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

Gbenga Ibikunle; Vito Mollica; Qiao Sun

doi:10.1002/fut.22212

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

Gbenga Ibikunle, Vito Mollica, Qiao Sun

Research output: Contribution to journal › Article › peer-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 language	English
Number of pages	19
Journal	Journal of futures markets
Early online date	6 May 2021
DOIs	https://doi.org/10.1002/fut.22212
Publication status	E-pub ahead of print - 6 May 2021

Keywords / Materials (for Non-textual outputs)

jumps
foreign exchange markets
market efficiency

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10.1002/fut.22212

IbikunleEtal2021JFMJumpsInForeignExchange
This is the peer reviewed version of the following article: Ibikunle, G., Mollica, V., & Sun, Q. (2021). Jumps in foreign exchange spot rates and the informational efficiency of currency forwards. Journal of Futures Markets, 1– 19. https://doi.org/10.1002/fut.22212, which has been published in final form at https://doi.org/10.1002/fut.22212. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Accepted author manuscript, 1.01 MB

Cite this

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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.",

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

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Keywords / Materials (for Non-textual outputs)

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