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Jumps in foreign exchange spot rates and the informational efficiency of currency forwards

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  • Gbenga Ibikunle
  • Vito Mollica
  • Qiao Sun

Abstract

In this paper, we show that forward premiums are significant predictors of innovations in currency spot rates, and currency forward rates lead to price discovery during normal trading periods. Conversely, currency spot rates lead to price discovery during volatile periods. This finding is linked to investors' overreaction to information, which in turn induces jumps in the currency spot rate; positive jumps weaken the contribution of the forward rate to price discovery and their informational efficiency. We also find that the forward premium puzzle is linked to jump‐driven pricing inefficiencies.

Suggested Citation

  • Gbenga Ibikunle & Vito Mollica & Qiao Sun, 2021. "Jumps in foreign exchange spot rates and the informational efficiency of currency forwards," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(8), pages 1201-1219, August.
    • Handle: RePEc:wly:jfutmk:v:41:y:2021:i:8:p:1201-1219
    DOI: 10.1002/fut.22212
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