Download This PaperFloating Exchange Rates, Expectations and New Information
31 Pages Posted: 3 May 2004 Last revised: 30 Nov 2022
Date Written: 1983
Abstract
This paper analyzes the relationship between forward exchange rates,future spot rates and new information. A stochastic model of exchangerate determination is used to formally show how unanticipated changes in the exchange rate determinants (or "news") affect the spot rate. The empirical analysis indicates that "new information" plays an important role in explaining the market forecasting error, or difference between the spot rate and the forward rate, determined in the previous period.
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