Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/130775
Authors: 
Breedon, Francis
Rime, Dagfinn
Vitale, Paolo
Year of Publication: 
2015
Series/Report no.: 
Working Paper, School of Economics and Finance, Queen Mary University of London 761
Abstract: 
We investigate the relation between foreign exchange (FX) order flow and the forward bias. We outline a decomposition of the forward bias according to which a negative correlation between interest rate differentials and order flow creates a time-varying risk premium consistent with that bias. Using ten years of data on FX order flow we find that more than half of the forward bias is accounted for by order flow - with the rest being explained by expectational errors. We also find that carry trading increases currency-crash risk in that order flow generates negative skewness in FX returns.
Subjects: 
Forward premium puzzle
FX microstructure
Carry trade
Survey data
JEL: 
F31
G14
G15
Document Type: 
Working Paper

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