Explaining Foreign Exchange Market Puzzles

Author/Editor:

Norman C. Miller

Publication Date:

March 1, 1999

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

The paper develops a flow model of the exchange rate with speculative capital flows integrated in a rigorous manner. The model is consistent with five foreign exchange market puzzles: (1) occasional discontinuous jumps in the exchange rate; (2) periodic short-term regimes of persistent appreciation/depreciation that can develop into a long swing; (3) the forward discount bias; (4) volatility clusters in the foreign exchange market that create conditional heteroskedasticity; and (5) the dual profitability of betting in the short run against any official foreign exchange intervention, and betting with the intervention in the long run.

Series:

Working Paper No. 1999/027

Subject:

Currency markets Exchange rates Financial markets Foreign exchange International trade National accounts Return on investment Trade balance

English

Publication Date:

March 1, 1999

ISBN/ISSN:

9781451844504/1018-5941

Stock No:

WPIEA0271999

Pages:

29

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