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The Risk Premium and the Liquidity Premium in Foreign Exchange Markets

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  • Engel, Charles

Abstract

The forward exchange rate may include a liquidity premium as well as a risk premium. The nature of these premiums is investigated in a general equilibrium model. The more obvious point the paper makes is that the forward rate will be affected by the liquidity of financial assets. The subtle point the paper makes is that the liquidity premium of the forward rate is also influenced by the liquidity of goods. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 33 (1992)
Issue (Month): 4 (November)
Pages: 871-79

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Handle: RePEc:ier:iecrev:v:33:y:1992:i:4:p:871-79

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Cited by:
  1. Juan-Ángel Jiménez-Martín & Rafael Flores de Frutos, 2004. "The Fit of Dynamic Equilibrium Models of Exchange Rate," Documentos del Instituto Complutense de Análisis Económico 0411, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
  2. Prakash Apte & Piet Sercu & Raman Uppal, 1996. "The Equilibrium Approach to Exchange Rates: Theory and Tests," NBER Working Papers 5748, National Bureau of Economic Research, Inc.
  3. Charles Engel, 1996. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc.
  4. Kevin X.D. Huang & Thaneepanichskul Suchada, 2003. "Sources of Exchange Rate Fluctuations: The Cases of Mexico and Thailand in the Aftermaths of their Recent Currency Crises," Annals of Economics and Finance, Society for AEF, vol. 4(2), pages 375-400, November.
  5. Schmukler, Sergio L. & Serven, Luis, 2002. "Pricing currency risk : facts and puzzles from currency boards," Policy Research Working Paper Series 2815, The World Bank.
  6. Schmukler, Sergio L. & Serven, Luis, 2002. "Pricing currency risk under currency boards," Journal of Development Economics, Elsevier, vol. 69(2), pages 367-391, December.

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