This chapter uses implied volatilities to examine both the existence and form of the currency risk premium. First, I test for “simple efficiency”, under which there is no risk premium and expectations are rational. This involves testing whether implied volatilities predict subsequent excess...

It is a common view that private information in the foreign exchange market does not exist. We provide evidence against this view. The evidence comes from the introduction of trading in Tokyo over the lunch hour. Lunch-hour return variance doubles with the introduction of trading, which cannot...