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A Multiple-Horizon Search for the Role of Trade and Financial Factors in Bilateral Real Exchange Rate Volatility

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Author Info
Yin-Wong Cheung (University of California, Santa Cruz)
Kon S. Lai (California State University, Los Angeles)

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Abstract

This study investigates the sources of bilateral real exchange rate (RER) volatility in industrial countries. Going beyond traditional macroeconomic determinants, we identify the role of both tradeand finance-related factors in explaining RER volatility at different time horizons. The results suggest that RER volatility tends to increase with financial openness and with transport costs but decrease with trade openness and with financial depth. Moreover, the time horizon matters. Financial factors (financial openness and financial depth) are found to influence RER volatility at primarily short horizons, while trade-related factors (trade openness and transport costs) contribute significantly also to RER volatility at much longer horizons. The relative importance of traditional macroeconomic fundamentals and these trade- and finance-related factors can vary considerably across horizons.

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Publisher Info
Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 212009.

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Length: 31 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:hkm:wpaper:212009

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Related research
Keywords: Exchange Rate Volatility; Time Horizons; Trade Openness; Financial Openness; Financial Depth;

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Find related papers by JEL classification:
F15 - International Economics - - Trade - - - Economic Integration
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
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