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The Price of Inflation and Foreign Exchange Risk in International Equity Markets

The Price of Inflation and Foreign Exchange Risk in International Equity Markets
Author: Cesare Robotti
Publisher:
Total Pages: 52
Release: 2014
Genre:
ISBN:

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In this paper the author formulates and tests an international intertemporal capital asset pricing model in the presence of deviations from purchasing power parity (II-CAPM[PPP]). He finds evidence in favor of at least mild segmentation of international equity markets in which only global market risk appears to be priced. When using the Hansen amp; Jagannathan (1991, 1997) variance bounds and distance measures as testing devices, the author finds that, while all international asset pricing models are formally rejected by the data, their pricing implications are substantially different. The superior performance of the II-CAPM (PPP) is mainly attributable to significant hedging against inflation risk.


Global Price of Foreign Exchange Risk and the Local Factor

Global Price of Foreign Exchange Risk and the Local Factor
Author: Francesca Carrieri
Publisher:
Total Pages: 42
Release: 2005
Genre:
ISBN:

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This paper provides new evidence on the pricing of exchange risk in global stock markets. We conduct empirical tests in a conditional setting with a multivariate GARCH-in-Mean specification and time-varying prices of risk for the US and nine emerging markets to determine whether exchange risk is priced under alternative model specifications and exchange rate measures. Since inflation rates in emerging markets are high and volatile, we argue that the use of real exchange rates offer a better proxy for risk stemming from purchasing power parity deviations. In addition to using real exchange rates, the empirical model allows for partial integration by including a time-varying price of local risk. Our main results support the hypothesis of significant exchange risk premia related to both emerging and developed markets. The price of exchange risk is also significantly time-varying consistent with previous evidence for major developed markets. The empirical evidence also suggests that there is variation across countries and over time in the relative importance of exchange risk premia. However, currency risk remains an important global risk factor even after accounting for local risk.


Sources of Risk and Expected Returns in Global Equity Markets

Sources of Risk and Expected Returns in Global Equity Markets
Author: Wayne E. Ferson
Publisher:
Total Pages: 56
Release: 1994
Genre: Capital assets pricing model
ISBN:

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This paper empirically examines multifactor asset pricing models for the returns and expected returns on eighteen national equity markets. The factors are chosen to measure global economic risks. Although previous studies do not reject the unconditional mean- variance efficiency of a world market portfolio, our evidence indicates that the tests are low in power, and the world market betas do not provide a good explanation of cross-sectional differences in average returns. Multiple beta models provide an improved explanation of the equity returns.


Currency Risk Premia in Global Stock Markets

Currency Risk Premia in Global Stock Markets
Author: Shaun K. Roache
Publisher: International Monetary Fund
Total Pages: 32
Release: 2006-08
Genre: Business & Economics
ISBN:

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Large fundamental imbalances persist in the global economy, with potential exchange rate implications. This paper assesses whether exchange rate risk is priced across G-7 stock markets. Given the multitude of hedging instruments available, theory suggests that stock market investors should not be compensated for currency risk. However, data covering 33 industry portfolios across seven major stock markets suggest that not only is exchange rate risk priced in many markets, but that it is time-varying and sensitive to currency-specific shocks. With stock market investors typically exhibiting "home bias," this suggests that investors are using equity asset proxies to hedge the exchange rate risks to consumption.


The Role of the Exchange Rate in Inflation-Targeting Emerging Economies

The Role of the Exchange Rate in Inflation-Targeting Emerging Economies
Author: Anna Nordstrom
Publisher: International Monetary Fund
Total Pages: 106
Release: 2009-11-24
Genre: Business & Economics
ISBN: 1589067967

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This paper explores the role of exchange rates in emerging economies with inflation-targeting regimes, an issue that has become especially germane during the current episode of financial turmoil and volatile capital flows. Under inflation targeting, the interest rate is the main monetary policy tool for influencing activity and inflation, and there is little agreement about the appropriate role of the exchange rate.The exchange rate is a more important monetary policy tool for emerging economies that have adopted inflation targeting than it is for inflation-targeting advanced economies. Inflation-targeting emerging economies generally have less flexible exchange rate arrangements and intervene more frequently in the foreign exchange market than their advanced economy counterparts. The enhanced role of the exchange rate reflects these economies' greater vulnerability to exchange rate shocks and their less developed financial markets. However, their sharper focus on the exchange rate may cause some confusion about the commitment of their central banks to achieve the inflation target and may also complicate policy implementation. Global inflation pressures, greater exchange rate volatility, and the financial stresses from the global financial turmoil that began in mid-2007 are heightening these tensions.


On Exchange Rates

On Exchange Rates
Author: Jeffrey A. Frankel
Publisher: MIT Press
Total Pages: 468
Release: 1993
Genre: Business & Economics
ISBN: 9780262061544

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These seventeen essays provide an accessible and thorough reference for understanding the role of exchange rates in the international monetary system since 1973, when the rates were allowed to float. The essays analyze such issues as exchange rate movements, exchange risk premia, investor expectations of exchange rates and behavior of exchange rates in different systems. Frankel's sound empirical treatment of exchange rate questions shows that it is possible to produce work that is interesting from a purely intellectual viewpoint while contributing to practical knowledge of the real world of international economics and finance.The essays have been organized in a way that provides an introduction to the field of empirical international finance. Part I documents the steady reduction in barriers to international capital movement and leads logically to part II, which explains how exchange rates are determined. Both monetary and portfolio-based models are surveyed in part II, providing a clear transition to the topic of part III; the possible existence of an exchange risk premium. Part IV applies the tools discussed in earlier sections to explore various policy questions related to exchange rate expectations such as whether foreign exchange intervention matters and whether the European monetary system had become credible by 1991. Each part begins with a detailed introduction explaining not only the central issues of that section but also suggesting connections with other essays in the book.Jeffrey A. Frankel is Professor of Economics at the University of California, Berkeley.


International Financial Markets

International Financial Markets
Author: Richard M. Levich
Publisher:
Total Pages: 736
Release: 2001
Genre: Business & Economics
ISBN:

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The purpose of this text is to analyze the key financial markets and instruments that facilitate trade and investment activity on a global scale. It spans two key areas: First-the economic determinants of prices, price changes and price relationships in the major financial markets; Second-the policy issues that result from private enterprises and public policymakers.


Patterns of Foreign Exchange Intervention under Inflation Targeting

Patterns of Foreign Exchange Intervention under Inflation Targeting
Author: Gustavo Adler
Publisher: International Monetary Fund
Total Pages: 29
Release: 2020-05-29
Genre: Business & Economics
ISBN: 1513536451

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The paper documents the use of foreign exchange intervention (FXI) across countries and monetary regimes, with special attention to its use under inflation targeting (IT). We find significant differences between advanced and emerging market economies, with the former group conducting FXI limitedly and broadly symmetrically, while the use of this policy instrument in emerging market countries is pervasive and mostly asymmetric (biased towards purchasing foreign currency, even after taking into account precautionary motives). Within emerging markets, the use of FXI is common both under IT and non-IT regimes. We find no evidence of FXI being used in response to inflation developments, while there is strong evidence that FXI responds to exchange rates, indicating that IT central banks in EMDEs have dual inflation/exchange rate objectives. We also find a higher propensity to overshoot inflation targets in emerging market economies where FXI is more pervasive.


The International Transmission of Inflation

The International Transmission of Inflation
Author: Michael R. Darby
Publisher: University of Chicago Press
Total Pages: 744
Release: 2008-04-15
Genre: Reference
ISBN: 0226136434

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Inflation became the dominant economic, social, and political problem of the industrialized West during the 1970s. This book is about how the inflation came to pass and what can be done about it. Certain to provoke controversy, it is a major source of new empirical information and theoretical conclusions concerning the causes of international inflation. The authors construct a consistent data base of information for eight countries and design a theoretically sound model to test and evaluate competing hypotheses incorporating the most recent theoretical developments. Additional chapters address an impressive variety of issues that complement and corroborate the core of the study. They answer such questions as these: Can countries conduct an independent monetary policy under fixed exchange rates? How closely tied are product prices across countries? How are disturbances transmitted across countries? The International Transmission of Inflation is an important contribution to international monetary economics in furnishing an invaluable empirical foundation for future investigation and discussion.