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Governments prefer to stabilize the exchange rate because excessive short-term volatility erodes market confidence and affects both the financial market and the real goods market. When there is inordinate instability, exchange rate uncertainty generates extra costs and reduces profits for firms. As a result, investors are unwilling to make ...
The most important insight of the model is that adjustment lags in some parts of the economy can induce compensating volatility in others; specifically, when an exogenous variable changes, the short-term effect on the exchange rate can be greater than the long-run effect, so in the short term, the exchange rate overshoots its new equilibrium ...
actual historical volatility which refers to the volatility of a financial instrument over a specified period but with the last observation on a date in the past near synonymous is realized volatility , the square root of the realized variance , in turn calculated using the sum of squared returns divided by the number of observations.
In foreign exchange, a relevant factor would be the rate of change of the foreign currency spot exchange rate. A variance, or spread, in exchange rates indicates enhanced risk, whereas standard deviation represents exchange-rate risk by the amount exchange rates deviate, on average, from the mean exchange rate in a probabilistic distribution. A ...
Another real-exchange-rate anomaly was documented by Mussa (1986). [3] In this paper Mussa documented that industrial countries which moved from fixed to floating exchange rate regimes experienced dramatic rises in nominal-exchange-rate volatility. Since the volatility increases much more than what can be accounted for by changes in the ...
The monetary union eliminates the time inconsistency problem within the zone and reduces real exchange rate volatility by requiring multinational agreement on exchange rate and other monetary changes. The potential drawbacks are that member countries suffering asymmetric shocks lose a stabilization tool—the ability to adjust exchange rates.
Ize and Levy-Yeyati (1998) examine the determinants of deposit and credit currency substitution, concluding that currency substitution is driven by the volatility of inflation and the real exchange rate. Currency substitution increases with inflation volatility and decreases with the volatility of the real exchange rate. [32]
CBOE also calculates the Nasdaq-100 Volatility Index (VXNSM), CBOE DJIA Volatility Index (VXDSM) and the CBOE Russell 2000 Volatility Index (RVXSM). [6] There is even a VIX on VIX (VVIX) which is a volatility of volatility measure in that it represents the expected volatility of the 30-day forward price of the CBOE Volatility Index (the VIX). [10]