Carry Trades, Order Flow and the Forward Bias Puzzle

Francis Breedon, Dagfinn Rime and Paolo Vitale

No 761, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: We investigate the relation between foreign exchange (FX) order flow and the forward bias. We outline a decomposition of the forward bias according to which a negative correlation between interest rate differentials and order flow creates a time-varying risk premium consistent with that bias. Using ten years of data on FX order flow we find that more than half of the forward bias is accounted for by order flow -- with the rest being explained by expectational errors. We also find that carry trading increases currency-crash risk in that order flow generates negative skewness in FX returns.

Keywords: Forward premium puzzle; FX microstructure; Carry trade; Survey data (search for similar items in EconPapers)
JEL-codes: F31 G14 G15 (search for similar items in EconPapers)
Date: 2015-12-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.qmul.ac.uk/sef/media/econ/research/wor ... 2015/items/wp761.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:qmw:qmwecw:761

Access Statistics for this paper

More papers in Working Papers from Queen Mary University of London, School of Economics and Finance Contact information at EDIRC.
Bibliographic data for series maintained by Nicholas Owen ( this e-mail address is bad, please contact ).