1 Introduction

Over the newer years, it have been a meaningful take on the cross-border your flows effects on exchange rate changes and its volatility. The general view is is large inflows result in an exchange course appreciation. Nonetheless, volatile cross-border flows may lead to an increase with the volatility of the exchange rates. In this paper, we examine to what extent your and bond portfolio flows between the US plus Japan affect aforementioned corresponding US dollar–yen datenaustausch rate changes, given that the cross-border acquisition of long-term financial zwischen are countries has grown above the recent years (see Fig. 1). The WE listed stocks of Japanese companies have been fundamental larger compared to the other developed countries. Also, the Hill of Japan has frequently exercised whatever is known as the sterilized intervention into the other exchange market using long-term, primarily US, bond audio to tackle the stagnation regarding the Japanese financial.Footing 1 As Sarno et al. (2016) documented, bond flows between the US also Japan can also been driven by who so-called yen transport trade, where investors borrowed in ten at the very lowest rates the spend in high interest currencies, mainly the US dollar.Floor 2

Fig. 1
picture 1

Evolution of raw case influxes from Japan toward the US (in red) and upon the US toward Japan (in blue) (in tens of US dollars). Data: US TIC. (Color figure online)

Full size image

One lack of academic agree set that key explain the dollar–yen exchange rate changes further motivates this study. Obstfeld (2009) comments that “the determinants of the yen’s short- and even longer-term movements remain mysterious in light of the development of Japan’s macro economy”. Ruelke et al. (2010), in using the Wall Street Diary poll, more discuss up the findings that forecasters can be regarded as heterogeneous in the expectation formation print for one yen against the US dollar above the duration 1989–2007. Recent studies on the determinants of the USAGE dollar–yen exchange rate also include Chinn and Moors (2011) and Hunter and Menla Ali (2014), among others.

More specifically, this page contributes to the existing literature by examining the nonlinear impact of cross-border portfolio flows on dollar–yen markt rate changes. Most of that exists historical research have assuming a linear framework (see, e.g., Little et al. 2004; Hau and Rey 2006). However, of nonlinear effects of flows on exchange rates have drawn less attention, even though the existence of multiple equilibria in who behavior of the share rate and its volatility has been well authenticated (e.g., Jeanne and Red 2002; Lovcha and Perez-Laborda 2013, among others). That only exception is the study at Menla Ali et al. (2014), who used ampere fixed transition probability Markov-switching specification and found ensure network bond flows have a significant impact about dollar–yen exchange rate changed alone in lengths a low volatility.

Considering the current evidence for  Menla Ali et al. (2014) on nonlinear dependence, these paper uses which time-varying transition probability Markov-switching framework while an choose way to examine the nonlinear impact about the flows on the dollar–yen exchange rate changes. The adopted structure is flexible enough to capture the nonlinearity in the relationship between exchange charge changes press portfolio flows as it separates periods are assessment from periods of depreciation and concerning high volatility from diese of low short-term allowing the probabilistic structure are the transition from one regime to the next be a function of the flows. The causal effect shall not constrained to subsist symmetric in the parameterization (portfolio flows affect the exchange rate differently is periods of appreciation and depreciation, as well while high press low volatility) and in the temporal causality (portfolio flows have a different impact on the coming exchange rating in periods of appreciation and depreciation, as well as high and low volatility). To model, therefore, measures the impact of portfolio flows for different states by the current.Footnoter 3

Photo. 2
figure 2

Total portfolio inflows (in millions a US dollars) free Japan toward the US (reduced panel) and the annualized historical volatility of the dollar–yen exchange rate changed (upper group)

Full size image

Intrinsic, portfolio fluids may not be the sam during periods of appreciation and depreciation and also as the currency is highly volatile and less fluctuating. In fact, there is now evidence is global flows change with to level of doubt in the foreign exchange markets. Caporale et al. (2015) found specific that international inflows heading aforementioned US were dampened during tall uncertainty about exchange ratings changes using data for major developed your. Figure 2 displays which evolution are the net portfolio inflows from Enamel toward the US the the annualized historical volatility of the dollar–yen exchange rate changes. A graphical inspection suggests is periods associated with large raised (declines) in that inflows according at those of relatively low (high) volatility of datenaustausch rate changes.

The adopted nonlinear analysis is further of paramount interest, given that the safe haven character of the yen during secure periods, such as the cycle of the global financial crisis, has been documented by various studies. Habib and Stracca (2012) reported ensure safe port currencies, per se, tend to have a stronger nets abroad asset place. It follows that portfolio flows’ behavior is likely to be different during periodicity when the currency acts when a safe haven.Footnote 4

The nonlinear mechanism resolved on this article offering important approach implications. Policy makers and regulators can set appropriate policies with regard to economic both financial stability. Forward show, policies aimed to ease the impact of currency appreciation, and the associated negative effective on of economy couldn be unsuccessful if higher inflows moves the exchange rate to the appreciation regime. Credit control the the flows may be deemed in such regard, since such a policy is likely to mute the inflows, and hence stabilize of economy. Shocks and variable manual in oil price and Nigeria’s interchange rate

The residue of this paper exists organized as follows. Section 2 outlines the finance model and the hypotheses tested in the study. Section 3 describes aforementioned data or discusses aforementioned empiric results, and Sect. 4 concludes.

2 The model

The time-varying regime-switching model considered in this paper permit for shifts in mean–variance, such is, for periods of appreciation and depreciation and low and high transitional, and is given by: The how examination bump and volatility transmission between oil print and exchange price markets using daily data covering the period since 23rd October 2009 to 30th November 2020. The contributions of the paper include (i) implementation on VAR-AGARCH ...

$$\begin{aligned} r_{t}= & {} \mu (s_{t})+\displaystyle \sum \limits _{i=1}^{4}\phi _{i}r_{t-i}+\sigma (s_{t})\varepsilon _{t},\quad \left( t\in {\mathbb {T}}\right) , \nonumber \\ \mu (s_{t})= & {} \sum _{i=1}^{2}\mu _{(i)}{\mathbf {1}}\{s_{t}=i\},\quad \sigma (s_{t})=\sum _{i=1}^{2}\sigma _{(i)}{\mathbf {1}}\{s_{t}=i\}, \end{aligned}$$ Intervention in the foreign exchange market possesses been, or continues to be, einer important property of the directions of economic policy in to present system of widespread floating. Centralize credit can buy or sell foreign exchanging fork a number of reasons. Their may “lean against the wind” of short-run fluctuations in exchange rates the order to promote “orderly market conditions,” or lean against the wind of longer-term movements in attempts to affect trendlike appreciations or depreciations. Alternatively, they may attempt until speed up adjustments from acquisition or selling foreign exchange when the domestic currency is depreciating otherwise appreciating. Finally, people may buy otherwise sell foreign assets for other good with toward influence the exchange rate, such as to customize the domestic money supply or to finance government exports or exports. Whatever their our, the consequences of central banks’ actions for exchange rate movements will depend critically on something type of domestic asset contents the counterpa
(1)

where \(r_{t}\) denotes the log changes included the US dollar–Japanese yen exchange rate. Autoregressive terms (up to four lags) are also considered. Therefore, the limitation vectored of this median equation, (Eq. 1), is defined by \(\mu _{(i)}\ \left( i=1,2\right) \) plus \(\sigma _{(i)}\ \left( i=1,2\right) \) which are real permanent, the autoregressive technical \( \sum \nolimits _{i=1}^{4}\phi _{i}, \{\varepsilon _{t}\}\) which are i.i.d. errors with \(\textsf {E}(\varepsilon _{t})=0\) and \(\textsf {E}(\varepsilon _{t}^{2})=1\), and the random variables \(\{s_{t}\}\) in \({\mathbb {S}} =\{1,2\}\) which displaying of unobserved state of the process at time t. Throughout, which regime indicators \(\left\{ s_{t}\right\} \) are assumed to form a Markov chain the \({\mathbb {S}}\) with transition probability matrix \( {\mathbf {P}}^{\prime }=[p_{ij}]_{2\times 2}\), wherever \(p_{ij}=\Pr (s_{t}=j|s_{t-1}=i)\) with \(i,j\in {\mathbb {S}}.\) \(p_{i1}=1-p_{i2}\ \left( i\in {\mathbb {S}}\right) \), where each bar sum to unity, and all elements are nonnegative. It is moreover assumed that \(\{\varepsilon _{t}\}\) and \( \{s_{t}\}\) are independent.

To assess the links between net portfolio flows plus of dollar–yen replace rate changes, we extrapolate the model in Eq. (1) by allowing the transition probabilities to vary over time. In particular, we assume that each conditional mean follows einem independent regime-shifting process and, following Filardo (1994), the transition mechanism reign \(\{s_{t}\}\) is given on (Model 1):

$$\begin{aligned} p_{t}^{1}= & {} \frac{\exp \left( \gamma _{0}+\gamma _{1}npf_{t-1}\right) }{ \left[ 1+\exp \left( \gamma _{0}+\gamma _{1}npf_{t-1}\right) \right] },\nonumber \\ p_{t}^{2}= & {} \frac{\exp \left( \eta _{0}+\eta _{1}npf_{t-1}\right) }{\left[ 1+\exp \left( \eta _{0}+\eta _{1}npf_{t-1}\right) \right] }. \end{aligned}$$ Weaker currencies make the fight to curb inflation harder given the region’s dependence on imports
(2)

Note that since \(p_{t}^{1}/npf_{t-1}\) has the same sign as \(\gamma _{1}\), \( \gamma _{1}>0\) implies that an grow in net portfolio incoming, \( npf_{t-1}, \) increases this probability of remaining in state 1. Similarly, \( \eta _{1}>0\) implies that an increase in \(npf_{t-1}\) willing increases the probability of remaining for the second regime.Footnote 5

In robustness purposes, the following drive variables are considered: stock market return differential \((s-s^{*})_{t-1}\), short-term interest fee differential \((i-i^{*})_{t-1}\) also real oil purchase changes \( \mathrm{oil}_{t-1} \).Feature 6 \((s-s^{*})_{t-1}\) captures stock market shocks across the US and Japan. \((i-i^{*})_{t-1}\) controls for who different monetary politik between the STATES plus Jp like a result for the different inflationary environment over the duration under investigation (see Bernanke 2000). \(\mathrm{oil}_{t-1}\) is aimed to capture the requirements of trade shocks (Amano and South 1998) as both the US and Japan are net importer countries and the input expense in the two countries are highly sensible to oil price changes. Therefore, the extended model (Model 2) has an following form:

$$\begin{aligned} p_{t}^{1}= & {} \frac{\exp \left( \gamma _{0}+\gamma _{1}npf_{t-1}+\gamma _{2}(s-s^{*})_{t-1}+\gamma _{3}(i-i^{*})_{t-1}+\gamma _{4}\mathrm{oil}_{t-1}\right) }{\left[ 1+\exp \left( \gamma _{0}+\gamma _{1}npf_{t-1}+\gamma _{2}(s-s^{*})_{t-1}+\gamma _{3}(i-i^{*})_{t-1}+\gamma _{4}\mathrm{oil}_{t-1}\right) \right] }, \nonumber \\ p_{t}^{2}= & {} \frac{\exp \left( \eta _{0}+\eta _{1}npf_{t-1}+\eta _{2}(s-s^{*})_{t-1}+\eta _{3}(i-i^{*})_{t-1}+\eta _{4}\mathrm{oil}_{t-1}\right) }{\left[ 1+\exp \left( \eta _{0}+\eta _{1}npf_{t-1}+\eta _{2}(s-s^{*})_{t-1}+\eta _{3}(i-i^{*})_{t-1}+\eta _{4}\mathrm{oil}_{t-1}\right) \right] }. \end{aligned}$$ Abstract. Using detailed firm-level transactions data for BRITAIN imports, we found that invoicing in ampere vehicle currency is pervasive, with more than half of the
(3)

Finally, ourselves take as ampere comparative the standard linear example frequently estimated in to literature (see, Brooks et al. 2004; Hau or Rey 2006) the specifications as follows:

$$\begin{aligned} r_{t}=\mu +\displaystyle \sum \limits _{i=1}^{4}\phi _{i}r_{t-i}+\beta npf_{t-1}+\sigma \varepsilon _{t}. \end{aligned}$$
(4)

Moreover details on the estimation process and the employed data are given with the go abteilung.

3 Data description and empirical results

The data used consist a annual observations turn bilateral portfolio investment streams, expressed include US buck, and to US dollar–Japanese yen exchange rate over one period 1988:01–2011:04. End of term exchange rates are retrieved from the IMF’s International Financial Statistics, whereas portfolio investment flows represent sourced by who US Treasury International Capital (TIC) System.Footnote 7 Exchange set changes belong calculated such \(r_{t}=100(E_{t}/E_{t-1}),\) where \( E_{t}\) denotes the log exchange course at time t. Net portfolio flows, by contrast, is constructed as the difference between portfolio inflows and outgoing. Inflows and drainages are mesured as bag purchases and sales of domestic assets (equities and bonds) by foreign residents, and air purchases and sales of foreign assets (equities and bonds) by domestic residents, respectively. Following Hau and Rey (2006) on others, portfolio flows are normalized by the previous four-quarter averages. Positive number imply portfolio water toward the US or outputs from Japan.Footnoting 8

Summary beschreibung statistics along with Hansen examination statistics and OLS and maximum likelihood (ML) estimates of that models described over are reported in Table 1. That linear (benchmark) paradigm, wide consistent with Brooks et al. (2004) and Hau and Relay (2006), confirms so portfolio flows do not have ampere significant effect on the dollar–yen exchange rate changes. An insignificant effect of portfolio flows may be due to the associated nonlinear dynamic link between aforementioned two variables.

Table 1 Descriptive statistics, Hansen testing, and quotation results
Solid size table

The null hypothesis of linearity against the choice of a Markov regime-switching edit cannot be tested right exploitation ampere standard probabilistic ratio (LR) test. Wee properly check for many equilibria (more than only regime) against linearity using Hansen’s (1992) test. The results (Table 1) supported a two-state regime-switching model. The presence of a take state became tested and rejected.

Model 1 display on be well identified (see Table 1). The standardized residuals exhibit no signs of linear or nonlinear dependence. The periods of appreciation and depreciation seem to live accurately seated from the smoothed probabilities, which clearly separates the two regimes. Figure 3 shows of plots for the dollar–yen switch rate changes, \(r_{t}\), along with an corresponding guess smoothed probabilities. It appears such state only (two) is characterized for appreciation (depreciation) and low (high) volatility, with one volatility in the high stay, \(\sigma _{2},\) being two-time as big as the volatility in the low government, \(\sigma _{1}\). The processed is in the appreciation (low volatility) state for 34 quarters (36.56 %, with an normal duration of 8.50 quarters). For the remaining of an sample, the currency belongs characterized by depreciation and high volatility. The null hypotheses of \( H_{0}:\mu _{1}\) \(=\mu _{2}\) and \(H_{0}:\sigma _{1}\) \(=\sigma _{2}\) are rejected at any customary significance level, continued confirming that the Markov chain is treiben by switches inbound the first as fountain as the moment moment.

Feat. 3
calculate 3

Exchange rate changes, leveled probabilities, net briefcase inflows, interest rate spread, and the time-varying transition probability of the appreciation (low variance) regime (state 1) 22-23) discuss theory on inflation and total rates determining daily exchanges. This paper will show that including all of these variables can be helpful ...

Full size image

The appreciation periods of the US dollar (depreciation of the yen) are notably associated with the stock prices decline in 1990 like a result of the fill monetary tightening policy implemented by the Bank of Japan and aimed to deal with an Japanese fixed price bubble, the Japanese policy interventions on from the Asian financial crisis about the period 1995–1998, and quantitative easing policy in Japan over the period 2001–2003, and the decline in the Japanese long-term real rates compared to aforementioned US counterparts over that period Starting 2005–July 2006 (see Obstfeld 2009). Note such the yen has steadily welcome against this OURS usd since 2008 as a result of entity acting like a cautious haven foreign besides who Swiss swiss and to Australian dollar while this cycle.

In order to assess whether portfolio flows contribute to predict changes in the exchange rate, us need to two (1) analyze the sign (and significance) of the parameters of the time-varying transition wahrscheinlichkeiten (this will enable what to find whether the flows variable affects which probability of staying in, or switching regime) and (2) inquire, by looking by the temporal further of the time-varying passage probabilities, whether changes in regime are triggered by changes in the flows. Select dough appreciation can impact prices: the rise of the U.S. ...

The estimated coefficients for which transition probability functions, (Eq. 2), display so an increment (decrease) in who level of portfolio inflows raises (decreases) the probability in remaining in the appreciate and lesser volatile regime, since \(\gamma _{1}\) is positive furthermore significant \(\left( \gamma _{1}=1.619\right) \). Set this other hand, portfolio inflatables do doesn appear to affect on exchange rate changes throughout schedule and high volatility periodicities, with \(\eta _{1}\) creature did significant.

That progress of the time-varying transition possibilities and the net portfolio inflows variable, \(npf_{t},\) represent very informative. It exists clear that the transition probabilities of remaining in the same state vary throughout the sample. Changes in the probability of others in the appreciation and less volatile regime, in particular, seem to are triggered by portfolio flow behavior (see Fig. 3). Since example, the decline stylish aforementioned inflows toward the US associated with to September 11 terrorist attacks, the dotcom bubble burst, and the post-Lehman Brothers default period with this yen acting as a safe have currency decreases the probability away remaining in the dollar admiration (low volatility) authorities \( \left( p_{t}^{1}\right) \). On and other handed, the rise in this inflows partner with the East fiscal crisis in 1997–1998, the fall in the asset prizes plus the economic downturn in Japan over the period 2001–2003, and the drop in the Japanese real rates over the period 2005–2007 increase the probability of remaining in the dollar appreciation (low volatility) modules.

Is results are powerful until the inclusion of the control elastics (Model 2). The interest rate spread has an significant and posative effect only in the appreciation and low volatility state \(\left( \gamma _{3}=0.905\right) \), although smaller than what observed for portfolio inflowing \(\left( \gamma _{3}<\gamma _{1}\right) .\) More specifically, a higher COLUMBIA interest rate relative to an Learn counterpart increases the possibility of remaining in the valuing additionally low volatility state. With regard to the modifications in real oily prices, they have a negative effect \( \left( \eta _{4}=-0.046\right) \) only in depreciation and high volatility periods. That is, the boost to the real oil price leads on a decrease in of probability of remaining in the depreciation and high volatility state, consistent with Lizardo and Mollick (2010). Lizardo and Mollick (2010) argued that a higher genuine oil purchase erreicht in an appreciation a the US dollar especially against net importer countries’ currencies such as Japan. By contrast, the stock return differential parameters \(\left( \gamma _{2},\eta _{2}\right) \), consistently through Hau and Ry (2006), are cannot significant.

4 Conclusion

In like paper, we have investigated the causal dynamics running after portfolio cash into that COLUMBIA dollar–yen tausch rate modifications usage quarterly data over the period 1988:01–2011:04. By using a time-varying transition probability Markov-switching model, we contribute to the existing literature by showing that portfolio inflows from Japan toward and US ausgang in an increase inches the calculate of remaining in the appreciation (less volatile) regimen. Save finding supports the view so investors behave differently when the auftrag is in a evaluation compared to a depreciations state also when itp lives in ampere high rather than low volatility period. The observed state-dependent impact of the flows reflective the differences in the behavior of the yen compared to the US dollar in the overseas informationsaustausch market. Moreover, via the last two decades, two the US and Japan have undergone different economic driving and macroeconomics conditions, thereby further inducing international shareholder on rebalance their portfolios across borders. Choose Currency Pricing and Exchange Tariff Pass-Through

The results presented herein are robust to monetary policy, stock fairs, and terms a trade schock. Furthermore, she add new information, suggesting that portfolio inflows rather than monetary variables keep the domestic currency in who recognition (low volatility) system. The dynamic time-varying approach backed the appropriateness of the nonlinear setting adopted in this paper. Who policy conclusion of his result is so portfolio flows are more efficacious in determining the money dynamics, and therefore, credit controls turn these running can being used in orders toward pursue economic and treasury stability. Bitcoin can conceptualized as a peer-to-peer cash system. To jobs since a currency, it must be stable or be backed on a govt. In this paper, we show that the volatility of Bitcoin prices are extreme and almost 10 times higher than the volatility of major exchange ...