Volatility in exchange rate components and the volume of international trade

Research output: Contribution to journalArticlepeer-review

9 Scopus citations


By decomposing the changes in the real exchange rate series into fundamental and transitory components (market microstructure and stochastic element) and modeling the volatility in each via a GARCH process, this paper examines how volatility in exchange rate affects the volume of aggregate and disaggregate US trade with Canada, Germany, and Hong Kong during the 1989-2002 period. The results indicate significantly different impacts of volatility due to the fundamental and transitory components of the exchange rate series on US bilateral trade. While the findings suggest heterogeneous responses of traders to volatilities arising from different components of the real exchange rate, the impact of the volatility due to the fundamental component is also found to vary across commodities, implying disparities in the inter- and intra-trading arrangements made by traders of different goods in counteracting foreign exchange risk arising from changes in the economic fundamentals.

Original languageEnglish (US)
Pages (from-to)110-141
Number of pages32
JournalInternational Trade Journal
Issue number2
StatePublished - Apr 2009


Dive into the research topics of 'Volatility in exchange rate components and the volume of international trade'. Together they form a unique fingerprint.

Cite this