On biases in the measurement of foreign exchange risk premiums
Article Abstract:
Empirical studies have been inconsistent with the forward rate hypothesis, that the forward rate can be used as an unbiased predictive element for future rates of currency exchange. Three sources of potential bias are examined: measurement error and lack of high quality data, omitted variables or conditional heteroskedasticity, and the lack of stable sample results due to major monetary and fiscal policy changes in the sample period. Results were interpreted to support general equilibrium models with rational learning components about policy regimes, but results could also support interpretation as market inefficiency.
Publication Name: Journal of International Money and Finance
Subject: Economics
ISSN: 0261-5606
Year: 1993
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Exchange rate risk premiums
Article Abstract:
A generalized state space model of analysis finds an inverse relationship of exchange rate risk premiums and unexpected rates of depreciation. Also involved in the study was an examination of risk premium relationships with macro variables suggested by Lucas' intertemporal pricing model. Forecasts obtained using the state space model, which permits covariation of unexpected rates of depreciation and risk premiums, were not superior to those obtained using random walk models.
Publication Name: Journal of International Money and Finance
Subject: Economics
ISSN: 0261-5606
Year: 1993
User Contributions:
Comment about this article or add new information about this topic:
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