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Understanding Exchange Rates and the Euro

Hörnell, Oskar LU and Nordblom, Tobias LU (2011) NEKK01 20102
Department of Economics
Abstract
This paper investigates the exchange rate movements for EUR/USD, EUR/SEK and EUR/NOK using an OLS regression. Movements are tested against traditional and nontraditional explanatory variables for exchange rate movements. Traditional variables consists of current account, inflation, productivity and interest rate differentials while the nontraditional are equity returns and risk appetite. Results indicate that the nontraditional variables are significant for all currency pairs. Increased equity returns are associated with currency appreciation consistent with previous research. Furthermore is the evidence on the risk appetite variable conclusive on how investors perceive the risk exposure to the currencies. For the EUR/SEK are coefficients... (More)
This paper investigates the exchange rate movements for EUR/USD, EUR/SEK and EUR/NOK using an OLS regression. Movements are tested against traditional and nontraditional explanatory variables for exchange rate movements. Traditional variables consists of current account, inflation, productivity and interest rate differentials while the nontraditional are equity returns and risk appetite. Results indicate that the nontraditional variables are significant for all currency pairs. Increased equity returns are associated with currency appreciation consistent with previous research. Furthermore is the evidence on the risk appetite variable conclusive on how investors perceive the risk exposure to the currencies. For the EUR/SEK are coefficients of the interest differentials evidence on the effect of the yield curve, suggesting that the currency is driven by expectations on future economic activity such as GDP growth and inflation instead of actual values as tested on the model. Results on the current account variables are coherent with the theory that current account is significant only when a threshold deficit is breached. Overall the results presented indicates that the exchange rates for reserve and non-reserves currencies are explained by different variables. (Less)
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author
Hörnell, Oskar LU and Nordblom, Tobias LU
supervisor
organization
course
NEKK01 20102
year
type
M2 - Bachelor Degree
subject
keywords
Portfolio Balance model, Balassa Samuelsson model, Exchange rates, Euro, SEB risk appetite index
language
English
id
1786991
date added to LUP
2011-02-16 15:44:14
date last changed
2011-02-16 15:44:14
@misc{1786991,
  abstract     = {{This paper investigates the exchange rate movements for EUR/USD, EUR/SEK and EUR/NOK using an OLS regression. Movements are tested against traditional and nontraditional explanatory variables for exchange rate movements. Traditional variables consists of current account, inflation, productivity and interest rate differentials while the nontraditional are equity returns and risk appetite.  Results indicate that the nontraditional variables are significant for all currency pairs. Increased equity returns are associated with currency appreciation consistent with previous research. Furthermore is the evidence on the risk appetite variable conclusive on how investors perceive the risk exposure to the currencies. For the EUR/SEK are coefficients of the interest differentials evidence on the effect of the yield curve, suggesting that the currency is driven by expectations on future economic activity such as GDP growth and inflation instead of actual values as tested on the model. Results on the current account variables are coherent with the theory that current account is significant only when a threshold deficit is breached. Overall the results presented indicates that the exchange rates for reserve and non-reserves currencies are explained by different variables.}},
  author       = {{Hörnell, Oskar and Nordblom, Tobias}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Understanding Exchange Rates and the Euro}},
  year         = {{2011}},
}