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International Risk-Averse Arbitrage and Exchange Rate Volatility - L’arbitraggio internazionale “risk-averse” e volatilità del tasso di cambio

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  • Tseng, Hui-Kuan

    ()
    (The University of North Carolina at Charlotte, Department of Economics)

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    Abstract

    A small open economy model emphasizing the endogenous interestrate arbitrage was employed to examine whether arbitrage activities would dampen or augment exchange rate volatility against random disturbances. Based on numerical simulation, increased risk aversion of arbitragers was observed to dampen exchange rate volatility that is subject to random disturbances resulting from domestic absorption, domestic money supply, and foreign interest rates. On the contrary, volatility was augmented by random disturbance from foreign income. Results of sensitivity analysis suggest that the role of arbitragers’ risk aversion could be associated with the degree of goods price flexibility, particularly when domestic monetary, or domestic income, or foreign income disturbances are present. These findings call for future empirical studies to address the role of price flexibility for improved estimates of parameter values that govern the exchange rate behavior in the model. - Al fine di esaminare se l’arbitraggio riduce o aumenta la volatilità del tasso di cambio in presenza di disturbi casuali, è stato preso in considerazione un modello di piccola economia ove è enfatizzato l’arbitraggio endogeno sui tassi di interesse. Sulla base di simulazioni numeriche è stato evidenziato che l’aumento dell’avversione al rischio da parte degli arbitraggisti preclude l’aumento della volatilità del tasso di cambio, il quale è soggetto a disturbi casuali conseguenti ad assorbimento interno, offerta interna di moneta e tassi di interesse esteri. Al contrario la volatilità aumenta in presenza di disturbi casuali nel reddito estero. I risultati delle analisi di sensitività suggeriscono che il ruolo dell’avversione al rischio degli arbitraggisti potrebbe essere associato al grado di flessibilità del prezzo dei beni, specialmente in presenza di disturbi monetari o di reddito, sia interno che estero. Queste evidenze richiedono che future analisi empiriche determinino qual è il ruolo della flessibilità del prezzo per il comportamento del tasso di cambio nel modello considerato.

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    Bibliographic Info

    Article provided by Camera di Commercio di Genova in its journal Economia Internazionale / International Economics.

    Volume (Year): 64 (2011)
    Issue (Month): 4 ()
    Pages: 503-524

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    Handle: RePEc:ris:ecoint:0634

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    Keywords: Risk-Averse; Interest Arbitrage; Exchange Rate Volatility;

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