Less of a Puzzle: A New Look at the Forward Forex Market

35 Pages Posted: 29 Apr 2002

See all articles by Michael Moore

Michael Moore

University of Warwick - Warwick Business School

Maurice J. Roche

National University of Ireland, Maynooth (NUI Maynooth) - Department of Economics, Finance and Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: October 2001

Abstract

The two-country monetary model is extended to include a consumption externality with habit persistence. The model is simulated using the artificial economy methodology. The 'puzzles' in the forward market are re-examined. The model is able to account for: (a) the low volatility of the forward discount (b) the higher volatility of expected forward speculative profit (c) the even higher volatility of the spot return (d) the persistence in the forward discount (e) the martingale behavior of spot exchange rates (f) the negative covariance between the expected spot return and expected forward speculative profit. It is unable to account for the forward market bias because the volatility of the expected spot return is too large relative to the volatility of the expected forward speculative profit.

Keywords: artificial economy, forward foreign exchange, habit persistence

JEL Classification: F31, F41, G12

Suggested Citation

Moore, Michael John and Roche, Maurice J., Less of a Puzzle: A New Look at the Forward Forex Market (October 2001). WBS Finance Group Research Paper No. 19, Available at SSRN: https://ssrn.com/abstract=307042 or http://dx.doi.org/10.2139/ssrn.307042

Michael John Moore (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Maurice J. Roche

National University of Ireland, Maynooth (NUI Maynooth) - Department of Economics, Finance and Accounting ( email )

County Kildare
Ireland
+353 1 7083786 (Phone)
+353 1 7083934 (Fax)

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