DYNAMIC INTERACTIONS BETWEEN THE SPOT AND FORWARD EURODRACHMA MARKETS

The study examines the joint distribution of spot and forward rates returns for three Greek drachma exchange rates in terms of German marks, British pounds and US dollars. The empirical methodology is the bivariate Exponential GARCH model with an error-correction term. The results indicate that innovations originating in the forward markets do not transmit any significant information to the spot markets and vice versa. Moreover, the magnitude and/or the nature of shocks in one market do not affect the other asymmetrically. The evidence also implies that conditional variances (and covariances) do not vary over time and hence risk-minimizing hedging strategies remain unchanged. In all, the forward rates are not efficient predictors of the spot rates since the difference between them may incorporate valuable information.