An analysis of intertemporal pricing for forward foreign exchange contracts

Article Abstract:

An asset-pricing model with an unobservable time-varying risk premium is used to price forward foreign exchange contracts. Specifically, the term spectrum of forward foreign exchange contracts is examined in order to focus on country-specific and maturity-specific information. The testable restrictions imposed by the model are consistent with both cross-country and cross-maturity forward contracts except at the short end of the maturity spectrum for cross-country forward exchange rates. This indicates that the intertemporal model is relatively robust in valuing forward contracts of different maturities and for different exchange rates but that it may fail when there are significant short-term country-specific shocks. (Reprinted by permission of the publisher.)

Risk management, Pricing, Capital assets

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Expectations of exchange rates and differential inflation rates: further evidence on purchasing power parity in efficient markets

Article Abstract:

The paper tests the null hypothesis of ex ante purchasing power parity. The empirical evidence obtained is inconsistent with the null for major industrialized countries over the current floating exchange rate regime. Expected nominal exchange rate changes appear to deviate systematically from expected inflation rate differentials over the same holding period even though real exchange rate changes appear to be serially uncorrelated. This supports the presence of time-varying risk premia in foreign exchange markets and real determinants of exchange rate movements as suggested by equilibrium theories of international asset markets. (Reprinted by permission of the publisher.)

International aspects, Inflation (Finance), Efficient market theory, Inflation (Economics)

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Transformed securities and alternative factor structures

Article Abstract:

Grinblatt and Titman (1985) reformulated a result of Chamberlain and Rothschild (1983) to show that the approximate factor structure of Chamberlain and Rothschild is asymptotically equivalent to the strict factor structure of Ross (1976) as long as investors can always repackage securities into an equal number of arbitrary portfolios. This paper uses a Procrustes rotation methodology that is compatible with the repackaging interpretation of Grinblatt and Titman to show that the empirical structure of stock prices is consistent with the convergency hypothesis. (Reprinted by permission of the publisher.)

Securities

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