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Profitability and Stability in International Currency Markets

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  • John F. O. Bilson

Abstract

A number of recent empirical studies have rejected the hypothesis that forward exchange rates are unbiased forecasts of future spot exchange rates. This result implies that there have been opportunities for speculative profit during the post Bretton Woods period. Observers of the floating rate system have also noted that exchange rates have been more volatile than they were anticipated to be in the 1960's. In this paper, the link between the volatility of exchange rates and the existence of opportunities for speculative profit is explored. The question answered in the paper is the following: if there were no opportunities for speculative profit, would exchange rates have been more stable? The answer is yes. This answer implies that speculation (intervention) based upon the forecasting equation described in the paper would be both profitable and stabilizing.

Suggested Citation

  • John F. O. Bilson, 1981. "Profitability and Stability in International Currency Markets," NBER Working Papers 0664, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0664
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    1. repec:bla:scandj:v:78:y:1976:i:2:p:200-224 is not listed on IDEAS
    2. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
    3. repec:bla:scandj:v:78:y:1976:i:2:p:229-48 is not listed on IDEAS
    4. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    5. repec:bla:scandj:v:78:y:1976:i:2:p:280-304 is not listed on IDEAS
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    Cited by:

    1. Frankel, Jeffrey A. & Froot, Kenneth A., 1987. "Short-term and long-term expectations of the yen/dollar exchange rate: Evidence from survey data," Journal of the Japanese and International Economies, Elsevier, vol. 1(3), pages 249-274, September.
    2. Bilson, John F. O. & Hsieh, David A., 1987. "The profitability of currency speculation," International Journal of Forecasting, Elsevier, vol. 3(1), pages 115-130.
    3. Rudiger Dornbusch & Jeffrey Frankel, 1988. "The Flexible Exchange Rate System: Experience and Alternatives," International Economic Association Series, in: Silvio Borner (ed.), International Finance and Trade in a Polycentric World, chapter 7, pages 151-208, Palgrave Macmillan.
    4. Lee, Namhoon & Choi, Wonseok & Pae, Yuntaek, 2021. "Market efficiency in foreign exchange market," Economics Letters, Elsevier, vol. 205(C).

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