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Jumps, Martingales, and Foreign Exchange Futures Prices
Author:
Zuliu Hu null

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Series:
IMF Working Papers
Volume/Issue:
Volume 1996: Issue 021
Language:
English
Publication Date:
01 Feb 1996
DOI:
https://doi.org/10.5089/9781451921649.001
ISBN:
9781451921649
ISSN:
1018-5941
Pages:
26
Keywords:
WP; futures price
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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A common specification about the behavior of foreign exchange spot and futures prices is that they follow continuous diffusion processes. The empirical regularities uncovered from daily and weekly currency futures data, however, cast doubts on the validity of this model. First, contrary to the suggestions in the literature, changes in foreign currency futures prices are serially correlated; variance ratio tests and other related tests overwhelmingly reject Samuelson’s martingale hypothesis. Second, foreign exchange futures prices do not appear to have continuous sample path; the evidence suggests the presence of a jump component, which may lead to pricing bias when applying the standard Black-Scholes option pricing formula to foreign exchange markets.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund