Premium
Forward Speculation, Excess Returns, and Exchange Rate Variability: The Role of Risk Premiums
Author(s) -
Dibooğlu Selahattin
Publication year - 1998
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00115
Subject(s) - economics , risk premium , speculation , liberian dollar , excess return , forward rate , foreign exchange risk , exchange rate , pound (networking) , context (archaeology) , financial economics , monetary economics , econometrics , interest rate , macroeconomics , finance , paleontology , biology , world wide web , computer science
The paper reconsiders the unbiasedness hypothesis in the foreign exchange market. Within the context of a conventional model of exchange rates, risk premium shocks are constrained to have no permanent effects on the spot rate. Using monthly data from the post‐floating period, the paper estimates risk premiums for the dollar rates of the yen, mark, and pound. Risk premium innovations seem to explain a modest proportion of short‐term variability of exchange rate changes and excess returns. However, risk premiums may explain serial correlations in excess returns.