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Do financial market variables show (symmetric) indicator properties relative to exchange rate returns?

  • Castrén, Olli
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    This paper assesses the contemporaneous, leading and lagging indicator properties of financial market variables relative to movements in six major developed country currency pairs. As indicator variables changes in various relative asset prices, short-term portfolio flows and currency options data are used. We find that changes in equity index differentials, short-term speculative flows and risk reversals on currency options prices exhibit consistent contemporaneous indicator properties and leading indicator properties for several currency pairs. Since 1999, changes in short-term interest rate differentials have gained importance as indicators. The best indicator variables explain over 50% of monthly returns of the USD/EUR and GBP/USD exchange rates and over 60% of the appreciation and depreciation episodes of the USD/EUR and JPY/EUR currency pairs. JEL Classification: F31, F32, G15

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    File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp379.pdf
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    Paper provided by European Central Bank in its series Working Paper Series with number 0379.

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    Date of creation: Jul 2004
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    Handle: RePEc:ecb:ecbwps:20040379
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    1. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
    2. Rime, Dagfinn, 2001. "U.S. Exchange Rates and Currency Flows," SIFR Research Report Series 4, Institute for Financial Research.
    3. Jeanne, Olivier & Rose, Andrew K, 1999. "Noise Trading and Exchange Rate Regimes," CEPR Discussion Papers 2142, C.E.P.R. Discussion Papers.
    4. Jermann, Urban J. & Quadrini, Vincenzo, 2007. "Stock market boom and the productivity gains of the 1990s," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 413-432, March.
    5. Robin Brooks & Hali Edison & Manmohan S. Kumar & Torsten Sløk, 2004. "Exchange Rates and Capital Flows," European Financial Management, European Financial Management Association, vol. 10(3), pages 511-533.
    6. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
    7. Martin D.D. Evans & Richard K. Lyons, 1999. "Order Flow and Exchange Rate Dynamics," NBER Working Papers 7317, National Bureau of Economic Research, Inc.
    8. Jorion, Philippe, 1995. " Predicting Volatility in the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 50(2), pages 507-28, June.
    9. Graciela L. Kaminsky & Carmen M. Reinhart, 1996. "The twin crises: the causes of banking and balance-of-payments problems," International Finance Discussion Papers 544, Board of Governors of the Federal Reserve System (U.S.).
    10. Jeffrey A. Frankel & Andrew K. Rose, 1996. "Currency crashes in emerging markets: an empirical treatment," International Finance Discussion Papers 534, Board of Governors of the Federal Reserve System (U.S.).
    11. Hau, Harald & Rey, Hélène, 2003. "Exchange Rates, Equity Prices and Capital Flows," CEPR Discussion Papers 3735, C.E.P.R. Discussion Papers.
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