Economics, Econometrics and Finance
4 years ago

Foreign exchange futures pricing model challenged by new empirical evidence.

SSRN Electronic Journal
Jumps, Martingales, and Foreign Exchange Futures Prices
Zuliu Hu

Paper Summary

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Foreign exchange futures prices do not follow continuous diffusion processes as commonly believed. Instead, changes in these prices show serial correlation and reject the martingale hypothesis. The presence of a jump component in foreign exchange futures prices suggests a pricing bias when using the standard Black-Scholes option pricing formula.