Exchange Rate Effects on the Volume of Trade Flows: An Empirical Analysis Employing High-Frequency Data
Abstract"Despite the common view that exchange rate volatility will inevitably depress the volume of international trade by increasing the riskiness of trading activity, empirical researchers have not found clear support for this relationship, with results being characterised as insignificant or where significant, conflicting." (McKenzie, 1999, p.72) These studies generally utilize aggregate U.S. or G7 export data. In this paper, we empirically investigate the impact of exchange rate volatility on real international trade flows, but with a much broader perspective and an improved measure of volatility. Our 18-country data set, which includes U.S., Canada, Germany, U.K., France, Italy, Japan, Austria, Denmark, Finland, India, Malaysia, Netherlands, Norway, Portugal, Spain, Sweden, and Switzerland, consists of bilateral real exports for the period 1980-1999 on a monthly basis in each direction. Hence it is possible to examine hundreds of relationships, and avoid the narrow focus on U.S. or G7 countries' data that have characterised much of the literature. Our study also improves upon much of the literature in its method of quantifying exchange rate volatility. We utilize daily spot exchange rates to compute one month-ahead exchange rate volatility (via a method based on Merton (1980), exploited by Klaassen (1999)) from the intra-monthly variations in the exchange rate. This should provide a more representative measure of the perceived volatility which economic agents must consider, as well as avoiding other potential problems, such as the high persistence of real exchange shocks when moving average representations are used, or high correlation in volatility when ARCH/GARCH models are utilized to quantify exchange rate volatility. Our preliminary analysis suggests that bilateral exchange volatility measures calculated from these data will shed considerable light on the debate about the impact of exchange rate volatility on trade flows.
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Bibliographic InfoPaper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Workshop Papers, January 2001 with number 5B.1.
Length: 37 pages
Date of creation: 28 Dec 2000
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- Christopher F Baum, Mustafa Caglayan, Neslihan Ozkan, 2001. "Exchange Rate Effects on the Volume of Trade Flows: An Empirical Analysis Employing High-Frequency Data," Computing in Economics and Finance 2001 85, Society for Computational Economics.
- F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
- F31 - International Economics - - International Finance - - - Foreign Exchange
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
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