STRUCTURAL EQUATION MODELING OF THE USD/PHP EXCHANGE RATE: AN INTEGRATED ANALYSIS OF GLOBAL RISK AND DOMESTIC FUNDAMENTALS FOR INVESTMENT STRATEGY
Abstract
This study evaluates the causes affecting the Philippine currency rate by incorporating global risk and domestic fundamentals into a structural framework. The research, grounded in the Portfolio Balance Approach and the Global Financial Cycle Hypothesis, utilizes Structural Equation Modeling on 252 monthly observations spanning from January 2005 to December 2025. Upon comparison of a saturated primary model with four nested alternatives, Alternative Model 4 was identified as the most robust framework. Empirical findings indicated that the growth rate of Gross International Reserves is the principal determinant of USD/PHP variations, significantly mitigating the influence of the Balance of Payments. The global risk sentiment VIX exerts strong direct pressure, causing peso devaluation during times of heightened market anxiety. The data revealed that the valuation of the Philippine currency is far more responsive to external global mood and central bank reserve management than to domestic liquidity expansion or occasional interest rate changes.
JEL: F31, E52, C38, F32, G15
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DOI: http://dx.doi.org/10.46827/ejefr.v10i3.2193
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