Portfolio theory
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This document discusses portfolio theory, which argues that exchange rates are determined by portfolio decisions of all investors between domestic and foreign assets. It states that exchange rates are influenced more by capital flows than trade flows, and rejects the idea that interest-bearing securities can be perfectly substituted internationally. Any changes in economic conditions of a country will directly impact demand and supply of domestic and foreign bonds, and in turn influence the exchange rate.
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This document discusses several exchange rate theories, including the traditional or elasticities approach, purchasing power parity (PPP), and interest rate parity (IRP).
The traditional approach assumes an equilibrium exchange rate where a country's imports balance its exports. If imports exceed exports, the exchange rate will fall to make the country's exports cheaper and imports more expensive, balancing trade.
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This document discusses interpretations of purchasing power parity (PPP), including absolute and relative PPP. Absolute PPP suggests exchange rates should equalize prices of identical goods between countries, implying a direct relationship between inflation differentials and exchange rate movements. Relative PPP considers changes in relative prices over time and focuses on inflation differentials as predictors of future exchange rate movements. The interpretations of PPP provide insights into the relationship between inflation, exchange rates, and purchasing power.
International Review of Economics and Finance 20 (2011) 485–49.docx
International Review of Economics and Finance 20 (2011) 485–497
Contents lists available at ScienceDirect
International Review of Economics and Finance
j ourna l homepage: www.e lsev ie r.com/ locate / i re f
Predicting foreign exchange movements using historic deviations from PPP
Mei Qiu a, John F. Pinfold a,⁎, Lawrence C. Rose b
a School of Economics and Finance (Albany), Massey University, New Zealand
b College of Business, Massey University, New Zealand
a r t i c l e i n f o
⁎ Corresponding author. School of Economics and F
Tel.: +64 9 414 0800x9463; fax: +64 9 441 8177.
E-mail addresses: [email protected] (M. Qiu), J.F
1059-0560/$ – see front matter © 2010 Elsevier Inc.
doi:10.1016/j.iref.2010.09.005
a b s t r a c t
Article history:
Received 25 June 2009
Received in revised form 8 September 2010
Accepted 8 September 2010
Available online 7 October 2010
The ability to forecast FX rates from historical exchange rate movements is examined. An eight
nation study shows a currency's deviation from the rate predicted by PPP over a four year
period can predict the direction of its movement in the subsequent one to four years. We show
short term exchange rate movements of freely floating currencies are large in comparison with
changes in economic fundamentals and these movements accumulate to create pressure which
results in a predictable pattern of reversal. The results are robust across currencies and
relatively insensitive to the time parameters used in the estimation.
© 2010 Elsevier Inc. All rights reserved.
JEL classification:
F31
G15
Keywords:
Purchasing power parity
Currency
Exchange rate
Foreign exchange
1. Introduction
Market based economic management, where market forces are allowed to prevail, is based on the notion that most economic
variables are self adjusting and outcomes are not enhanced by government economic intervention. Many nations have adopted a
freely floating exchange rate system which relies upon market mechanisms to adjust the value of their currencies and
interventions are rare, and rarely successful when attempted. This implies that market forces influence exchange rates, as the
international competitiveness of nations is inextricably linked to the relative exchange rates between nations. If the movements in
freely floating exchange rates are purely random, international competitiveness will simply be a lottery, with winners and losers
being determined by chance. Clearly this cannot be the case. We know exchange rates adjust over time and a floating exchange
rate regime produces results which, in the long run, reflect underlying economic fundamentals. The lack of models capable of
providing reliable predictions of future exchange rates is therefore puzzling.
Purchasing power parity, the concept that in the long run exchange rates are determined by the relationship between domestic
and foreign prices, is intuitively the most appealing of all exchange rate models. We know it must apply, yet we also know an
im.
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2) The notable European ERM introduced in 1979 to reduce exchange rate variability between European countries before adopting a single currency. It faced issues in 1992 when Britain withdrew.
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1) Purchasing power parity (PPP) theory states that exchange rates should adjust to equalize the prices of identical goods between countries when translated to a common currency.
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This document discusses several exchange rate theories, including the traditional or elasticities approach, purchasing power parity (PPP), and interest rate parity (IRP).
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PPP has both an absolute and relative form. In absolute PPP, similar goods should have the same price in different currencies. Relative PPP recognizes market imperfections but holds that inflation rates between countries will offset exchange rate changes over time.
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International Review of Economics and Finance 20 (2011) 485–49.docx
International Review of Economics and Finance 20 (2011) 485–497
Contents lists available at ScienceDirect
International Review of Economics and Finance
j ourna l homepage: www.e lsev ie r.com/ locate / i re f
Predicting foreign exchange movements using historic deviations from PPP
Mei Qiu a, John F. Pinfold a,⁎, Lawrence C. Rose b
a School of Economics and Finance (Albany), Massey University, New Zealand
b College of Business, Massey University, New Zealand
a r t i c l e i n f o
⁎ Corresponding author. School of Economics and F
Tel.: +64 9 414 0800x9463; fax: +64 9 441 8177.
E-mail addresses: [email protected] (M. Qiu), J.F
1059-0560/$ – see front matter © 2010 Elsevier Inc.
doi:10.1016/j.iref.2010.09.005
a b s t r a c t
Article history:
Received 25 June 2009
Received in revised form 8 September 2010
Accepted 8 September 2010
Available online 7 October 2010
The ability to forecast FX rates from historical exchange rate movements is examined. An eight
nation study shows a currency's deviation from the rate predicted by PPP over a four year
period can predict the direction of its movement in the subsequent one to four years. We show
short term exchange rate movements of freely floating currencies are large in comparison with
changes in economic fundamentals and these movements accumulate to create pressure which
results in a predictable pattern of reversal. The results are robust across currencies and
relatively insensitive to the time parameters used in the estimation.
© 2010 Elsevier Inc. All rights reserved.
JEL classification:
F31
G15
Keywords:
Purchasing power parity
Currency
Exchange rate
Foreign exchange
1. Introduction
Market based economic management, where market forces are allowed to prevail, is based on the notion that most economic
variables are self adjusting and outcomes are not enhanced by government economic intervention. Many nations have adopted a
freely floating exchange rate system which relies upon market mechanisms to adjust the value of their currencies and
interventions are rare, and rarely successful when attempted. This implies that market forces influence exchange rates, as the
international competitiveness of nations is inextricably linked to the relative exchange rates between nations. If the movements in
freely floating exchange rates are purely random, international competitiveness will simply be a lottery, with winners and losers
being determined by chance. Clearly this cannot be the case. We know exchange rates adjust over time and a floating exchange
rate regime produces results which, in the long run, reflect underlying economic fundamentals. The lack of models capable of
providing reliable predictions of future exchange rates is therefore puzzling.
Purchasing power parity, the concept that in the long run exchange rates are determined by the relationship between domestic
and foreign prices, is intuitively the most appealing of all exchange rate models. We know it must apply, yet we also know an
im.
Strong and Weak Form of Purchasing Power Parity
This document discusses testing the strong and weak forms of purchasing power parity (PPP) between Jordan and its major trading partners (Japan, UK, Turkey, and US) from 2000-2012. It first examines the strong form of PPP by testing if the real exchange rate is stationary, finding it is nonstationary, implying long-run PPP does not hold. It then uses Johansen cointegration tests to examine the weak form of PPP, finding a cointegrating relationship between exchange rates and domestic/foreign price levels, providing evidence that weak PPP holds between Jordan and its trading partners. The document reviews literature on PPP testing and discusses the methodology used, including specifications for testing the strong and weak forms.
Exchange rate volatility implied from option prices
This document is a dissertation submitted by Srdjan Begovic in partial fulfillment of a Master's degree in finance and investments from Aston University. The dissertation focuses on forecasting exchange rate volatility using three models: GARCH(1,1), Black-Scholes implied volatility, and model-free implied volatility. Forecasts from these three models are generated for the out-of-sample period from January 2002 to December 2006 using weekly data on seven exchange rates. The forecasts are then evaluated and compared based on accuracy measures to determine the most reliable model for predicting realized volatility.
Determinants of interest rate empirical evidence from pakistan
This document summarizes a research paper that analyzes the determinants of interest rates in Pakistan. It begins with background definitions of key rate indicators like KIBOR and inflation. It then states the purpose is to study the determinants of interest rates, with the hypotheses that inflation and exchange rates have a positive impact on interest rates. The literature review summarizes several past studies on factors influencing interest rates in countries like Pakistan, Austria, and Japan. These studies examined the relationship between policy rates, market rates, inflation, and economic growth.
The Effect of Inflation, Interest Rates and Exchange Rates on Stock Prices C...
The Effect of Inflation, Interest Rates and Exchange Rates on Stock Prices C...Dr. Mahfoudh Hussein Mgammal
Abstract The main purpose of this paper is to investigate whether stock prices and exchange rates are related to each
other or not. Both the short term and the long term association between these variables are discovered. The study applies
monthly and quarterly data on two gulf countries, including Kingdom Saudi Arabia (KSA) and United Arab Emirate (UAE)
for the period January 2008 to December 2009. The results of this study in the short term found that the exchange rate
influence positively on the stock market price index for United Arab Emirate and there is no association between them for
Kingdom Saudi Arabia. Moreover the study in the long term found that the exchange rate influence negatively on stock
market price index for the United Arab Emirate. While no association between these variables in Kingdom Saudi Arabia. Exchange Rate Overshooting and its Impact on the Balance of Trade for the Tur...
Exchange rate overshooting is the short run phenomenon under the Dornbusch Model presented in 1976. We are really desiderative to find out whether the overshoots are for the short run or for the long run period for the Turkish economy. The estimated result using the Johansen Julius method and VECM, we have found that overshooting is for the short run period as opposed to the findings of Bahmani-Oskooee & Orhan (2000) while the Purchasing power parity [PPP] does not hold for the Turkish economy.
Application of taylor principle to lending rate pass through debate in nigeri...
This document summarizes research on the pass-through of policy interest rates to retail lending rates in Nigeria. It finds that pass-through is incomplete, which contradicts the Taylor principle and implications for monetary policy effectiveness. The paper also reviews literature showing that retail rates typically do not fully adjust to changes in policy rates due to factors like bank-customer relationships and asymmetric information. An incomplete pass-through can interfere with the stabilizing role of monetary policy and alter macroeconomic stability.
Ch07
This document discusses inflation, deflation, yield curves, and duration and how they impact interest rates and asset prices. It defines key terms like inflation, nominal and real interest rates, and explores theories on the relationship between inflation and interest rates. It also examines how yield curves are formed and used, and introduces the concept of duration as a measure of a debt security's price sensitivity to interest rate changes.
Determination of exchange rate chapter 6
Determination of exchange rate, mint par theory, balance of payment theory, Purchasing power parity theory, Absolute version and relative version, Criticisms
Pm132 education portfolio_diversification
Commodities can be useful diversifiers for inflation risk when included in a portfolio, but the shape of the futures curve is important. When the spot price is lower than deferred futures prices (contango), changes are likely due to demand, while a backwardated market suggests supply issues. Evaluating the term structure allows investors to better understand if commodities will diversify portfolio risk from inflation.
Forecasting exchange rates 1
The document discusses exchange rate forecasting. Exchange rate forecasting is done by calculating the value of one currency relative to others over time. Various theories can be used for predictions, but no model is perfect. Exchange rate forecasts are required by multinational corporations, governments, financial institutions, and brokers. Fundamental analysis considers long-term economic factors, while technical analysis charts patterns in investor sentiment. Models for predicting exchange rates and prices include the random walk approach, uncovered interest rate parity, purchasing power parity, and theories related to interest rates, inflation, and investor psychology.
Exchange Rate Volatility and Import Substitution in Nigeria: A Sectoral Analysis
ABSTRACT: The study attempts to estimate the impact of exchange rate volatility on import substitution in
Nigeria. The study establishes that the volatility in exchange rate has a detrimental effect in the agricultural
sector in the short run, but this normalizes in the long run, thus having a positive permanent effect. Similarly,
the empirical results depict that the demand for the consumer goods sector was negatively affected by exchange
rate shocks in the initial stage, but over the periods had a positive effect. The result of the food sector, however,
conforms with the apriori expectation that currency exchange rates have a significant impact on food prices.
Food prices are likely to respond as the Naira weakens or strengthens vis a visother currency.This study
provides empirical evidence to drive policy formulation in the management of the country’ foreign exchange
rate as it impacts on trade of goods and services, andprovides information that may guide more studies on the
subject.
Keywords: Exchange rate volatility; Import substitution; Agricultural sector; GARCH; Vector autoregression
Interest rate analysis, inflation risk and yield.pptx
Interest rates represent the price paid by borrowers to access funds now rather than later. They compensate lenders for delaying current consumption. Nominal interest rates factor in inflation while real rates do not. Long-term bonds are more sensitive to interest rate changes than short-term bonds. The yield curve maps interest rates against maturities, normally sloping upward due to liquidity and risk preferences. Different theories offer explanations for how interest rates are determined in markets.
micro finance
This article analyzes how stock characteristics like mean returns, variances, and covariances differ between day and night periods. The authors find empirical evidence that these characteristics are not constant, but change based on whether it is day or night. They propose a trading strategy that rebalances a portfolio each day based on the distinct day and night characteristics. Computing optimal portfolios separately for day and night, and rebalancing daily, can substantially increase returns compared to a standard buy and hold strategy. The authors numerically analyze stock data from the finance industry to demonstrate how this approach works in practice and the potential gains from daily rebalancing based on time-varying characteristics.
Empirical analysis of the relationship between stock market returns and macro...
The International Institute for Science, Technology and Education (IISTE). Science, Technology and Medicine Journals Call for Academic Manuscripts
Determinants of stock price movements in nigeria evidence from monetary varia...
This document summarizes a research article that examined the determinants of stock price movements in Nigeria from 1985 to 2010. The researchers used cointegration tests and regression analysis to analyze the relationship between stock prices and various macroeconomic variables, including monetary policy factors like interest rates, exchange rates, and money supply as well as inflation and political instability. The results showed no long-run relationship between the variables, but inflation was found to be a major determinant of stock price movements in Nigeria. The study recommends that monetary authorities pay attention to changes in money supply and inflation given their impact on stock prices.
Liquidity, investment style, and the relation between fund size and fund perf...
This document summarizes a study that examines the effect of liquidity and investment style on the relationship between fund size and fund performance. The study finds:
1) Fund performance declines as fund size increases, consistent with prior research.
2) This inverse relationship is stronger for funds holding less liquid portfolios, providing evidence that liquidity issues contribute to performance declining with size.
3) The negative effect of size on performance is also more pronounced for growth funds and high-turnover funds, which tend to have higher trading costs.
4) Controlling for other fund characteristics, performance is still negatively related to size, and this effect is stronger for less liquid funds.
Thesis Final Copy
This thesis examines the relationship between retail prices and real exchange rates using daily data from online retailers. The author fits a structural VAR model to exchange rate and relative price data from several countries. This allows estimating impulse responses that show how each variable responds to shocks in the other. The paper analyzes exchange rate pass-through, the effect of price shocks on exchange rates, and the long-run behavior of real exchange rates. The results provide new insights into purchasing power parity and how different shocks affect real exchange rate persistence.
Thesis Final Copy
- The document is a thesis submitted by Arup Pal to MIT Sloan School of Management in partial fulfillment of the requirements for a Master of Finance degree.
- It uses daily retail price data from online retailers for multiple countries to examine relationships between exchange rates and relative prices, including purchasing power parity, exchange rate pass-through, and the effects of price and exchange rate shocks.
- Structural vector autoregression models are estimated to compute impulse responses and study the dynamic effects of shocks to exchange rates and relative prices, as well as the persistence of shocks and their impacts on real exchange rates.
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This document discusses ratio analysis, which refers to analyzing financial statements using accounting ratios. Ratios show quantitative relationships between accounting items and can be expressed as proportions, rates, or percentages. Ratio analysis is useful for evaluating trends, performance, efficiencies, and more. It allows for comparison of a company's performance over time and against other firms. While useful, ratio analysis has some limitations like not capturing a full picture on its own and being impacted by accounting policies. The document outlines various ways of classifying and calculating ratios from financial statements.
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The document discusses several concepts related to foreign exchange rates:
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3:国家专业人才认证中心颁发入库证书
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一、工作未确定，回国需先给父母、亲戚朋友看下文凭的情况，办理一份就读学校的毕业证【微信号:176555708】文凭即可
二、回国进私企、外企、自己做生意的情况，这些单位是不查询毕业证真伪的，而且国内没有渠道去查询国外文凭的真假，也不需要提供真实教育部认证。鉴于此，办理一份毕业证【微信号:176555708】即可
三、进国企，银行，事业单位，考公务员等等，这些单位是必需要提供真实教育部认证的，办理教育部认证所需资料众多且烦琐，所有材料您都必须提供原件，我们凭借丰富的经验，快捷的绿色通道帮您快速整合材料，让您少走弯路。
留信网认证的作用:
1:该专业认证可证明留学生真实身份
2:同时对留学生所学专业登记给予评定
3:国家专业人才认证中心颁发入库证书
4:这个认证书并且可以归档倒地方
5:凡事获得留信网入网的信息将会逐步更新到个人身份内，将在公安局网内查询个人身份证信息后，同步读取人才网入库信息
6:个人职称评审加20分
7:个人信誉贷款加10分
8:在国家人才网主办的国家网络招聘大会中纳入资料，供国家高端企业选择人才
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Portfolio theory
- 1. PORTFOLIO THEORY Dr. Mohamed Kutty Kakkakunnan Associate Professor P G Dept. of Commerce N A M College Kallikkandy Kannur – Kerala - India
- 2. P O R T F O L I O T H E O R Y The Portfolio Balance approach is a modern theory based on the relationship between the relative price of bonds and exchange rates Argues that exchange rate is determined by portfolio decisions of all investors Foreign exchange is a financial asset and the demand for foreign exchange arises from the portfolio decisions of all investors Exchange rates between freely traded currencies are influenced more by capital flows than by trade flows Rejects the proposition that interest bearing securities can be perfectly substituted internationally to attain a uniform real rate of interest among nations
- 3. Risk factors and current account imbalances may have an important role to play in exchange rate changes Any change in the economic conditions of a country will have a direct impact on the demand and supply for the domestic and the foreign bond This shift in the demand/supply for bonds will in turn influence the exchange rate between the domestic and foreign economies The key advantage of the portfolio approach when compared to traditional approaches is that the financial assets tend to adjust considerably faster to news economic conditions than tradeable goods
- 4. Investors desire for diversified portfolios which include domestic and foreign assets Equilibrium exchange rate is one of the many prices that jointly equate demand and supply for asset in international financial markets This theory by establishing relationship between supply and demand functions for bonds and equilibrium conditions that equate supply and demand bonds show how bond markets reach in equilibrium Also shows how changes in bond supplies and demand affect the interest rate and exchange rates (consequences) This approach also argues that the central bank can through changing the supply of bonds can influence the interest rates and exchange rates
- 5. The central bank by reducing the supply of bonds can increase the demand over supply which will increase the demand for bonds and lower interest rates Interest rate reduction affects investments, output and prices that will affect the exchange rate. According to portfolio theory, exchange rate can stray (move) at least in the short run from its long run PPP equilibrium Nevertheless, based on empirical evidence, the portfolio balance approach is not an accurate predictor of exchange rates.