Predictability and Good Deals in Emerging and Developed Currency Markets: The Role of Spot vs. Forward Speculation

53 Pages Posted: 12 Jun 2018

See all articles by Richard M. Levich

Richard M. Levich

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Thomas Conlon

University College Dublin

Valerio Potì

University College Dublin

Date Written: January 15, 2017

Abstract

We study the predictability of forward and spot exchange rates of currencies of emerging and developed economies from 1994 to 2016 to shed light on the efficiency of currency markets and how it has evolved over this time. For the currencies of emerging economies, our analysis of rates of return on forward contracts finds some evidence of excess-predictability, especially in the earlier parts of the sample period, consistent with the view that this portion of the foreign exchange market has only become efficient in recent times. When we turn our attention to excess-returns computed from spot exchange rates and spot interest rates, however, we find much less predictability. In particular, over our full sample period, we find no evidence of excess-predictability, in contrast with the results reported by Hsu et al. (2016) but in agreement with Kuang et al. (2014). The different predictability of spot excess-returns and rates of return on forward contracts is a manifestation of the widespread violation of covered interest parity which emerged with the onset of the 2008 financial crisis.

Keywords: Predictability, Foreign Exchange, Filter Rules, Market Efficiency

JEL Classification: F31

Suggested Citation

Levich, Richard M. and Conlon, Thomas and Potì, Valerio, Predictability and Good Deals in Emerging and Developed Currency Markets: The Role of Spot vs. Forward Speculation (January 15, 2017). Available at SSRN: https://ssrn.com/abstract=2901169 or http://dx.doi.org/10.2139/ssrn.2901169

Richard M. Levich

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0422 (Phone)
212-995-4256 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Thomas Conlon

University College Dublin ( email )

Smurfit Graduate Business School
Blackrock
Co. Dublin, n/a
Ireland

HOME PAGE: http://www.ucd.ie/bankingfinance/staff/drthomasconlon/

Valerio Potì (Contact Author)

University College Dublin ( email )

M. Smurfit School of Business
Carysfort Avenue, Blackrock
Dublin, Co Dublin
Ireland

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