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Common and idiosyncratic movements in Latin-American exchange rates

Author

Listed:
  • Fredy Gamboa-Estrada
  • José Vicente Romero

Abstract

We propose a simple theoretical and empirical approach to differentiate between common and idiosyncratic exchange rate movements in 5 Latin-American economies: Brazil, Chile, Colombia, Mexico, and Peru. Our approach allows us to distinguish the effects of a regional exchange rate common factor and macroeconomic fundamentals differentials on exchange rates. The methodology and estimation strategy are suitable for both low- and high-frequency settings. We provide evidence that the regional common factor is important to assess the dynamics of the Latin-American exchange rates. In our estimations, the relation between exchange rates and the common factor is contemporaneous and stable during the studied period.

Suggested Citation

  • Fredy Gamboa-Estrada & José Vicente Romero, 2022. "Common and idiosyncratic movements in Latin-American exchange rates," International Economics, CEPII research center, issue 171, pages 174-190.
    • Handle: RePEc:cii:cepiie:2022-q3-171-10
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    Cited by:

    1. Kyriazis, Nikolaos & Corbet, Shaen, 2024. "The role of international currency spillovers in shaping exchange rate dynamics in Latin America," The Quarterly Review of Economics and Finance, Elsevier, vol. 94(C), pages 1-10.
    2. Alfaro, Rodrigo & Goldberger, Natan, 2024. "FX-hedging for Latin American investors," Emerging Markets Review, Elsevier, vol. 59(C).
    3. Parra-Polanía, Julián & Sánchez-Jabba, Andrés & Sarmiento, Miguel, 2024. "Are FX communications effective? Evidence from emerging markets," Emerging Markets Review, Elsevier, vol. 59(C).

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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