Citation

Discussion Paper Details

Please find the details for DP7791 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: A Transaction Data Study of the Forward Bias Puzzle

Author(s): Francis Breedon, Dagfinn Rime and Paolo Vitale

Publication Date: April 2010

Keyword(s): Carry Trade, Forward Discount Puzzle, FX Microstructure and Survey Data

Programme Area(s): International Macroeconomics

Abstract: Using a market microstructure analytical framework we decompose the FX forward discount bias into elements due to time-varying risk premia (related to EBS order flow) and forecast errors derived using the Reuters survey of FX market participants. We find that both elements are significant contributors to the forward bias with risk premia being particularly important in currency pairs traditionally associated with carry trade activity. Part of order flow is driven by carry trade, and from our decomposition the carry trade driven risk premia account for about 50% of the forward bias.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7791

Bibliographic Reference

Breedon, F, Rime, D and Vitale, P. 2010. 'A Transaction Data Study of the Forward Bias Puzzle'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=7791