Information arrival, interest rate differentials, and yen/dollar exchange rate

This paper examines the effects of interest rate differentials as inflowing information into the forex market on the yen/dollar exchange rate and unexpected trading volume by a structural VAR model. The impulse responses show that the short-term interest rate differential affects the exchange rate t...

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Bibliographic Details
Published inJapan and the world economy Vol. 18; no. 1; pp. 108 - 119
Main Authors Kitamura, Yoshihiro, Akiba, Hiroya
Format Journal Article
LanguageEnglish
Published Elsevier B.V 2006
Elsevier
SeriesJapan and the World Economy
Subjects
Currency market
Dollar
Exchange rates
Financial information
Information
Interest rate differentials
Portfolio management
Vector-autoregressive models
Yen
Yen/dollar exchange rate
C22 time-series models
F31 foreign exchange
Information
Interest rate differentials
Yen/dollar exchange rate
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Summary:This paper examines the effects of interest rate differentials as inflowing information into the forex market on the yen/dollar exchange rate and unexpected trading volume by a structural VAR model. The impulse responses show that the short-term interest rate differential affects the exchange rate through (a) UIP with little change in unexpected trading volume, and (b) different expectation revisions at different points in time with a high transaction volume. The effects of long-term interest rate differential on the exchange rate appear instantaneous with high trading volume, reflecting instantaneous reshuffling in international portfolio holdings of long-term assets.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0922-1425
1879-2006
DOI:10.1016/j.japwor.2004.05.004