IDEAS home Printed from https://ideas.repec.org/p/tch/wpaper/cep054.html
   My bibliography  Save this paper

Exchange rate expectation, abnormal returns, and the COVID-19 pandemic

Author

Listed:
  • Joscha Beckmann

    (Faculty of Business Administration and Economics, FernUniversitaet in Hagen and Kiel Institute for the World Economy)

  • Robert L. Czudaj

    (Faculty of Mathematics, Computer Science and Statistics, Ludwig-Maximilians-University Munich and Department of Economics, Chemnitz University of Technology)

Abstract

This study analyzes the impact of the COVID-19 pandemic on exchange rates based on a comprehensive set of survey forecasts for more than 50 currency pairs. At the first stage, we assess whether the policy to manage the COVID-19 pandemic affects the expected path of exchange rates over the medium and long run. At the second stage, we adopt an event study analysis and identify the occurrences of abnormal returns on foreign exchange markets since the start of the COVID-19 pandemic. Our results suggest the presence of cumulated excess returns that are partly driven by macroeconomic fundamentals for major currencies. However, we find that policy responses to the COVID-19 pandemic have the strongest effect on cumulated excess returns, showing that foreign exchange markets take expected policy effects as an important determinant of future developments into account while expectations for minor currencies react stronger to response policies.

Suggested Citation

  • Joscha Beckmann & Robert L. Czudaj, 2022. "Exchange rate expectation, abnormal returns, and the COVID-19 pandemic," Chemnitz Economic Papers 054, Department of Economics, Chemnitz University of Technology, revised Jan 2022.
  • Handle: RePEc:tch:wpaper:cep054
    as

    Download full text from publisher

    File URL: https://www.tu-chemnitz.de/wirtschaft/vwl1/RePEc/download/tch/wpaper/CEP054_Czudaj.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Blake, David & Beenstock, Michael & Brasse, Valerie, 1986. "The Performance of UK Exchange Rate Forecasters," Economic Journal, Royal Economic Society, vol. 96(384), pages 986-999, December.
    2. Lucio Sarno & Giorgio Valente & Hyginus Leon, 2006. "Nonlinearity in Deviations from Uncovered Interest Parity: An Explanation of the Forward Bias Puzzle," Review of Finance, European Finance Association, vol. 10(3), pages 443-482, September.
    3. Filippou, Ilias & Taylor, Mark P., 2017. "Common Macro Factors and Currency Premia," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(4), pages 1731-1763, August.
    4. Bacchetta, Philippe & van Wincoop, Eric, 2013. "On the unstable relationship between exchange rates and macroeconomic fundamentals," Journal of International Economics, Elsevier, vol. 91(1), pages 18-26.
    5. Lucio Sarno & Giorgio Valente, 2009. "Exchange Rates and Fundamentals: Footloose or Evolving Relationship?," Journal of the European Economic Association, MIT Press, vol. 7(4), pages 786-830, June.
    6. 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.
    7. Olivier Coibion & Yuriy Gorodnichenko, 2012. "What Can Survey Forecasts Tell Us about Information Rigidities?," Journal of Political Economy, University of Chicago Press, vol. 120(1), pages 116-159.
    8. Fritsche, Ulrich & Pierdzioch, Christian & Rülke, Jan-Christoph & Stadtmann, Georg, 2015. "Forecasting the Brazilian real and the Mexican peso: Asymmetric loss, forecast rationality, and forecaster herding," International Journal of Forecasting, Elsevier, vol. 31(1), pages 130-139.
    9. Fratzscher, Marcel, 2009. "What explains global exchange rate movements during the financial crisis?," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1390-1407, December.
    10. Lucio Sarno, 2005. "Viewpoint: Towards a solution to the puzzles in exchange rate economics: where do we stand?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 38(3), pages 673-708, August.
    11. Menkhoff, Lukas & Rebitzky, Rafael R. & Schröder, Michael, 2009. "Heterogeneity in exchange rate expectations: Evidence on the chartist-fundamentalist approach," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 241-252, May.
    12. Philippe Bacchetta & Eric Van Wincoop, 2004. "A Scapegoat Model of Exchange-Rate Fluctuations," American Economic Review, American Economic Association, vol. 94(2), pages 114-118, May.
    13. Philippe Bacchetta & Eric Van Wincoop, 2006. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," American Economic Review, American Economic Association, vol. 96(3), pages 552-576, June.
    14. Hossfeld, Oliver & MacDonald, Ronald, 2015. "Carry funding and safe haven currencies: A threshold regression approach," Journal of International Money and Finance, Elsevier, vol. 59(C), pages 185-202.
    15. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    16. Beckmann, Joscha, 2021. "Measurement and effects of euro/dollar exchange rate uncertainty," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 773-790.
    17. Feng, Gen-Fu & Yang, Hao-Chang & Gong, Qiang & Chang, Chun-Ping, 2021. "What is the exchange rate volatility response to COVID-19 and government interventions?," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 705-719.
    18. Ron Jongen & Willem F.C. Verschoor & Christian C.P. Wolff, 2008. "Foreign Exchange Rate Expectations: Survey And Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 22(1), pages 140-165, February.
    19. Gräb, Johannes & Kellers, Moritz & Le Mezo, Helena, 2021. "Rotation towards normality – the impact of COVID-19 vaccine-related news on global financial markets," Economic Bulletin Boxes, European Central Bank, vol. 1.
    20. Beckmann, Joscha & Czudaj, Robert, 2017. "Exchange rate expectations since the financial crisis: Performance evaluation and the role of monetary policy and safe haven," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 283-300.
    21. Jongen, Ron & Verschoor, Willem F.C. & Wolff, Christian C.P. & Zwinkels, Remco C.J., 2012. "Explaining dispersion in foreign exchange expectations: A heterogeneous agent approach," Journal of Economic Dynamics and Control, Elsevier, vol. 36(5), pages 719-735.
    22. Iregui, Ana María & Núñez, Héctor M. & Otero, Jesús, 2021. "Testing the efficiency of inflation and exchange rate forecast revisions in a changing economic environment," Journal of Economic Behavior & Organization, Elsevier, vol. 187(C), pages 290-314.
    23. Beckmann, Joscha & Reitz, Stefan, 2020. "Information rigidities and exchange rate expectations," Journal of International Money and Finance, Elsevier, vol. 105(C).
    24. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    25. Goldbaum, David & Zwinkels, Remco C.J., 2014. "An empirical examination of heterogeneity and switching in foreign exchange markets," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 667-684.
    26. Silvia Miranda-Agrippino & Hélène Rey, 2021. "The Global Financial Cycle," NBER Working Papers 29327, National Bureau of Economic Research, Inc.
    27. Lucio Sarno & Maik Schmeling, 2014. "Which Fundamentals Drive Exchange Rates? A Cross‐Sectional Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(2-3), pages 267-292, March.
    28. Chinn, Menzie & Frankel, Jeffrey, 1994. "Patterns in Exchange Rate Forecasts for Twenty-five Currencies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 759-770, November.
    29. Ranaldo, Angelo & Somogyi, Fabricius, 2021. "Asymmetric information risk in FX markets," Journal of Financial Economics, Elsevier, vol. 140(2), pages 391-411.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Naveed, Hafiz Muhammad & HongXing, Yao & Memon, Bilal Ahmed & Ali, Shoaib & Alhussam, Mohammed Ismail & Sohu, Jan Muhammad, 2023. "Artificial neural network (ANN)-based estimation of the influence of COVID-19 pandemic on dynamic and emerging financial markets," Technological Forecasting and Social Change, Elsevier, vol. 190(C).
    2. Ngo Thai Hung & Vo Xuan Vinh, 2023. "Asymmetric impact of the COVID-19 pandemic on foreign exchange markets: Evidence from an extreme quantile approach," Economics and Business Letters, Oviedo University Press, vol. 12(1), pages 20-32.
    3. Klose, Jens, 2023. "European exchange rate adjustments in response to COVID-19, containment measures and stabilization policies," Economic Modelling, Elsevier, vol. 128(C).

    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. Beckmann, Joscha & Czudaj, Robert, 2017. "Exchange rate expectations since the financial crisis: Performance evaluation and the role of monetary policy and safe haven," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 283-300.
    2. Beckmann, Joscha & Czudaj, Robert L., 2020. "Fundamental determinants of exchange rate expectations," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224617, Verein für Socialpolitik / German Economic Association.
    3. Joscha Beckmann & Gary Koop & Dimitris Korobilis & Rainer Alexander Schüssler, 2020. "Exchange rate predictability and dynamic Bayesian learning," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(4), pages 410-421, June.
    4. Beckmann, Joscha & Czudaj, Robert, 2017. "The impact of uncertainty on professional exchange rate forecasts," Journal of International Money and Finance, Elsevier, vol. 73(PB), pages 296-316.
    5. Francesca Pancotto & Giuseppe Pignataro & Davide Raggi, 2015. "Social Learning and Higher Order Beliefs: A Structural Model of Exchange Rates Dynamics," LEM Papers Series 2015/24, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    6. Dick, Christian D. & MacDonald, Ronald & Menkhoff, Lukas, 2015. "Exchange rate forecasts and expected fundamentals," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 235-256.
    7. Rime, Dagfinn & Sarno, Lucio & Sojli, Elvira, 2010. "Exchange rate forecasting, order flow and macroeconomic information," Journal of International Economics, Elsevier, vol. 80(1), pages 72-88, January.
    8. Daniel L. Thornton, 2019. "Resolving the unbiasedness and forward premium puzzles," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(1), pages 5-27, February.
    9. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    10. Beckmann, Joscha, 2021. "Measurement and effects of euro/dollar exchange rate uncertainty," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 773-790.
    11. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    12. F. Pancotto & G. Pignataro & D. Raggi, 2014. "Higher order beliefs and the dynamics of exchange rates," Working Papers wp957, Dipartimento Scienze Economiche, Universita' di Bologna.
    13. Kwas, Marek & Beckmann, Joscha & Rubaszek, Michał, 2024. "Are consensus FX forecasts valuable for investors?," International Journal of Forecasting, Elsevier, vol. 40(1), pages 268-284.
    14. Liu, De-Chih & Chang, Yu-Chien, 2022. "Systematic variations in exchange rate returns," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 569-583.
    15. Bacchetta, Philippe & van Wincoop, Eric, 2013. "On the unstable relationship between exchange rates and macroeconomic fundamentals," Journal of International Economics, Elsevier, vol. 91(1), pages 18-26.
    16. Frederik Kunze, 2020. "Predicting exchange rates in Asia: New insights on the accuracy of survey forecasts," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(2), pages 313-333, March.
    17. David Alan Peel & Pantelis Promponas, 2016. "Forecasting the nominal exchange rate movements in a changing world. The case of the U.S. and the U.K," Working Papers 144439514, Lancaster University Management School, Economics Department.
    18. Lorenzo Pozzi & Barbara Sadaba, 2017. "Detecting Scapegoat Effects in the Relationship Between Exchange Rates and Macroeconomic Fundamentals," Staff Working Papers 17-22, Bank of Canada.
    19. Beckmann, Joscha & Czudaj, Robert, 2017. "Exchange rate expectations and economic policy uncertainty," European Journal of Political Economy, Elsevier, vol. 47(C), pages 148-162.
    20. Fratzscher, Marcel & Rime, Dagfinn & Sarno, Lucio & Zinna, Gabriele, 2015. "The scapegoat theory of exchange rates: the first tests," Journal of Monetary Economics, Elsevier, vol. 70(C), pages 1-21.

    More about this item

    Keywords

    Abnormal returns; COVID-19 pandemic; Exchange rates; Expectations; Survey data;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

    Statistics

    Access and download statistics

    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:tch:wpaper:cep054. 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: Christian Kulitza (email available below). General contact details of provider: https://edirc.repec.org/data/fwtucde.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.