The price of freedom: Idiosyncratic currency devaluations

Marshall L. Stocker

Research in International Business and Finance, 2016, vol. 38, issue C, 312-325

Abstract: Differences in economic institutions, as measured by an index of economic freedom, have been correlated to differences in cross-country investment levels, capital market development, and country-level equity index returns. Here, a country’s level of economic freedom is demonstrated to be a proxy measure for the likelihood of an idiosyncratic currency devaluation during periods of low global foreign exchange volatility. This observation makes economic freedom determinant of whether carry traders may be facing a ‘peso problem,’ giving currency speculators insights into a risk factor which the foreign exchange market may not be pricing or for which there is no historical evidence.

Keywords: Uncovered interest parity; Carry trade; Institutions; Economic freedom; Peso problem (search for similar items in EconPapers)
JEL-codes: F31 F37 F41 F42 G12 G15 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:38:y:2016:i:c:p:312-325

DOI: 10.1016/j.ribaf.2016.03.016

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