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Distribution of Spot and Forward Exchange Rates: Empirical Evidence and Investor Valuation of Skewness and Kurtosis *
Author(s) -
Aggarwal Raj
Publication year - 1990
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/j.1540-5915.1990.tb00336.x
Subject(s) - kurtosis , skewness , economics , econometrics , normality , standard deviation , portfolio , financial economics , exchange rate , risk premium , foreign exchange risk , valuation (finance) , currency , monetary economics , statistics , mathematics , finance
This paper examines the statistical distribution of exchange rates for eight major currencies for the post‐1973 floating rate period. The results show that spot rates, forward rates, and ex‐post risk premia all exhibit significant, persistent, but varying deviations from normality, and that the risk premia in forward rates reflect investor preferences for skewness and investor aversion towards standard deviation and kurtosis. These results imply that foreign currency forecasting and hedging practices, mean‐variance portfolio analysis, pricing of foreign currency options, and other research involving exchange rates should account for these significant deviations from normality.