Advanced Search
MyIDEAS: Login to save this paper or follow this series

The risk premium in forward foreign exchange markets and G-3 central bank intervention: evidence of daily effects, 1985-1990

Contents:

Author Info

  • Richard T. Baillie
  • William P. Osterberg

Abstract

Evidence that forward rates for foreign exchange are not unbiased forecasts of future spot rates suggests a time-varying risk premium. However, there is little evidence that the forecast error is related to fundamentals, although most investigations have lacked high-frequency data. In this paper, we use daily exchange-rate and official Federal Reserve intervention data to test for an impact of intervention on the forecast error. This paper extends recent analyses of daily changes in exchange rates by Baillie and Bollersev (1989) and Hsieh (1989) to the daily forward-rate forecast errors for the dm/US$ and yen/US$ rates. We estimate an MA(21) process and utilize GARCH with a conditional student-t distribution. We find that 1) U.S. purchases of dollars on day t-1 affect the day t forecast error (ft-Et[st+k]), 2) there are day-of-the-week effects in the conditional variance, and 3) for the yen/US$ rate, there is GARCH-in-mean. These findings provide some support for considering intervention as a channel through which fundamentals influence risk premiaannel through which fundamentals influence risk premia.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.clevelandfed.org/research/Workpaper/1991/wp9109.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9109.

as in new window
Length:
Date of creation: 1991
Date of revision:
Handle: RePEc:fip:fedcwp:9109

Contact details of provider:
Postal: 1455 East 6th St., Cleveland OH 44114
Phone: 216.579.2000
Web page: http://www.clevelandfed.org/
More information through EDIRC

Order Information:
Email:

Related research

Keywords: Foreign exchange - Law and legislation ; Risk;

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Owen F. Humpage, 1991. "Central-bank intervention: recent literature, continuing controversy," Economic Review, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, issue Q II, pages 12-26.
  2. Engel, Charles & Rodrigues, Anthony P, 1989. "Tests of International CAPM with Time-Varying Covariances," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 4(2), pages 119-38, April-Jun.
  3. Loopesko, Bonnie E., 1984. "Relationships among exchange rates, intervention, and interest rates: An empirical investigation," Journal of International Money and Finance, Elsevier, Elsevier, vol. 3(3), pages 257-277, December.
  4. William P. Osterberg, 1989. "Intervention and the risk premium in foreign exchange rates," Working Paper 8908, Federal Reserve Bank of Cleveland.
  5. Domowitz, Ian & Hakkio, Craig S., 1985. "Conditional variance and the risk premium in the foreign exchange market," Journal of International Economics, Elsevier, Elsevier, vol. 19(1-2), pages 47-66, August.
  6. Michael W. Klein & Karen K. Lewis, 1991. "Learning About Intervention Target Zones," NBER Working Papers 3674, National Bureau of Economic Research, Inc.
  7. Bossaerts, Peter & Hillion, Pierre, 1991. "Market Microstructure Effects of Government Intervention in the Foreign Exchange Market," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 4(3), pages 513-41.
  8. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1429-45, November.
  9. Jeffrey A. Frankel & Kenneth A. Froot, 1985. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
  10. Milhoj, Anders, 1987. "A Conditional Variance Model for Daily Deviations of an Exchange Rate," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 5(1), pages 99-103, January.
  11. E.K. Berndt & B.H. Hall & R.E. Hall, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 103-116 National Bureau of Economic Research, Inc.
  12. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, American Economic Association, vol. 77(1), pages 133-53, March.
  13. Mark, Nelson C., 1988. "Time-varying betas and risk premia in the pricing of forward foreign exchange contracts," Journal of Financial Economics, Elsevier, Elsevier, vol. 22(2), pages 335-354, December.
  14. Diebold, Francis X & Nerlove, Marc, 1989. "The Dynamics of Exchange Rate Volatility: A Multivariate Latent Factor Arch Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 4(1), pages 1-21, Jan.-Mar..
  15. 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, Elsevier, vol. 6(1), pages 107-123, March.
  16. Lewis, Karen K., 1988. "The persistence of the `peso problem' when policy is noisy," Journal of International Money and Finance, Elsevier, Elsevier, vol. 7(1), pages 5-21, March.
  17. Michael W. Klein & Eric S. Rosengren, 1991. "Foreign exchange intervention as a signal of monetary policy," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, issue May, pages 39-50.
  18. McCurdy, T.H. & Morgan, I.G., 1989. "Evidence of risk Premia in Foreign Currency Futures Markets," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 130.90, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fedcwp:9109. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lee Faulhaber).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.