Common Movement of the Emerging Market Currencies
AbstractThe aim of this study is to show that there exists a common movement among the currencies of emerging market economies that implemented the exible exchange rate regime after 2000. Also, we examine if this common movement is closely related to financial markets and some macroeconomic fundamentals commonly referred to as possible driving forces of exchange rates in economics literature. This common movement, which has been derived using a dynamic factor model, is introduced as a composite index of these currencies. Our findings suggest that the currencies of the emerging market economies have a common movement which can be explained to a great extent with the help of financial variables. On the other hand, macroeconomic fundamentals have limited explanatory power for apprehending the common dynamics of currencies. Also, both financial variables and macroeconomic fundamentals are analyzed together, within a nonlinear estimation framework, to see if the explanatory power of macroeconomic fundamentals improves. However, we could not observe a significant improvement. Specifically, the results underline the importance of bond market variables, stock market variables and risk indices in understanding the (common) dynamics of the emerging market currencies after 2000.
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Bibliographic InfoPaper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 1207.
Date of creation: 2012
Date of revision:
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exchange rate analysis; emerging market economies; dynamic factor model; financial analysis; exchange rate models; nonlinear models;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-01 (All new papers)
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