Trading the Forward Bias: Are There Limits to Speculation?

26 Pages Posted: 20 Apr 2005 Last revised: 6 Jan 2008

See all articles by Markus Hochradl

Markus Hochradl

Vienna Graduate School of Finance (VGSF)

Christian Wagner

WU Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF)

Date Written: 2007

Abstract

In this paper we investigate whether trading the forward bias allows for economically significant excess returns. We find that bias-trading strategies can be viewed as attractive investment opportunities per se, useful diversification devices, and promising portfolio extensions for active fund managers trying to beat their benchmarks. The empirical results, which also mirror the problems arising in attempts to explain the puzzle by risk-premia, are consistent with market evidence that the bias is traded in practice. Overall, our findings suggest that limits to speculation are unlikely to provide a (stand-alone) explanation for the persistence of the forward bias.

Keywords: Exchange rates, forward bias, trading strategies, currency options, limits to speculation

JEL Classification: F31

Suggested Citation

Hochradl, Markus and Wagner, Christian, Trading the Forward Bias: Are There Limits to Speculation? (2007). EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=702201 or http://dx.doi.org/10.2139/ssrn.702201

Markus Hochradl

Vienna Graduate School of Finance (VGSF) ( email )

Austria

Christian Wagner (Contact Author)

WU Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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