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Effects of Changes in the Exchange Rates on the Banks\' Profitability in Short-Term and Long Term: VECM Approach (in Persian)

Author

Listed:
  • Babazadeh, Mohammad

    (Iran)

  • Farokhnejad, Farshid

    (Iran)

  • Aghababaei, Mohammad Ebrahim

    (Iran)

Abstract

In consideration of the importance of foreign exchange rate changes in the banks' operations and their profitability¡ we have attempted to examine the effect of changes in the exchange rates on the bank's operations and their short-term and long-term profitability. In this respect¡ we have applied Error Correction Model to measure this effect. The related data have also been extracted from exchange rate lists and balance sheets of one of the Iranian commercial banks during 2005-2010. In order to enter and analyze raw data¡ E-views software has been used.Test results show that changes in exchange rates have a negative effect on the foreign exchange profitability of banks. While¡ foreign exchange position has a negative effect on profitability. Also¡ according to the adjustment coefficient¡ in presence of shock¡ the model almost takes about 25 days to reach equilibrium. JEL Classification: C53, G29, G23, G21

Suggested Citation

  • Babazadeh, Mohammad & Farokhnejad, Farshid & Aghababaei, Mohammad Ebrahim, 2011. "Effects of Changes in the Exchange Rates on the Banks\' Profitability in Short-Term and Long Term: VECM Approach (in Persian)," Journal of Monetary and Banking Research (فصلنامه پژوهش‌های پولی-بانکی), Monetary and Banking Research Institute, Central Bank of the Islamic Republic of Iran, vol. 4(9), pages 205-225, December.
    • Handle: RePEc:mbr:jmbres:v:4:y:2011:i:9:p:205-225
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    More about this item

    Keywords

    Exchange Rate; Foreign Exchange Profitability; Foreign Exchange Position; Foreign Exchange Resources; VECM;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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