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The relationship between exchange rates and interest rate differentials: A wavelet approach
Jönköping University, Jönköping International Business School, JIBS, Economics, Finance and Statistics.
Jönköping University, Jönköping International Business School, JIBS, Economics, Finance and Statistics.
Jönköping University, Jönköping International Business School, JIBS, Economics, Finance and Statistics.
2012 (English)In: The World Economy, ISSN 0378-5920, E-ISSN 1467-9701, Vol. 35, no 9, 1162-1185 p.Article in journal (Refereed) Published
Abstract [en]

This paper uses wavelet analysis to investigate the relationship between the spot exchange rate and  interest rate differential for seven pairs of countries, with a small country, Sweden, included in each case. The key empirical results show that there tends to be a negative relationship between the spot exchange rate (domestic-currency price of foreign currency) and the nominal interest rate differential (approximately the domestic interest rate minus the foreign interest rate) at the shortest time scales, while a positive relationship is shown at the longest time scales. This indicates that among models of exchange rate determination using the asset approach, the sticky-price models are supported in the short-run and flexible-price models in the long-run.

Place, publisher, year, edition, pages
2012. Vol. 35, no 9, 1162-1185 p.
National Category
Economics
Identifiers
URN: urn:nbn:se:hj:diva-17940DOI: 10.1111/j.1467-9701.2012.01466.xOAI: oai:DiVA.org:hj-17940DiVA: diva2:516061
Available from: 2012-04-17 Created: 2012-04-17 Last updated: 2013-01-08Bibliographically approved
In thesis
1. Dynamics of macroeconomic and financial variables in different time horizons
Open this publication in new window or tab >>Dynamics of macroeconomic and financial variables in different time horizons
2012 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This dissertation consists of an introductory chapter and four papers dealing with financial issues of open economies, which can be in two broad categorizations: 1) exchange rate movements and 2) stock market interdependence. The first paper covers how the exchange rate changes affect the prices of internationally traded goods. With the variables (the price of exports in exporters’ currency and the exchange rate, both of which are in logarithmic form) being cointegrated, a model with both long- and short-run characteristics (the Error Correction Model, ECM) is formulated. By using prices of major exports from South Korea to different destinations over the world, how the markup adjustment of those exports varies with respect to changes in exchange rates is estimated empirically under the context of pricing-to-market (PTM).

The second paper relates to the standard macroeconomic models of exchange rate determination. This paper investigates the relationship between the exchange rate and the domestic-foreign interest rate differential. The associated regression model follows the form of earlier literature in testing the effect of the interest rate differential on the exchange rate although the use of wavelet-decomposed levels of the data series distinguishes this paper from the earlier empirical works.

A relevant issue associated with the relationship between export prices and exchange rates for different industries is found in the third paper. The responsiveness of firms’ profitability to changes in exchange rates (i.e. exchange rate exposure) is tested using a factor model. Following specifications of the earlier literature on this subject, returns of various industries (or sectors) of the US stock market are regressed on the changes in exchange rates as well as the excess return on the market portfolio. The Kalman filter is used to estimate time-varying coefficients (beta) of the variables at different frequencies (daily, weekly, monthly, quarterly and annually).

After the three papers noted above, the dissertation moves on to the final paper which explores the relationship between national stock markets (i.e. interdependence). The causal linkages of the U.S. stock market to each of six eastern Asian national stock markets (China, Hong Kong, Japan, Singapore, South Korea and Taiwan) as well as the causal linkages among those Asian equity markets are tested in a vector autoregression (VAR) model using wavelet-decomposed data.

Place, publisher, year, edition, pages
Jönköping: Jönköping International Business School, 2012. 183 p.
Series
JIBS Dissertation Series, ISSN 1403-0470 ; 77
National Category
Economics
Identifiers
urn:nbn:se:hj:diva-17943 (URN)978-91-86345-29-7 (ISBN)
Opponent
Supervisors
Available from: 2012-04-17 Created: 2012-04-17 Last updated: 2012-04-17Bibliographically approved

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