Alexandra Horobet

Exchange Rate Volatility in the Balkans and Eastern Europe: Implications for International Investments

Our paper’s objective is to study the volatility of exchange rates from the region that have not yet adopted the Euro and are not members of the Exchange Rate Mechanism II by considering the exchange rate regime and the implications of currency volatility for foreign capital flows. We model exchange rate volatility by using standard deviations of daily logarithmic changes in the exchange rates, rolling standard deviations, Hodrick-Prescott filters to detect the trends in volatility and ARIMA models. We find that currency volatility remains a strong issue for these countries and that central banks have attempted to manage it, particularly after the global financial crisis. Spikes in monthly volatility are identified for all currencies, although with some variation in time. Over the long-run, some exchange rates experienced sudden increases in volatility over the entire period, but rather quickly corrected, while others have shown an episode of high volatility at the beginning of the period and recorded a reasonable level of volatility throughout the remaining period. Exchange rate volatility “has memory”, but some exchange rates are more prone to the persistent effects of shocks in volatility.

Implications of Volatility for Uncovered Interest Parity Testing

The concept of interest rate parity is an important component of the macroeconomic analysis for open economies and one of the basic models used in international finance. The validation of interest parity has important implications for both international corporate finance decisions and international investments. Interest rate parity has been developed in two forms, known as covered interest parity (CIP) and uncovered interest parity (UIP), which provide simple relationships between money market variables, more specifically interest rates, and foreign exchange market prices.

Exposure to Exchange Rate Risk and Competitiveness: An Application to South-Eastern Europe

Our chapter investigates the economic exposure to currency risk of stock markets from nine countries in South-Eastern Europe using bilateral exchange rates of the domestic currencies against their main trading partners’ currencies between 1999 and 2015. The relevance and magnitude of exposures are investigated through changes in exchange rates in linear and non-linear specifications. Our results indicate that these economies show contemporaneous exposure to currency risk, but they are different in size and sign from one country to another and from one currency to another, a result that can be explained by the dissimilar economic structures in the region. There is smaller evidence for asymmetric exposures in linear specifications, which might indicate a general inability of companies in the region to use real or financial options in order to benefit from the positive effects of changes in exchange rates or to hedge the undesired expected exposures. The evidence for non-linear exposures is strong for these economies and generally shows that companies’ value is negatively influenced by higher volatility in exchange rates and more frequent appreciations of foreign currencies. Overall, our findings suggest that countries from South-Eastern Europe face competitiveness challenges regarding their main trading partners, but also that companies from the region are less capable to use real and financial options to mitigate their exposures to currency risk and this is reflected in their overall market performance.

Time-varying Diversification Benefits: The Impact of Capital Market Integration on European Portfolio Holdings

This unique and fascinating book illustrates that the ‘credit crunch’ and the ensuing financial and economic crisis of 2007–2009 did not only strike hard at the economy in the Western world, but also at its policymakers, at economics as a scientific discipline and, more specifically, at the process of European integration itself.