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Bank positions and forecasts of exchange rate movements

Author

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  • Michael P. Leahy

Abstract

Using data on the foreign exchange positions of five leading financial institutions, this paper attempts to determine whether the recent profitability of banks' foreign exchange trading is due to superior abilities to forecast exchange rate movements. Overall, the position data provide evidence that the performances of some financial institutions are 1) better than one might expect if their forecasts were purely random and 2) consistent with the possibility that they may possess information that would be valuable in forecasting changes in exchange rates. The conclusions are limited, however, by the possibility that there exists a time-varying risk premium which is correlated with the positions.

Suggested Citation

  • Michael P. Leahy, 1994. "Bank positions and forecasts of exchange rate movements," International Finance Discussion Papers 486, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgif:486
    as

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    File URL: http://www.federalreserve.gov/pubs/ifdp/1994/486/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1994/486/ifdp486.pdf
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    References listed on IDEAS

    as
    1. Henriksson, Roy D & Merton, Robert C, 1981. "On Market Timing and Investment Performance. II. Statistical Procedures for Evaluating Forecasting Skills," The Journal of Business, University of Chicago Press, vol. 54(4), pages 513-533, October.
    2. Grinblatt, Mark & Titman, Sheridan, 1992. "The Persistence of Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 47(5), pages 1977-1984, December.
    3. Ammer, John & Brunner, Allan D., 1997. "Are banks market timers or market makers? Explaining foreign exchange trading profits," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 7(1), pages 43-60, April.
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    1. Ammer, John & Brunner, Allan D., 1997. "Are banks market timers or market makers? Explaining foreign exchange trading profits," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 7(1), pages 43-60, April.
    2. Chamberlain, Sandra & Howe, John S. & Popper, Helen, 1997. "The exchange rate exposure of U.S. and Japanese banking institutions," Journal of Banking & Finance, Elsevier, vol. 21(6), pages 871-892, June.

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    Keywords

    Forecasting; Foreign exchange rates;

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