The dollar–euro exchange rate and monetary fundamentals

Beckmann, Joscha; Glycopantis, Dionysius; Pılbeam, Keith

doi:10.1007/s00181-017-1335-1

Cited by 6 publications

(3 citation statements)

References 54 publications

(53 reference statements)

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“…Another direction for future research on international markets is testing for market inefficiencies causing carry trade profitability in foreign exchange (the carry trade strategy is discussed in [76], chap.7). The time-varying coefficient methodology that we investigate should also play a part in this research along the lines of [77]. Another possible avenue would be to consider nonlinear models either with a business cycle transition variable or more generally, a smooth transition approach such as the STAR or Markov regime-switching models also accounting for measurement/specification errors or endogeneity biases.…”

Section: Resultsmentioning

confidence: 99%

The conditional Fama-French model and endogenous illiquidity: A robust instrumental variables test

et al. 2019

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We investigate conditional specifications of the five-factor Fama-French (FF) model, augmented with traditional illiquidity measures. The motivation for this time-varying methodology is that the traditional static approach of the FF model may be misspecified, especially for the endogenous illiquidity measures. We focus on the time-varying nature of the Jensen performance measure α and the market systematic risk sensitivity β, as these parameters are essentially universal in asset pricing models. To tackle endogeneity and other specification errors, we rely on our robust instrumental variables (RIV) algorithm implemented via a GMM approach. In this dynamic or time-varying conditional context, we generally find that the most significant factor is the market one, but illiquidity may matter depending on which states or estimation methods we consider. In particular, sectors whose returns embed a market illiquidity premium are more exposed to a binding funding constraint in times of crisis, which leads to deleveraging and a resulting decrease in systematic risk.

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Section: Resultsmentioning

confidence: 99%

The conditional Fama-French model and endogenous illiquidity: A robust instrumental variables test

et al. 2019

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“…Many studies have demonstrated the time-varying relationship between exchange rates and macroeconomic fundamentals (Frömmel et al, 2005;Junttila & Korhonen, 2011;Yuan 2011;Wu, 2015;Beckmann et al, 2018). MS models define different states of regimes and allow us to analyze the asymmetric behaviors of variables conditional on the regimes (Baharumshah et al, 2017).…”

Section: Introductionmentioning

confidence: 99%

Analyzing Exchange Market Pressure Dynamics with Markov Regime Switching: The Case of Turkey

İlhan

Akdeni̇z

Özdemir

2022

OMEE

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This study analyzes the dynamics of exchange market pressure in Turkey by employing the Markov regime switching model for the period from January 2006 to December 2019. Our findings show that there are two regimes in the foreign exchange market, characterized as low- and high-pressure periods. The domination of the high-pressure regime in the sample period indicates that depreciation pressure prevails in the Turkish foreign exchange market. During this regime, the pressure is aggravated by the rising inflation, credit growth, and VIX, and the falling of short-term external debt. Thus, in the presence of capital flows, the preferences of policy authorities regarding price stability and growth determine the course of the pressure. When these policy choices favor credit-driven growth, depreciation pressure in the foreign exchange market is exacerbated through the current account deficit.

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“…In order to overcome modelling limitations, the Markov switching model allows regressors to switch between states or regimes to estimate individual regime coefficients [22,23]. Compared with other ways of modelling time-varying coefficients, such as state-space models (see, e.g., [24]), the Markov switching model is superior in the case when nonlinearities are caused by exogenous events [22].…”

Section: Introductionmentioning

confidence: 99%

The Dollar Exchange Rate, Adjustment to the Purchasing Power Parity, and the Interest Rate Differential

Frömmel

Vuković

2022

Mathematics

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This study applies a Markov switching error correction model to describe the single most important real exchange rate (Deutsche mark versus US dollar) over the flexible exchange rates period from 1973 to 2004. We show an alternative way of modelling non-linear adjustment to the purchasing power parity (PPP) besides standard threshold models. The model merges the two possible sources of non-linearity by additionally allowing the probability of a mean-reverting regime to increase with the distance from PPP. The interest rate differential as an additional determinant of real exchange rate behaviour in a Markov switching framework is introduced in the model. The study finds that the real dollar exchange rate during the post-Bretton Woods era is well described by a Markov switching error correction model with (PPP) as long-run equilibrium. There is one mean reversion regime where PPP and the interest parity condition are valid. Contrary, the second regime is characterised by persistent mean aversion, where a regime switch does not become more likely with increasing distance from PPP. The unconditional half-life of shocks is about 1.5 years.

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The dollar–euro exchange rate and monetary fundamentals

Cited by 6 publications

References 54 publications

The conditional Fama-French model and endogenous illiquidity: A robust instrumental variables test

The conditional Fama-French model and endogenous illiquidity: A robust instrumental variables test

Analyzing Exchange Market Pressure Dynamics with Markov Regime Switching: The Case of Turkey

The Dollar Exchange Rate, Adjustment to the Purchasing Power Parity, and the Interest Rate Differential

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