Essays in modeling foreign currencies

Ronald Jerome Mueller, Purdue University

Abstract

This study investigates issues in modeling foreign currencies along a number of dimensions. The extent that black market exchange rates of developing countries can be forecast is evaluated. It is found that by implementing modeling techniques that incorporate both long term and short term behaviors of the exchange rates, forecasting performance can be enhanced. Similarly, the profitable expiration of call options is forecast by employing a probit model. This is the first study of this nature and the results indicate that by using observable features of the underlying exchange rate and option market, in-the-money expiration of the option can be forecast. If exchange rates can be successfully forecast, the efficiency of the market needs to be investigated. This can be done by determining if relationships that exist among several markets that should adjust to remove short term anomalies fail to do so. If markets exhibit inefficiencies long enough for traders to exploit, arbitrage opportunities are said to exist. This is evaluated and it is found that arbitrage profits are dependent upon the particular markets involved.

Degree

Ph.D.

Advisors

Kadiyala, Purdue University.

Subject Area

Economics

COinS