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Explaining Forward Exchange Bias... Intraday

Richard Lyons () and Andrew Rose ()

Journal of Finance, 1995, vol. 50, issue 4, 1321-29

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. Copyright 1995 by American Finance Association.

Date: 1995
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Related works:
Working Paper: Explaining Forward Exchange Bias..Intraday (1995) Downloads
Working Paper: Explaining Forward Exchange Bias...Intraday (1995)
Working Paper: Explaining Forward Exchange Bias.... Intra-day (1994) Downloads
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