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How do exchange rates co-move? A study on the currencies of five inflation-targeting countries

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  • Li, Xiao-Ming

Abstract

This paper does three things. First, it explores the type of asymmetry in exchange rate correlation for five inflation-targeting countries. We show their currencies co-move more closely with the currencies of some influential foreign countries during joint appreciations than joint depreciations against a world currency. Second, it establishes empirically the linkage between interest rate differentials and exchange rate correlation. We find evidence that both widening and narrowing interest rate differentials will reduce the correlation. Third, it proposes a new version of the asymmetric dynamic conditional correlation model. The model proves to be capable of providing great insight into the two issues investigated.

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File URL: http://www.sciencedirect.com/science/article/pii/S0378-4266(10)00328-6
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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 2 (February)
Pages: 418-429

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:2:p:418-429
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

Keywords: Exchange rate correlation Interest rate differentials ADCCE model Inflation-targeting countries;

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Cited by:

  1. Wang, Kai-Li & Fawson, Christopher & Chen, Mei-Ling & Wu, An-Chi, 2014. "Characterizing information flows among spot, deliverable forward and non-deliverable forward exchange rate markets: A cross-country comparison," Pacific-Basin Finance Journal, Elsevier, vol. 27(C), pages 115-137.
  2. Boubaker, Heni & Sghaier, Nadia, 2013. "Portfolio optimization in the presence of dependent financial returns with long memory: A copula based approach," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 361-377.
  3. Li, Xiao-Ming & Zhang, Bing & Gao, Ruzhao, 2015. "Economic policy uncertainty shocks and stock–bond correlations: Evidence from the US market," Economics Letters, Elsevier, vol. 132(C), pages 91-96.
  4. Evzen Kocenda & Vit Bubak & Filip Zikes, 2011. "Volatility Transmission in Emerging European Foreign Exchange Markets," William Davidson Institute Working Papers Series wp1020, William Davidson Institute at the University of Michigan.
  5. Akhtar, Shumi & Faff, Robert & Oliver, Barry & Subrahmanyam, Avanidhar, 2011. "The power of bad: The negativity bias in Australian consumer sentiment announcements on stock returns," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1239-1249, May.
  6. Itir OZER-IMER & Ibrahim OZKAN, 2013. "On the Co-Movements of Exchange Rates," Chapters of Financial Aspects of Recent Trends in the Global Economy book, in: Rajmund Mirdala (ed.), Financial Aspects of Recent Trends in the Global Economy, volume 2, chapter 1, pages 12-37 ASERS Publishing.
  7. Reboredo, Juan C., 2012. "Modelling oil price and exchange rate co-movements," Journal of Policy Modeling, Elsevier, vol. 34(3), pages 419-440.

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