Global Capital Flows, Time Varying Fundamentals and Transitional Exchange Rate Dynamics: An MS-VAR Approach

Abstract

This paper studies whether dynamic relationship between exchange rate and economic and financial fundamentals vary depending on exchange rate is overvalued and undervalued with respect to its fundamental value. To achieve this, we implement two-state Markov Switching Vector Auto Regression (MSVAR) model with time varying transition probabilities to investigate whether the relationship among exchange rate, interest rate and inflation dynamics depend on overvaluation and undervaluation of exchange rates for the pre-crises period between years 1972-2009. We govern the transition between the undervalued and overvalued states by using Sharpe Ratios of debt and equity investments of the currency to assess whether risk adjusted returns induce overvaluation or undervaluation of the currencies. We employ this model to the bilateral exchange rate, which is defined between US Dollar and four highly traded currencies (AUD, CAD, JPY, and UKS). We provide evidence that the relationship among these variables varies in terms of on magnitude, direction and statistical significance in between the overvalued and undervalued regimes. Furthermore, we show that risk adjusted excess debt and equity returns influence the overvaluation and the undervaluation of the currencies.

Keywords

• Capital flows
• markov regime switching
• sharpe ratio

Küresel Sermaye Akımları, Zamana Göre Değişen Temeller ve Geçişken Kur Dinamikleri: Bir MS-VAR Yaklaşımı

Abstract

Bu çalışma döviz kurları ile ekonomik ve finansal değişkenler arasındaki dinamik ilişkinin kurun temel değerine göre daha değerli ve az değerli olmasına bağlı olarak nasıl değiştiğini araştırmaktadır. Bu maksatla, kriz öncesi 1972-2009 yılları arasında, döviz kuru, faiz oranı ve enflasyon dinamikleri arasındaki ilişkinin kurun daha değerli ve az değerli olmasına bağlı olup olmadığını incelemek için zamanla değişen geçiş olasılıklarını kullanan MSVAR yöntemi uygulanmıştır. Riske uyarlanmış getirinin, para birimlerinin daha değerli veya az değerli olmasına neden olup olmadığını belirlemek için, borç ve öz kaynak yatırımlarının Sharpe oranları kullanılarak daha değerli ve az değerli durumlar arasındaki geçişler sağlanmıştır. Bu model en fazla işlem hacmine sahip olan, Amerikan Doları ve 4 para birimi (AUD, CAD, JPY ve UKS) arasındaki ikili döviz kurları için uygulanmıştır. Bu değişkenler arasındaki ilişkinin daha değerli ve az değerli rejimler arasında yön, büyüklük ve istatiksel anlamlılık açısından değiştiği belgelenmiştir. Ayrıca, riske uyarlanmış hisse senedi ve borç senedi getirilerinin kurların daha değerli olmasını ve az değerli olmasını etkilediği gösterilmiştir.

Keywords

• Sermaye akımları
• markov switching modeli
• sharpe oranı

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