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Explaining Foreign Exchange Market Puzzles

Author

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  • Mr. Norman C. Miller

Abstract

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.

Suggested Citation

  • Mr. Norman C. Miller, 1999. "Explaining Foreign Exchange Market Puzzles," IMF Working Papers 1999/027, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1999/027
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