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What determines the exchange rate: economic factors or market sentiment?

  • Gregory P. Hopper
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    Do economic factors influence exchange rates? Or does market sentiment play a bigger role? Are short-run exchange rates predictable? Greg Hopper reviews exchange-rate economics, focusing on what is predictable and what isn't. He also examines the practical implications of exchange-rate theories for currency option pricing, risk management, and portfolio selection.

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    File URL: http://www.phil.frb.org/files/br/brso97gh.pdf
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    Article provided by Federal Reserve Bank of Philadelphia in its journal Business Review.

    Volume (Year): (1997)
    Issue (Month): Sep ()
    Pages: 17-29

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    Handle: RePEc:fip:fedpbr:y:1997:i:sep:p:17-29
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    1. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    2. Branson, William H. & Halttunen, Hannu & Masson, Paul, 1977. "Exchange rates in the short run: The dollar-dentschemark rate," European Economic Review, Elsevier, vol. 10(3), pages 303-324.
    3. Schlagenhauf, Don E. & Wrase, Jeffrey M., 1995. "Liquidity and real activity in a simple open economy model," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 431-461, June.
    4. David Backus, 1984. "Empirical Models of the Exchange Rate: Separating the Wheat from the Chaff," Canadian Journal of Economics, Canadian Economics Association, vol. 17(4), pages 824-46, November.
    5. Maurice Obstfeld & Kenneth Rogoff, 1995. "The mirage of fixed exchange rates," Working Papers in Applied Economic Theory 95-08, Federal Reserve Bank of San Francisco.
    6. Gregory P. Hopper, 1996. "Value at risk: a new methodology for measuring portfolio risk," Business Review, Federal Reserve Bank of Philadelphia, issue Jul, pages 19-31.
    7. Bollerslev, Tim, 1990. "Modelling the Coherence in Short-run Nominal Exchange Rates: A Multivariate Generalized ARCH Model," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 498-505, August.
    8. Martin Eichenbaum & Charles L. Evans, 1993. "Some Empirical Evidence on the Effects of Monetary Policy Shocks on Exchange Rates," NBER Working Papers 4271, National Bureau of Economic Research, Inc.
    9. MacDonald, Ronald, 1983. "Some Tests of the Rational Expectations Hypothesis in the Foreign Exchange Market," Scottish Journal of Political Economy, Scottish Economic Society, vol. 30(3), pages 235-50, November.
    10. Frankel, Jeffrey A., 1982. "In search of the exchange risk premium: A six-currency test assuming mean-variance optimization," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 255-274, January.
    11. Kroner, Kenneth F. & Sultan, Jahangir, 1993. "Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(04), pages 535-551, December.
    12. Edwards, Sebastian, 1983. "Floating exchange rates, expectations and new information," Journal of Monetary Economics, Elsevier, vol. 11(3), pages 321-336.
    13. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
    14. Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 200-224.
    15. Gregory P. Hopper, 1994. "Is the foreign exchange market inefficient?," Business Review, Federal Reserve Bank of Philadelphia, issue May, pages 17-27.
    16. Lewis, Karen K., 1988. "Testing the portfolio balance model: A multi-lateral approach," Journal of International Economics, Elsevier, vol. 24(1-2), pages 109-127, February.
    17. Edwards, Sebastian, 1982. "Exchange rates and `news': A multi-currency approach," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 211-224, January.
    18. Sweeney, Richard J, 1986. " Beating the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 41(1), pages 163-82, March.
    19. Andrew K. Rose, 1994. "Are exchange rates macroeconomic phenomena?," Economic Review, Federal Reserve Bank of San Francisco, pages 19-30.
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