Portfolio substitution and exchange rate volatility
Ha, J. and Sibert, Anne (1997) Portfolio substitution and exchange rate volatility. Journal of Monetary Economics 39 (3), pp. 517-534. ISSN 0304-3932.
Abstract
Legal and institutional changes are making it easier to adjust foreign exchange portfolios. This has raised fears that exchange rates will become increasingly volatile. This paper presents an optimizing, equilibrium model where varying degrees of portfolio substitutability are possible. Our results suggest that if preferences are nearly log linear, or transactions costs are small, exchange rate volatility rises as portfolios become more substitutable. With empirically reasonable parameter values, however, volatility is little affected by substitutability. An implication is that a transactions tax on foreign exchange trading would have little impact.
Metadata
| Item Type: | Article |
|---|---|
| School: | Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School |
| Depositing User: | Sarah Hall |
| Date Deposited: | 28 Jul 2020 08:52 |
| Last Modified: | 02 Aug 2023 18:01 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/32712 |
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