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Title:The crisis in the foreign exchange market PDF Logo
Authors:Melvin, Michael
Taylor, Mark P.
Issue Date:2009
Series/Report no.:CESifo working paper 2707
Abstract:The financial crisis of 2007-2008 had major implications for the foreign exchange market. We review events and implications for exchange rates, volatility, returns to currency investing, and transaction costs. This blow-by-blow” narrative is intended to be a resource for researchers seeking a comprehensive review of the what, why and when” of the financial crisis in terms of foreign exchange market dynamics. An implementable financial stress index (FSI) is created and then used to illustrate the dramatic nature of the current crisis compared to earlier crises. We also examine how the global FSI might have been used to condition the exposure to the carry trade (long high interest rate currencies, short low interest rate currencies) and we show that such an index has potential value in protecting a portfolio against loss during periods of stress, although this result is subject to the important caveats of controlling for transaction costs and timely recognition of the change in regime.
Subjects:financial crisis
foreign exchange
exchange rates
transaction costs
JEL:F30
F31
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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