Random risk aversion and the cost of eliminating the foreign exchange risk of the Euro
AbstractThis paper answers the following questions. If the Euro foreign exchange risk is given, what is the cost of eliminating such a risk? How does risk aversion affect this cost? What is the relation between the insurance premium on the Euro and this cost? Is it possible to find out the level of risk aversion by looking upon actual risk-free yields? If risk aversion is random, how do risk-free yields move with the return on the Euro currency? Economists usually take for granted that preferences are stable. By contrast, business news networks mention frequently changing risk appetite, or changing investor sentiment, in order to explain market behavior. This paper shows that it is worthwhile to presume that risk aversion is random, because such randomness provides direct answers to the questions raised above.
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Bibliographic InfoArticle provided by AccessEcon in its journal Economics Bulletin.
Volume (Year): 30 (2010)
Issue (Month): 1 ()
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The Euro; foreign exchange risk; expected utility; cost of risk; risk aversion; risk compensation; insurance premium; risk-free yields; Monte Carlo simulations; bootstrap sampling; EU financial markets;
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