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More Evidence on the Dollar Risk Premium in the Foreign Exchange Market

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  • Wolff, Christian
  • Bams, Dennis
  • Walkowiak, Kim

Abstract

In this article, we develop and estimate an econometric panel data model to capture the common dynamics in dollar risk premia in various forward foreign exchange rates. The common component in the dollar risk premia is highly significant and embodies a common pattern of positive serial correlation (persistence) for the pound, the yen and the mark. Interestingly, our results indicate that the dynamics of the forward prediction error can be attributed almost exclusively to this dollar-related common component. Our evidence also suggests that the three different foreign currencies? dollar risk premia ?respond? to the common factor to different degrees.

Suggested Citation

  • Wolff, Christian & Bams, Dennis & Walkowiak, Kim, 2003. "More Evidence on the Dollar Risk Premium in the Foreign Exchange Market," CEPR Discussion Papers 3726, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3726
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    2. Baik, Hyeoncheol & Han, Sumin & Joo, Sunghoon & Lee, Kangbok, 2022. "A bank's optimal capital ratio: A time-varying parameter model to the partial adjustment framework," Journal of Banking & Finance, Elsevier, vol. 142(C).
    3. Rafael R. Rebitzky, 2010. "The Influence Of Fundamentals On Exchange Rates: Findings From Analyses Of News Effects," Journal of Economic Surveys, Wiley Blackwell, vol. 24(4), pages 680-704, September.
    4. Zhiguang Wang & Prasad Bidarkota, 2012. "Risk premia in forward foreign exchange rates: a comparison of signal extraction and regression methods," Empirical Economics, Springer, vol. 42(1), pages 21-51, February.
    5. Chakraborty, Avik, 2009. "Learning, The Forward Premium Puzzle, And Market Efficiency," Macroeconomic Dynamics, Cambridge University Press, vol. 13(S1), pages 31-57, May.
    6. Menkhoff, Lukas & Rebitzky, Rafael R. & Schröder, Michael, 2009. "Heterogeneity in exchange rate expectations: Evidence on the chartist-fundamentalist approach," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 241-252, May.
    7. Perron, Pierre & Wada, Tatsuma, 2009. "Let's take a break: Trends and cycles in US real GDP," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 749-765, September.
    8. Schepp, Zoltán, 2003. "Befektetői horizont és a „forwardrejtély” [The investor horizon and the ‘forward puzzle’]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 939-963.
    9. Hadhri, Sinda, 2023. "News-based economic policy uncertainty and financial contagion: An international evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 90(C), pages 63-76.
    10. Adrian, Tobias & Etula, Erkko & Groen, Jan J.J., 2011. "Financial amplification of foreign exchange risk premia," European Economic Review, Elsevier, vol. 55(3), pages 354-370, April.
    11. Gkillas, Konstantinos & Tsagkanos, Athanasios & Vortelinos, Dimitrios I., 2019. "Integration and risk contagion in financial crises: Evidence from international stock markets," Journal of Business Research, Elsevier, vol. 104(C), pages 350-365.
    12. Murphy, Austin, 2008. "An empirical investigation of investor expectations in the currency market," International Review of Financial Analysis, Elsevier, vol. 17(1), pages 108-133.
    13. Luchtenberg, Kimberly F. & Vu, Quang Viet, 2015. "The 2008 financial crisis: Stock market contagion and its determinants," Research in International Business and Finance, Elsevier, vol. 33(C), pages 178-203.

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    More about this item

    Keywords

    Forward exchange; Risk;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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