Market microstructure effects of government intervention in the foreign exchange market

As asymmetric information model of the bid - ask spread is developedfor a foreign exchange market subject to occasional governmentinterventions. Traditional tests of the unbiasedness of theforward rate as a predictor of the future spot rate are shownto be inconsistent when the rates are measured as the averageof their respective bid and ask quotes. Larger bid - ask spreadson Fridays are documented. Reliable evidence of asymmetric bid- ask spreads for all days of the week, albeit more pronouncedon Fridays, are presented. The null hypothesis that the forwardrate is an unbiased predictor of the future spot rate continuesto be rejected. The regression slope coefficients increase towardunity, however, indicating a less variable risk premium.