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Does intervention explain the forward discount puzzle?


  • William P. Osterberg


An investigation of the impact of U.S. and German central-bank interventions on the forward discount puzzle for two exchange rates-the German mark/U.S. dollar and the Japanese yen/U.S. dollar-using official 1985-91 data. The evidence on the importance of intervention is strongest for the DM/$. However, the direction of the impact is inconsistent with the findings of Flood and Rose (1996) if periods of intervention are viewed as equivalent to fixed-rate regimes.

Suggested Citation

  • William P. Osterberg, 1997. "Does intervention explain the forward discount puzzle?," Economic Review, Federal Reserve Bank of Cleveland, issue Q IV, pages 24-31.
  • Handle: RePEc:fip:fedcer:y:1997:i:qiv:p:24-31

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    References listed on IDEAS

    1. Flood, Robert P & Rose, Andrew K, 1996. "Fixes: Of the Forward Discount Puzzle," The Review of Economics and Statistics, MIT Press, vol. 78(4), pages 748-752, November.
    2. Kaminsky, Graciela L. & Lewis, Karen K., 1996. "Does foreign exchange intervention signal future monetary policy?," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 285-312, April.
    3. Baillie, Richard T. & Bollerslev, Tim, 2000. "The forward premium anomaly is not as bad as you think," Journal of International Money and Finance, Elsevier, vol. 19(4), pages 471-488, August.
    4. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
    5. Owen F. Humpage, 1994. "Institutional aspects of U.S. intervention," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 2-19.
    6. Hung, Juann H, 1997. "Intervention strategies and exchange rate volatility: a noise trading perspective," Journal of International Money and Finance, Elsevier, vol. 16(5), pages 779-793, September.
    7. Loopesko, Bonnie E., 1984. "Relationships among exchange rates, intervention, and interest rates: An empirical investigation," Journal of International Money and Finance, Elsevier, vol. 3(3), pages 257-277, December.
    8. Michael W. Klein & Eric S. Rosengren, 1991. "Foreign exchange intervention as a signal of monetary policy," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 39-50.
    9. Baillie, Richard T. & P. Osterberg, William, 1997. "Central bank intervention and risk in the forward market," Journal of International Economics, Elsevier, vol. 43(3-4), pages 483-497, November.
    10. Bansal, Ravi, 1997. "An Exploration of the Forward Premium Puzzle in Currency Markets," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 369-403.
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    Cited by:

    1. Zhu, Zhen, 2002. "Time-varying forward bias and the expected excess return," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 12(2), pages 119-137, April.

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