Existing literature reports a puzzle about the forward foreign exchange rate premium over the spot foreign exchange rate. The premium is often negatively correlated with subsequent changes in the spot rate, which is considered to defy economic intuition and possibly violate market efficiency. Rational explanations include non-stationary risk premia and econometric misspecifications, and the puzzle as a guide to profitable trading. Actually, the puzzle consists of three aspects of anomalies: volatility, persistence, and unbiasedness. The puzzle has not yet solved fully thus far. / In the latter part of the thesis, we try to explore the behavioral aspects of the investors in the foreign currency markets (spot and forward markets). We discuss asset prices in an economy where investors derive direct utility from their consumption and adjust their utility based on the concept of habit formation and "catching up with Joneses", therefore explaining thus far the formidable unbiasedness anomaly to a certain extent. Simulation results exhibit properties similar to what has been observed in historical data. / This thesis suggests firstly that there may be no real puzzle. A simple model fits the data. Starting from examining the relations between the excess return of speculation in foreign currency forward markets and the change rates of the return rate on equity (stock) portfolio and the change rate of futures price on stock index as well as foreign currencies where the stock markets and futures market are active, publicly traded, and highly transparent markets, the source of the risk premia in the future change in spot rate has been analyzed in detail. We believe that the panel data analysis is in place for the puzzle based on its nature. In this thesis we find that the future change in spot foreign exchange rate correlate with both forward premium and especially the change rate in stock index or the change rate of futures settlement price on the stock index or on the currencies, which implies that the investors compare and employ the profitable opportunities across financial markets not just act in only one market such as just foreign exchange forward market, thus maximizing the utility or efficiency of their funds. In addition, the change rate of futures price has rather impacts on the excess return of speculation in forward currency markets, thus establishing the relation between OTC markets and publicly traded markets of foreign exchange. / Tan Yue. / "January 2007." / Adviser: Jia He. / Source: Dissertation Abstracts International, Volume: 68-09, Section: A, page: 4006. / Thesis (Ph.D.)--Chinese University of Hong Kong, 2007. / Includes bibliographical references. / Electronic reproduction. Hong Kong : Chinese University of Hong Kong, [2012] System requirements: Adobe Acrobat Reader. Available via World Wide Web. / Electronic reproduction. [Ann Arbor, MI] : ProQuest Information and Learning, [200-] System requirements: Adobe Acrobat Reader. Available via World Wide Web. / Electronic reproduction. Ann Arbor, MI : ProQuest dissertations and theses, [201-] System requirements: Adobe Acrobat Reader. Available via World Wide Web. / Abstract in English and Chinese. / School code: 1307.
| Identifer | oai:union.ndltd.org:cuhk.edu.hk/oai:cuhk-dr:cuhk_343841 |
| Date | January 2007 |
| Contributors | Tan, Yue, Chinese University of Hong Kong Graduate School. Division of Finance. |
| Source Sets | The Chinese University of Hong Kong |
| Language | English, Chinese |
| Detected Language | English |
| Type | Text, theses |
| Format | electronic resource, microform, microfiche, 1 online resource (1 v. (unpaged) : ill.) |
| Rights | Use of this resource is governed by the terms and conditions of the Creative Commons “Attribution-NonCommercial-NoDerivatives 4.0 International” License (http://creativecommons.org/licenses/by-nc-nd/4.0/) |
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