Foreign Exchange Markets: Overview of the Special Issue

Posted: 1 May 2010

See all articles by Kees C. G. Koedijk

Kees C. G. Koedijk

Tilburg University - Department of Finance

James R. Lothian

Gabelli School of Business, Fordahm University; National Bureau of Economic Research (NBER)

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM)

Date Written: January 1, 2006

Abstract

Researchers in the field of foreign exchange markets have worked hard to understand the behavior of nominal and real exchange rates and the mechanics of the markets in which nominal exchange rates are determined. JIMF has played a continual role in this process, via both the research that it has published and the conferences that it has sponsored to bring researchers together to share ideas. The purpose of this special issue is to extend these lines of research and to create fruitful avenues for further academic work on the subject. The three papers in this issue that deal with uncovered interest parity, although they do not solve the UIP puzzle completely, provide some important pieces to it. They demonstrate that our understanding of UIP increases considerably when we either take into account data for more recent years, longer horizons or emerging markets, use survey data to measure anticipated exchange-rate rather than actual values, use models that allow for nonlinearities in the UIP relationship, or incorporate heterogeneous beliefs into models of bond prices. The two high-frequency studies of exchange rate fluctuations contained in this special issue reveal important effects of oral interventions by monetary authorities as well as of a much wider array of news events than previously reported. They thus add to the new second-generation body of high-frequency literature, which goes beyond pure description of the data to try to discover the links between traders’ behavior and the flow of economic information. This literature, as two of the more prominent contributors to it have recently argued (Evans and Lyons, 2005), is now beginning to supply some major pieces to the ‘‘exchange-rate disconnect’’ puzzle. Thus providing evidence of macroeconomic influences on exchange rates at short horizons of the sort that the PPP studies have provided at much longer horizons. Further empirical evidence presented in this special issue indicates that realistic exchange rate premia can be obtained using asset pricing models, that both the probability and the extent of currency crises are related to institutional factors as well as country-specific economic factors and that, in what amounts to a new puzzle of sorts, differences in exchange rate volatilities between developing and industrial countries cannot readily be ascribed to differences in real and nominal shocks.

Keywords: Foreign Exchange Markets, Exchange Rates, Purchasing Power Parity, Uncovered Interest Parity, Monetary Policy

JEL Classification: F31, G15, E52

Suggested Citation

Koedijk, Kees G. and Lothian, James R. and Van Dijk, Mathijs A., Foreign Exchange Markets: Overview of the Special Issue (January 1, 2006). Journal of International Money and Finance, Vol. 25, pp. 1-6, 2006. Available at SSRN: https://ssrn.com/abstract=1598723

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

James R. Lothian

Gabelli School of Business, Fordahm University ( email )

113 West 60th Street
New York, NY 10023
United States
212-636-6147 (Phone)
212-765-5573 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mathijs A. Van Dijk (Contact Author)

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31 10 408 1124 (Phone)
+31 10 408 9017 (Fax)

HOME PAGE: http://mathijsavandijk.com/

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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