Forward foreign exchange rates, expected spot rates, and premia: A signal-extraction approach

Article Abstract:

In this paper, we implement a methodology to identify and measure premia in the pricing of forward foreign exchange that involves application of signal-extraction techniques from the engineering literature. Diagnostic tests indicate that these methods are quite successful in capturing the essence of the time-series properties of premium terms. The estimated premium models indicate that premia show a certain degree of persistence over time and that more than half the variance in the forecast error that results from the use of current forward rates as predictors of future spot rates is accounted for by variation in premium terms. The methodology can be applied straightforwardly to the measurement of unobservables in other financial markets. (Reprinted by permission of the publisher.)

Currency options, Foreign exchange futures

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On intraday risk premia

Article Abstract:

This article presents a framework for analyzing the dynamic effects of anticipated large demand pressures on asset risk premia. We show that large institutions who can time their entry into the market will trade either at the open, or during periods of unusual demand pressures. We show that if these institutions do enter later in the day, they trade in the same direction as institutions which provide liquidity continuously; institutions therefore appear to exhibit "herding" behavior. We also explore how changing the uncertainty of demand pressures late in the day affects trading costs throughout the day. (Reprinted by permission of the publisher.)

Risk assessment, Stock-exchange, Stock exchanges

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Was it real? The exchange rate-interest differential relation over the modern floating-rate period

Article Abstract:

In this paper, we explore the relationship between real exchange rates and real interest rate differentials in the United States, Germany, Japan, and the United Kingdom. Contrary to theories based on the joint hypothesis that domestic prices are sticky and monetary disturbances are predominant, we find little evidence of a stable relationship between real interest rates and real exchange rates. We consider both in-sample and out-of-sample tests. One hypothesis that is consistent with our findings is that real disturbances (such as productivity shocks) may be a major source of exchange rate volatility. (Reprinted by permission of the publisher.)

Analysis, Floating rate notes, Financial research

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