covered interest rate arbitrage in the interwar period and the keynes einzig conjecture keynes 1923 conjectured that deviations from covered interest rate parity would not be arbitraged unless a profit of at least a half of one percent on an annualized basis was available and that larger deviations would still be moderately persistent because of less than perfect elasticity of supply of arbitrage funds this two part conjecture was given further emphasis by other writers on this period notably einzig 1937 we apply nonlinear econometric techniques to a previously unexploited weekly data base for the 1920s london and new york markets and find strong support for the conjecture

the out of sample success of term structure models as exchange rate predictors a step beyond abstract a large literature suggests that standard exchange rate models cannot outperform a random walk forecast and that the forward rate is not an optimal predictor of the spot rate however there is evidence that the term structure of forward premia contains valuable information for forecasting future spot exchange rates and that exchange rate dynamics display nonlinearities this paper proposes a term structure forecasting model of exchange rates based on a regime switching vector equilibrium correction model which is novel in this context our model significantly outperforms both a random walk and to a lesser extent a linear term structure vector equilibrium correction model for four major dollar rates across a range of horizons

short run forecasting of the euro dollar exchange rate with economic fundamentals abstract we propose a fundamentals based econometric model for the weekly changes in the euro dollar rate with the distinctive feature of mixing economic variables quoted at different frequencies the model obtains good in sample fit and more importantly encouraging out of sample forecasting results at horizons ranging from one week to one month specifically we obtain statistically significant improvements upon the hard to beat random walk model using traditional statistical measures of forecasting error at all horizons moreover our model obtains a great improvement when we use the direction of change metric which has more economic relevance than other loss measures with this measure our model performs much better at all forecasting horizons than a naive model that predicts the exchange rate as an equal chance to go up or down with statistically significant improvements

the forward premium puzzle in the interwar period and deviations from covered interest parity we revisit the forward premium puzzle in the interwar period and find that as the deviation from covered interest rate parity increases the coefficient on the forward premium in the standard fama regression tends towards zero

a note on interest parity and the supply of arbitrage funds the divergence of the actual forward premium on foreign exchange from that dictated by the principle of interest rate parity can arise from two separately identifiable causes 1 an equilibrium position as indicated by the interest parity principle has not been reached or 2 that the principle itself is not a correctly specified equilibrium condition it is the purpose of this note to offer a revised specification of the interest parity condition and to determine whether this version approximates more closely the actual premium as determined in the market it should be made clear however that this is a partial analysis and does not deal with the impact of other forces for example speculation on the forward premium as a result a complete model of the spot and forward markets for foreign exchange such as stein s 1965 is not attempted here in general the principle of interest parity maintains that in equilibrium

covered interest arbitrage and market turbulence the covered interest parity theorem states that the covered interest differential between two similar assets denominated in different currencies should be zero this paper utilizes high quality data recorded by the dealers at the bank of england to test covered interest parity during certain historical periods in which there is known to have been turbulence as well as during a relatively calm control period the data is high frequency and allowance is made for the bid offer spread brokerage costs and other considerations the results have three main implications firstly profitable arbitrage opportunities do occasionally occur and sometimes persist during turbulent periods secondly the degree of efficiency of the relevant markets appears to have increased over time thirdly there appears to be a maturity effect whereby the existence and size of profitable arbitrage opportunities appear to be positive functions of the length of maturity a rationalization of this phenomenon is offered in terms of the existence of credit limits copyright 1989 by royal economic society

what do we learn from the price of crude oil futures summary despite their widespread use as predictors of the spot price of oil oil futures prices tend to be less accurate in the mean squared prediction error sense than no change forecasts this result is driven by the variability of the futures price about the spot price as captured by the oil futures spread this variability can be explained by the marginal convenience yield of oil inventories using a two country multi period general equilibrium model of the spot and futures markets for crude oil we show that increased uncertainty about future oil supply shortfalls under plausible assumptions causes the spread to decline increased uncertainty also causes precautionary demand for oil to increase resulting in an immediate increase in the real spot price thus the negative of the oil futures spread may be viewed as an indicator of fluctuations in the price of crude oil driven by precautionary demand an empirical analysis of this indicator provides evidence of how shifts in the uncertainty about future oil supply shortfalls affect the real spot price of crude oil copyright 2010 john wiley sons ltd

the role of intratemporal adjustment costs in a multisector economy abstract in this paper we construct a multisector business cycle model which is capable of reproducing the procyclical behavior of cross sector measures of capital employment and output we start by documenting the difficulty that a standard variant of a conventional real business cycle model has in accounting for these facts we then show how the introduction of intratemporal adjustment costs for investment can significantly enhance the performance of such a model these costs make it difficult to alter the composition of production of new capital goods the presence of these costs eliminates many counterfactual observations of the model that would otherwise be present the dynamic response of variables in the model is different from what one would observe in the standard one sector model we also examine the implications of imposing intratemporal adjustment costs for labor the model can also account for the cross sector behavior of employment observed in the data

trade factor prices and the gains from trade with increasing returns to scale existing analyses seem to suggest that national increasing returns to scale are not a very useful tool for analysing trade owing to problems such as multiple equilibria and the tendency towards complete specialization the purpose of this paper is to construct a model in which there are in fact determinant relationships among country size the direction of trade the gains from trade and international factor price differences in the model differences in country size determine the direction of trade which in turn determines factor price differences and limits the possible distribution of the gains from trade commerce international prix des facteurs de production et les gains de l change dans un contexte de rendements croissants a l echelle les analyses conventionnelles semblent suggerer que les rendements croissants h l 6chelle au niveau national ne constituent pas une avenue prometteuse dans l analyse du commerce international parce que de tels rendements creent une presomption en faveur de la specialisation complete et conduisent a des situations d 6quilibres multiples le but de ce m6moire est de construire un mod le dans lequel il existe des rapports determinants entre la dimension du pays la direction des 6changes les gains de l echange et les differentiels internationaux entre les prix des facteurs de production dans ce mod le les differences entre les pays en termes de dimension d6terminent la direction du commerce international laquelle d6termine le differentiel entre les prix des facteurs de production et limite l eventail des r6partitions possibles des gains de l echange

covered interest arbitrage profits the role of liquidity and credit risk we study the profitability of covered interest parity cip arbitrage violations and their relationship with market liquidity and credit risk using a novel and unique dataset of tick by tick firm quotes for all financial instruments involved in the arbitrage strategy the empirical analysis shows that positive cip arbitrage deviations include a compensation for liquidity and credit risk once these risk premia are taken into account small arbitrage profits only accrue to traders who are able to negotiate low trading costs the results are robust to stale pricing and the nonsynchronous trading occurring in the markets involved in the arbitrage strategy

market structure and inefficiency in the foreign exchange market abstract this paper investigates the intradaily operational efficiency of the us foreign exchange market by conducting computer simulation experiments with market structure the numbers of market makers brokers and customers the results indicate significant operational inefficiencies which can be explained by temporary inventory imbalances inherent in a decentralized market the results also suggest that much of this inefficiency could be alleviated through a centralization of price information jel f31 g15

exchange rate theory and practice this volume grew out of a national bureau of economic research conference on exchange rates held in bellagio italy in 1982 in it the world s most respected international monetary economists discuss three significant new views on the economics of exchange rates rudiger dornbusch s overshooting model jacob frenkel s and michael mussa s asset market variants and pentti kouri s current account portfolio approach their papers test these views with evidence from empirical studies and analyze a number of exchange rate policies in use today including those of the european monetary system

the term structure of the forward premium abstract most studies of the efficiency of the foreign exchange market focus on a single maturity usually a one month forward exchange rate however one observes that forward contracts of many maturities are simultaneously traded in the foreign exchange market the hypothesis that the foreign exchange market uses all available information has implications for the joint behavior of forward exchange rates of various maturities this paper proposes an equilibrium theory of the term structure of the forward premium the model is tested using data on the german and canadian exchange rates the results indicate that the data are consistent with the theory for germany and inconsistent with the theory for canada

when and how us dollar shortages evolved into the full crisis evidence from the cross currency swap market abstract this paper investigates when and how the us dollar shortages evolved into the full crisis in the cross currency swap market between major european currencies and the us dollar during the turmoil of 2007 2009 using the dynamic factor model with regime switching coefficients of each swap price with respect to the latent common factor the 1 year market entered the high crisis regime soon after the onset of the subprime problem in august 2007 the 10 year market entered that regime following the collapse of bear sterns in mid march 2008 financial credit spreads have significant predictive power for switches between high and low regimes

momentary exchange rate locked in a triangular mechanism of international currency this study uses two way quoted data on major and nonmajor currencies to test the exchange rate dynamics particular attention is paid to the arbitrage and the spread in triangular foreign exchange trades there is only one possible triangle when a bilateral exchange rate equals its trilateral rate otherwise any third currency would potentially create arbitrage opportunities empirical testing evidence supports that small but possibly exploitable profitable arbitrage has significantly occurred over the very short haul of uncertainty and turbulence in other words we are convinced that the bilateral exchange rate could be diverged from one common currency side of the trilateral basket rates until markets function efficiently this helps in better explaining foreign exchange rate movements in addition we find that the currency correlating decreases slightly but the volatility increases over time as we expected

short term and long term government debt and nonresident interest withholding taxes abstract this paper examines the incidence of nonresident interest withholding taxes in the international 3 month treasury bill market and the international 5 year government bond market the approach is one of pooled cross section time series regressions the evidence suggests that the yields on national treasury bills and on 5 year government bonds fully reflect the nonresident interest withholding taxes imposed on american or japanese investors nonresident interest withholding taxes on short term and long term government debt thus do not appear to be borne by the international investor

rethinking an old empirical puzzle econometric evidence on the forward discount anomaly using both semiparametric and parametric estimation methods this paper corroborates earlier findings of fractionally integrated behaviour in the forward premium two new explanations are also proposed to help reconcile earlier conflicting empirical evidence on the time series properties of the forward premium traditional regression approaches used to test the forward rate unbiasedness hypothesis are then evaluated including regression in levels in returns fama s 1984 regression and in error correction format interesting statistical and or interpretive implications are found in all three cases for example the predictions of the appropriate nonstandard limit theory are consistent with many of the standard empirical results reported from fama s regression including the commonly occurring yet puzzling negative correlations between spot returns and the forward premium it is suggested that the principal failure of unbiasedness may be due instead to the difference in persistence between these two series copyright 2001 john wiley sons ltd

global political risk and currency momentum using a measure of political risk relative to the united states that captures unexpected political conditions we show that political risk is priced in the cross section of currency momentum and contains information beyond other risk factors our results are robust after controlling for transaction costs reversals and alternative limits to arbitrage the global political environment affects the profitability of the momentum strategy in the foreign exchange market investors following such strategies are compensated for the exposure to the global political risk of those currencies they hold that is the past winners and exploit the lower returns of loser portfolios the risk compensation is mainly justified by the different exposures of foreign currencies in the momentum portfolio to u s political shocks which is the main component of global political risk

foreign exchange market efficiency tests implications of recent empirical findings abstract the recent empirical literature on the efficiency of the foreign exchange market has been characterized by strikingly contradictory conclusions drawn from similar empirical evidence these contradictions result because 1 different maintained hypotheses are held and 2 different criteria e g micro versus macroeconomic are used to judge the evidence in this survey we organize the empirical literature under several headings the presence of risk premiums empirical regularities in regression tests profitable trading rules and advanced econometric techniques in integrating this material we consider the implications of the current evidence for investors forecasters policy makers and theorists

from turmoil to crisis dislocations in the fx swap market before and after the failure of lehman brothers abstract this paper investigates dislocations in the foreign exchange fx swap market between the us dollar and three major european currencies after the failure of lehman brothers in september 2008 deviations from covered interest parity cip were negatively associated with the creditworthiness of us financial institutions as well as that of european institutions consistent with the deepening of a dollar liquidity problem into a global phenomenon us dollar term funding auctions by the ecb snb and boe as well as the us federal reserve commitment to provide unlimited dollar swap lines are found to have ameliorated the fx swap market dislocations

covered interest parity a high frequency high quality data study profitable deviations from covered interest parity cip represent riskless arbitrage opportunities and so indicate market ineffic iency previous empirical work on cip uses noncontemporaneously sampl ed data and reports mixed results this paper uses high frequency te n minute high quality data gathered personally by the author in th e london foreign exchange market to test the cip condition the resu lts overwhelmingly support the market efficiency hypothesis copyright 1987 by the review of economic studies limited

the term structure of forward exchange premiums and the forecastability of spot exchange rates correcting the errors we develop a framework to extract information regarding subsequent spot rate movements from the term structure of forward exchange premiums while admitting possible deviations from rationality and