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Author(s): Lucio Sarno, Cass Business School, Farooq Akram and Dagfinn Rime, Norges Bank
If markets are efficient, then there are no exploitable arbitrage opportunities. But if no one engages in arbitrage, then what eliminates such exploitable opportunities? This column puts international financial markets under the microscope and shows that arbitrage opportunities exist, but they are usually eliminated in less than five minutes. Such micro-arbitrage makes the assumption of no arbitrage safe for those looking at the bigger picture.
Updated: 05/09/2010 | Comments: 0 | Rating: Not yet rated | Views: 101
Author(s): Lucio Sarno, Cass Business School, Giorgio Valente, University of Leicester, Hyginus L. Leon, International Monetary Fund
We examine empirically the hypothesis that limits to speculation in the foreign exchange market may induce nonlinearities in the spot-forward relationship and in the process driving the deviations from the uncovered interest rate parity (UIP) condition.
Updated: 03/09/2010 | Comments: 0 | Rating: Not yet rated | Views: 69
Author(s): Lucio Sarno, Cass Business School, Lukas Menkhoff, Andreas Schrimpf, Leibniz Universitaet Hannover, Maik Schmeling, University of Aarhus
We investigate the relation between global FX volatility and the excess returns to carry trade portfolios. We find a significantly negative return co-movement of high interest rate currencies with global volatility, whereas low interest rate currencies provide a hedge against volatility shocks.
Updated: 05/09/2010 | Comments: 0 | Rating: Not yet rated | Views: 118
Author(s): Lucio Sarno, Cass Business School, Pasquale Della Corte and Ilias Tsiakas, University of Warwick
The forward premium, the difference between the forward exchange rate and the spot exchange rate, contains economically valuable information about the future of exchange rates. Here is the evidence that it can help predict short-run rates and that investors who ignore it and use random walk models may be leaving money on the table.
Updated: 06/09/2010 | Comments: 0 | Rating: Not yet rated | Views: 180
Author(s): Lucio Sarno, Cass Business School, Barry Eichengreen, University of California, Berkeley, Milan Nedeljkovic, University of Warwick, Ashoka Mody, International Monetary Fund
How did the Subprime Crisis, a problem in a small corner of U.S. financial markets, affect the entire global banking system? To shed light on this question we use principal component analysis to identify common factors in the movement of banks’ credit default swap spreads.
Updated: 02/09/2010 | Comments: 0 | Rating: Not yet rated | Views: 238
