Nobody downloaded yet

International Financial Theory on the basis of Empirical Evidence - Essay Example

Comments (0) Cite this document
Summary
The three main theories in international finance are the purchasing power parity theory, interest rate parity theory and the international Fischer effect. In this report, the empirical verification for each of these theories is done. This report is divided into four sections. In…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER97.7% of users find it useful
International Financial Theory on the basis of Empirical Evidence
Read TextPreview

Extract of sample "International Financial Theory on the basis of Empirical Evidence"

Download file to see previous pages The PPP theory states that there will be price equalization of goods internationally once they are measured in the same currency due to arbitrage forces (Pilbeam, 2006). This theory is based on the law of one price, which states that identical products when sold in different markets will sell at the same price when expressed in common currency. The main assumptions for this law to hold good are the presence of a competitive market structure, absence of transport costs and other barriers to trade (Sarno and Taylor, 2002).There are two types of purchasing power parity; the absolute and relative power parity. The absolute power parity theory states that a rise in the home price level relative to the foreign price level will result in an equivalent depreciation of the home currency against the foreign currency. Relative power parity states that there will be adjustments for the exchange rate by the amount of inflation differential between two countries (Pilbeam, 2006). The main problem with the PPP theory is that it does not distinguish between traded and non-traded goods. Many studies have shown that this distinction is important for testing PPP since traded goods are determined mainly by international competition while non-traded goods are influenced by domestic supply and demand conditions (Officer, 1976, 1986). At the same time, some other authors have showed distinction between traded and non-traded goods as unclear (Sarno and Taylor, 2002).The other limitations are the assumptions underlying the PPP theory like perfect competition, absence of transport costs and barriers to trade which are questionable. Further, it is very difficult to find identical products to be compared for testing PPP in different countries (Rogoff, 1996). Thus PPP is theoretically ambiguous and remains and empirical question.
Three types of empirical evidence for PPP have been done .They are based on graphical representations, simplistic data analysis and ...Download file to see next pagesRead More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“International Financial Theory on the basis of Empirical Evidence Essay”, n.d.)
International Financial Theory on the basis of Empirical Evidence Essay. Retrieved from https://studentshare.org/miscellaneous/1560187-international-financial-theory-on-the-basis-of-empirical-evidence
(International Financial Theory on the Basis of Empirical Evidence Essay)
International Financial Theory on the Basis of Empirical Evidence Essay. https://studentshare.org/miscellaneous/1560187-international-financial-theory-on-the-basis-of-empirical-evidence.
“International Financial Theory on the Basis of Empirical Evidence Essay”, n.d. https://studentshare.org/miscellaneous/1560187-international-financial-theory-on-the-basis-of-empirical-evidence.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document

CHECK THESE SAMPLES OF International Financial Theory on the basis of Empirical Evidence

Empirical Evidence-Financial Systems and Economic Activity

...discussed in this paper. However, as mentioned previously in this paper, the international comparisons of corporate and financial infrastructure in the developed world were unable to disclose evident relationship between the financial or corporate structures and the economic performance of a country. Due to this finding, it can be concluded that no financial or governance mechanism functions specifically well in regulating agency issues and for that matter solutions should be hunted from some where else, for instance, from product market competition. However, empirical analyses indicated persistently towards the significant role for...
15 Pages(3750 words)Essay

Evidence Is The Basis of Justice

...?Evidence is the basis of justice: to exclude evidence is to exclude justice’ Introduction This paper examines the English law of evidence within thecontext of Jeremy Bentham’s quote “to exclude evidence is to exclude justice”. His idea is that by excluding evidence adverse to the defendant/accused under some pretext or other, justice should not be denied to the plaintiff/complainant. Reverse can also be the case. Bentham lays down certain principles as a standard of reference or as a guide for practice. They are: 1) By excluding a lesser evil, a greater evil should not be produced. 2) For the sake of lesser good, greater good should not...
17 Pages(4250 words)Dissertation

International Financial Accounting and Theory

...?INTERNATIONAL FINANCIAL ACCOUNTING AND THEORY QUESTION ONE Introduction Corporate governance is defined by Sheridan, Jones and Marston, 2006) as the way companies are controlled and it involves a specific system which guides the manner in which a given company is directed. Corporate governance also describes the manner in which company management, board, stakeholders and shareholders relate to each other so that conflict of interest is mitigated. The developments in the corporate governance of the United Kingdom companies have led to influential changes which have stimulated similar amendments in the corporate governance of the European Union in general and that of the United States. The...
7 Pages(1750 words)Essay

Empirical Asset Pricing Theory

...Empirical Asset Pricing Theory Introduction Empirical pricing theories relating to the assets are used as benchmarks for valuation of an asset. Stochastic discount factor method of pricing is itself a criterion through which assets are valued. This paper will outline how this method of valuing an asset fits to be a factor pricing model. This will entail discussing the assumptions relating to the form of stochastic discount model as well as how the factor method is related to the acquiring of equilibrium risk premium. In other words, the paper will look at the negative covariance of SDF and excess returns. The paper will also outline the Fama-French factors. This will...
6 Pages(1500 words)Assignment

Basis of Grammatical Evidence

From the two perspectives, there is a contrast basing on the issue of spying, which is a form of investigation patterns, which incurred and propelled by various participants in both texts. Text 1 adopted from the Arabs news Germany summons U.S. envoy over Merkel phone spy suspicion and Text 2 adopted from the New York news Anger Growing among Allies on U.S. Spying Table1: The clause structure types: Transitive Intransitive Active Passive Long Short Text: 1 1.8kol,5 8 18 1 5 Text: 2 14 9 16 3 8 From the table 1 it gives a clear indication that in both texts transitive clauses have been used more that intransitive clauses. In addition, there is an active voice more than passive voice. We define a transitive clause as one that involv...
3 Pages(750 words)Essay

International Theory

...International Theory: ical Liberalism versus English School The ical liberalism and English school theories are concepts in international law that deal with international relations between and among states. These theories came about as a result of the international relations disaster that was World War II and previous conflicts that marked the history of many nations of the world (Sturgis, 2006). After World War II, there was an ominous need to set up better international relations between and among the different countries of the world. Different theories on how to go about ‘relating’...
4 Pages(1000 words)Essay

International financial accounting and theory

...Topic: International Financial Accounting and Theory Affiliation: Introduction Contemporary accounting has emerged to be one of the diverse and dynamic concepts in financial accounting and reporting. Accounting practices of the modern times are faced with numerous factors to account for in the contemporary business environment. Social and environmental accounting is a contemporary component of accounting principles and standards. It goes beyond the formal record keeping and financial reporting to encompass internal and external information demands by accounting stakeholders in the economies. Accounting theories are...
6 Pages(1500 words)Term Paper

Neural basis of game theory

...Neural Basis of Game Theory Introduction The decision making process in the social groups consists of two distinguishing feature: being human factor, and the animal constant change of behavior to suit their physical and social behavior. The situation does not create room for behavior predictions in various circumstances; as the parties making the decisions are subject to change. In the cases of animals, it requires a highly adaptive decision making strategies for one to forecast various outcomes. Secondly decision makers can have favorites, in relation to consequences. This may result to bias decision towards one individual as opposed to the other, and hence select an action that will develop or degrade...
2 Pages(500 words)Essay

Discuss whether economic theory and the available empirical evidence justi

...remuneration and compensation for the CEOs. Moreover, there is always deliberate discussion over the compensation policy, especially during the time of poor company performance and financial crisis (Balsam, 2002). In this regard, the aim of the paper is to examine the effect in the executive compensation regardless of the poor performance of the company with the help of various economic theories and the empirical evidence. Discussion According to Bertrand & Mullainathan (2001) the remuneration of the CEOs in an organisation is based on the principle of the economic agency model. In accordance with this model, the firm owners act as the principal and the hired CEOs are...
6 Pages(1500 words)Essay

INTERNATIONAL FINANCIAL

...International Financial “Answer to Part A” Mackintosh started his speech at the IFRS Foundation conference in Johannesburg mirroring the hard lessons learned from the recent international financial meltdown. Mackintosh told that initiative to accomplish international accounting standards was started in 1973 with the establishment of the International Accounting Standards Committee (IASC) which was mainly intended to minimise the differences in the national accounting standards against the globally agreed benchmarks. After the lapse of twenty-five years, the accounting standards of those nations stayed as inconsistency as ever and to our...
12 Pages(3000 words)Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic International Financial Theory on the basis of Empirical Evidence for FREE!

Contact Us