International Bond and Currency Markets Essay Example | Topics and Well Written Essays - 2000 words

International Bond and Currency Markets - Essay ExampleIn precise, it also helps in pre-determining the magnetic variation of the currency appreciation or depreciation in respect to countries and influenced cross border trade prospects by a substantial extent. It is noteworthy that the irritability of exchange rate, in the short shed blood and also in the coarse run depends on multiple factors such as the demand and supply prospects in the financial market. Arguably, forecasting in the desire run and short run is considered as quite difficult, which can be explained with reference to the Theory of Speculation in the market and the collective belief of the investors some the future prospects (Andreou & Zombanakis, 2006). Based on these underpinnings about the importance of forecasting exchange rate fluctuations, this essay will aim at emphasising the challenges commonly witnessed by analysts when obtaining the intend forecasting results in the short run as well as in the long r un performance of the exchange rate. Challenges in Forecasting vary Rate in Short Run Arguably, in the short run, the forecasting of exchange rate is nearly impossible. Forecasts, which are delivered by the macroeconomic factors, are mainly less accurate than the results obtained through Random Walk theory application. In general, the Random Walk Theory presumes that market changes, in terms of stock-prices changes, are unpredictable. sluice though in the long run forecasting, the theory has been considered by many financial investors and analysts, the short run implications of Random Walk theory remains under considerable scrutiny. It is in this context that no claims to substantiate a perfect Random Walk model in the short-run stock price fluctuation were firmly made. On the contrary, arguments centralised on the theory that forecasting stock-prices changes in the short run is challenging owing to the fact that in the short run, the excitability of the exchange rate is less bu t the speed of convergence based on Purchasing Power Parity (PPP) is slower than that recorded in the long run (Babazadeh & Farrokhnejad, 2012). Correspondingly, it has been argued that the level of exchange rate in the short run is not very predictable, but is also not entirely unpredictable, as the volatility of the currency and the correlation between them vary with time and hence, forecasting becomes challenging (Mitra, 2008). The current account balances, real income of the people, interest rates, the preferences of the consumers regarding the domestic or foreign products, are all signified as market fundamentals influence the stock-prices in the short run, as per the conceptual framework of PPP. As explained by Taylor & Taylor (2004 135), PPP is a disarmingly simple theory that holds that the nominal exchange rate between two currencies should be equal to the ratio of aggregate price levels between the two countries, so that a unit of currency of one country will have the same purchasing power in a foreign country. Subsequently, it is the fiscal policies, the fiscal policies and the market speculations affect the forecasting decisions in the short run. These factors are important when considering the financial transfers with regards to the