Download or read book Continuous-Time Market Dynamics, Arch Effects, and the Forward Premium Anomaly written by Nelson C. Mark and published by . This book was released on 2002 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study a simple continuous-time model based on uncovered interest parity (UIP) that endogenously generates conditional heteroskedasticity in exchange rate returns. The volatility clustering arises from dependence of the ex post deviation from UIP on the lagged interest differential which is induced into discretized observations that conform to sampling intervals of the data. This dependence has a quot;big newsquot; interpretation. The model also provides an explanation of the forward premium anomaly as a result of sporadic central bank intervention that creates unanticipated switches in the process governing the interest differential.