Explaining Foreign Exchange Market Puzzles

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.
Publication date: March 1999
ISBN: 9781451844504
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Money and Monetary Policy , Money and Monetary Policy , Exchange Rates , Foreign Exchange Puzzles , exchange rate , probability , foreign exchange , foreign exchange market

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