Explaining Forward Exchange Bias .... Intra-day
Intra-day 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 defence. In equilibrium, however, buyers of the vulnerable currency must be compensated on average with an intra-day capital gain, as long as no devaluation occurs. That is, currencies under attack should typically appreciate intra-day. Using data on intra-day exchange rate changes within the European Monetary System, we find this prediction is borne out.
|Date of creation:||Nov 1994|
|Contact details of provider:|| Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.|
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lyons, Richard K., 1995.
"Tests of microstructural hypotheses in the foreign exchange market,"
Journal of Financial Economics,
Elsevier, vol. 39(2-3), pages 321-351.
- 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.
- Richard K. Lyons, 1993. "Tests of Microstructural Hypotheses in the Foreign Exchange Market," NBER Working Papers 4471, National Bureau of Economic Research, Inc.