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Covered Purchasing Power Parity, Ex-ante PPP and Risk Aversion

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  • Michael J. Moore

    (Queen's University of Belfast)

Abstract

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. Copyright Blackwell Publishers Ltd 1997.

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Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

Volume (Year): 24 (1997-04)
Issue (Month): 3 ()
Pages: 397-412

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Handle: RePEc:bla:jbfnac:v:24:y:1997-04:i:3:p:397-412

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Cited by:
  1. Maria Perez Jurado & Juan Luis Vega, 1994. "Paridad del poder de compra: un análisis empírico," Investigaciones Economicas, Fundación SEPI, vol. 18(3), pages 539-556, September.
  2. Maurice J. Roche & Michael J. Moore, 2009. "Solving Exchange Rate Puzzles with neither Sticky Prices nor Trade Costs," Working Papers 001, Ryerson University, Department of Economics.
  3. Moore, Michael J. & Roche, Maurice J., 2002. "Less of a puzzle: a new look at the forward forex market," Journal of International Economics, Elsevier, vol. 58(2), pages 387-411, December.

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