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The Effect of the Lebanese Peg to the US Dollar on Market Efficiency and Risk

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  • Samih Antoine Azar

    (Samih Antoine Azar is Associate Professor at Faculty of Business Administration and Economics, Haigazian University, Lebanon. E-mail: azars@haigazian.edu.lb)

Abstract

The theory of self-fulfilling currency attacks predicts that pegged foreign exchange rates are extremely sensitive to adverse and hostile speculation. This is true whenever fiscal policy and monetary policy are inconsistent with each other, or even when intensive and public official intervention is initiated by a central bank with limited foreign exchange reserves. The experience of Lebanon, with its peg to the US-dollar since December 1998, shows that contrary to the received wisdom, a peg can stabilise the financial markets and eliminate inefficiencies such as serial correlation, a bias of the forward rate and the presence of a Peso problem. Moreover, risk was not only reduced during the Lebanese peg but was also dissipated.

Suggested Citation

  • Samih Antoine Azar, 2008. "The Effect of the Lebanese Peg to the US Dollar on Market Efficiency and Risk," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 7(1), pages 1-15, January.
    • Handle: RePEc:sae:emffin:v:7:y:2008:i:1:p:1-15
    DOI: 10.1177/097265270700700101
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    References listed on IDEAS

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    More about this item

    Keywords

    International finance; foreign exchange rates; pegging; Lebanon; market efficiency; risk; forward rate unbiasedness; JEL Classification: F31; JEL Classification: C22;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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