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Covered Purchasing Power Parity, Ex‐ante PPP and Risk Aversion
Author(s) -
Moore Michael J.
Publication year - 1997
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00111
Subject(s) - purchasing power parity , ex ante , economics , risk aversion (psychology) , capital asset pricing model , purchasing , purchasing power , consumption (sociology) , econometrics , financial economics , microeconomics , monetary economics , expected utility hypothesis , macroeconomics , operations management , exchange rate , social science , sociology
The standard expectations augmented theory of ex‐ante Purchasing Power Parity which was first developed by Roll assumes that agents are risk neutral. A Covered Purchasing Power Condition is developed which holds for the general case of risk aversion. A risk augmented form of ex‐ante PPP is then derived using a consumption‐based asset pricing framework. This is tested for the post‐Bretton woods period for the group of seven main industrial countries. The results suggest that risk aversion has a part to play in explaining deviations from PPP.