia. Given that the standard monetary policy instruments had already been exhausted on easing the monetary policy conditions, the CNB Bank Board opted for an exchange rate commitment. The secondary objective of the exchange rate commitment was to boost the economy through the positive effect of a weaker koruna on exports. Next, we focus in more detail on the effect of the exchange rate commitment in the economy and the course of the foreign exchange interventions. Overall, we can summarize that the CNB's foreign exchange interventions were an extraordinary monetary policy instrument – in a market economy with inflation targeting and a flexible exchange rate – used in extraordinary times.
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Kamal Upadhyaya and Bruno Barreto de Góes
This paper aims to study the impact of economic freedom and some key macroeconomic variables on the foreign direct investment (FDI) inflow in Brazil.
Abstract
Purpose
This paper aims to study the impact of economic freedom and some key macroeconomic variables on the foreign direct investment (FDI) inflow in Brazil.
Design/methodology/approach
An econometric model is developed that includes FDI inflow as the dependent variable and macroeconomic variables such as the output, current account balance, the real exchange rate, openness and economic freedom as explanatory variables. Annual time series data from 1995 to 2022 is used. Before carrying out the estimation, the time series properties of the data are diagnosed using unit root tests and cointegration tests. Since the data series were found to be stationary in the first difference form and the variables in the model were cointegrated, an error correction model is developed and estimated.
Findings
The findings demonstrate that the size of the market (gross domestic product), current account balance and the economic freedom index significantly influence FDI inflow to Brazil. Although the signs of openness and the real exchange rate align with theoretical expectations, they do not attain statistical significance.
Originality/value
To the best of the authors’ knowledge, this is the first formal study on the impact of economic freedom on the FDI inflow in Brazil. The finding of this study adds value to the understanding of FDI dynamics in Brazil, highlighting the critical role of economic freedom and market size in attracting foreign investment.
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Ladislava Issever Grochová and Michal Škára
This chapter examines the impact of sectoral indebtedness on GDP in Czechia, initially a low-indebted small open economy in which debt dynamics are becoming a major concern. The…
Abstract
This chapter examines the impact of sectoral indebtedness on GDP in Czechia, initially a low-indebted small open economy in which debt dynamics are becoming a major concern. The impact of household debt, non-financial corporation debt and public debt is analysed with the use of local projections based on instrumental variable estimations. The results show a more pronounced influence of household debt compared to non-financial corporation and government debt. Initially, increasing household debt stimulates short-run economic activity, but in the medium run, it limits household consumption and negatively affects output. This negative impact gradually turns into a positive effect in the long run. Non-financial corporation debt has a negative short- to medium-run impact but can have a small positive effect in the long run due to the prevalence of tradable industries. Public debt initially has a short-run negative impact, but then gradually becomes positive. Overall, the findings have implications for macroeconomic policies and the importance of monitoring financial stability.
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Jahanzaib Alvi and Imtiaz Arif
The crux of this paper is to unveil efficient features and practical tools that can predict credit default.
Abstract
Purpose
The crux of this paper is to unveil efficient features and practical tools that can predict credit default.
Design/methodology/approach
Annual data of non-financial listed companies were taken from 2000 to 2020, along with 71 financial ratios. The dataset was bifurcated into three panels with three default assumptions. Logistic regression (LR) and k-nearest neighbor (KNN) binary classification algorithms were used to estimate credit default in this research.
Findings
The study’s findings revealed that features used in Model 3 (Case 3) were the efficient and best features comparatively. Results also showcased that KNN exposed higher accuracy than LR, which proves the supremacy of KNN on LR.
Research limitations/implications
Using only two classifiers limits this research for a comprehensive comparison of results; this research was based on only financial data, which exhibits a sizeable room for including non-financial parameters in default estimation. Both limitations may be a direction for future research in this domain.
Originality/value
This study introduces efficient features and tools for credit default prediction using financial data, demonstrating KNN’s superior accuracy over LR and suggesting future research directions.
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