A Multiple-Horizon Search for the Role of Trade and Financial Factors in Bilateral Real Exchange Rate Volatility

Yin-Wong Cheung and Kon S. Lai
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Kon S. Lai: California State University, Los Angeles

No 212009, Working Papers from Hong Kong Institute for Monetary Research

Abstract: This study investigates the sources of bilateral real exchange rate (RER) volatility in industrial countries. Going beyond traditional macroeconomic determinants, we identify the role of both tradeand finance-related factors in explaining RER volatility at different time horizons. The results suggest that RER volatility tends to increase with financial openness and with transport costs but decrease with trade openness and with financial depth. Moreover, the time horizon matters. Financial factors (financial openness and financial depth) are found to influence RER volatility at primarily short horizons, while trade-related factors (trade openness and transport costs) contribute significantly also to RER volatility at much longer horizons. The relative importance of traditional macroeconomic fundamentals and these trade- and finance-related factors can vary considerably across horizons.

Keywords: Exchange Rate Volatility; Time Horizons; Trade Openness; Financial Openness; Financial Depth (search for similar items in EconPapers)
JEL-codes: F15 F31 F41 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2009-06
New Economics Papers: this item is included in nep-ifn and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: A Multiple-Horizon Search for the Role of Trade and Financial Factors in Bilateral Real Exchange Rate Volatility (2009)
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