The Foreign Exchange Market

Theory and Econometric Evidence

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Paperback | 31 December 1990

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The flotation of exchange rates in the early 1970s saw a significant increase in the importance of foreign exchange markets and in the interest shown in them. Apart from the consequent institutional changes, this period also witnessed a revolution in macroeconomic analysis and finance theory based on the concept of rational expectations. This book provides an integrated approach to recent developments in the understanding of foreign exchange markets. It begins by charting the institutional background and looks at the recent history of movements in some of the major exchange rates. The theoretical sections focus on the economic and finance theory of the asset market approach, the macroeconomic models developed from this approach, and on interest rate parity theory. The empirical chapters draw on the authors' own research from a high quality set of exchange rate and interest rate data. The statistical properties of exchange rates are analysed; the relationship between spot and forward rates is examined; and the modelling and impact of new information on the forward and spot relationship is considered. The final chapter is devoted to the estimation and testing of exchange rate models.

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"This well written and sophisticated book reviews the theoretical and empirical literature concerned with the determination of exchange rates." Herbert G. Grubel, Journal of Economic Literature

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List of figures	p. viii
List of tables	p. ix
Preface	p. xi
Exchange rate concepts, historical development and institutions	p. 1
Introduction	p. 1
The international monetary system after the failure of Bretton Woods	p. 6
The historical debate over floating	p. 10
Exchange rate concepts	p. 15
Purchasing power parity (PPP) theory and real exchange rates	p. 16
Recent exchange rate behaviour	p. 19
Graphical display of recent exchange rate behaviour	p. 29
The theory of efficient markets	p. 39
Introduction	p. 39
Alternative definitions of efficiency	p. 40
Martingale, sub-martingale and random walk models	p. 44
Practical problems with the concept of an efficient market	p. 49
Consideration of risk	p. 54
Theoretical models of exchange rate behaviour	p. 62
Introduction	p. 62
Purchasing power parity	p. 64
The monetary model	p. 71
Dornbusch's sticky price monetary model	p. 75
The Portfolio Balance model	p. 80
Other variants of the monetary model	p. 83
Currency substitution models	p. 85
Recent developments and concluding remarks	p. 86
Appendix	p. 91
Statistical analysis of exchange rates and tests of efficiency	p. 102
Introduction	p. 102
Time series analysis of exchange rates	p. 102
Statistical tests of weak form efficiency	p. 115
Tests of weak form efficiency of exchange rates	p. 122
Tests of strong form efficiency of exchange rates	p. 127
The distribution of changes in the exchange rate	p. 134
Volatility and conditional variance models of changes in the log of the exchange rate	p. 137
Appendix	p. 148
Interest rate parity, transactions costs and the modern theory	p. 150
Introduction	p. 150
The interest rate parity theory	p. 150
Transactions costs and modifications to IRPT	p. 152
The modern theory of forward exchange	p. 157
Econometric testing of IRPT	p. 159
The forward rate as a predictor of the future spot rate	p. 162
Introduction	p. 162
Interest rate parity and the relationship between spot and forward exchange rates	p. 162
Possible reasons for breakdown of UEE	p. 166
Econometric tests of the UEE hypothesis	p. 168
Single equation tests of the UEE hypothesis with overlapping data	p. 176
Simultaneous equation tests of the UEE hypothesis with overlapping data	p. 179
The role of news and the term structure of the forward premium	p. 190
Introduction	p. 190
The role of news in movements of the spot rate	p. 190
Econometric approaches to estimating news equations	p. 193
Edwards additive news model	p. 196
Empirical results on news	p. 201
The term structure of the forward premium	p. 204
Modelling the time varying risk premium	p. 207
Estimation and testing of exchange rate models	p. 219
Introduction	p. 219
Purchasing power parity	p. 220
Estimation of the monetary model	p. 222
Estimation of the monetary model under rational expectations	p. 229
Bibliography	p. 236
Index	p. 255
Table of Contents provided by Syndetics. All Rights Reserved.

The Foreign Exchange Market

Theory and Econometric Evidence

At a Glance

Paperback

Industry Reviews

Shipping

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