Group
Project (only 2 or 3 students in a group)
Research Topics
1.
Test
whether the conventional theory of forward exchange or modern theory of forward
exchange rate holds for Saudi Arabia by estimating the following equations:
ft = α+βf*t+
ut Keynesian Theory of Forward Exchange
Rate
ft
= α+βf*t+ γst+1+ut Modern Theory of Forward Exchange Rate
ft is the logarithm of the
actual forward rate (F), F* is the logarithm of of the interest
parity forward rate (F* = [S((1+r/400)/(1+r*/400))]). The above relationship states
that the logarithm of the actual forward exchange rate (e.g. 3-month) is
determined by the logarithm of the current spot exchange rate adjusted for the
interest rate differential (3-month domestic and foreign treasury bill rates).
The interest rates must be de-annualized, since they are always quoted on
annual basis.
(i)
Collect
quarterly data on 3-month outright forward and spot exchange rates vis-à-vis
the US dollar, British pound, Swiss franc and euro and LIBOR rates (US dollar,
the British pound and Swiss franc) and the relevant interest rate for Saudi
Arabia or Kuwait over the period 2000q1-2018q4.
(ii)
Use
cointegration analysis to test whether the theory of forward exchange holds in
the long run and interpret your results.
(iii)
What
conclusion would you derive from these results?
References
(i)
Moosa,
I.A. and Bhatti, R.H. (1994), “Testing the Effectiveness of Arbitrage and
Speculation under Flexible Exchange Rates", Economia Internazionale, 47, 393-408.
(ii)
Callier,
P (1980), Speculation and the forward foreign exchange rate: a note, Journal of
Finance
2.
Test
exchange-rate pass through between Saudi Arabia and its trading partners (China,
India, Japan, South Korea and Euro Area) by testing purchasing power parity
theory and an extended model of Exchange Rate Pass-Through, which are given as
follows:
log Pt = β0 + β1log
P*t + β2log St +ut
log Pt
= β0
+ β1log P*t + β2log
NERt + β3log Mt + β4log Poilt+ut
References
(i)
Bhatti,
R.H. (1996), “A Correct Test of Purchasing Power Parity: The Case of Pak-rupee
Exchange Rates”, Pakistan Development Review, Papers and Proceedings,
35, 671-682.
(ii)
Campa, J. M. & Goldberg, L. S. (2005). “Exchange Rate
Pass-Through into Import Prices”. Review of Economics and Statistics, 87(4),
679-690.
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