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What Exactly is 'Bad News' in Foreign Exchange Markets? Evidence from Latin American Markets

Cuadernos de economía (Santiago), 2008-11, Vol.45 (132), p.161-183

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License. ;ISSN: 0716-0046 ;ISSN: 0717-6821 ;EISSN: 0717-6821 ;DOI: 10.4067/S0717-68212008000200001

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  • Title:
    What Exactly is 'Bad News' in Foreign Exchange Markets? Evidence from Latin American Markets
  • Author: Maya, Cecilia ; Gómez, Karoll
  • Subjects: asymmetric volatility ; Asymmetry ; Brazil ; Capital market ; Comparative analysis ; Currency ; Economic models ; Economic theory ; ECONOMICS ; Empirical evidence ; Exchange rate volatility ; Exchange rates ; Financial leverage ; Floating exchange rates ; Foreign exchange ; Foreign exchange markets ; Foreign exchange rates ; GARCH ; GARCH models ; HYAPARCH ; Latin America ; leverage effect ; Peru ; Price volatility ; Statistical discrepancies ; Volatility
  • Is Part Of: Cuadernos de economía (Santiago), 2008-11, Vol.45 (132), p.161-183
  • Description: This paper asks whether the 'leverage effect' -as defined by Black (1976) for stock markets-is also a characteristic of foreign exchange markets. The study focuses on five Latin American emerging markets which have adopted a floating exchange regime. It finds that the response of exchange rates to volatility shocks is characterized by long memory and symmetry in most countries. The response is asymmetric only in Brazil and Peru. A possible explanation for this asymmetry is the 'fear of floating' that induces side-effects on interest rates and inflation, which the market considers 'bad news'. The opposite direction of the asymmetry may be explained by the particular characteristics of each economy. El objetivo de este artículo es investigar si el efecto apalancamiento (leverage effect) encontrado en Black (1976) para los mercados accionarios también está presente en el mercado cambiarlo. El estudio se realizó para los cinco países latinoamericanos que han adoptado el régimen de flotación en sus tipos de cambio. Encontramos que las respuestas a los shocks en volatilidad se caracterizan generalmente por larga memoria y simetría, excepto en Brasil y Perú donde dichas respuestas son asimétricas. Una posible explicación a este comportamiento es el miedo a flotar (fear or floating) que al inducir efectos colaterales sobre la tasa de interés y la inflación provoca "malas noticias "para el mercado. Las características peculiares de cada economía pueden explicar las diferentes direcciones que toma la asimetría.
  • Publisher: Universidad Catolica de Chile
  • Language: English;Portuguese
  • Identifier: ISSN: 0716-0046
    ISSN: 0717-6821
    EISSN: 0717-6821
    DOI: 10.4067/S0717-68212008000200001
  • Source: SciELO
    RePEc
    Digital Library of the Commons
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