Are banks market timers or market makers? Explaining foreign exchange trading profits

John Ammer and Allan Brunner (allan_brunner@yahoo.com)
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John Ammer: https://www.federalreserve.gov/econres/john-ammer.htm

No 484, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We analyze the foreign exchange trading earnings of large U.S commercial banks over the past several years. In particular, we use several approaches to try to determine to what extent these profits can be attributed either to position-taking by banks or to the provision of intermediation services to bank customers. The results can be summarized as follows. First, banks appear to generate a substantial portion of their foreign exchange earnings from making markets in conventional spot and forward foreign exchange contracts. In addition, some indirect evidence supports anecdotal reports that intermediation in volatility-related products (e.g., options contracts) has been a significantly profitable activity. Finally, on average, positions in currencies do not appear to contribute to profits. Tests applied to monthly and daily data on banks' portfolio positions suggest that banks cannot accurately forecast changes in exchange rates, and that these currency positions account for only a small fraction (if any) of the banks' foreign exchange earnings.

Keywords: Bank profits; Foreign exchange (search for similar items in EconPapers)
Date: 1994
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Citations: View citations in EconPapers (2)

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Journal Article: Are banks market timers or market makers? Explaining foreign exchange trading profits (1997)
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