Exchange rate Volatility and Interest rate Risk: In the case of Pakistan.

Hussain, Adnan and Mubin, Muhammad and Lal, Irfan (2011): Exchange rate Volatility and Interest rate Risk: In the case of Pakistan. Published in: Kashmir Economic Review , Vol. 19, No. 2

Abstract

The study examines the effects of volatility of exchange rate volatility on interest rates and inflation. For this purpose the study used monthly data over the period January 1990 to December 2010. To explore the volatility of exchange rate study used the ARCH (Auto Regressive Conditional Heterosidasticity) and GARCH (Generalized Auto regressive conditional Heterosidasticity). The result shows that positive association between exchange rate risk and interest rate in the form risk premia. The result of the study fulfills the interest parity condition and purchasing power parity.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange rate volatility, ARCH, GARCH
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

Adler, M., and B. Dumas, (1984), “Exposure to currency risk: Definition and measurement”, Financial Management 13, 41-50.

Akçay, O. C. C. EmreAlper, and M. Karasulu, (1997), “Currency Substitution and the Exchange Rate Instability: The Turkish Case”, European Economic Review,41, 827 – 835.

Berument, H. and K. Malatyalı, (2001), “Determinants of Interest Rate in Turkey”, Russian & East European Finance and Trade, 37(1), 5-16.

Bollerslev, T., 1986. “Generalised Autoregressive Conditional Heteroscedasticity”, Journal of Econometrics 31, 307–28.

Branson, W. H. (1976), “Asset Markets and Relative Prices in Exchange Rate Determination” Institute for International Economic Studies, Seminar Paper No. 66, Stockholm. Dornbusch, R. (1976), “Expectations and Exchange Rate Dynamics”, Journal of Political Economy, 84(6), 1161-76.

Frankel, J. A. (1979), “On The Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials” American Economic Review, No.69, pp6101-22.

Furman, J., and J. E. Stiglitz, (1998), “Economic Crises: Evidence and Insights From East Asia” Brooking Papers on Economic Activity, No. 2, Brooking Institution, Washington D.C.

Gould, D. M. and S. B. Kamin, (2000), “The Impact of Monetary Policy on Exchange Rates During Financial Crisis”, International Finance Discussion Paper 669, Board of Governers of the Federal Reserve System, Washington D.C.

Granger, C. W. J. (1969), “Investing Causal Relations by Econometric Models and CrossSpectral Methods” Econometrica, 37, 424-295. Granger, C. W. J. (1986), “Developments in the Study of Co-integrated Economic Variables”, Oxford Bulletin of Economics and Statistics, 48, 226-46.

Hamilton, J. (1994), Time Series Analysis, Princeton University Press, Princeton.

Johansen, S. and Juselius, K. (1990), “Maximum Likelihood Estimation and Inference on Cointegration with Applications to the Demand for Money”, Oxford Bulletin of Economics and Statistics, 52, 169-209.

Muhammad, S. D., and L. Irfan, (2010), “The Euro-Dollar Exchange Rate & Pakistan Economy”, European Journal of Scientific Research, 42(1), 6-15.

Pattnaik, S. and Mitra A. K. (2001), “Interest Rate Defence of Exchange Rate: Tale of the Indian Rupee”, Economic and Political Weekly, 24, 4418-4427.