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Determinants of Currency Risk Premiums

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  • Carlson, J.A: Osler, C.L.
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    Abstract

    The 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 Info

    Paper provided by Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER) in its series Papers with number 98-006.

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    Length: 38 pages
    Date of creation: 1998
    Date of revision:
    Handle: RePEc:fth:purkib:98-006

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    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/
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    Related research

    Keywords: INTERNATIONAL FINANCIAL MARKET ; CURRENCIES ; EXCHANGE RATE;

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