Working Paper: NBER ID: w1064
Authors: Sebastian Edwards
Abstract: This paper analyzes the relationship between forward exchange rates,future spot rates and new information. A stochastic model of exchangerate determination is used to formally show how unanticipated changes in the exchange rate determinants (or "news") affect the spot rate. The empirical analysis indicates that "new information" plays an important role in explaining the market forecasting error, or difference between the spot rate and the forward rate, determined in the previous period.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| new information (D83) | forecasting error (C53) |
| unanticipated changes in exchange rate determinants (F31) | spot rate (E43) |
| unanticipated changes in real income (D89) | forecasting error (C53) |
| new information (D83) | market efficiency (G14) |
| nonconstant risk premium (G19) | exchange rate behavior (F31) |