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Explaining Forward Exchange Bias..Intraday

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  • Richard K. Lyons
  • Andrew K. Rose

Abstract

Intraday 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 Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4982.

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Date of creation: Jan 1995
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Handle: RePEc:nbr:nberwo:4982

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  1. 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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Cited by:
  1. Pasricha, Gurnain Kaur, 2006. "Survey of Literature on Covered and Uncovered Interest Parities," MPRA Paper 22737, University Library of Munich, Germany.
  2. Alain P. Chaboud & Jonathan H. Wright, 2003. "Uncovered interest parity: it works, but not for long," International Finance Discussion Papers 752, Board of Governors of the Federal Reserve System (U.S.).

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