Jumps in foreign exchange spot rates and the informational efficiency of currency forwards

In this paper, we show that forward premiums are significant predictors of innovations in currency spot rates, and currency forward rates lead to price discovery during normal trading periods. Conversely, currency spot rates lead to price discovery during volatile periods. This finding is linked to...

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Bibliographic Details
Published in:The journal of futures markets 2021-08, Vol.41 (8), p.1201-1219
Main Authors: Ibikunle, Gbenga, Mollica, Vito, Sun, Qiao
Format: Article
Language:English
Subjects:
Currency
Discovery
Foreign exchange
foreign exchange markets
Innovations
jumps
market efficiency
Premiums
Trading
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Summary:In this paper, we show that forward premiums are significant predictors of innovations in currency spot rates, and currency forward rates lead to price discovery during normal trading periods. Conversely, currency spot rates lead to price discovery during volatile periods. This finding is linked to investors' overreaction to information, which in turn induces jumps in the currency spot rate; positive jumps weaken the contribution of the forward rate to price discovery and their informational efficiency. We also find that the forward premium puzzle is linked to jump‐driven pricing inefficiencies.
ISSN:0270-7314
1096-9934
DOI:10.1002/fut.22212