Foreign exchange market inefficiency and exchange rate anomalies

Jing Li and Norman C. Miller

Journal of International Financial Markets, Institutions and Money, 2015, vol. 34, issue C, 311-320

Abstract: This paper develops a perfectly general non-linear Uncovered Interest Parity, UIP, framework with foreign exchange (fx) market inefficiency. The latter means that there is always some “unexploited profit” which tends to generate a negative value for Fama's beta coefficient. However, as ID decays over time, this tends to generate a positive value for beta. The sign of beta is uncertain. It is shown that this result implies that the existence of fx market inefficiency is consistent with many puzzling facts about exchange rates, and that the model's implied values for beta are consistent with those obtained via actual data.

Keywords: Uncovered Interest Parity; Delayed overshooting; fx market inefficiency; Extreme support; Fama's beta; Forward bias puzzle (search for similar items in EconPapers)
JEL-codes: F31 F37 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:34:y:2015:i:c:p:311-320

DOI: 10.1016/j.intfin.2014.12.001

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