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Bank positions and forecasts of exchange rate movements

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  • Michael P. Leahy
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    Abstract

    Using data on the foreign exchange positions of five leading financial institutions, this paper attempts to determine whether the recent profitability of banks' foreign exchange trading is due to superior abilities to forecast exchange rate movements. Overall, the position data provide evidence that the performances of some financial institutions are 1) better than one might expect if their forecasts were purely random and 2) consistent with the possibility that they may possess information that would be valuable in forecasting changes in exchange rates. The conclusions are limited, however, by the possibility that there exists a time-varying risk premium which is correlated with the positions.

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    File URL: http://www.federalreserve.gov/pubs/ifdp/1994/486/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1994/486/ifdp486.pdf
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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 486.

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    Date of creation: 1994
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    Handle: RePEc:fip:fedgif:486

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    Related research

    Keywords: Forecasting ; Foreign exchange rates;

    References

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    1. John Ammer & Allan D. Brunner, 1994. "Are banks market timers or market makers? Explaining foreign exchange trading profits," International Finance Discussion Papers 484, Board of Governors of the Federal Reserve System (U.S.).
    2. Henriksson, Roy D & Merton, Robert C, 1981. "On Market Timing and Investment Performance. II. Statistical Procedures for Evaluating Forecasting Skills," The Journal of Business, University of Chicago Press, vol. 54(4), pages 513-33, October.
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    Cited by:
    1. John Ammer & Allan D. Brunner, 1994. "Are banks market timers or market makers? Explaining foreign exchange trading profits," International Finance Discussion Papers 484, Board of Governors of the Federal Reserve System (U.S.).
    2. Sandra L. Chamberlain & John S. Howe & Helen Popper, 1996. "The Exchange Rate Exposure of U.S. and Japanese Banking Institutions," Center for Financial Institutions Working Papers 96-55, Wharton School Center for Financial Institutions, University of Pennsylvania.

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