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Recent estimates of time-variation in the conditional variance and in the exchange risk premium

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  • Frankel, Jeffrey A.

Abstract

The optimal-diversification model of investors' portfolio behavior can give a linear relationship between the exchange risk premium and the conditional exchange rate variance. This note surveys recent empirical work that allows for the conditional variance itself, and therefore the risk premium, to vary over time. In particular, it examines the implications of recent empirical estimates for earlier arguments, based on the assumption that the conditional variance was constant over time, that the exchange risk premium had to be small in magnitude and variability.

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(This abstract was borrowed from another version of this item.)

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 7 (1988)
Issue (Month): 1 (March)
Pages: 115-125
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Handle: RePEc:eee:jimfin:v:7:y:1988:i:1:p:115-125

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Web page: http://www.elsevier.com/locate/inca/30443

For corrections or technical questions regarding this item, or to correct its listing, contact: (Jeroen Loos).

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References

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  1. 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.
  2. Engel, Charles & Rodrigues, Anthony P, 1989. "Tests of International CAPM with Time-Varying Covariances," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 4(2), pages 119-38, April-Jun.
  3. Frankel, Jeffrey A., 1982. "In search of the exchange risk premium: A six-currency test assuming mean-variance optimization," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 255-274, January.
  4. Domowitz, Ian & Hakkio, Craig S., 1985. "Conditional variance and the risk premium in the foreign exchange market," Journal of International Economics, Elsevier, vol. 19(1-2), pages 47-66, August.
  5. Robert E. Cumby & Maurice Obstfeld, 1984. "International Interest Rate and Price Level Linkages under Flexible Exchange Rates: A Review of Recent Evidence," NBER Chapters, in: Exchange Rate Theory and Practice, pages 121-152 National Bureau of Economic Research, Inc.
  6. Hsieh, David A., 1984. "Tests of rational expectations and no risk premium in forward exchange markets," Journal of International Economics, Elsevier, vol. 17(1-2), pages 173-184, August.
  7. Jeffrey A. Frankel and Richard Meese., 1987. "Are Exchange Rates Excessively Variable," Economics Working Papers 8738, University of California at Berkeley.
  8. Francis X. Diebold & Marc Nerlove, 1986. "The dynamics of exchange rate volatility: a multivariate latent factor ARCH model," Special Studies Papers 205, Board of Governors of the Federal Reserve System (U.S.).
  9. Lyons, Richard K., 1988. "Tests of the foreign exchange risk premium using the expected second moments implied by option pricing," Journal of International Money and Finance, Elsevier, vol. 7(1), pages 91-108, March.
  10. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
  11. Giovannini, Alberto & Jorion, Philippe, 1987. "Interest rates and risk premia in the stock market and in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 6(1), pages 107-123, March.
  12. Bilson, John F O, 1985. "Macroeconomic Stability and Flexible Exchange Rates," American Economic Review, American Economic Association, vol. 75(2), pages 62-67, May.
  13. Garman, Mark B. & Kohlhagen, Steven W., 1983. "Foreign currency option values," Journal of International Money and Finance, Elsevier, vol. 2(3), pages 231-237, December.
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Citations

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Cited by:
  1. Bekaert, G.R.J. & Gray, S.F., 1997. "Target zones and exchange rates: An empirical investigation," Discussion Paper 1997-22, Tilburg University, Center for Economic Research.
  2. Joachim Zietz & Ghassem Homaifar, 1994. "Exchange rate uncertainty and the efficiency of the forward market for foreign exchange," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(3), pages 461-475, September.
  3. Charles Engel & Anthony P. Rodrigues, 1987. "Tests of International CAPM with Time-Varying Covariances," NBER Working Papers 2303, National Bureau of Economic Research, Inc.
  4. Vincent Bouvatier, 2007. "Are International Interest Rate Differentials Driven by the Risk Premium? The Case of Asian Countries," Economics Bulletin, AccessEcon, vol. 5(6), pages 1-14.
  5. Lars E.O. Svensson, 1990. "The Foreign Exchange Risk Premium in a Target Zone with Devaluation Risk," NBER Working Papers 3466, National Bureau of Economic Research, Inc.
  6. Cavaglia, Stefano & Verschoor, Willem F.C. & Wolff, Christian C.P., 1993. "Asian exchange rate expectations," Open Access publications from Maastricht University urn:nbn:nl:ui:27-13904, Maastricht University.
  7. Fischer Black, 1989. "Equilibrium Exchange Rate Hedging," NBER Working Papers 2947, National Bureau of Economic Research, Inc.
  8. Melolinna, Marko, 2011. "What explains risk premia in crude oil futures?," Research Discussion Papers 2/2011, Bank of Finland.
  9. Svensson, L.E.O., 1989. "Target Zones And Interest Rate Variability," Papers 457, Stockholm - International Economic Studies.

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