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Working Paper
Why is the forward exchange rate forecast biased? A survey of recent evidence
Forward exchange rate unbiasedness is rejected in tests from the current floating exchange rate era. This paper surveys advances in this area since the publication of Hodrick's (1987) survey. It documents that the change in the future exchange rate is generally negatively related to the forward premium. Properties of the expected forward forecast error are reviewed. Issues such as the relation of uncovered interest parity to real interest parity, and the implications of uncovered interest parity for cointegration of various quantities are discussed. The modeling and testing for risk premiums ...
Report
Interbank interest rates as term structure indicators
Interbank fixed income claims are a rich but neglected source of information on the term structure of interest rates and interest rate expectations. The first half of this paper describes the information content of two types of over-the-counter interest rate derivatives, forward rate agreements and interest rate swaps. Interbank interest rates and derivatives lend themselves well to a particular technique for fitting zero-coupon curves. The second half of this paper present this technique, along with some examples of how it can be used to gain insights into market views on interest rates and ...
Working Paper
The forward exchange rate bias: a new explanation
Although the literature has devoted prodigious resources to investigating the risk premium explanation of the systematic time-varying discrepancies between forward and corresponding future spot exchange rates, empirical verification of the risk premium hypothesis has proven elusive. This paper tests an alternative explanation of the forward bias: the anticipated real exchange rate hypothesis. This hypothesis states that except for a constant risk premium, the predictable, time varying wedge between forward and expected future spot exchange rates is fully explained by the anticipated rate of ...
Report
Price discovery in the foreign currency futures and spot market
In this paper, we compare price discovery in the foreign exchange futures and spot markets during a period in which the spot market was less transparent but had higher volume than the futures market. We develop a foreign exchange futures order flow measure that is a proxy for the order flow observed by Chicago Mercantile Exchange pit traders. We find that both foreign currency futures and spot order flow contain unique information relevant to exchange rate determination. When we measure contributions to price discovery using the methods of Hasbrouck and of Gonzalo and Granger, we obtain ...
Working Paper
The pricing of forward exchange rates
This paper addresses the question: do risk premia account for the observed time-varying discrepancies between forward and corresponding future spot exchange rates? A simple theoretical framework is used to derive testable restrictions on the parameters of a multivariate regression model. Using various econometric procedures and different estimation periods, the data reject the restrictions. In contrast to past investigations, the empirical results are inconsistent with a world in which time-varying risk premia are the sole determinants of observed deviations from the unbiased expectations ...
Working Paper
The risk premium in the foreign exchange market
Working Paper
Market efficiency and cointegration