Risk and Parity in Purchasing Power
AbstractDeviations from purchasing power parity in efficient markets are often attributed to time-varying risk premiums. Some models have also identified the risk premiums to be the expected real interest rate differentials. This paper shows that risk premiums generally are not equal to ex ante real rate differentials. Empirically, the author finds risk premiums to be better than ex ante real rate differentials in accounting for deviations from purchasing power parity. In addition, both the risk premiums and the deviations from purchasing power parity respond proportionately to a single common factor. Copyright 1990 by Ohio State University Press.
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Bibliographic InfoArticle provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.
Volume (Year): 22 (1990)
Issue (Month): 3 (August)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879
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- Engel, Charles, 1996.
"The forward discount anomaly and the risk premium: A survey of recent evidence,"
Journal of Empirical Finance,
Elsevier, vol. 3(2), pages 123-192, June.
- Charles Engel, 1995. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc.
- Mun, Kyung-Chun & Morgan, George Emir, 2003. "Risk premia on foreign exchange: a direct approach," Journal of Multinational Financial Management, Elsevier, vol. 13(3), pages 231-250, July.
- Barabás, Gyula, 1996.
"Kamatparitás lebegő és csúszó leértékeléses árfolyamrendszerben
[Interest parity in floating and in crawling-peg foreign exchange rate régimes]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 972-994.
- Thomas Chiang & Jose Trinidad, 1997. "Risk and International Parity Conditions: A Synthesis from Consumption Based Models," International Economic Journal, Taylor & Francis Journals, vol. 11(2), pages 73-101.
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