Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis

Hansen, Lars Peter; Hodrick, Robert J.

doi:10.1086/260910

Cited by 1,820 publications

(1,006 citation statements)

References 13 publications

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“…Solnik (1973j, Grauer, Litzenberger, andStehle (1976), Kouri (1976), Adler and Dumas (1977), Roll and Solnik (1977), Eaton (1978), Frankel (1979), Fama and Farber (1979), Stein (1980). Furthermore: the theoretical existence of this bias is generally supported by available empirical evidence; see Levich (1978Levich ( , 1979, Hansen and Hodrick (1980).…”

Section: Introductionmentioning

confidence: 88%

Effects of monetary disturbances on exchange rates with risk averse speculation

Eaton

Turnovsky

1982

Journal of International Money and Finance

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Section: Introductionmentioning

confidence: 88%

Effects of monetary disturbances on exchange rates with risk averse speculation

Eaton

Turnovsky

1982

Journal of International Money and Finance

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“…First, empirical tests of the efficient market hypothesis have generally rejected the proposition that the expected return to currency speculation is zero, since forward exchange rates appear to be poor predictors of future spot rates. While covered interest parity generally holds in the data over longer time periods, numerous studies have documented the failure of uncovered interest parity at short and medium term horizons, implying that interest rate arbitrage between countries is profitable (Hansen and Hodrick 1980;Hodrick 1987;Froot and Thaler 1990). Second, researchers have documented the tendency of exchange rates to trend, otherwise known as momentum.…”

Section: The Empirics Of Currency Speculationmentioning

confidence: 99%

If You're So Smart: John Maynard Keynes and Currency Speculation in the Interwar Years

Accominotti¹,

Chambers²

2016

J. Econ. Hist.

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This article explores the risks and returns to currency speculation during the 1920s and 1930s. We study the performance of two well-knowntechnicaltrading strategies (carry and momentum) and compare them with that of afundamentals-basedtrader: John Maynard Keynes. Technical strategies were highly profitable during the 1920s and even outperformed Keynes. In the 1930s, however, both technical strategies and Keynes performed relatively poorly. While our results reveal the existence of profitable opportunities for currency traders in the interwar years, they suggest that such profits were necessary compensation for enduring the substantial risks that all strategies entailed.

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“…Such trading strategies are popular approaches which involve constructing portfolios by selling low interest rate currencies in order to buy higher interest rate currencies, thus profiting from the interest rate differentials. The presence of such profit opportunities, pointed out by [2,10,15] and more recently by [5-7, 20, 21, 23], violates the fundamental relationship of uncovered interest rate parity (UIP). The UIP refers to the parity condition in which exposure to foreign exchange risk, with unanticipated changes in exchange rates, is uninhibited and therefore if one assumes rational risk-neutral investors, then changes in the exchange rates should offset the potential to profit from the interest rate differentials between high interest rate (investment) currencies and low interest rate (funding) currencies.…”

Section: Currency Carry Trade and Uncovered Interest Rate Paritymentioning

confidence: 99%

Upside and Downside Risk Exposures of Currency Carry Trades via Tail Dependence

Ames

Peters

Bagnarosa

et al. 2015

Innovations in Quantitative Risk Management

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Currency carry trade is the investment strategy that involves selling low interest rate currencies in order to purchase higher interest rate currencies, thus profiting from the interest rate differentials. This is a well known financial puzzle to explain, since assuming foreign exchange risk is uninhibited and the markets have rational risk-neutral investors, then one would not expect profits from such strategies. That is, according to uncovered interest rate parity (UIP), changes in the related exchange rates should offset the potential to profit from such interest rate differentials. However, it has been shown empirically, that investors can earn profits on average by borrowing in a country with a lower interest rate, exchanging for foreign currency, and investing in a foreign country with a higher interest rate, whilst allowing for any losses from exchanging back to their domestic currency at maturity. This paper explores the financial risk that trading strategies seeking to exploit a violation of the UIP condition are exposed to with respect to multivariate tail dependence present in both the funding and investment currency baskets. It will outline in what contexts these portfolio risk exposures will benefit accumulated portfolio returns and under what conditions such tail exposures will reduce portfolio returns.

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Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis

Cited by 1,820 publications

References 13 publications

Effects of monetary disturbances on exchange rates with risk averse speculation

Effects of monetary disturbances on exchange rates with risk averse speculation

If You're So Smart: John Maynard Keynes and Currency Speculation in the Interwar Years

Upside and Downside Risk Exposures of Currency Carry Trades via Tail Dependence

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