Carry trades, order flow, and the forward bias puzzle
Journal article, Peer reviewed
Permanent lenke
http://hdl.handle.net/11250/2405230Utgivelsesdato
2016Metadata
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- Scientific articles [2223]
Originalversjon
Journal of Money, Credit and Banking, 48(2016)6: 1113-1134 http://dx.doi.org/10.1111/jmcb.12328Sammendrag
We investigate the relation between foreign exchange (FX) order
ow and the
forward bias. We outline a decomposition of the forward bias according to which
a negative correlation between interest rate di erentials and order
ow creates a
time-varying risk premium consistent with that bias. Using ten years of data on
FX order
ow we nd that more than half of the forward bias is accounted for by
order
ow | with the rest being explained by expectational errors. We also nd
that carry trading increases currency-crash risk in that order
ow generates negative
skewness in FX returns.
Beskrivelse
This is the accepted, refereed and final manuscript to the article