The covariation of risk premiums and expected future spot exchange rates
AbstractFama(1984) analyzed the variability and the covariation of risk premiums and expected rates of depreciation. We employ three statistical techniques that do not suffer from a potential bias in Fama's analysis, but we nevertheless confirm his findings. In contrast to his interpretation the results are not necessarily at variance with the predictions of a theoretical model of the risk premium. Increases in expected rates of depreciation of the dollar relative to five foreign currencies are positively correlated with increases in the expected profitability of purchasing these currencies in the forward market, and risk premiums have larger variances than expected rates of depreciation.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Money and Finance.
Volume (Year): 5 (1986)
Issue (Month): 1, Supplement (March)
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Web page: http://www.elsevier.com/locate/inca/30443
Other versions of this item:
- Robert J. Hodrick & Sanjay Srivastava, 1986. "The Covariation of Risk Premiums and Expected Future Spot Exchange Rates," NBER Working Papers 1749, National Bureau of Economic Research, Inc.
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