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Less of a puzzle: a new look at the forward forex market

Author

Listed:
  • Maurice J. Roche

    () (Department of Economics, National University of Ireland, Maynooth, Ireland)

  • Michael J. Moore

    () (School of Management and Economics, The Queen's University of Belfast, Belfast, Northern Ireland)

Abstract

The two-country monetary model is extended to include a consumption externality with habit persistence. This is set within a limited participation framework. The model is simulated using the artificial economy methodology. The 'puzzles' in the forward market are re-examined. The model is able to account for (a) the low volatility of the forward discount (b) the higher volatility of expected forward speculative profits (c) the even higher volatility of spot rate changes (d) the persistence in the forward discount and (e) the random walk in spot exchange rates The major innovation is that it is able to replicate some of the extent of the bias of the forward discount as a predictor of realised spot rate changes.

Suggested Citation

  • Maurice J. Roche & Michael J. Moore, 1999. "Less of a puzzle: a new look at the forward forex market," Economics, Finance and Accounting Department Working Paper Series n910799, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  • Handle: RePEc:may:mayecw:n910799
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Artificial economy; Forward foreign exchange; Limited participation; Habit persistence;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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