International diversification Essay Example

The use of monetary targets must be based on assumptions about the correlation between current monetary growth and future inflation. If interest rates are used as the policy instrument, there needs to be an assumption about the relationship between current interest rates and future monetary growth. (Frankel, 1993)

Inflation targeting and monetary targeting both require forecasts, but explicit inflation targeting emphasizes the need for forecasts more than monetary targeting does. (Dickinson, 2002, pg 18)

Although theories suggest a causal relationship between exchange rates and stock prices, existing evidence indicates a weak connection at a micro level. (Bodnar et al., 1993)

US firms did not find a significant link between exchange rates and stock returns. However, Japanese firms found that only 25 percent of their sample of 171 Japanese multinationals had substantial exchange rate exposure on stock returns. (He et al., 1998)

Financial shocks account for approximately 0.6% of market volatility. Similar results have been observed in other countries as well, specifically in country number three.

In the comparison between the U.S. and UK, there is a 4% difference. In contrast, when comparing the U.S. and Japan, there is only a 0.3% difference.

According to Shigeru et al (2005, pg. 1121), the majority of differences in growth rates of marginal utility are caused by external shocks related to consumption, inflation, and monetary policies. Ma et al (1990) found that an increase in currency value negatively affects the stock market of export-dependent countries and positively affects the stock market of import-dependent countries, which aligns with goods market theory. Ajayi et al (1996) conducted research using daily data from eight countries and discovered significant interactions between foreign exchange and stock markets. Abdulla

et al (1997) observed that monthly exchange rates influence stock prices in a country but not vice versa. The relationship between exchange rates and the stock market is complex and varies depending on the specific country and time period.

(Ramasamy et al, 2001) suggests that distinguishing between the cultural and cosmological beliefs of different civilizations is advantageous. According to (Vasquez, 2000, pg 38), South Korea faced a foreign exchange crisis due to the withdrawal of funds by foreign banks and investors. Despite efforts by the government and the Bank of Korea, both the exchange rate and stock market suffered significant declines, putting South Korea at risk of defaulting on its foreign debt obligations (Armstrong, 2002, pg 101). Bahrain is widely acknowledged as the financial hub for the Gulf region and serves as an example of a small open economy.

The purpose of this exercise is to analyze the relationship between Bahrain's stock market and major exchange rates, including the Dutch Mark (DM), British Pound (GBP), and Japanese Yen (YEN). It is important to note that Bahrain operates on a fixed exchange rate system, where the Bahraini Dinar (BD) is tied to the U.S. Dollar. Tahir et al (2006) suggest that fluctuations in stock prices may not have a complete impact on the BD-USD exchange rate. To investigate this connection, Ramasamy et al (2001) propose using co-integration and error correction modeling methods, which involve three main steps.

Testing the relevant time series for stationarity (unit roots), conducting cointegration tests, and finally employing error-correction modeling is the approach we will take. We will utilize standard notation from textbook1 to briefly explain the steps involved. According to Ma et al

(1990), a non-stationary time series Yt is considered integrated of order d if it becomes stationary after being differenced d times2. To determine the integration order, unit root tests have been developed, with the most common one being the Dickey-Fuller (DF) test (Dickey et al, 1979, 427) or the Augmented Dickey-Fuller (ADF) test.

Reference

1. E. Philip Davis, 1997, Pension Funds: Retirement-Income Security and Capital Markets an International Perspective.Publisher: Clarendon Press. Place of Publication: Oxford.
2. Page Number: 2. Dornbusch, R.and S. Fischer, 1980, “Exchange Rates and Current Account,” American Economic Review 70, 960-71 E.

Philip Davis, 1997,

• Pension Funds: Retirement-Income Security and Capital Markets an International Perspective.
• Publisher: Clarendon Press. Place of Publication: Oxford. Page Number: 12.
• Frankel, Jeffrey A., 1993, “Monetary and Portfolio-Balance models of the determination of Exchange rates” In Jeffrey A. Frankel on exchange rates, Cambridge, MA: MIT Press Dilip K. Das, 1993,
• International Finance: Contemporary Issues.
• Contributors: editor.

Publisher: Routledge. Place of Publication: New York. PG 14 Ian VAsquez, 2000, Global Fortune: The Stumble and Rise of World Capitalism.
Publisher: Cato Institute.
Place of Publication: Washington, DC. Page Number: 38.

Frankel, Jeffrey A., 1993, “Monetary and Portfolio-Balance models of the determination of Exchange rates” In Jeffrey A.

Maxwell Fry Publisher: Routledge. Place of Publication: London.

M. Gentry, 1993, “Exchange Rate Exposure and Industry Characteristics: Evidence from Canada, Japan, and the USA,” Journal of International Money and Finance 12, 29-45 Shigeru Iwata, Shu Wu, 2005, What Macroeconomic Risks Are (Not) Shared by International Investors?

K., and G. W.Kao, 1990, “On Exchange Rate Changes and Stock Price Reactions,” Journal of Business Finance ;

K., and G. W.Kao (1990) conducted a study on the relationship between exchange rate changes and stock price reactions in their article titled "On Exchange Rate Changes and Stock Price Reactions" published in the Journal of Business Finance; Accounting. Ajayi, R.A., and Mougoue (1996) explored the dynamic relation between stock price and exchange rates in their research article titled "On the Dynamic Relation between Stock Price and Exchange Rates" published in the Journal of Financial Research. Abdalla, I.S. A. and V. also conducted a study relevant to this topic.

The text includes citation and reference information for three sources:

Charles K.

Place of Publication: London. Page Number: 101.

and W. A. Fuller, 1979, “Distribution of the Estimators for Autoregressive Time Series with a Unit Root,” Journal of the American Statistical Association 84, 427-31 Ma,

The article "Distribution of the Estimators for Autoregressive Time Series with a Unit Root" by P. C. B. Phillips and W. A. Fuller was published in 1979 in the Journal of the American Statistical Association (volume 84, page 438).