Jumps, Martingales, and Foreign Exchange Futures Prices

IMF Working Papers, February 1, 1996

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Jumps, Martingales, and Foreign Exchange Futures Prices

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Bibliographic details

• Authors: Zuliu Hu
• Published: February 1, 1996
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451921649.001

Summary

• Author: Zuliu Hu
• Date: February 1, 1996
• Core proposition: The common specification that foreign exchange spot and futures prices follow continuous diffusion processes is questioned by empirical regularities in daily and weekly currency futures data.

Empirical findings

• Changes in foreign currency futures prices are serially correlated.
• Variance ratio tests and other related tests overwhelmingly reject Samuelson’s martingale hypothesis.
• Foreign exchange futures prices do not appear to have continuous sample paths; evidence suggests the presence of a jump component.

Implications and consequences

• The presence of jumps can lead to pricing bias when applying the standard Black-Scholes option pricing formula to foreign exchange markets.
• Continuous-diffusion models may be misspecified for daily and weekly currency futures data, necessitating models that incorporate serial correlation and discrete jumps.

Subjects and keywords

• Subject: Asset prices, Currencies, Exchange rates, Foreign exchange, Futures
• Keywords: futures price, WP