Jumps in foreign exchange spot rates and the informational efficiency of currency forwards

Gbenga Ibikunle, Vito Mollica and Qiao Sun

Journal of Futures Markets, 2021, vol. 41, issue 8, 1201-1219

Abstract: In this paper, we show that forward premiums are significant predictors of innovations in currency spot rates, and currency forward rates lead to price discovery during normal trading periods. Conversely, currency spot rates lead to price discovery during volatile periods. This finding is linked to investors' overreaction to information, which in turn induces jumps in the currency spot rate; positive jumps weaken the contribution of the forward rate to price discovery and their informational efficiency. We also find that the forward premium puzzle is linked to jump‐driven pricing inefficiencies.

Date: 2021
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https://doi.org/10.1002/fut.22212

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