Showing papers on "Forward exchange rate published in 1993"
Posted Content•
TL;DR: In this article, the authors present a model of the foreign exchange market in which there are two types of traders: those who are fully rational and those whose expectations are anchored to the forward exchange rate.
Abstract: Anchoring is a well-documented behaviour pattern. It occurs when agents form their expectations of an objective variable by only partially adjusting from some given starting value. We present a model of the foreign exchange market in which there are two types of traders: those who are fully rational and those whose expectations are anchored to the forward exchange rate. Under plausible conditions, a significant proportion of the anchored traders survive in the market in the long-run. The model explains both forward discount bias in the direction consistently observed in foreign exchange markets and the results of surveys of market participants’ exchange rate expectations.
18 citations
Posted Content•
TL;DR: The authors showed that the vector of forward premia can be used to reduce the root mean squared forecast error for the spot rate (relative to a random walk forecast) by at least 33% at a six-month horizon and by between 50% and 90% for a one-year horizon.
Abstract: This paper challenges the widespread view that forward exchange premia contain little information regarding subsequent spot rate movements. Using weekly dollar/Deutschmark and dollar/sterling data, we show that spot and forward exchange rates are well represented by a vector error correction model and that the vector of forward premia form a basis for the cointegrating space. Dynamic forecasts indicate that the information in the forward premia can be used to reduce the root mean squared forecast error for the spot rate (relative to a random walk forecast) by at least 33% at a six-month horizon and by between 50% and 90% at a one-year horizon.
12 citations
TL;DR: In this paper, the role of exchange rate expectations in the pricing of the forward exchange rate, the rationality of foreign exchange market expectations and the nature of expectation formation mechanisms were evaluated.
Abstract: Survey data on the expectations of the Singapore/US dollar exchange rate are employed to evaluate (i) the role of exchange rate expectations in the pricing of the forward exchange rate, (ii) the rationality of foreign exchange market expectations and (iii) the nature of expectation formation mechanisms. The analyses indicate that movements in the forward discount mainly reflect expectations of future changes in the exchange rate and expectations of the market are not rational. In addition, expectations are best characterized as regressing toward the equilibrium PPP exchange rate The views expressed in this paper are solely the authors' and do not necessarily reflect those of the Monetary Authority of Singapore
10 citations
TL;DR: This article examined the behaviour of exchange rates to Canadian CPI announcements and found that the reaction to the monthly CPI announcements provides a unique opportunity to test hypothesis whether the Bank of Canada gained credibility after it announced a change in objective of price stability in January 1988 and in February 1991.
Abstract: Previous announcement studies have focused primarily on market reactions to money announcements. This study examines the behaviour of exchange rates to Canadian CPI announcements. The reaction to the monthly CPI announcements provides a unique opportunity to test hypothesis whether the Bank of Canada gained credibility after it announced a change in objective of price stability in January 1988 and in February 1991. The post-1988 spot and forward exchange rate actions are found to be conistent with the policy anticipation hypothesis, suggesting that the Bank did gain credibility. Whenever inflations is larger than anticipated, the Canadian dollar appreciates because markets expect the Bank to counteract the inflaction shock. An interesting result is that the announcement effect is found to by aymmetric.
7 citations
TL;DR: The authors showed that the expected excess rate of return is determined by the world consumption beta and the exchange beta, and that the exchange risk should be priced in the equilibrium model of international asset pricing.