IDEAS home Printed from https://ideas.repec.org/a/eut/journl/v22y2018i1p253.html
   My bibliography  Save this article

Foreign Exchange Rate Pricing at the Future Contract (Case of I.R. of Iran)

Author

Listed:
  • Hossein Bastanzad

    (Economist in Money and Foreign Exchange Department, Monetary and Banking Research Institute of the Central Bank of Iran (MBRI) Tehran, Iran.)

  • Pedram Davoudi

    (Institute for management and planning studies (IMPS), Tehran, Iran.)

  • Hossein Tavakolian

    (Faculty of Economics, Allameh Tabataba'i University, Tehran, Iran.)

Abstract

The RER which is theoretically influenced by the real interest rate differential (RRE) and currency excess return (CER), is statistically examined during 1990-2016. Accordingly, the stationarity of RER as null hypothesis is not approved in the Iranian economy. Therefore, the TVAR method is examined to analyze the nonstationary RER sample to two sub-periods stationary process which are both statistically recognized trend stationary and mean reversion in the context of flexible and inflexible regimes. The impacts of the RRE and CER on the RER are examined by TVAR method. The results indicate that the expected value of RER significantly explains the real interest rate differential given the fact that the estimated parameters is approximately considered non-zero. Thus, the hypothesis of real interest rate parity (RRE) is rejected in both flexible and inflexible regimes in Iran. Eventually, future contracts should be introduced at the foreign exchange market to reduce risks and uncertainty.

Suggested Citation

  • Hossein Bastanzad & Pedram Davoudi & Hossein Tavakolian, 2018. "Foreign Exchange Rate Pricing at the Future Contract (Case of I.R. of Iran)," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 22(1), pages 253-293, Winter.
    • Handle: RePEc:eut:journl:v:22:y:2018:i:1:p:253
    as

    Download full text from publisher

    File URL: ftp://80.66.179.253/eut/journl/20181-11.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    2. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    3. Charles Engel & Kenneth D. West, 2005. "Exchange Rates and Fundamentals," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 485-517, June.
    4. Mr. Aasim M. Husain & Mr. Ashoka Mody & Nienke Oomes & Mr. Robin Brooks & Mr. Kenneth Rogoff, 2003. "Evolution and Performance of Exchange Rate Regimes," IMF Working Papers 2003/243, International Monetary Fund.
    5. Juan Berganza & Roberto Chang & Alicia Herrero, 2004. "Balance sheet effects and the country risk premium: An empirical investigation," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 140(4), pages 592-612, December.
    6. Olivier Jeanne & Andrew K. Rose, 2002. "Noise Trading and Exchange Rate Regimes," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 537-569.
    7. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
    8. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "A panel project on purchasing power parity: Mean reversion within and between countries," Journal of International Economics, Elsevier, vol. 40(1-2), pages 209-224, February.
    9. Hossain, Akhand Akhtar, 2016. "Inflationary shocks and real output growth in nine Muslim-majority countries: Implications for Islamic banking and finance," Journal of Asian Economics, Elsevier, vol. 45(C), pages 56-73.
    10. Jeanne, Olivier & Masson, Paul, 2000. "Currency crises, sunspots and Markov-switching regimes," Journal of International Economics, Elsevier, vol. 50(2), pages 327-350, April.
    11. Nils Herger, 2016. "Panel Data Models and the Uncovered Interest Parity Condition: The Role of Two‐Way Unobserved Components," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 21(3), pages 294-310, July.
    12. Esen Onur, 2008. "The role of asymmetric information among investors in the foreign exchange market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(4), pages 368-385.
    13. Savvides, Savvakis C., 1994. "Risk Analysis in Investment Appraisal," MPRA Paper 10035, University Library of Munich, Germany, revised 14 Aug 2008.
    14. Mishkin, Frederic S, 1984. "Are Real Interest Rates Equal across Countries? An Empirical Investigation of International Parity Conditions," Journal of Finance, American Finance Association, vol. 39(5), pages 1345-1357, December.
    15. Mark, Nelson C & Wu, Yangru, 1998. "Rethinking Deviations from Uncovered Interest Parity: The Role of Covariance Risk and Noise," Economic Journal, Royal Economic Society, vol. 108(451), pages 1686-1706, November.
    16. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    17. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-648, August.
    18. Savvides, Andreas, 1990. "Real exchange rate variability and the choice of exchange rate regime by developing countries," Journal of International Money and Finance, Elsevier, vol. 9(4), pages 440-454, December.
    19. Masso, Jaan & Staehr, Karsten, 2005. "Inflation dynamics and nominal adjustment in the Baltic States," Research in International Business and Finance, Elsevier, vol. 19(2), pages 281-303, June.
    20. Karsten Staehr, 2015. "Currency Reforms in Emerging-Market and Transition Economies," Palgrave Macmillan Books, in: Jens Hölscher & Horst Tomann (ed.), Palgrave Dictionary of Emerging Markets and Transition Economics, chapter 2, pages 28-38, Palgrave Macmillan.
    21. repec:zbw:bofitp:2011_019 is not listed on IDEAS
    22. Jens Hölscher & Horst Tomann (ed.), 2015. "Palgrave Dictionary of Emerging Markets and Transition Economics," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-137-37138-6, December.
    23. Fratianni, Michele & von Hagen, Juergen, 1990. "The European Monetary System ten years after," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 32(1), pages 173-241, January.
    24. George Allayannis & Jane Ihrig & James P. Weston, 2001. "Exchange-Rate Hedging: Financial versus Operational Strategies," American Economic Review, American Economic Association, vol. 91(2), pages 391-395, May.
    25. Chaboud, Alain P. & Wright, Jonathan H., 2005. "Uncovered interest parity: it works, but not for long," Journal of International Economics, Elsevier, vol. 66(2), pages 349-362, July.
    26. Charles Engel, 2016. "Exchange Rates, Interest Rates, and the Risk Premium," American Economic Review, American Economic Association, vol. 106(2), pages 436-474, February.
    27. Alexander J. McNeil & Rüdiger Frey & Paul Embrechts, 2015. "Quantitative Risk Management: Concepts, Techniques and Tools Revised edition," Economics Books, Princeton University Press, edition 2, number 10496.
    28. Mehrara, Mohsen & Oskoui, Kamran Niki, 2007. "The sources of macroeconomic fluctuations in oil exporting countries: A comparative study," Economic Modelling, Elsevier, vol. 24(3), pages 365-379, May.
    29. Gopinath, G. & Helpman, . & Rogoff, K. (ed.), 2014. "Handbook of International Economics," Handbook of International Economics, Elsevier, edition 1, volume 4, number 4.
    30. Vander Kraats, R.H. & Booth, L.D., 1983. "Empirical tests of the monetary approach to exchange-rate determination," Journal of International Money and Finance, Elsevier, vol. 2(3), pages 255-278, December.
    31. Farzanegan, Mohammad Reza & Markwardt, Gunther, 2009. "The effects of oil price shocks on the Iranian economy," Energy Economics, Elsevier, vol. 31(1), pages 134-151, January.
    32. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
    33. repec:aei:rpbook:52719 is not listed on IDEAS
    34. Martin D. D. Evans, 2017. "Exchange-Rate Dark Matter," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 4, pages 101-185, World Scientific Publishing Co. Pte. Ltd..
    35. Mrs. O. Liu & Mr. Olumuyiwa S Adedeji, 2000. "Determinants of Inflation in the Islamic Republic of Iran: A Macroeconomic Analysis," IMF Working Papers 2000/127, International Monetary Fund.
    36. Wadhwani, Sushil B, 1987. "The Macroeconomic Implications of Profit Sharing: Some Empirical Evidence," Economic Journal, Royal Economic Society, vol. 97(388a), pages 171-183, Supplemen.
    37. Mr. Martin D Evans, 2012. "Exchange-Rate Dark Matter," IMF Working Papers 2012/066, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    2. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    3. Candian, Giacomo, 2019. "Information frictions and real exchange rate dynamics," Journal of International Economics, Elsevier, vol. 116(C), pages 189-205.
    4. Engel, Charles, 2014. "Exchange Rates and Interest Parity," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 453-522, Elsevier.
    5. Berg, Kimberly A. & Mark, Nelson C., 2015. "Third-country effects on the exchange rate," Journal of International Economics, Elsevier, vol. 96(2), pages 227-243.
    6. Jürgen von Hagen & Jizhong Zhou, 2005. "The choice of exchange rate regime: An empirical analysis for transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 13(4), pages 679-703, October.
    7. Piersanti, Giovanni, 2012. "The Macroeconomic Theory of Exchange Rate Crises," OUP Catalogue, Oxford University Press, number 9780199653126.
    8. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    9. Takashi Kano, 2021. "Exchange Rates and Fundamentals: A General Equilibrium Exploration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(1), pages 95-117, February.
    10. Charles Engel & Feng Zhu, 2019. "Exchange rate puzzles: evidence from rigidly fixed nominal exchange rate systems," BIS Working Papers 805, Bank for International Settlements.
    11. Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
    12. Carmen M. Reinhart & Vincent Raymond Reinhart, 2002. "What Hurts Emerging Markets Most? G3 Exchange Rate or Interest Rate Volatility?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 133-170, National Bureau of Economic Research, Inc.
    13. John A Carlson & Christian M. Dahl & Carol L. Osler, 2008. "Short-run Exchange-Rate Dynamics: Theory and Evidence," CREATES Research Papers 2008-01, Department of Economics and Business Economics, Aarhus University.
    14. Ca’ Zorzi, Michele & Kolasa, Marcin & Rubaszek, Michał, 2017. "Exchange rate forecasting with DSGE models," Journal of International Economics, Elsevier, vol. 107(C), pages 127-146.
    15. Jaehun Chung & Yongmiao Hong, 2007. "Model-free evaluation of directional predictability in foreign exchange markets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(5), pages 855-889.
    16. von Hagen, Jurgen & Zhou, Jizhong, 2005. "De facto and official exchange rate regimes in transition economies," Economic Systems, Elsevier, vol. 29(2), pages 256-275, June.
    17. Charles Engel, 2016. "Exchange Rates, Interest Rates, and the Risk Premium," American Economic Review, American Economic Association, vol. 106(2), pages 436-474, February.
    18. Giancarlo Marini & Giovanni Piersanti, 2012. "Models of Speculative Attacks and Crashes in International Capital Markets," CEIS Research Paper 245, Tor Vergata University, CEIS, revised 24 Jul 2012.
    19. Corrado Macchiarelli, 2013. "On the Joint Test of the Uncovered Interest Parity and the Ex-ante Purchasing Power Parity," Review of International Economics, Wiley Blackwell, vol. 21(3), pages 519-535, August.
    20. Oleg Itskhoki & Dmitry Mukhin, 2021. "Exchange Rate Disconnect in General Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 129(8), pages 2183-2232.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eut:journl:v:22:y:2018:i:1:p:253. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: [z.rahimalipour] (email available below). General contact details of provider: https://edirc.repec.org/data/fecutir.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.