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- Title
Explaining Forward Exchange Bias…Intraday.
- Authors
Lyons, Richard K.; Rose, Andrew K.
- Abstract
Intraday interest rates are zero. Consequently, a foreign exchange dealer can short a vulnerable currency in the morning, close this position in the afternoon, and never face an interest cost. This tactic might seem especially attractive in times of fixed-rate crisis, since it suggests an immunity to the central bank's interest rate defense. In equilibrium, however, buyers of the vulnerable currency must be compensated on average with an intraday capital gain as long as no devaluation occurs. That is, currencies under attack should typically appreciate intraday. Using data on intraday exchange rate changes within the European Monetary System, we find this prediction is borne out.
- Subjects
INTEREST rates; FOREIGN exchange; FOREIGN exchange rates; RATE of return; CRISIS management; RISK assessment; DEVALUATION of currency; CAPITAL gains; EXPECTED returns; PORTFOLIO management (Investments)
- Publication
Journal of Finance (Wiley-Blackwell), 1995, Vol 50, Issue 4, p1321
- ISSN
0022-1082
- Publication type
Article
- DOI
10.1111/j.1540-6261.1995.tb04061.x