Covered Purchasing Power Parity, Ex-Ante PPP and Risk Aversion
AbstractThe standard expectations augmented theory of ex-ante purchasing power parity (PPP), which was first developed by Roll, assumes that agents are risk neutral. A Covered Purchasing Power Condition is developed which holds for the general case of risk aversion. A risk-augmented form of ex-ante PPP is then derived using a Lucas-style asset pricing framework. From this I conclude that real exchange rates may not possess the martingale property though the analysis clarifies the circumstances under which this property does hold.A consumption-based orthogonality condition is tested for, using 1970s and 1980s data for the seven main industrial countries. An interesting by-product of the study is that it provides us with a useful example of unit root testing on seasonal data. Overall the results give rise to cautious optimism.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 635.
Date of creation: Apr 1992
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Other versions of this item:
- Michael J. Moore, 1997. "Covered Purchasing Power Parity, Ex-ante PPP and Risk Aversion," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(3), pages 397-412.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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- Maurice J. Roche & Michael J. Moore, 2009.
"Solving Exchange Rate Puzzles with neither Sticky Prices nor Trade Costs,"
001, Ryerson University, Department of Economics.
- Moore, Michael J. & Roche, Maurice J., 2010. "Solving exchange rate puzzles with neither sticky prices nor trade costs," Journal of International Money and Finance, Elsevier, vol. 29(6), pages 1151-1170, October.
- Maurice J. Roche & Michael J. Moore, 2007. "Solving Exchange Rate Puzzles with neither Sticky Prices nor Trade Costs," Economics, Finance and Accounting Department Working Paper Series n1750507, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
- Maurice J. Roche & Michael J. Moore, 1999.
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Economics, Finance and Accounting Department Working Paper Series
n910799, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
- Moore, Michael J. & Roche, Maurice J., 2002. "Less of a puzzle: a new look at the forward forex market," Journal of International Economics, Elsevier, vol. 58(2), pages 387-411, December.
- Maria Perez Jurado & Juan Luis Vega, 1994. "Paridad del poder de compra: un análisis empírico," Investigaciones Economicas, Fundación SEPI, vol. 18(3), pages 539-556, September.
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