Empirical Studies in Exchange Rates and Foreign Exchange Markets: A Survey

Abstract

This paper presents a selective survey of the recent empirical research on exchange rates and foreign exchange markets in Korea. This paper focuses on four basic areas: purchasing power parity and real exchange rates, nominal exchange rate dynamics, foreign exchange market efficiency and market microstructure, and corporate finance issues of exchange rates including foreign exchange risk hedging. First of all, we introduce empirical studies that investigate whether the won/dollar exchange rate satisfies the purchasing power parity relationship in the long run and examine the determinants of short-run fluctuations in the won/dollar real exchange rate. Then, we introduce research about nominal exchange rate dynamics and exchange rate forecasting. Research based on the asset market approach is presented including those investigating the effect of “news” on nominal exchange rates. In addition, empirical studies about foreign exchange markets covering diverse topics such as market efficiency, foreign exchange market intervention and the market microstructure approach are discussed. Finally, studies that measure the foreign exchange exposure and identify the factors that determine the foreign exchange exposure of Korean firms are introduced together with studies that investigate the effect of foreign exchange risk on the return from international portfolio investment.