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Profitability and Stability in International Currency Markets

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  • John F. O. Bilson

Abstract

A number of recent empirical studies have rejected the hypothesis that forward exchange rates are unbiased forecasts of future spot exchange rates. This result implies that there have been opportunities for speculative profit during the post Bretton Woods period. Observers of the floating rate system have also noted that exchange rates have been more volatile than they were anticipated to be in the 1960's. In this paper, the link between the volatility of exchange rates and the existence of opportunities for speculative profit is explored. The question answered in the paper is the following: if there were no opportunities for speculative profit, would exchange rates have been more stable? The answer is yes. This answer implies that speculation (intervention) based upon the forecasting equation described in the paper would be both profitable and stabilizing.

Suggested Citation

  • John F. O. Bilson, 1981. "Profitability and Stability in International Currency Markets," NBER Working Papers 0664, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0664
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    References listed on IDEAS

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    1. Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 200-224.
    2. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
    3. Kouri, Pentti J K, 1976. " The Exchange Rate and the Balance of Payments in the Short Run and in the Long Run: A Monetary Approach," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 280-304.
    4. Mussa, Michael, 1976. " The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy under a Regime of Controlled Floating," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 229-248.
    5. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
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    Cited by:

    1. Rudiger Dornbusch & Jeffrey A. Frankel, 1987. "The Flexible Exchange Rate System: Experience and Alternatives," NBER Working Papers 2464, National Bureau of Economic Research, Inc.
    2. Frankel, Jeffrey A. & Froot, Kenneth A., 1987. "Short-term and long-term expectations of the yen/dollar exchange rate: Evidence from survey data," Journal of the Japanese and International Economies, Elsevier, vol. 1(3), pages 249-274, September.

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