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

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  • Yin-Wong Cheung

    (Department of Economics, University of California, Santa Cruz, U.S.A.)

  • Kon S. Lai

    (Department of Economics, California State University, Los Angeles, U.S.A.)

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 trade- and 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.

Suggested Citation

  • Yin-Wong Cheung & Kon S. Lai, 2009. "A Multiple-Horizon Search for the Role of Trade and Financial Factors in Bilateral Real Exchange Rate Volatility," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 5(2), pages 187-218, July.
    • Handle: RePEc:jec:journl:v:5:y:2009:i:2:p:187-218
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    Cited by:

    1. Peter Calkins & Songsak Sriboonchitta & Aree Wiboonpongse, 2009. "Econometric Advances in the Service of Macroeconomic Prediction and Planning: An Overview," Journal of Economics and Management, College of Business, Feng Chia University, Taiwan, vol. 5(2), pages 159-166, July.
    2. repec:erh:journl:v:6:y:2014:i:2:p:59-77 is not listed on IDEAS
    3. Munazza Jabeen & Saud Ahmad Khan, 2014. "Modelling Exchange Rate Volatility by Macroeconomic Fundamentals in Pakistan," International Econometric Review (IER), Econometric Research Association, vol. 6(2), pages 58-76, September.

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    More about this item

    Keywords

    exchange rate volatility; time horizons; trade openness; financial openness; financial depth;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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