Less of a puzzle: a new look at the forward forex market

Maurice Roche and Michael Moore

Economics Department Working Paper Series from Department of Economics, National University of Ireland - Maynooth

Abstract: The two-country monetary model is extended to include a consumption externality with habit persistence. This is set within a limited participation framework. 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 profits (c) the even higher volatility of spot rate changes (d) the persistence in the forward discount and (e) the random walk in spot exchange rates The major innovation is that it is able to replicate some of the extent of the bias of the forward discount as a predictor of realised spot rate changes.

Keywords: Artificial economy; Forward foreign exchange; Limited participation; Habit persistence (search for similar items in EconPapers)
JEL-codes: F31 F41 G12 (search for similar items in EconPapers)
Pages: 34 pages
New Economics Papers: this item is included in nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

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http://repec.maynoothuniversity.ie/mayecw-files/N910799.pdf (application/pdf)

Related works:
Journal Article: Less of a puzzle: a new look at the forward forex market (2002)
Working Paper: Less of a puzzle: a new look at the forward forex market (1999)
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