Are Currencies Coordinating?: The Coupling-Decoupling Behavior of Won-Dollar and Yen-Dollar Exchange Rates

Jae-Young Kim ; Yun-Jong Wang ; Woong-Yong Park

Corresponding Author, Professor, Department of Economics, Seoul National University, 1 Gwanak-ro, Gwanak-gu, Seoul 151-746, Korea, Tel: +82-2-880-6390, Fax: +82-2-886-4231 jykim017@snu.ac.kr
Senior Vice President, SK China, 29F, SK Tower, No. 6 Jia, Jianguomenwai Avenue, Beijing 100022, P.R., China, Tel: +86-10-5928-0055, Fax: +86-10-5928-0684 yjwang@sk.com
Assistant Professor, School of Economics and Finance, The University of Hong Kong, Room 1007, 10/F, K. K. Leung Building, Pokfulam Road, Hong Kong wypark@hku.hk

JEL Classification: C1, C5, F31, G15

Abstract

This paper studies dynamic relation, namely, two currencies of Korean won and Japanese yen, before and after the East Asian financial crisis of the late 1990s. We conjecture that there exists a long-run relation between won and yen, which is characterized by a band-reverting-type dynamic behavior. This band-reverting behavior of the two currencies implies that their relative values maintain a stable relation, keeping their discrepancy within a certain bound or band. Such band-reverting behavior is due to the arbitrage-seeking behavior of investors or the market intervention of monetary authorities. Our empirical analysis shows that the two currencies have a long-run equilibrium relation that implies a band-reverting-type dynamic relation. Our analysis also shows that this band-reverting relation becomes clearer in the post-crisis period.

Keywords:

Band-reverting behavior, Threshold cointegration, Structural change, Financial crisis, Won-Yen exchange rate

Acknowledgments

This work was partially supported by the National Research Foundation of Korea (grant numbers KRF-200-20110075 and KRF-448A-2011000).

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