Currency Crisis Prediction Using ADR Market Data: An Options-based Approach
Stefan Eichler, Dominik Maltritz
International Journal of Forecasting,
Nr. 4,
2010
Abstract
During capital control episodes, large price deviations between American Depositary Receipts (ADR) and their underlying stocks signal that a currency crisis is about to occur. We interpret this price spread as the price of a call option. Using option pricing theory we derive detailed information about both the probability of a currency crisis and the expected magnitude of devaluation. Analyzing daily ADR market data preceding the Venezuelan crisis (1996), our approach predicts crisis probabilities of almost 100% and forecasts the exchange rate after floating quite accurately. During the Argentine crisis (2002), the estimated exchange rates are similar to the actual ones.
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Transmission of Nominal Exchange Rate Changes to Export Prices and Trade Flows and Implications for Exchange Rate Policy
Mathias Hoffmann, Oliver Holtemöller
Scandinavian Journal of Economics,
2010
Abstract
We discuss how the welfare ranking of fixed and flexible exchange rate regimes in a New Open Economy Macroeconomics model depends on the interplay between the degree of exchange rate pass-through and the elasticity of substitution between home and foreign goods. We identify combinations of these two parameters for which flexible and fixed exchange rates are superior with respect to welfare as measured by a representative household's utility level. We estimate the two parameters for six non-EMU European countries (Czech Republic, Hungary, Poland, Slovakia, Sweden, and the UK) using a heterogeneous dynamic panel approach.
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A First Look on the New Halle Economic Projection Model
Sebastian Giesen, Oliver Holtemöller, Juliane Scharff, Rolf Scheufele
Abstract
In this paper we develop a small open economy model explaining the joint determination of output, inflation, interest rates, unemployment and the exchange rate in a multi-country framework. Our model – the Halle Economic Projection Model (HEPM) – is closely related to studies recently published by the International
Monetary Fund (global projection model). Our main contribution is that we model the Euro area countries separately. In this version we consider Germany and France, which represent together about 50 percent of Euro area GDP. The model allows for country specific heterogeneity in the sense that we capture different adjustment patterns to economic shocks. The model is estimated using Bayesian techniques. Out-of-sample and pseudo out-of-sample forecasts are presented.
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Book Review on: Mahmound A.T. Elkhafif, Exchange Rate Policy and Currency Substitution: The Case of Africa’s Emerging Economies, 2002, Economic Research Papers No. 71, Abidjan: African Development Bank
Tobias Knedlik
African Development Perspectives Yearbook: Private and Public Sectors: Towards a Balance,
2004
Abstract
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Can Fixed Exchange Rates Discipline Fiscal Policy?
Makram El-Shagi
CEGE Diskussionspapier Nr. 84,
2009
Abstract
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The ADR Shadow Exchange Rate as an Early Warning Indicator for Currency Crises
Stefan Eichler, Alexander Karmann, Dominik Maltritz
Journal of Banking and Finance,
Nr. 11,
2009
Abstract
We develop an indicator for currency crisis risk using price spreads between American Depositary Receipts (ADRs) and their underlyings. This risk measure represents the mean exchange rate ADR investors expect after a potential currency crisis or realignment. It makes crisis prediction possible on a daily basis as depreciation expectations are reflected in ADR market prices. Using daily data, we analyze the impact of several risk drivers related to standard currency crisis theories and find that ADR investors perceive higher currency crisis risk when export commodity prices fall, trading partners’ currencies depreciate, sovereign yield spreads increase, or interest rate spreads widen.
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A Simple Macro Model of Original Sin based on Optimal Price Setting under Incomplete Information
Axel Lindner
International Economics and Economic Policy,
2009
Abstract
This paper analyses the consequences of “original sin“ (the fact that the currency of an emerging market economy usually cannot be used to borrow abroad) for macroeconomic stability. The approach is based on third-generation models of currency crises, but differs from alternative versions by explicitly modeling the price setting behavior of firms if prices are sticky and there is incomplete information about the future exchange rate. It is shown that a small depreciation is beneficial, but a large one is detrimental.
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Transmission of Nominal Exchange Rate Changes to Export Prices and Trade Flows and Implications for Exchange Rate Policy
Oliver Holtemöller, Mathias Hoffmann
Deutsche Bundesbank Discussion Paper 21/2009,
2009
Abstract
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Exchange Rates and FDI: Goods versus Capital Market Frictions
Claudia M. Buch, J. Kleinert
World Economy,
im Erscheinen
Abstract
Changes in exchange rates affect countries through their impact on cross-border activities such as trade and foreign direct investment (FDI). With increasing activities of multinational firms, the FDI channel is likely to gain in importance. Economic theory provides two main explanations why changes in exchange rates can affect FDI. According to the first explanation, FDI reacts to exchange rate changes if there are information frictions on capital markets and if investment depends on firms’ net worth (capital market friction hypothesis). According to the second explanation, FDI reacts to exchange rate changes if output and factor markets are segmented, and if firm-specific assets are important (goods market friction hypothesis). We provide a unified theoretical framework of these two explanations. We analyse the implications of the model empirically using a dataset based on detailed German firm-level data. We find greater support for the goods market than for the capital market friction hypothesis.
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Are Botswana and Mozambique ready for CMA enlargement?
Tobias Knedlik
Botswana Journal of Economics,
Nr. 3,
2006
Abstract
The paper elaborates on the appropriateness of a potentially enlarged Common Monetary Area in Southern Africa including Botswana and Mozambique. The theory of optimum currency areas including some extensions by accounting for costs of non-integration and considering the external relations of currency areas are presented. Various indicators such as the structure of the economies, interest rates, inflation rates, exchange rates, factor mobility and trading partners are observed empirically. The paper concludes that current changes in the exchange rate policy of Botswana are expected to lead to increasing, though already high, convergence with CMA countries. Botswana is therefore an appropriate candidate for CMA enlargement. Mozambique is converging towards South Africa but still remains on a lower level. Taking into account the costs of non-integration, however, the target of integration should be formulated for the medium term.
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