An Empirical Study on the Relationship Between Exchange Rate Volatility and International Trade Dynamics

Posted: Mar 02, 2001

• Liam Lee
• Liam Thompson
• Luna Baker

Abstract

The relationship between exchange rate volatility and international trade represents one of the most enduring puzzles in international economics. Traditional econometric approaches have yielded conflicting results, with some studies finding significant negative effects of volatility on trade volumes, while others report negligible or even positive relationships. This empirical ambiguity suggests that conventional linear models may be insufficient to capture the complex, multi-dimensional nature of exchange rate dynamics and their transmission mechanisms to trade flows. The limitations of existing methodologies become particularly apparent when analyzing emerging markets, where institutional factors, market imperfections, and heterogeneous agent behaviors create non-linear relationships that standard models struggle to represent adequately. Our research addresses these methodological gaps by introducing a quantum-inspired computational framework that re-conceptualizes exchange rate volatility not as a statistical measure of dispersion, but as a multi-scale phenomenon with distinct regime-dependent properties. This perspective draws inspiration from quantum mechanics, where particles exhibit both wave-like and particle-like behaviors depending on the observational context. Similarly, we propose that exchange rate movements manifest different characteristics across various time horizons and market conditions, requiring analytical tools that can adapt to these contextual shifts. This paper makes three primary contributions to the literature. First, we develop a novel Quantum Wavelet Transform Ensemble (QWTE) model that integrates principles from quantum computing with multi-resolution analysis, enabling simultaneous examination of exchange rate dynamics across multiple temporal scales. Second, we identify and characterize three distinct volatility regimes that correspond to fundamentally different trade adjustment mechanisms, providing a more nuanced understanding of how currency fluctuations affect international commerce. Third, we demonstrate that the relationship