Exchange Rate Effects on the Volume of Trade Flows: An Empirical Analysis Employing High-Frequency Data

Christopher F Baum, Mustafa Caglayan, Neslihan Ozkan
Authors registered in the RePEc Author Service: Mustafa Caglayan (m.caglayan@hw.ac.uk) and Christopher Baum

No 85, Computing in Economics and Finance 2001 from Society for Computational Economics

Abstract: "Despite the common view that exchange rate volatility will inevitably depress the volume of international trade by increasing the riskiness of trading activity, empirical researchers have not found clear support for this relationship, with results being characterised as insignificant or where significant, conflicting." (McKenzie, 1999, p.72) In this paper, we empirically investigate the impact of exchange rate volatility on real international trade flows, but with a much broader perspective and an improved measure of volatility. Our 18-country data set consists of bilateral real exports for the period 1980-1999 on a monthly basis in each direction. Our study also improves upon much of the literature in its method of quantifying exchange rate volatility. We utilize daily spot exchange rates to compute one month-ahead exchange rate volatility from the intra-monthly variations in the exchange rate. This should provide a more representative measure of the perceived volatility which economic agents must consider, as well as avoiding other potential problems, such as the high persistence of real exchange shocks when moving average representations are used, or high correlation in volatility when ARCH/GARCH models are utilized to quantify exchange rate volatility. Our preliminary analysis suggests that bilateral exchange volatility measures calculated from these data will shed considerable light on the debate about the impact of exchange rate volatility on trade flows.

Keywords: exchange rates; volatility; trade flows (search for similar items in EconPapers)
JEL-codes: C22 F17 F31 (search for similar items in EconPapers)
Date: 2001-04-01
New Economics Papers: this item is included in nep-ifn
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Citations: View citations in EconPapers (9)

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Working Paper: Exchange Rate Effects on the Volume of Trade Flows: An Empirical Analysis Employing High-Frequency Data (2000)
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