Economics
College of Humanities and Social Sciences

Essays on Exchange Rate Volatility and International Trade, Exchange Rate Volatility and Stock Returns for the U.S. and Turkey, and Political Corruption

Fuat Sekmen

Enterprise Hall, 318
May 26, 2004, 08:00 PM to 07:00 PM

Abstract:

This dissertation consists of three essays. In the first essay, I shed light on the effect of exchange rate volatility on the volume of trade, using autoregressive conditional heteroskedasticity (ARCH) and generalized ARCH (GARCH) models, to generate a measure of exchange rate volatility in the gravity model. In this essay, I introduce a Panel data model to analyze the effect of exchange rate volatility on bilateral trade flows for 20 OECD countries and 11 developing countries during the period of 16 years between 1985 and 2000. I find that the coefficient of exchange rate volatility has statistical significance and has a negative sign. In the second essay, I examine the effects of exchange rate volatility, using the squared residuals from the Autoregressive Moving Average (ARMA) models, on stock returns for the U.S. and Turkey separately. Even though my core variable is exchange rate volatility, I use several other explanatory variables to explain changes in the stock returns for both the U.S. and Turkey. I find that exchange rate volatility affects US stock returns. Even though firms engaged in international operations have some methods, such as hedging possibilities, to protect themselves from exchange rate risk, exchange rate volatility may negatively affect firms? profitability because of increasing cost of covering exchange risk under a flexible rate system. However, I find that exchange rate volatility does not affect stock returns for Turkey significantly, but currency crises significantly and negatively affects Turkish stock returns. In the third essay, I explain the variation in the perceived level of corruption across 62 countries. I propose a set of hypotheses to explain the level of corruption. In the final specification, I find that levels of corruption are higher: 1) the lower the number of years of democratic government, 2) the lower the share of the population with Protestant religious affiliation, 3) the lower the number of years of schooling, 4) the lower the British colony experience, and 5) the higher the ethnolinguistic fractionalization.

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