The Interactions between Debt and Currency Crises – Common Causes or Contagion? In contrast to the well-known twin currency and banking crises the literature has so far neglected a second type of twin crises, the simultaneous occurrence of currency and debt crises. The decision of a government to devalue and/or to default is closely interlinked through the government’s intertemporal budget cons...

Given that a multinational enterprise can react flexibly upon exchange rate movements, international trade flows may be interpreted as an option. An enterprise will opt to export if the profits obtained from exporting under given exchange rate developments are greater than if foreign subsidiary sales were opted. Naturally, given negative exchange rate scenario situations, an enterprise will cho...

We assess the behavior of real effective exchange rates (REERs) of members of the CEMAC zone with respect to their long-term equilibrium paths. A reduced form of the fundamental equilibrium exchange rate (FEER) model is estimated and associated misalignments are derived for the period 1980 to 2009. Our findings suggest that for majority of countries, macroeconomic fundamentals have the expected...

Standard tests of the Harrod-Balassa-Samuelson (HBS) hypothesis treat productivity levels in and across countries as fixed and observable, and offer little empirical support for the hypothesis. If productivity follows a jump-diffusion process, these standard tests will generate biased estimates, measuring productivity levels with error. This paper instead proposes an ‘errors in variables’ appro...

We study the properties of foreign exchange risk premia that can explain the forward bias puzzle – the tendency of high-interest rate currencies to appreciate rather than depreciate. These risk premia arise endogenously from the no-arbitrage condition we impose on the relation between the term structure of interest rates and exchange rates, and they compensate for both currency risk and interes...

We propose a nonlinear heterogeneous panel unit root test for testing the null hypothesis of unit-root processes against the alternative that allows a proportion of units to be generated by globally stationary ESTAR processes and a remaining non-zero proportion to be generated by unit root processes. The proposed test is simple to apply and accommodates cross section dependence. Monte Carlo sim...

This article examines how differently the same dealer quotes in the inter-dealer and customer foreign exchange markets that have different market structures. The model first predicts that customer spreads are generally wider than inter-dealer ones due to less transparency in the customer market. The model also predicts that since customers are believed to be less informed than dealers, the diff...

In the aftermath of the Taper Tantrum episode, the Central Bank of Brazil announced a major program of intervention in foreign exchange markets on August 2013, with daily sales of FX futures settling in domestic currency swaps that provided insurance against a depreciation of the real. We analyze the effect of that program on the level and volatility of the exchange rate using a synthetic contr...

This paper addresses the following issue: given a set of daily observations on an asset (historical opening, closing, high and low prices), how should one go about estimating the asset’s volatility? We use high-frequency data on very liquid assets to construct daily realized volatility series, which enables us to treat volatility as observed rather than latent. We then compare the empirical per...

A practice that has become widespread and widely endorsed is that of evaluating forecasts of financial variability obtained from discrete time models by comparing them with high-frequency ex post estimates (e.g. realised volatility) based on continuous time theory. In explanatory financial variability modelling this raises several methodological and practical issues, which suggests an alternati...