Explaining Forward Exchange Bias .... Intra-day
AbstractIntra-day interest rates are zero. Consequently, a foreign exchange dealer can short a vulnerable currency in the morning, close this position in the afternoon, and never face an interest cost. This tactic might seem especially attractive in times of crisis, since it suggests an immunity to the central bank's interest rate defence. In equilibrium, however, buyers of the vulnerable currency must be compensated on average with an intra-day capital gain, as long as no devaluation occurs. That is, currencies under attack should typically appreciate intra-day. Using data on intra-day exchange rate changes within the European Monetary System, we find this prediction is borne out.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1059.
Date of creation: Nov 1994
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Other versions of this item:
- Richard K. Lyons and Andrew K. Rose., 1995. "Explaining Forward Exchange Bias...Intraday," Research Program in Finance Working Papers RPF-242, University of California at Berkeley.
- Richard K. Lyons & Andrew K. Rose, 1995. "Explaining Forward Exchange Bias..Intraday," NBER Working Papers 4982, National Bureau of Economic Research, Inc.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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- Richard K. Lyons, 1993. "Tests of Microstructural Hypotheses in the Foreign Exchange Market," NBER Working Papers 4471, National Bureau of Economic Research, Inc.
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