Determinants of Currency Risk Premiums
AbstractThe risk premium is a function of both the interest rate differential and the gap between the current exchange rate and its long-run equilibrium in a model of the foreign exchange market with both non-speculating traders and rational speculators. If the speculators have an alternative to specializing in exchange-rate speculation, then there should be no presumption that uncovered interest rate parity will hold even approximately with a long-run equilibrium number of speculators. Furthermore, when other traders respond to interest-rate differentials, the model can give rise to a negative relationship between the interest-rate differential and the subsequent change in the exchange rate, a phenomenon that is often evident in foreign exchange markets.
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Bibliographic InfoPaper provided by Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER) in its series Papers with number 98-006.
Length: 38 pages
Date of creation: 1998
Date of revision:
Contact details of provider:
Postal: Purdue University, Center for International Business Education and Research, Krannert Graduate School of Management, 1310 Krannert Building West Lafayette, Indiana 47907-1310.
Web page: http://www.krannert.purdue.edu/
More information through EDIRC
INTERNATIONAL FINANCIAL MARKET ; CURRENCIES ; EXCHANGE RATE;
Find related papers by JEL classification:
- F30 - International Economics - - International Finance - - - General
- F31 - International Economics - - International Finance - - - Foreign Exchange
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
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