Less of a Puzzle: a new look at the forward forex market

Michael Moore, M.J. Roche

Research output: Contribution to journalArticlepeer-review

12 Citations (Scopus)


The two-country monetary model is extended to include a consumption externality with habit persistence. The model is simulated using the artificial economy methodology. The 'puzzles' in the forward market are re-examined. The model is able to account for: (a) the low volatility of the forward discount; (b) the higher volatility of expected forward speculative profit; (c) the even higher volatility of the spot return; (d) the persistence in the forward discount; (e) the martingale behavior of spot exchange rates; and (f) the negative covariance between the expected spot return and expected forward speculative profit. It is unable to account for the forward market bias because the volatility of the expected spot return is too large relative to the volatility of the expected forward speculative profit.
Original languageEnglish
Pages (from-to)387-411
Number of pages25
JournalJournal of International Economics
Volume58 (2)
Issue number2
Publication statusPublished - Dec 2002

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance


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