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What determines the exchange rate: economic factors or market sentiment?

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  • Gregory P. Hopper
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    Abstract

    Do economic factors influence exchange rates? Or does market sentiment play a bigger role? Are short-run exchange rates predictable? Greg Hopper reviews exchange-rate economics, focusing on what is predictable and what isn't. He also examines the practical implications of exchange-rate theories for currency option pricing, risk management, and portfolio selection.

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    File URL: http://www.phil.frb.org/files/br/brso97gh.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of Philadelphia in its journal Business Review.

    Volume (Year): (1997)
    Issue (Month): Sep ()
    Pages: 17-29

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    Handle: RePEc:fip:fedpbr:y:1997:i:sep:p:17-29

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    Related research

    Keywords: Foreign exchange rates;

    References

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    1. Sebastian Edwards, 1982. "Exchange Rates amd "News": A Multi-Currency Approach," UCLA Economics Working Papers, UCLA Department of Economics 238, UCLA Department of Economics.
    2. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
    3. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 73-96, Fall.
    4. Andrew K. Rose, 1994. "Are exchange rates macroeconomic phenomena?," Economic Review, Federal Reserve Bank of San Francisco, pages 19-30.
    5. Sebastian Edwards, 1983. "Floating Exchange Rates, Expectations and New Information," NBER Working Papers 1064, National Bureau of Economic Research, Inc.
    6. Kroner, Kenneth F. & Sultan, Jahangir, 1993. "Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 28(04), pages 535-551, December.
    7. Lewis, Karen K., 1988. "Testing the portfolio balance model: A multi-lateral approach," Journal of International Economics, Elsevier, vol. 24(1-2), pages 109-127, February.
    8. Gregory P. Hopper, 1994. "Is the foreign exchange market inefficient?," Business Review, Federal Reserve Bank of Philadelphia, Federal Reserve Bank of Philadelphia, issue May, pages 17-27.
    9. Gregory P. Hopper, 1996. "Value at risk: a new methodology for measuring portfolio risk," Business Review, Federal Reserve Bank of Philadelphia, Federal Reserve Bank of Philadelphia, issue Jul, pages 19-31.
    10. David Backus, 1984. "Empirical Models of the Exchange Rate: Separating the Wheat from the Chaff," Canadian Journal of Economics, Canadian Economics Association, vol. 17(4), pages 824-46, November.
    11. Don E. Schlagenhauf & Jeffrey M. Wrase, 1992. "Liquidity and real activity in a simple open economy model," Discussion Paper / Institute for Empirical Macroeconomics 57, Federal Reserve Bank of Minneapolis.
    12. Martin Eichenbaum & Charles L. Evans, 1993. "Some Empirical Evidence on the Effects of Monetary Policy Shocks on Exchange Rates," NBER Working Papers 4271, National Bureau of Economic Research, Inc.
    13. Branson, William H. & Halttunen, Hannu & Masson, Paul, 1977. "Exchange rates in the short run: The dollar-dentschemark rate," European Economic Review, Elsevier, vol. 10(3), pages 303-324.
    14. Frankel, Jeffrey A., 1982. "In search of the exchange risk premium: A six-currency test assuming mean-variance optimization," Journal of International Money and Finance, Elsevier, Elsevier, vol. 1(1), pages 255-274, January.
    15. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
    16. MacDonald, Ronald, 1983. "Some Tests of the Rational Expectations Hypothesis in the Foreign Exchange Market," Scottish Journal of Political Economy, Scottish Economic Society, vol. 30(3), pages 235-50, November.
    17. Sweeney, Richard J, 1986. " Beating the Foreign Exchange Market," Journal of Finance, American Finance Association, American Finance Association, vol. 41(1), pages 163-82, March.
    18. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 84(6), pages 1161-76, December.
    19. Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 78(2), pages 200-224.
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    Cited by:
    1. Rotheli, Tobias F., 2002. "Bandwagon effects and run patterns in exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 12(2), pages 157-166, April.

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