Showing papers on "Forward exchange rate published in 1988"
TL;DR: This paper explored some anomalies in the foreign exchange market and found that longer-term speculation based on fundamentals is strictly limited, and survey data and other evidence suggest that expectations and speculation are based on a variety of models.
Abstract: This paper explores some anomalies in the foreign exchange market. It is hard to find evidence of either short-term overshooting or of longer-term reversion to an equilibrium. The forward exchange rate contains virtually no information on future spot rates. Discussions with practitioners indicate that longer-term speculation based on fundamentals is strictly limited, and survey data and other evidence suggest that expectations and speculation are based on a variety of models. The interplay between speculation based on fundamentals, and on a random walk, or Chartist, approach, influences the outcome. This endorses the prior model of J. A. Frankel and K. A. Froot. Copyright 1988 by The London School of Economics and Political Science.
302 citations
TL;DR: In this article, the authors test for real exchange rate risk effects on U.S. bilateral trade flows during the floating period using several new as well as previously used risk measures.
225 citations
TL;DR: In this article, a vector autoregression model (VAR) is proposed in order to test uncovered interest parity (UIP) in the foreign exchange market, and the results are compared to the efficiency test with a single equation using the Hansen-Hodrick procedure for the same data set.
Abstract: In this paper, a vector autoregression model (VAR) is proposed in order to test uncovered interest parity (UIP) in the foreign exchange market. Consider a VAR system of the spot exchange rate (yen/dollar), the domestic (US) interest rate and the foreign (Japanese) interest rate, describing the interdependence of the domestic and international financia lmarkets. Uncovered interest parity is stated as a null hypothesis that the current difference between the two interest rates is equal to the difference between the expected future (log of) exchange rate and the (log of) current spot exchange rate. Note that the VAR system will yield the expected future spot exchange rate as a k-step ahead unconditional prediction. Hence, the null hypothesis is stated as nonlinear cross-equational restrictions for the three-equation VAR system. Then UIP is tested by the Wald test between the unrestricted and restricted systems. A test of UIP with a maintained hypothesis of covered interest parity, becomes a hypothesis test of efficiency without risk premium, that is,the forward exchange rate isthe unbiased predictor of the future spot exchange rate, and information is efficiently used in its prediction. Our results are compared to the efficiency test with a single equation using the Hansen-Hodrick procedure for the same data set.
39 citations
TL;DR: In this article, the authors carried out quantitative tests of the accuracy of a number of UK-based exchange-rate forecasts and concluded that the forward rate tends to outperform the forecast services as far as quantitative accuracy is concerned.
38 citations
TL;DR: In this paper, the authors model the risk premi um as a latent variable depending upon domestic and foreign asset volatility, using an unobservable component framework, and obtain estimates of the model for dollar-sterling, dollar-Swiss franc and dollar-Japan ese yen, obtained by maximum likelihood Kalman filtering techniques.
Abstract: One explanation which has been proposed for the failure of the forward exchange rate to act as an unbiased predictor of the future spot rate is the exist ence of a time-varying risk premium. This paper models the risk premi um as a latent variable depending upon domestic and foreign asset yie ld volatility, using an unobservable components framework. Estimates of the model for dollar-sterling, dollar-Swiss franc and dollar-Japan ese yen, obtained by maximum likelihood Kalman filtering techniques, are encouraging. Copyright 1988 by Blackwell Publishers Ltd and The Victoria University of Manchester
31 citations
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TL;DR: In this paper, an alternative explanation of the forward bias is proposed: the anticipated real exchange rate hypothesis, which states that except for a constant risk premium, the predictable, time-varying wedge between forward and expected future spot exchange rates is fully explained by the anticipated rate of change in real exchange rates.
Abstract: Although the literature has devoted prodigious resources to investigating the risk premium explanation of the systematic time-varying discrepancies between forward and corresponding future spot exchange rates, empirical verification of the risk premium hypothesis has proven elusive. This paper tests an alternative explanation of the forward bias: the anticipated real exchange rate hypothesis. This hypothesis states that except for a constant risk premium, the predictable, time varying wedge between forward and expected future spot exchange rates is fully explained by the anticipated rate of change in the real exchange rate. The data do not reject this hypothesis. This suggests that the literature's almost singular concern with the risk premium explanation of the forward bias should be amended to include the effects of anticipated real exchange rate movements.
4 citations