This paper revisits the role of macroeconomic fundamentals as predictors for exchange rate movements at different horizons. It takes seriously the notion that the fundamental dynamics of an economy is hard to measure and that the usual measures, such as monetary aggregates, price index and deflator series and GDP, are imperfect approximations of these fundamental movements. As an alternative me...

Volatility smiles arise in currency option markets when empirical exchange rate returns distributions exhibit leptokurtosis. This feature of empirical distributions is symptomatic of turbulent periods when exchange rate movements are in excess of movements based on the assumption of normality. In contrast, during periods of tranquility, movements in exchange rates are relatively small, resultin...

This paper, considering revenue and cost exposure channels, investigates the effects of exchange rate behaviour on fixed capital investment in Mexican manufacturing sector over 1994-2002. We find that i) currency depreciation has a positive (negative) effect on fixed investment through the export (import) channel; ii) exchange rate volatility impacts mostly export oriented sectors; iii) the sen...