Explaining Foreign Exchange Market Puzzles

International Monetary Fund
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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.
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Publisher
International Monetary Fund
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Published on
Mar 1, 1999
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Pages
29
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ISBN
9781451985474
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Language
English
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Genres
Business & Economics / Economics / General
Business & Economics / Economics / Macroeconomics
Business & Economics / International / Economics
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Content Protection
This content is DRM protected.
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