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The price of freedom: Idiosyncratic currency devaluations

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  • Stocker, Marshall L.

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.

Suggested Citation

  • Stocker, Marshall L., 2016. "The price of freedom: Idiosyncratic currency devaluations," Research in International Business and Finance, Elsevier, vol. 38(C), pages 312-325.
    • Handle: RePEc:eee:riibaf:v:38:y:2016:i:c:p:312-325
    DOI: 10.1016/j.ribaf.2016.03.016
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    More about this item

    Keywords

    Uncovered interest parity; Carry trade; Institutions; Economic freedom; Peso problem;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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