A fractional cointegration approach to testing mean reversion between spot and forward exchange rates: a case of high frequency data with low frequency dynamics

Article Abstract:

A generalized theory of fractional cointegration was used to elucidate on the applicability of a long-run relationship between high frequency daily spot and the lagged forward Australian-US dollar exchange rate. An analysis of the stochastic characteristics of these rates showed them to be fractionally cointegrated if mean reverting processes that are CI(1,d) with 0 < d < 1 are permitted. Eliminating the condition that the residual from the cointegration equation must be a I(0) process results in a broader class of mean-reversion behavior.

Foreign Currency Management, Prices and rates, Foreign exchange, Foreign exchange rates

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The intertemporal relationship between the currency spot market and the currency option market

Article Abstract:

The lead-lag relation between the foreign exchange spot market and the foreign exchange option market is investigated using intraday transactions data of currency options for 1989. The results suggest that the spot market is ahead of the options market, contrary to the findings of Peterson and Tucker (1988). In addition, this lead is found to be about 90 minutes. Implications for further studies are discussed.

Stock Options, Research, Currency options, Executive compensation, Spot market, Foreign exchange market

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