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The dynamics of ex-ante risk premia in the foreign exchange market: evidence from the yen/usd exchange rate using survey data

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  • Georges Prat

    (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre)

  • Remzi Uctum

    (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre)

Abstract

Using financial experts' Yen/USD exchange rate expectations provided by Consensus Forecasts surveys, this paper aims to model the 3 and 12-month ahead ex-ante risk premia, measured as the difference between the expected and forward exchange rates. The condition of predictability of returns implies that the variance of the rate of change in exchange rate is horizon-dependent and this is a sufficient condition for agents not to require at any time a risk premium but a set of premia scaled by the time horizon of the investment. Moreover, using a two-step portfolio decision making process framework, we show that each premium depends on the net market position related to the maturity of the asset considered. Since the time-varying real net market positions are unobservable, they have been estimated through a state space model using the Kalman filter methodology. We find that a two-country portfolio asset pricing model explains satisfactorily both the common and the specific time-patterns of the 3- and 12-month ex-ante premia.

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Bibliographic Info

Paper provided by HAL in its series Post-Print with number halshs-00173109.

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Date of creation: Jun 2007
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Publication status: Published - Presented, Global Finance Conference, 2007, Dublin, Ireland
Handle: RePEc:hal:journl:halshs-00173109

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00173109/en/
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Keywords: Risk premium; foreign exchange market;

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