Explaining Forward Exchange Bias..Intraday
AbstractIntraday 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 defense. In equilibrium, however, buyers of the vulnerable currency must be compensated on average with an intraday capital gain as long as no devaluation occurs. That is, currencies under attack should typically appreciate intraday. Using data on intraday exchange rate changes within the EMS, we find this prediction is borne out.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4982.
Date of creation: Jan 1995
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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.
- Lyons, Richard K & Rose, Andrew K, 1994. "Explaining Forward Exchange Bias .... Intra-day," CEPR Discussion Papers 1059, C.E.P.R. Discussion Papers.
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- F31 - International Economics - - International Finance - - - Foreign Exchange
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- Richard K. Lyons., 1993. "Tests of Microstructural Hypotheses in the Foreign Exchange Market," Research Program in Finance Working Papers RPF-230, University of California at Berkeley.
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