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Understanding bilateral exchange rate risks

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  • Li, Guangzhong
  • Zhu, Jiaqing
  • Li, Jie

Abstract

We apply the autoregressive conditional jump intensity (ARJI) model to weekly bilateral exchange rate returns of 31 countries and examine the determinants of bilateral exchange rate risks over the period 2001–2013. Consistent with the balance sheet effects in the open economy literature, we find that bilateral exchange rate risks are significantly reduced by external financial liabilities, above and beyond the standard optimal currency area (OCA) factors, and the development of domestic financial sectors will attenuate this effect. Subsample analysis reveals that developed countries also face credit constraints in the global capital market and the negative effects of external liabilities on bilateral exchange rate risks are increasingly pronounced in countries facing more credit constraints.

Suggested Citation

  • Li, Guangzhong & Zhu, Jiaqing & Li, Jie, 2016. "Understanding bilateral exchange rate risks," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 103-129.
    • Handle: RePEc:eee:jimfin:v:68:y:2016:i:c:p:103-129
    DOI: 10.1016/j.jimonfin.2016.07.008
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    More about this item

    Keywords

    Exchange rate risks; GARCH; Optimal currency area; Financial constraints;
    All these keywords.

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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