Trade friction and price discovery in the USD–CAD spot and forward markets

Meng Yan, Jian Chen, Victor Song and Ke Xu ()

The North American Journal of Economics and Finance, 2022, vol. 59, issue C

Abstract: This paper examines the impact of trade friction on price discovery in the USD–CAD spot and forward markets. Using the recently developed fractionally cointegrated vector autoregressive (FCVAR) model, we investigate how the foreign exchange spot and forward markets respond to trade friction. We consider two major trade friction events: the United States–Mexico–Canada Agreement and the recent trade friction between Canada and China. Both events show that the forward market plays a dominant role in price discovery, and the influence of the forward market increases as trade tension increases. By comparing the fractional and non-fractional models, we find that the fractional model fits the data better and has superior forecasting performance to the cointegrated vector autoregressive (CVAR) model.

Keywords: Trade friction; Price discovery; Fractional cointegration; Foreign exchange market (search for similar items in EconPapers)
JEL-codes: G14 G15 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:59:y:2022:i:c:s1062940821002217

DOI: 10.1016/j.najef.2021.101628

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