Portfolio Balance Approach to Exchange Rate Determination: Testing a Model by Applying Bilateral Data of Turkey and United States1

Year 2018, Volume: 18 Issue: 3, 423 - 434, 01.07.2018

Recep Tarı , Mehmet Çağrı Gözen

Abstract

Turkish economy started to be liberated in the

beginning of 1980’s and gradually to be a part of

global economic and financial system. But as a result

of economic articulation of Turkey to the global

world, global economic and financial headwinds

have affected trade and economy especially via

exchange rates. Since Turkey is of ever-growing

foreign trade volume with global economic world

determination of fluctuations in exchange rates has

increased in importance. Due to global integration

of financial markets, inflow and outflow of foreign

bonds could cause economic agents to change

currency composition of foreign assets to reduce

the risks arisen from exchange rates. This situation

can negatively affect exchange rates by fluctuating

them. Aim of this study is to empirically investigate

the portfolio balance effect on exchange rates. In

this context, different version of Cushman’s model

(2007) using monthly bilateral data of Turkey

and U.S. covering the period 2006-2016 will be

employed and portfolio balance approach to the

exchange rates determination will be tested by

performing cointegration test allowing for multiple

structural breaks.

Keywords

Exchange Rate Determination Approaches, Portfolio Balance, Risk Premium, Maki Cointegration Test

References

• Alper, A. M. (2010), “Sürdürülebilir Reel Döviz Kuru: Türkiye Örneği”, Yayınlanmamış Doktora Tezi, Ankara: Ankara Üniversitesi Sosyal Bilimler Enstitüsü.
• Atış, A. G. (2008), “Türkiye’de Denge Döviz Kurunun Belirlenmesinde Portföy Yaklaşımı”, Yayınlanmamış Doktora Tezi, İzmir: Dokuz Eylül Üniversitesi Sosyal Bilimler Enstitüsü. Ay A. (1996) , “Döviz Kurunun Belirlenmesinde Portföy Denge
• Modeli Yaklasımı: Türkiye Örneği (1989-1996), Yayınlanmamış Doktora Tezi, Konya: Selçuk Üniversitesi Sosyal Bilimler Enstitüsü.
• Aydemir, O. ve Demirhan, E. (2009), “The Relationship between Stock Prices and Exchange Rates Evidence from Turkey”, International Research Journal of Finance and Economics, 23, s.207-215.
• Bai, J. ve Perron, P. (1998), “Estimating and Testing Linear Models with Multiple Structural Changes”, Econometrica, 66, s. 47–78.
• Bai, J. ve Perron, P. (2003), “Computation and Analysis of Multiple Structural Change Models” Journal of Applied Econometrics, 18, s. 1–22.
• Berke, B. (2012), “Döviz Kuru ve IMKB100 Endeksi İlişkisi: Yeni Bir Test”, Maliye Dergisi, Sayı 163, s. 243-257.
• Bisignano J. ve Hoover K. (1983), “Some Suggested Improvments to A Simple Portfolio Balance Model of Exchange Rate Determination with Special Reference to the US Dollar-Canadian Dollar Rate”, Weltwirtschaftliches Archiv, 119, s.19-37.
• Black, S.W. (2013), “The Portfolio Theory of Exchange Rates- Then and Now”, Review of International Economics, 23(2), s. 379-386.
• Branson, W. H., Haltunen, H., ve Masson, P. (1977), “Exchange Rates in the Short Run”, European Economic Review, 10, s. 395−402.
• Branson, W. H. (1977), “Asset Markets and Relative Prices in Exchange Rate Determination, Sozialwissenschafiliche Annalen, 1(1), s. 69-89.
• Branson, W. H. (1981), “Macroeconomic Determinants of Real Exchange Rates,’ NBER Working Paper, No. 801, Cambridge, MA: NBER.
• Branson, W. H. (1983), “A Model of Exchange Rate Determination with Policy Reaction: Evidence from Monthly Data,’ NBER Working Paper, No. 1135, Cambridge, MA: NBER.
• Branson,W.H. (1983), “Macroeconomic Determinants of Real Exchange Risk”, R.J. Herring (ed.), Managing Foreign Exchange Risk, Cambridge: Cambridge University Press.
• Branson, W. H., ve Henderson, D. W. (1985), “The Specification and Influence of Assets Markets”, R. W. Jones, & P. B. Kenen (Eds.), Handbook of international economics, Sayı 2, Amsterdam: Elsevier.
• Breedon, F. ve Vitale, P. (2010) “An Empirical Study of Portfolio- balance and Information Effects of Order Flow on Exchange Rates,” Journal of International Money and Finance, 29, s. 504–524.
• Copeland, L. (2005), “Exchange Rates and International Finance”, Pearson Education Limited.
• Cushman, O. D. (2003), A Portfolio Balance Approach to the Canadian- U.S. Exchange Rate, (http://homepage.usask. ca/~doc658/PBpaper.pdf), (Erişim Tarihi: 09.10.2013), s.1-35
• Cushman, D.O. (2007), “A Portfolio Balance Approach to the Canadian-US Exchange Rate”, Review of Financial Economics, 19, s. 305-320.
• Doğru, B. ve Recepoğlu, M. (2013), “Türkiye’de Hisse Senedi Fiyatları ve Döviz Kuru Arasında Doğrusal ve Doğrusal Olmayan Eş Bütünleşme İlişkisi”, Dumlupınar Üniversitesi Sosyal Bilimler Dergisi (Özel Sayı), s. 17-34.
• Erer, D., Erer, E. ve Güleç, T.C. (2015), “Fractional Cointegration Analysis of Stock Market and Exchange Rates: The Case of Turkey”, Financial Studies, 20(3).
• Fama, E.F. (1970),”Efficient Capital Markets: A Review of Theory and Empirical Work”, Journal of Finance, 25, s. 383-417.
• Fama, E.F. (1991),”Efficient Capital Markets: II”, Journal of Finance, 46, s. 1575-1617.
• Fatum, R. (2015), “Foreign Exchange Intervention When Interest Rates are Zero: Does the Portfolio Balance Channel Matter After All?”, Journal of International Money and Finance, 57, s. 185-199.
• Frankel, J. (1983), “Monetary and portfolio balance models of exchange rate determination”, J. Bhandari, & B. Putnam (Eds.), Economic interdependence and flexible exchange rates, Cambridge, MA: MIT Press, s. 84−114.
• Frankel, J. (1984), “Tests of monetary and portfolio-balance models of exchange rate determination”, J. Bilson, & R. Marston (Eds.), Exchange rate theory and practice Chicago: University of Chicago Press.
• Gregory, A.W. ve Hansen B.E. (1996a), “Residual Based Tests for Cointegration in Models with Regime Shifts”, Journal of Econometrics, 70, s. 99-126.
• Gregory, A.W., Hansen, B.E., (1996b), “Tests for Cointegration in Models with Regime and Trend Shifts” Oxford Bulletin of Economics and Statistics, 58, s. 555–560.
• Gregory, A.W., Nason, J.M. ve Watt, D.G., (1996) “Testing for Structural Breaks in Cointegration Relationships”, Journal of Econometrics, 71, s. 321–341.
• Hall, S.G., Hondroyiannis, G., Swamy, P.A.V.B. ve Tavlas, G.S. (2008), “A Portfolio Balance Approach to Euro-Area Money Demand in a Time-Varying Environment”, University of Leichester Working Paper No. 08/9, s.1-37.
• Hatemi-J, A. (2008), “Tests for Cointegration with Two Unknown Regime Shifts with an Application to Financial Market Integration”, Empirical Economics, 35, s. 497–505.
• Hatemi-J, A. (2012), “Asymmetric Causality Tests with an Application”, Empirical Economics, 43(1), s. 447–456.
• Hatemi-J, A., Al Shayeb, A. ve Roca, E. (2017), “The Effect Of Oil Prices On Stock Prices: Fresh Evidence From Asymmetric Causality Tests”, Applied Economics, 49(16), s. 1584-1592.
• Karacaoğlu, A. (2010), “Portföy Dengesi Yaklaşımı ve Türkiye Örneği”, Yayınlanmamış Yüksek Lisans Tezi, Ankara: Gazi Üniversitesi Sosyal Bilimler Enstitüsü.
• Kapetanios, G. (2005), “Unit-Root Testing against the Alternative Hypothesis of up to m Structural Breaks” Journal of Time Series Analysis, 26, s. 123–133.
• Khan, A. Ve Abbas, Z. (2015), “Portfolio Balance Approach: An Empirical Testing”, Journal of Economics and International Finance, 7(6), s. 137-143.
• Kilian, L. ve Vigfusson, R.J. (2011), “Are the Responses of U.S. Economy Asymmetric in Energy Price Increases and Decreases?”, Quantitative Economics, 2, s. 419-453.
• Kim, K. (1986), “An Exchange Rate Determination by Portfolio Approach in Korea: Empirical Results”, Journal of Economic Integration, 1(2), s. 194-208.
• Lewis, K.K. (1986), “Testing the Portfolio Balance Model: A Multi-Lateral Approach”, Journal of International Economics, 24, s. 109-127.
• MacDonald, R. (2007), “Exchange Rate Economics: Theories and Evidence”, Taylor & Francis Group: Taylor & Francis E-Library.
• Maki, D. (2012), “Tests for Cointegration Allowing for an Unknown Number of Breaks”, Economic Modelling, 29, s. 2011- 2015.
• Mark, N.C. (1995), “Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability”, The American Economic Review,85(1), s. 201-218.
• Markowitz, H. (1952), “Portfolio Selection”, The Journal of Finance, 7, No.1, s. 77-91.
• Min, H.G. ve McDonald, J. (1993), “The Portfolio Balance Model of Exchange Rates: Short-Run Behavior and Forecasting (The Korean Won/U.S. Dollar Case)”, International Economic Journal, 4, s. 75-87.
• Nwafor; F. (2008), “Portfolio Balance Model of Exchange Rate Behavior: A Peso-Dollar Example”, The Icfai University Journal of Financial Economics, 6, s.41-47.
• Öcal, M. S. (1990), “Döviz Kurunun Belirlenmesinde Portfölyo Yaklaşımı ve Türkiye Üzerine Bir Deneme (1985-1989)”, Yayınlanmamış Yüksek Lisans Tezi, Ankara: Gazi Üniversitesi Sosyal Bilimler Enstitüsü.
• Öruç, E. (2016), “Döviz Kurlarının Belirlenmesinde Parasalcı Yaklaşım: Türkiye Örneği”, Kocaeli Üniversitesi Sosyal Bilimle r Dergisi, 32, s. 101-122.
• Pekkaya, M. ve Bayramoğlu, M. F., “Hisse Senedi Fiyatları ve Döviz Kuru Arasındaki Nedensellik İlişkisi: YTL/USD, IMKB100 ve S&P500 Üzerine Bir Uygulama”, Muhasebe ve Finansman Dergisi, Sayı 38, s. 163-176.
• Tze-Haw, C., Teck, L.C. ve Chee-Wooi, H. (2013), “Forecasting Malaysian Ringgit: Before and After the Global Crisis”, AAMJAF, 9(2), s. 157-175.
• Umer, U.M, Güven, S. ve Kamışlı, S. (2015), “The Dynamic Linkages between Exchange Rates and Stock Prices: Evidence from Emerging Markets”, Journal of Finance and Investment Analysis, 4(3), s. 17-32.
• Yılancı, V. Ve Bozoklu, Ş. (2015), “Analysis of Symmetric and Asymmetric Nonlinear Causal Relationship Between Stock Prices and Exchange Rates for Selected Emerging Market Economies”, Doğuş Üniversitesi Dergisi, 16(2), s. 155-164.