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Activity Number:
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24
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Type:
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Contributed
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Date/Time:
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Sunday, August 8, 2004 : 2:00 PM to 3:50 PM
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Sponsor:
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Business and Economics Statistics Section
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| Abstract - #301557 |
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Title:
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Effect of Exchange-rate Volatility on Trade Volume: Evidences from a Threshold Model
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Author(s):
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Hui S. Chang*+ and Yanhong Zhang
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Companies:
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University of Tennessee, Knoxville and University of Tennessee
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Address:
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Dept. of Economics, Knoxville, TN, 37996-0550,
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Keywords:
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exchange rate ; grid search ; cointegration analysis
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Abstract:
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Effects of exchange-rate volatility on tade volume have been studied extensively with diverse results. One drawback of previous studies lies in the assumption of a constant, or linear, effect of exchange-rate volatility on trade volume. In theory, the uncertainty associated with exchange-rate volatility will trigger trading firms' reaction only when volatility reaches certain level. Minor volatility should have little effect on trade volumes. A grid-search procedure is used to find the threshold which triggers the reaction of trading firms to exchange-rate volatility. Based on monthly data for bilateral trade between the US and other 6 G-7 countries from 1989 to 2002, a GARCH model is used to estimate the volatility variable, and the cointegration analysis is adopted to study the threshold effect of volatility along with the effect of other explanatory variables on trade volume. Results show that most of the control variables have correct signs and are significant statistically. Results also confirm that threshold effect exists for five of the six countries studied.
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