Trade friction and price discovery in the USD–CAD spot and forward markets |
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| Institution: | 1. Department of Economics, University of Victoria, Canada;2. Department of Electrical and Computer Engineering, Queen’s University, Canada;3. Beedie School of Business, Simon Fraser University, Canada;1. Department of Banking and Finance, Tamkang University, Taiwan;2. Department of Finance, Providence University, Taiwan;3. Department of Accounting, Feng Chia University, Taiwan; Center for Research in Econometric Theory and Applications, National Taiwan University, Taiwan |
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| Abstract: | This paper examines the impact of trade friction on price discovery in the USD–CAD spot and forward markets. Using the recently developed fractionally cointegrated vector autoregressive (FCVAR) model, we investigate how the foreign exchange spot and forward markets respond to trade friction. We consider two major trade friction events: the United States–Mexico–Canada Agreement and the recent trade friction between Canada and China. Both events show that the forward market plays a dominant role in price discovery, and the influence of the forward market increases as trade tension increases. By comparing the fractional and non-fractional models, we find that the fractional model fits the data better and has superior forecasting performance to the cointegrated vector autoregressive (CVAR) model. |
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| Keywords: | Trade friction Price discovery Fractional cointegration Foreign exchange market |
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