Jumps, Martingales, and Foreign Exchange Futures Prices

Author/Editor:

Zuliu Hu

Publication Date:

February 1, 1996

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:

A common specification about the behavior of foreign exchange spot and futures prices is that they follow continuous diffusion processes. The empirical regularities uncovered from daily and weekly currency futures data, however, cast doubts on the validity of this model. First, contrary to the suggestions in the literature, changes in foreign currency futures prices are serially correlated; variance ratio tests and other related tests overwhelmingly reject Samuelson’s martingale hypothesis. Second, foreign exchange futures prices do not appear to have continuous sample path; the evidence suggests the presence of a jump component, which may lead to pricing bias when applying the standard Black-Scholes option pricing formula to foreign exchange markets.

Series:

Working Paper No. 96/21

Subject:

English

Publication Date:

February 1, 1996

ISBN/ISSN:

9781451921649/1018-5941

Stock No:

WPIEA0211996

Format:

Paper

Pages:

26

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