Explaining Foreign Exchange Market Puzzles

March 1, 1999

Preview Citation

Format: Chicago

Norman C. Miller Explaining Foreign Exchange Market Puzzles, (USA: International Monetary Fund, 1999) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper develops a flow model of the exchange rate with speculative capital flows integrated in a rigorous manner. The model is consistent with five foreign exchange market puzzles: (1) occasional discontinuous jumps in the exchange rate; (2) periodic short-term regimes of persistent appreciation/depreciation that can develop into a long swing; (3) the forward discount bias; (4) volatility clusters in the foreign exchange market that create conditional heteroskedasticity; and (5) the dual profitability of betting in the short run against any official foreign exchange intervention, and betting with the intervention in the long run.

Subject: Currency markets, Exchange rates, Financial markets, Foreign exchange, International trade, National accounts, Return on investment, Trade balance

Keywords: Balance of payments, Currency markets, Differential in favor, Exchange rate, Exchange Rates, Foreign Exchange Puzzles, FX market, Home interest rate, Interest rate differential, Long term speculator, Prediction error, Profit taking, Return on investment, Time horizon, Trade balance, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1999/027
Stock No:

WPIEA0271999
ISBN:

9781451844504
ISSN:

1018-5941

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