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

Gbenga Ibikunle, Vito Mollica, Qiao Sun

Research output: Contribution to journalArticlepeer-review

Abstract

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.
Original languageEnglish
Pages (from-to)1201-1219
Number of pages19
JournalThe Journal of Futures Markets
Volume41
Issue number8
Early online date6 May 2021
DOIs
Publication statusPublished - Aug 2021

Keywords

  • foreign exchange markets
  • jumps
  • market efficiency

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